[B] Stock-based compensation was $0 and $126,250, and $128,597
and $529,799 for the three and nine months ended June 30, 2016 and 2015, respectively.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1.
|
DESCRIPTION OF
BUSINESS 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”) is the premier brand under the VAPE umbrella. HIVE 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. The HIVE product line currently consists of over 15 distinct ceramic elements, including the 2 piece domeless,
domeless direct inject, and HIVE’s signature domeless elements covering 10mm, 14mm and 18mm applications as well as regular
elements, the HIVE Flower Cup, the HIVE Carb Cap, HIVE Stinger Dabber, the 14mm HIVE x Quave - Club Banger, the HIVE x Brothership
Honey Bucket and the HIVE x D-Nail 16mm and 20mm attachments.
The
Company intends to rely on a combination of trademark, copyright, trade secret and patent laws in the United States as well as
confidentiality procedures and contractual provisions to protect future proprietary technology and its brands, as they are developed. The
Company has created or acquired and continues in the process of creating and/or acquiring proprietary vaporizers and e-cigarettes,
and various trademarks, patents and copyrights for brands which are developed or in development. The Company is actively
engaged in improving and expanding lines of branded products through business alliances and acquisitions, as well as developing
its branded retail business expansion. VAPE and its business units are organized and directed to operate strictly in
accordance with all applicable state and federal laws.
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.
VAPE is organized and
directed to operate strictly in accordance with all applicable state and federal laws.
GOING
CONCERN
VAPE’s consolidated
financial statements reflect a net loss of $3,865,758 during the nine months ended June 30, 2016. As of June 30, 2016, we had cash
of $5,410 and a working capital deficit of $1,960,283. VAPE has suffered an accumulated deficit of $32,032,503 and during the nine
months ended June 30, 2016, the Company took steps to cease its Offset, HIVE Glass and HIVE Supply, and Revival business lines.
The Company also closed its “THE HIVE” retail store in order to reduce overhead costs and focus on HIVE Ceramics. Moreover,
the Company curtailed its exploration into providing real estate, management and consulting solutions to the legal cannabis industry
in states where such cannabis cultivation and extraction is legal. The Company was never able to execute on any of these plans
and ultimately determined that the Company’s capital reserves for such projects as well as the risks inherent in each project
due to the current regulatory environment surrounding the cannabis industry made this line of business too difficult to pursue.
All of which have resulted in losses and opportunity costs. 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 is skeptical that VAPE will obtain
funding for operations for the foreseeable future; 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 10
for subsequent events regarding financing activities.
VAPE is currently involved in litigation with 1 convertible promissory note holder seeking the specific performance
of VAPE’s issuance of shares underlying denied conversion notices. VAPE is also currently negotiating with a second noteholder
threatening similar litigation. VAPE shall vigorously defend any lawsuits; however, if these noteholders are allowed to convert
their respective notes VAPE shareholders will experience substantial dilution.
NOTE
2.
|
ACCOUNTING POLICIES
AND BASIS OF PRESENTATION
|
BASIS
OF PRESENTATION
The
accompanying unaudited interim consolidated financial statements have been prepared by the Company pursuant to the rules and regulations
of the SEC. Certain information and disclosures normally included in the annual financial statements prepared in accordance with
the accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules
and regulations. 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. The current results are not
an indication of the full year.
CONSOLIDATION
The
consolidated financial statements include the assets, liabilities, and operating results of the Company and its wholly-owned subsidiaries,
Revival and Nouveau after elimination of all material inter-company accounts and transactions.
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.
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 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 June
30, 2016 and September 30, 2015. 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 June
30, 2016:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,410
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,410
|
|
Total assets measured at fair value
|
|
$
|
5,410
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
|
|
$
|
-
|
|
|
$
|
724,729
|
|
|
$
|
-
|
|
|
$
|
724,729
|
|
Total liabilities measured at fair value
|
|
$
|
-
|
|
|
$
|
724,729
|
|
|
$
|
-
|
|
|
$
|
724,729
|
|
The
following table presents the Company’s fair value hierarchy for assets and liabilities measured at fair value on a recurring
basis at September 30, 2015:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
273,904
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
273,904
|
|
Total assets measured at fair value
|
|
$
|
273,904
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
273,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
|
|
$
|
-
|
|
|
$
|
1,672,726
|
|
|
$
|
-
|
|
|
$
|
1,672,726
|
|
Total liabilities measured at fair value
|
|
$
|
-
|
|
|
$
|
1,672,726
|
|
|
$
|
-
|
|
|
$
|
1,672,726
|
|
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
Two
(2) customers accounted for 60% of our accounts receivable as of June 30, 2016. One (1) customer accounted for 37% of our accounts
receivable as of September 30, 2015. The loss of these customers would have a significant impact on the Company’s financial
results.
Suppliers
Two
(2) suppliers accounted for 100% and 98% of our purchases during the three and nine months ended June 30, 2016. Two (2) suppliers
68% and 70% of our purchases during the three and nine months ended June 30, 2015. The loss of these suppliers would have a significant
impact on the Company’s financial results.
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 generally recorded when sales orders are shipped.
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.
We
purchase product sourced from China which we are required to pay 50% upon placing the order. Amounts paid for products, which
have not been received, are recorded as prepaid inventory. There are no amounts paid which are in dispute or considered impaired.
FIXED
ASSETS
Fixed
assets are recorded at cost and depreciation is provided over the estimated useful lives of the related assets using the straight-line
method for financial statement purposes. The estimated life of tooling related to our ceramic products is two (2) years. The estimated
life of our leasehold improvements is the lesser of the term of the related lease and useful life of the asset.
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 three and nine months ended June 30, 2016 and 2015, the Company did not record any impairment of 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 three and nine
months ended June 30, 2016 and 2015, research and development costs were $950 and $91,428, and $47,648 and $143,481, respectively.
CONVERTIBLE
DEBT
Convertible debt is
accounted for under the guidelines established by ASC 470-20 “Debt with Conversion and Other Options.” ASC 470-20
governs the calculation of an embedded beneficial conversion, which is treated as an additional discount to the instruments where
derivative accounting (explained below) does not apply. The amount of the value of warrants and beneficial conversion feature
may reduce the carrying value of the instrument to zero, but no further. 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. The
embedded conversion features are recorded as discounts when the notes become convertible. The excess of fair value of the embedded
conversion feature over the carrying value of the debt is recorded as an immediate charge to operations. Each reporting
period, the Company will compute the estimated fair value of derivatives and record changes to operations. The discounts relating
to the initial recording of the derivatives or beneficial conversion features are accreted over the term of the debt using the
effective interest method. Notes with cash payment penalties are recorded over the six month term of the note.
The
Company has lost the ability to increase the share reserves due to the significantly increased outstanding held by convertible
noteholders 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 find continued
finance, properly run the Company, and proceed with business to include any mergers or acquisitions or any transactions that would
require available stock.
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.
EARNINGS
(LOSS) PER COMMON SHARE
Basic
earnings (loss) per common share is computed by dividing net income (loss) 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. In the event of losses, such common share equivalents are excluded as their effects
are antidilutive.
The
following is a summary of outstanding securities which have been included in the calculation of diluted net income per share and
reconciliation of net income to net income available to common stock holders for the three months ended June 30, 2016:
|
|
For the
Three Months
Ended
|
|
|
|
June 30,
2016
|
|
Weighted average common shares outstanding used in calculating basic earnings per share
|
|
|
215,717,808
|
|
Effect of preferred stock
|
|
|
500,000
|
|
Effect of convertible notes payable
|
|
|
881,166,280
|
|
Weighted average common and common equivalent shares used in calculating diluted earnings per share
|
|
|
1,097,384,088
|
|
|
|
|
|
|
Net income as reported
|
|
$
|
1,434,703
|
|
Add - interest on convertible notes payable
|
|
|
408,419
|
|
Net income available to common stockholders
|
|
$
|
1,843,122
|
|
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 if the Company generated
net income for the nine months ended June 30, 2016:
|
|
For the
Nine Months
Ended
|
|
|
|
June 30,
|
|
|
|
2016
|
|
Series A Preferred stock
|
|
|
500,000
|
|
Convertible notes
|
|
|
881,166,280
|
|
|
|
|
881,666,280
|
|
The
Company excluded 110,000 options from the computation for the nine months ended June 30, 2015, as their exercise prices were in
excess of the average closing market price of the Company’s common stock, causing their effects to be anti-dilutive using
the treasury stock method.
During
the three months ended June 30, 2015, no options would have been included had the Company generated net income in the computation
of dilutive shares outstanding using the treasury-stock method since the exercise prices exceeded the average market value of
the Company’s common stock.
The following is a summary
of outstanding securities which have been included in the calculation of diluted net income per share and reconciliation of net
income to net income available to common stock holders for the nine months ended June 30, 2015:
|
|
For the
Nine Months
Ended
|
|
|
|
June 30,
2015
|
|
Weighted average common shares outstanding used in calculating basic earnings per share
|
|
|
11,253,868
|
|
Effect of preferred stock
|
|
|
500,000
|
|
Effect of convertible notes payable
|
|
|
1,924,046
|
|
Effect of options and warrants
|
|
|
197,012
|
|
Weighted average common and common equivalent shares used in calculating diluted earnings per share
|
|
|
13,874,926
|
|
|
|
|
|
|
Net income as reported
|
|
$
|
232,002
|
|
Add - interest on convertible notes payable
|
|
|
427,240
|
|
Net income available to common stockholders
|
|
$
|
659,242
|
|
STOCK-BASED
COMPENSATION
ASC
718, “Share-Based Payment” requires that compensation cost related to share-based payment transactions be recognized
in the consolidated financial statements. Share-based payment transactions within the scope of ASC 718 include stock options,
restricted stock plans, performance-based awards, stock appreciation rights, and employee share purchase plans.
The
Company adopted ASC 718, which requires disclosure of the fair value and other characteristics of stock options and more prominent
disclosure about the effects of an entity’s accounting policy decisions with respect to stock-based compensation on reported
net loss. The Company has reflected the expense of such stock based compensation based on the fair value at the grant date for
awards consistent with the provisions of ASC 718.
In
connection with the adoption of ASC 718, the fair value of our share-based compensation has been determined utilizing the Black-Scholes
pricing model. The fair value of the options granted is amortized as compensation expense on a straight line basis over the requisite
service period of the award, which is generally the vesting period. The fair value calculations involve significant judgments,
assumptions, estimates and complexities that impact the amount of compensation expense to be recorded in current and future periods.
Upon option exercise, the Company issues new shares of stock.
The
following weighted average variables were used in the Black Scholes model for all option issuances valued during the nine months
ended June 30, 2016 and 2015:
Nine Months
Ended
March,
|
|
Stock Price at
Grant Date
|
|
|
Dividend
Yield
|
|
|
Exercise
Price
|
|
|
Risk Free
Interest Rate
|
|
|
Volatility
|
|
|
Average
Life
|
|
2016
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
2015
|
|
$
|
0.73
|
|
|
|
n/a
|
|
|
$
|
0.73
|
|
|
|
2.2
|
%
|
|
|
380
|
%
|
|
|
10.0
|
|
The
Company’s accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services
follows the provisions of Emerging Issues Task Force (“EITF”) 96-18, “Accounting for Equity Instruments That
are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”, codified into ASC
505-50. The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i)
the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant
or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value
of the equity instrument is recognized over the term of the consulting agreement. Prepaid stock-based compensation is recorded
when shares are issued based on the value on the grant date, but vest over the contractual period at which time the prorated expense
will be recorded.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
April 2015, the FASB issued Accounting Standard Update (“ASU”) 2015-03 Simplifying the Presentation of Debt Issuance
Costs. This update requires capitalized debt issuance costs to be classified as a reduction to the carrying value of debt rather
than a deferred charge, as is currently required. This update will be effective for the Company for all annual and interim periods
beginning after December 15, 2015 and is required to be adopted retroactively for all periods presented, and early adoption is
permitted. The Company adopted the policy during the quarter ending March 31, 2016.
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.
In
August 2014, the FASB issued ASU 2014-15, which provides guidance on determining when and how to disclose going-concern uncertainties
in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s
ability to continue as a going concern within one year of the date the financial statements are issued.2 An entity must provide
certain disclosures if “conditions or events raise substantial doubt about the entity’s ability to continue as a going
concern.” The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim
periods thereafter, with early adoption permitted.
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
Although
forward-looking statements in this Quarterly Report reflect our good faith judgment, such statements can only be based on facts
and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties
and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking
statements. Factors that could cause or contribute to such differences in results and outcomes include without limitation those
discussed under the heading “Risk Factors” below, as well as those discussed elsewhere in this Quarterly Report. Readers
are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report.
We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that
may arise after the date of this Quarterly Report. Readers are urged to carefully review and consider the various disclosures
made in this Quarterly Report, which attempt to advise interested parties of the risks and factors that may affect our business,
financial condition, results of operations and prospects.
The
following is a summary of fixed assets as of June 30, 2016 and September 30, 2015:
|
|
June 30,
2016
|
|
|
September 30,
2015
|
|
Molds and Tooling
|
|
$
|
219,115
|
|
|
$
|
176,015
|
|
Leasehold improvements
|
|
|
29,795
|
|
|
|
29,795
|
|
Accumulated depreciation
|
|
|
(194,449
|
)
|
|
|
(87,483
|
)
|
|
|
$
|
54,461
|
|
|
$
|
118,327
|
|
During
the nine months ended June 30, 2016 and 2015, depreciation expense included in cost of revenue were $106,967 and $49,990, respectively.
The
following is a summary of accrued expenses as of June 30, 2016 and September 30, 2015:
|
|
June 30,
2016
|
|
|
September 30,
2015
|
|
Accrued interest
|
|
$
|
139,929
|
|
|
$
|
46,337
|
|
Accrued interest - related party
|
|
|
38,331
|
|
|
|
24,538
|
|
Accrued wages and taxes
|
|
|
223,224
|
|
|
|
112,322
|
|
Other
|
|
|
3,102
|
|
|
|
24,412
|
|
|
|
$
|
404,586
|
|
|
$
|
207,609
|
|
As
of June 30, 2016, $25,000 for Kyle Tracey, $16,667 for Joe Andreae, $43,742 for Mike Cook, $36,382 for Allan Viernes, $38,048
for Benjamin Beaulieu, and $25,792 for Justin Braune are recorded in accrued wages.
CONVERTIBLE
NOTES PAYABLE
In connection with the
Third Party Debt Conversions, each of the Company’s convertible noteholders 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 noteholders 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 noteholders but none of the noteholders have called a default under the terms of the notes at this time. The
Company’s ability to issue common stock other than those presently allocated to noteholders is restricted during this time.
The Company has lost the
ability to increase the share reserves by written consent of shareholders due to the significantly increased outstanding held by
convertible noteholders 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 find continued
financing, properly run the Company, and proceed with business to include any mergers or acquisitions or any transactions that
would require available stock.
The Company is currently
involved in litigation with 1 noteholder seeking the specific performance of VAPE’s issuance of shares underlying denied
conversion notices. VAPE is also currently negotiating with a second noteholder threatening similar litigation. If the noteholders
are allowed to convert their respective notes VAPE shareholders will experience substantial dilution.
The Company’s denial
of the conversion notices has triggered a technical default on certain of its convertible notes and have presented amounts due
as current liabilities other than those subsequently converted and began accruing interest at their default interest rates.
Further, our funding partner may not commit to purchasing the balance of the notes currently outstanding
due to the declining stock market price of the Company’s common stock.
Securities
Purchase Agreement
On
December 3, 2014, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with
an accredited investor (the “Investor”) pursuant to which the Company agreed to sell, and the Investor agreed to purchase,
an unsecured convertible promissory note (the “Note”) in the principal amount of $560,000 less an original issue discount
(“OID”) of $50,000 and transaction expenses of $10,000 for a total purchase price of $500,000. The Company also paid
a finder’s fee in the amount of $25,000 in connection with this transaction, which was recorded as a discount to the note
as it was paid from the proceeds. The closing under the Securities Purchase Agreement occurred on December 3, 2014. The Company
received $475,000 net proceeds after transactions costs. On December 10, 2015, the Company and the Investor entered into a forbearance
agreement regarding the Investor’s convertible note and added $105,000 to the principal and charged to interest expense
during the three months ended December 31, 2015. On February 26, 2016, the note was assigned to an accredited investor and $21,874
was added to the principal balance and charged to interest expense during the three and six months ended March 31, 2016.
We
amortized $5,556 and $8,333, and $22,222 and $19,444 of the original issue discount to interest expense during the three and nine
months ended June 30, 2016 and 2015, respectively. In addition, the Company recorded $45,940 in debt issuance costs as a discount
on the note and amortized $5,106 and $7,657, and $20,418 and $17,866 to interest expense during the three and nine months ended
June 30, 2016 and 2015, respectively. As of June 30, 2016, the Company had fully amortized the discounts.
On
August 26, 2015, the Company and Investor entered into an Amendment whereby the conversion rate of the note was amended to 55%
of the lowest price of the prior fifteen (15) trading days and conversion floor removed which amendment was triggered by the dilutive
issuances of the August 2015 convertible note financing thereby entitling Investor to the lowest conversion rate granted during
the year ended September 30, 2015 per the terms of the Securities Purchase Agreement. On August 26, 2015, the Company recorded
the note as a derivative liability at fair value of $830,921, a derivative discount of $332,666, and the excess in fair value
of $498,254 to loss on debt extinguishment. The total loss on debt extinguishment on this note was $582,254. During the three
and nine months ended June 30, 2016, the Company amortized $28,183 and $277,682 of the derivative discount to interest expense,
recorded a loss (gain) on the change in fair value of the derivative liability of ($287,888) and $574,381, and allocated the fair
value of $401,128 and $1,195,787 of the conversions below to additional paid-in capital and a reduction in the derivative liability,
respectively. As of June 30, 2016, the derivative liability was $22,507.
Between
October 2015 and June 30, 2016, the Company issued the following conversions for payment towards Investor:
Conversion Date
|
|
Principal Converted
|
|
|
Accrued Interest Converted
|
|
|
Total Converted
|
|
|
Conversion Rate
|
|
|
Common Shares Issued
|
|
October 8, 2015
|
|
$
|
21,000
|
|
|
$
|
-
|
|
|
$
|
21,000
|
|
|
$
|
0.012
|
|
|
|
1,818,182
|
|
October 16, 2015
|
|
|
18,900
|
|
|
|
-
|
|
|
|
18,900
|
|
|
$
|
0.012
|
|
|
|
1,636,364
|
|
October 22, 2015
|
|
|
25,800
|
|
|
|
-
|
|
|
|
25,800
|
|
|
$
|
0.011
|
|
|
|
2,333,786
|
|
October 29, 2015
|
|
|
22,460
|
|
|
|
-
|
|
|
|
22,460
|
|
|
$
|
0.011
|
|
|
|
2,031,660
|
|
November 11, 2015
|
|
|
33,500
|
|
|
|
-
|
|
|
|
33,500
|
|
|
$
|
0.007
|
|
|
|
4,649,549
|
|
November 18, 2015
|
|
|
24,000
|
|
|
|
-
|
|
|
|
24,000
|
|
|
$
|
0.006
|
|
|
|
4,195,804
|
|
November 30, 2015
|
|
|
30,000
|
|
|
|
-
|
|
|
|
30,000
|
|
|
$
|
0.005
|
|
|
|
5,741,627
|
|
December 11, 2015
|
|
|
22,000
|
|
|
|
-
|
|
|
|
22,000
|
|
|
$
|
0.002
|
|
|
|
9,090,909
|
|
December 28, 2015
|
|
|
22,500
|
|
|
|
-
|
|
|
|
22,500
|
|
|
$
|
0.002
|
|
|
|
9,297,521
|
|
January 7, 2016
|
|
|
20,000
|
|
|
|
-
|
|
|
|
20,000
|
|
|
$
|
0.002
|
|
|
|
10,101,010
|
|
January 20, 2016
|
|
|
12,500
|
|
|
|
-
|
|
|
|
12,500
|
|
|
$
|
0.001
|
|
|
|
10,330,579
|
|
February 2, 2016
|
|
|
13,200
|
|
|
|
-
|
|
|
|
13,200
|
|
|
$
|
0.001
|
|
|
|
10,909,091
|
|
March 2, 2016
|
|
|
10,627
|
|
|
|
-
|
|
|
|
10,627
|
|
|
$
|
0.001
|
|
|
|
10,169,800
|
|
March 10, 2016
|
|
|
11,184
|
|
|
|
-
|
|
|
|
11,184
|
|
|
$
|
0.001
|
|
|
|
10,702,619
|
|
March 17, 2016
|
|
|
8,272
|
|
|
|
-
|
|
|
|
8,272
|
|
|
$
|
0.001
|
|
|
|
6,539,200
|
|
March 29, 2016
|
|
|
22,797
|
|
|
|
-
|
|
|
|
22,797
|
|
|
$
|
0.002
|
|
|
|
12,191,000
|
|
March 31, 2016
|
|
|
22,347
|
|
|
|
-
|
|
|
|
22,347
|
|
|
$
|
0.002
|
|
|
|
11,950,000
|
|
April 4, 2016
|
|
|
25,140
|
|
|
|
-
|
|
|
|
25,140
|
|
|
$
|
0.002
|
|
|
|
13,444,000
|
|
April 7, 2016
|
|
|
21,019
|
|
|
|
-
|
|
|
|
21,019
|
|
|
$
|
0.002
|
|
|
|
11,240,000
|
|
April 13, 2016
|
|
|
35,664
|
|
|
|
-
|
|
|
|
35,664
|
|
|
$
|
0.002
|
|
|
|
14,737,000
|
|
April 19, 2016
|
|
|
36,711
|
|
|
|
-
|
|
|
|
36,711
|
|
|
$
|
0.002
|
|
|
|
15,170,000
|
|
April 20, 2016
|
|
|
18,244
|
|
|
|
-
|
|
|
|
18,244
|
|
|
$
|
0.002
|
|
|
|
7,538,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
477,865
|
|
|
$
|
-
|
|
|
$
|
477,865
|
|
|
|
|
|
|
|
185,818,367
|
|
As
of June 30, 2016, there is $22,632 in accrued interest expense related to this note, and the Company recorded $2,255 and
$14,156, and $21,094 and $32,511 in interest expense during the three and nine months ended June 30, 2016 and 2015, respectively.
$2M
Securities Purchase Agreement
On
February 10, 2015, the Company entered into a securities purchase agreement (the “February 2015 Securities Purchase Agreement”)
with an accredited investor pursuant to which the Company agreed to sell, and the investor agreed to purchase, an unsecured convertible
promissory note (the “$2M 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 closing under the February 2015 Securities Purchase Agreement occurred
on February 10, 2015. During the year ended September 30, 2015, the Company received $800,000 toward the $2M Note with an original
issue discount of $148,600 and transaction costs for net proceeds of $651,395. On February 23, 2016, the note was assigned to
an accredited investor, the same accredited investor as the Security Purchase Agreement, and $36,038 was added to the principal
balance and charged to interest expense during the three and six months ended March 31, 2016.
On
August 13, 2015, the Company entered into an Amendment, Waiver and Modification Agreement (the “Amendment”) to its
$2M Securities Purchase Agreement and related Transaction Documents with Redwood Management, LLC including any designees and or
assignees thereto. Under the terms of the Amendment, the parties agreed to reduce the $2,000,000 outstanding balance of
the $2M Note to $800,000 to reflect the total amount funded under the note, to terminate the offsetting investor note securing
the additional unfunded balance and to waive any past claims of default or offsetting interest on the $2M Note or investor note.
In addition, the conversion rate of the note was amended to 55% of the lowest price of the prior fifteen (15) trading days and
conversion floor removed which amendment was triggered by the dilutive issuances of the August 2015 convertible note financing
thereby entitling Investor to the lowest conversion rate granted during the year ended September 30, 2015 per the terms of the
$2M Securities Purchase Agreement. As a result, we expensed the unamortized discount of $40,000 to loss on debt extinguishment.
On August 13, 2015, the carrying value on the note was $655,816, net of unamortized discounts of $94,184. The Company recorded
the note as a derivative liability at fair value of $970,956, a derivative discount of $655,816, and the excess in fair value
of $315,140 to loss on debt extinguishment. The total loss on debt extinguishment on this note was $369,324. During the three
and nine months ended June 30, 2016, the Company amortized $0 and $472,628 of the derivative discount to interest expense, recorded
a loss (gain) on the change in fair value of the derivative liability of ($296,142) and $27,730, and allocated the fair value
of $123,179 and $1,056,544 of the conversions below as additional paid-in-capital and a reduction in the derivative liability,
respectively. As of June 30, 2016, the derivative liability was fully extinguished due to its full conversion.
The
following is summary of conversions by the $2M Note holder (including its assignees) during the nine months ended June 30, 2016:
Conversion Date
|
|
Principal Converted
|
|
|
Accrued Interest Converted
|
|
|
Total Converted
|
|
|
Conversion Rate
|
|
|
Common Shares Issued
|
|
October 1, 2015
|
|
$
|
10,000
|
|
|
$
|
-
|
|
|
$
|
10,000
|
|
|
$
|
0.015
|
|
|
|
675,676
|
|
October 5, 2015
|
|
|
10,000
|
|
|
|
-
|
|
|
|
10,000
|
|
|
$
|
0.015
|
|
|
|
675,676
|
|
October 6, 2015
|
|
|
13,262
|
|
|
|
-
|
|
|
|
13,262
|
|
|
$
|
0.014
|
|
|
|
961,000
|
|
October 7, 2015
|
|
|
10,000
|
|
|
|
-
|
|
|
|
10,000
|
|
|
$
|
0.012
|
|
|
|
865,801
|
|
October 9, 2015
|
|
|
11,728
|
|
|
|
-
|
|
|
|
11,728
|
|
|
$
|
0.012
|
|
|
|
1,011,000
|
|
October 9, 2015
|
|
|
10,000
|
|
|
|
-
|
|
|
|
10,000
|
|
|
$
|
0.012
|
|
|
|
865,801
|
|
October 12, 2015
|
|
|
14,680
|
|
|
|
-
|
|
|
|
14,680
|
|
|
$
|
0.012
|
|
|
|
1,271,000
|
|
October 13, 2015
|
|
|
11,601
|
|
|
|
-
|
|
|
|
11,601
|
|
|
$
|
0.012
|
|
|
|
1,000,052
|
|
October 15, 2015
|
|
|
14,680
|
|
|
|
-
|
|
|
|
14,680
|
|
|
$
|
0.012
|
|
|
|
1,271,000
|
|
October 19, 2015
|
|
|
17,400
|
|
|
|
-
|
|
|
|
17,400
|
|
|
$
|
0.012
|
|
|
|
1,500,000
|
|
October 19, 2015
|
|
|
15,000
|
|
|
|
-
|
|
|
|
15,000
|
|
|
$
|
0.012
|
|
|
|
1,298,701
|
|
October 20, 2015
|
|
|
16,650
|
|
|
|
-
|
|
|
|
16,650
|
|
|
$
|
0.011
|
|
|
|
1,500,000
|
|
October 21, 2015
|
|
|
17,500
|
|
|
|
-
|
|
|
|
17,500
|
|
|
$
|
0.012
|
|
|
|
1,515,152
|
|
October 23, 2015
|
|
|
20,000
|
|
|
|
-
|
|
|
|
20,000
|
|
|
$
|
0.012
|
|
|
|
1,731,602
|
|
October 26, 2015
|
|
|
24,420
|
|
|
|
-
|
|
|
|
24,420
|
|
|
$
|
0.011
|
|
|
|
2,200,000
|
|
October 29, 2015
|
|
|
26,640
|
|
|
|
-
|
|
|
|
26,640
|
|
|
$
|
0.011
|
|
|
|
2,400,000
|
|
November 2, 2015
|
|
|
29,970
|
|
|
|
-
|
|
|
|
29,970
|
|
|
$
|
0.011
|
|
|
|
2,700,000
|
|
November 2, 2015
|
|
|
20,000
|
|
|
|
-
|
|
|
|
20,000
|
|
|
$
|
0.011
|
|
|
|
1,809,136
|
|
November 5, 2015
|
|
|
32,190
|
|
|
|
-
|
|
|
|
32,190
|
|
|
$
|
0.011
|
|
|
|
2,900,000
|
|
November 10, 2015
|
|
|
28,800
|
|
|
|
-
|
|
|
|
28,800
|
|
|
$
|
0.010
|
|
|
|
3,000,000
|
|
November 12, 2015
|
|
|
23,930
|
|
|
|
-
|
|
|
|
23,930
|
|
|
$
|
0.007
|
|
|
|
3,323,611
|
|
November 17, 2015
|
|
|
16,500
|
|
|
|
-
|
|
|
|
16,500
|
|
|
$
|
0.006
|
|
|
|
2,727,273
|
|
November 19, 2015
|
|
|
1,640
|
|
|
|
11,225
|
|
|
|
12,865
|
|
|
$
|
0.006
|
|
|
|
2,316,013
|
|
November 23, 2015
|
|
|
23,111
|
|
|
|
-
|
|
|
|
23,111
|
|
|
$
|
0.006
|
|
|
|
4,127,000
|
|
November 27, 2015
|
|
|
24,750
|
|
|
|
-
|
|
|
|
24,750
|
|
|
$
|
0.006
|
|
|
|
4,500,000
|
|
December 2, 2015
|
|
|
18,450
|
|
|
|
-
|
|
|
|
18,450
|
|
|
$
|
0.004
|
|
|
|
4,500,000
|
|
December 8, 2015
|
|
|
18,000
|
|
|
|
-
|
|
|
|
18,000
|
|
|
$
|
0.004
|
|
|
|
5,000,000
|
|
December 11, 2015
|
|
|
13,368
|
|
|
|
-
|
|
|
|
13,368
|
|
|
$
|
0.002
|
|
|
|
5,570,000
|
|
December 16, 2015
|
|
|
14,181
|
|
|
|
-
|
|
|
|
14,181
|
|
|
$
|
0.002
|
|
|
|
5,860,000
|
|
December 22, 2015
|
|
|
15,488
|
|
|
|
-
|
|
|
|
15,488
|
|
|
$
|
0.002
|
|
|
|
6,400,000
|
|
December 29, 2015
|
|
|
17,666
|
|
|
|
|
|
|
|
17,666
|
|
|
$
|
0.002
|
|
|
|
7,300,000
|
|
May 31, 2016
|
|
|
27,495
|
|
|
|
-
|
|
|
|
27,495
|
|
|
$
|
0.001
|
|
|
|
19,227,000
|
|
June 13, 2016
|
|
|
28,936
|
|
|
|
-
|
|
|
|
28,936
|
|
|
$
|
0.001
|
|
|
|
20,235,000
|
|
June 21, 2016
|
|
|
22,254
|
|
|
|
-
|
|
|
|
22,254
|
|
|
$
|
0.001
|
|
|
|
21,296,000
|
|
June 28, 2016
|
|
|
12,339
|
|
|
|
2,589
|
|
|
|
14,928
|
|
|
$
|
0.001
|
|
|
|
16,964,625
|
|
|
|
$
|
632,629
|
|
|
$
|
13,814
|
|
|
$
|
646,443
|
|
|
|
|
|
|
|
160,498,119
|
|
During
the three and nine months ended June 30, 2016 and 2015, the Company amortized $0 and $17,600, and $30,713 and $22,400 of the original
issue discount to interest expense, respectively. As of June 30, 2016, there is $35,319 in accrued interest expense related to
this note and the Company recorded $7,617 and $10,111, and $16,209 and $14,500 in interest expense during the three and nine months
ended June 30, 2016 and 2015, respectively.
Convertible
Note Financing
On
August 5, 2015, the Company entered into a series of convertible note financings with several accredited investors totaling an
aggregate of $541,000 in aggregate proceeds raised less certain fees and costs as set forth in the financing documents known as
the “August 2015 Notes”. The financing was disclosed on the Company’s Current Report on Form 8-K filed on August
11, 2015 and is incorporated herein by reference. The Company recorded an original issue discount of $12,500 along with these
notes. On March 7, 2016, $112,000 of these notes were assigned to the same accredited investor previously mentioned and $7,806
was added to the principal balance and recorded as interest expense during the three and six months ended March 31, 2016.
August
2015 Notes
On
August 5, 2015, the carrying value on the notes were $419,626, net of unamortized original issue discounts of $9,374. In six months
when the note became convertible, the Company recorded the note as a derivative liability at fair value of $1,181,732, a derivative
discount of $419,626, and the excess in fair value of embedded conversion feature of $762,106. The Company amortizes the derivative
discount over the expected life of the related debt. During the three and nine months ended June 30, 2016, the Company amortized
$205,284 and $313,020 of the derivative discount to interest expense and recorded a gain on the change in fair value of the derivative
liability of $1,235,526 and $839,257. As of June 30, 2016, the derivative liability was $342,474. During the three and nine months
ended June 30 2016, the Company amortized $2,764 and $5,890 of original issue discounts to interest expense. During the three
and nine months ended June 30 2016, the Company amortized $17,964 and $53,891 of debt issuance costs to interest expense. As of
June 30, 2016, $163,219 and $61,167 is classified as current and long-term on the accompanying consolidated balance sheet, net
of total unamortized discounts of $105,381 and $13,833, respectively. As of June 30, 2016, there is $53,241 in accrued interest
expense related to these notes and the Company recorded $23,807 and $46,944 in interest expense during the three and nine months
ended June 30, 2016, respectively.
Additional
Funding Under August 2015 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. A one-time interest charge of $11,600 was added to the principal of the note.
In six months when the note became convertible, the Company recorded the note as a derivative liability at fair value of $95,251,
a derivative discount of $61,600, and the excess in fair value of $33,651 to excess of fair value of embedded conversion feature.
The Company amortizes the derivative discount over the expected life of the related debt. During the three and nine months ended
June 30, 2016, the Company amortized $3,422 and $3,422 of the derivative discount to interest expense and recorded a gain on the
change in fair value of the derivative liability of $9,630 and $9,630, respectively. As of June 30, 2016, the derivative liability
was $85,621.The Company also recorded $4,000 of debt issuance costs as a discount. During the three and nine months ended June
30, 2016, the Company amortized $500 and $1,000 of debt issuance costs to interest expense. As a result, as of June 30, 2016,
$422 is classified as current on the accompanying consolidated balance sheet, net of total unamortized discounts of $61,178. As
of June 30, 2016, there is default interest of $5,605 in accrued interest expense related to these notes and the Company recorded
$3,757 and $5,605 during the three and nine months ended June 30, 2016, respectively.
Assigned
2015 Notes
On August 5, 2015, the
carrying value on an assigned note was $112,000. In six months when the note became convertible, the Company recorded the note
as a derivative liability at fair value of $400,722, a derivative discount of $112,000, and the excess in fair value of $288,722
to loss on debt extinguishment. During the three and nine months ended June 30, 2016, the Company amortized $74,667 and $112,000
of the derivative discount to interest expense and recorded a gain on the change in fair value of the derivative liability of
$516,101 and $223,098, respectively. As of June 30, 2016, the derivative liability was fully extinguished due to its full conversion.
During the three and nine months ended June 30, 2016, the Company amortized $0 and $8,571 of debt issuance costs to interest expense,
respectively.
During
the nine months ended June 30, 2016, the Company enacted the following conversions:
Conversion Date
|
|
Principal Converted
|
|
|
Accrued Interest Converted
|
|
|
Total Converted
|
|
|
Conversion Rate
|
|
|
Common Shares Issued
|
|
April 20, 2016
|
|
$
|
16,117
|
|
|
$
|
-
|
|
|
$
|
16,117
|
|
|
$
|
0.0024
|
|
|
|
6,660,000
|
|
April 25, 2016
|
|
|
46,349
|
|
|
|
-
|
|
|
|
46,349
|
|
|
$
|
0.0029
|
|
|
|
15,900,000
|
|
May 5, 2016
|
|
|
37,744
|
|
|
|
-
|
|
|
|
37,744
|
|
|
$
|
0.0025
|
|
|
|
15,250,000
|
|
May 18, 2016
|
|
|
19,597
|
|
|
|
1,594
|
|
|
|
21,191
|
|
|
$
|
0.0020
|
|
|
|
10,413,268
|
|
|
|
$
|
119,807
|
|
|
$
|
1,594
|
|
|
$
|
121,401
|
|
|
|
|
|
|
|
48,223,268
|
|
As
of June 30, 2016, there is $12,562 in accrued interest expense related to these notes and the Company recorded $3,219 and $12,066
in interest expense during the three and nine months ended June 30, 2016, respectively.
On
August 12, 2015, the Company entered into an additional convertible note financing transaction with an accredited investor in
the principal amount of $105,000 less fees and costs. The same accredited investor was assigned mentioned above was assigned this
note and $20,000 was added to the principal balance and recorded as interest expense during the three and six months ended March
31, 2016. The closing under the financing occurred concurrently with the execution of the financing documents on August 12, 2015.
The convertible note bears interest at the rate of 8% 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 58% of the average of the lowest trading price
of the common stock in the thirteen (13) trading days immediately preceding the applicable conversion date. The Company has 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 is June 12, 2016 subject to the noteholder’s right to extend maturity
an additional nine (9) month period. The Company recorded an original issue discount of $5,000 along with this note. In six months
when the note became convertible, the Company recorded the note as a derivative liability at fair value of $110,669, a derivative
discount of $103,000, and the excess in fair value of $7,669 to loss on debt extinguishment. During the three and nine months
ended June 30, 2016, the Company amortized $51,500 and $85,833 of the derivative discount to interest expense and recorded a loss
(gain) on the change in fair value of the derivative liability of ($237,246) and $38,179, respectively. As of June 30, 2016, the
derivative liability was $148,847. During the three and nine months ended June 30, 2016, the Company amortized $1,000 and $4,000
of original issue discounts to interest expense, respectively. During the three and nine months ended June 30, 2016, the Company
amortized $3,280 and $13,120 of debt issuance costs to interest expense, respectively. As a result, as of June 30, 2016, $107,833
is classified as long-term on the accompanying consolidated balance sheet, net of total unamortized discounts of $17,167. As of
June 30, 2016, there is $16,366 in accrued interest expense related to these notes and the Company recorded $7,769 and $15,222
in interest expense during the three and nine months ended June 30, 2016, respectively.
Subsequent
to June 30, 2016, the note was fully converted as a result of the following conversions:
Conversion Date
|
|
Principal Converted
|
|
|
Accrued Interest Converted
|
|
|
Total Converted
|
|
|
Conversion Rate
|
|
|
Common Shares Issued
|
|
July 8, 2016
|
|
$
|
19,222
|
|
|
$
|
-
|
|
|
$
|
19,222
|
|
|
$
|
0.0008
|
|
|
|
23,300,000
|
|
July 25, 2016
|
|
|
17,518
|
|
|
|
-
|
|
|
|
17,518
|
|
|
$
|
0.0007
|
|
|
|
24,500,000
|
|
August 3, 2016
|
|
|
17,738
|
|
|
|
-
|
|
|
|
17,738
|
|
|
$
|
0.0007
|
|
|
|
25,800,000
|
|
August 10, 2016
|
|
|
17,919
|
|
|
|
-
|
|
|
|
17,919
|
|
|
$
|
0.0007
|
|
|
|
27,150,000
|
|
September 19, 2016
|
|
|
11,482
|
|
|
|
-
|
|
|
|
11,482
|
|
|
$
|
0.0008
|
|
|
|
14,912,185
|
|
January 10, 2017
|
|
|
41,121
|
|
|
|
879
|
|
|
|
42,000
|
|
|
$
|
0.0014
|
|
|
|
30,000,000
|
|
January 18, 2017
|
|
|
-
|
|
|
|
28,795
|
|
|
|
28,795
|
|
|
$
|
0.0045
|
|
|
|
6,398,894
|
|
|
|
$
|
125,000
|
|
|
$
|
29,674
|
|
|
$
|
154,674
|
|
|
|
|
|
|
|
152,061,079
|
|
The
foregoing descriptions of the August 12, 2015 note financing and related documentation do not purport to be complete and are qualified
in their entirety by reference to the full text of the documents, which are filed as exhibits to this Quarterly Report on Form
10-K/A and are incorporated herein by reference.
April
2016 Note
On
April 19, 2016, the Company entered into an additional convertible note financing transaction with an accredited investor in the
principal amount of $176,150 less fees and costs. The convertible note bears interest at the rate of 10% 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 thirteen (20) trading days immediately preceding the applicable conversion date. The Company
has 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 is January 19, 2017. The Company recorded the prepayment penalty of $91,011
as a discount to the convertible note and will amortize it through the notes maturity date. During the three and nine months ended
June 30, 2016, the Company recorded $45,505 and $45,505 of the discount to interest expense, respectively. As a result, as of
June 30, 2016, $130,645 is classified as current on the accompanying consolidated balance sheet, net of total unamortized discounts
of $45,505. As of June 30, 2016, there is $5,711 in accrued interest expense related to these notes and the Company recorded $5,711
and $5,711 in interest expense during the three and nine months ended June 30, 2016, respectively. In six months, if and when
the note becomes convertible, the Company will record a derivative liability at fair value.
EQUITY
INVESTMENT BY THE INVESTOR
On December 10, 2015, the
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 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 note as a derivative liability
at fair value of $114,611, a derivative discount of $90,000, and the excess in fair value of $24,611 to excess of fair value of
embedded conversion features. During the three and nine months ended June 30, 2016, the Company amortized $15,000 and $15,000
of the derivative discount to interest expense and recorded a loss on the change in fair value of the derivative liability of
$10,670 and $10,670, respectively. As a result, as of June 30, 2016, $15,000 is classified as current on the accompanying consolidated
balance sheet, net of total unamortized discounts of $75,000.
NOTE
6.
|
RELATED
PARTY DEBT
|
Related
Party Note
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 June 30, 2016, there is $2,330 in accrued interest expense related
to this note and the Company recorded $228 and $686 in interest expense related to this note during the three and nine months
ended June 30, 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
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.
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.
During the three and nine
months ended June 30, 2016, the Company recorded $4,550 and $13,108 of interest expense related to the notes. As of June 30, 2016,
$300,000 of the Series B Notes along with $36,001 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.
NOTE
7.
|
COMMITMENTS
AND CONTINGENCIES
|
Office
Lease
As
of June 30, 2016, the Company leases a 2,500 square foot office in Agoura Hills, California for approximately $2,500 per month
which expires in December 2017.
Warrant
Liability
The
Company recorded the estimated settlement liability as of March 31, 2014 for the Warrant Shares issued and the Warrants that remain
outstanding and unexercised that would be entitled to the same settlement based on the number of shares expected to be issued
and the market price of the Company’s common stock on the dates of the actual settlements from $4.72 per share to $7.25
per share, and market price of the first settlement of $7.25 for the unsettled claims. The warrant liability expired during May
2016. As of June 30, 2016, the estimated liability is $0. The Company recorded a gain on the change in warrant liability of $31,401
and $2,156,203 during the nine months ended June 30, 2016 and 2015, respectively.
Settlement
of Company Legal Claims
On
December 15, 2014, the Company recorded a gain on settlement of $257,930 for a confidential settlement by and between the Company
and certain shareholders and related parties as settlement for certain potential legal claims held by the Company. As a result
of the settlement, the Company received net proceeds of $62,930 and vendor credits of $200,000 during the three months ended December
31, 2014. A total of $325,000 in vendor credits has been received in connection with the settlement and no further credits will
be given. In January 2015, the Company received 440,625 shares from the settlement that was assigned to officers of the Company.
The officers decided it was in the best interest of the Company to return these shares to the Company to be used for future strategic
issuances. Accordingly, the 440,625 shares valued at $367,531 were recorded as treasury stock as of March 31, 2015. The Company
recorded a gain on settlement of $0 and $0, and $0 and $625,461 during the three and nine months ended June 30, 2016 and 2015,
respectively.
Settlement
Liability
On
or about December 1, 2016, the Company learned that LG Capital Funding, LLC (“LG Capital”), a plaintiff in a lawsuit
pending in New York against the Company (Case 1:16-cv-02217-CBA-LB), 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. 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 carries a 10% interest rate, is 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. As of June 30, 2016, the Company recorded a settlement liability of
$151,000.
NOTE
8.
|
STOCKHOLDERS’
DEFICIT
|
COMMON
STOCK
On
November 27, 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.
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
6.
COMMON
STOCK ISSUED FOR ACCRUED WAGES
On
October 22, 2015, the Company’s Board of Directors issued 2,083,333 shares of restricted common stock to Kyle Tracey at
$0.024 per share for payment of $50,000 in accrued wages. On October 22, 2015, the Company’s Board of Directors issued 555,555
shares of restricted common stock to Joe Andreae at $0.024 per share for payment of $13,333 in accrued wages. On October 22, 2015,
the Company’s Board of Directors issued 1,250,000 shares of restricted common stock to Michael Cook at $0.024 per share
for payment of $3,000 in accrued wages.
In
February 2016, Justin Braune elected to take $15,000 of wages as common stock. The shares will formally be issued once the debt
conversions and capital structure restrictions have been resolved.
On
March 31, 2016, the Company’s Board of Directors issued 250,000 shares of restricted common stock to Justin Braune at $0.009
per share for payment of $2,375 in accrued wages.
To
date, the Company has issued but not delivered 3,000,000 shares of common stock to Justin Braune in accrued wages. The Company
and Justin Braune, through Mr. Braune’s counsel, are attempting to negotiate a resolution of Mr. Braune’s assertions
that the Company breached its agreements with Mr. Braune.
COMMON
STOCK ISSUED FOR BONUSES
On
October 22, 2015, the Company’s Board of Directors issued bonus stock grants of 600,000 shares of restricted common stock
each to Allan Viernes and Benjamin Beaulieu at $0.024 per share. In addition, the Company issued 300,000 shares of restricted
common stock to employees at $0.024 per share. These issuances were based on the fair market value on the date of issuance immediately
vested and resulted in $36,000 being charged to general and administrative expense during the three months ended December 31,
2015.
On
October 22, 2015, the Company’s Board of Directors issued bonus stock grants of 1,250,000 shares of restricted common stock
an outside sales consultant at $0.024 per share. The issuance was based on the fair market value on the date of issuance immediately
vested and resulted in $30,000 being charged to sales and marketing expense during the three months ended December 31, 2015.
COMMON
STOCK ISSUED FOR SERVICES
On
November 25, 2015, the Company’s Board of Directors issued stock grants of 49,760 shares of restricted common stock a business
development consultant at $0.011 per share. These issuances were based on the fair market value on the date of issuance immediately
vested and resulted in $547 being charged to general and administrative expense during the three months ended December 31, 2015.
On
December 23, 2015, the Company’s Board of Directors issued stock grants of 142,857 shares of restricted common stock a business
development consultant at $0.008 per share. These issuances were based on the fair market value on the date of issuance immediately
vested and resulted in $1,143 being charged to general and administrative expense during the three months ended December 31, 2015.
COMMON STOCK SURRENDERED
On
October 22, 2015, Joe Andreae surrendered 130,000 shares of restricted common stock valued at $3,120 and were recorded as treasury
stock. In addition, on October 22, 2015, an employee also surrendered 30,000 shares valued at $360, which was recorded as treasury
stock.
On
December 20, 2015, Kyle Tracey surrendered 130,000 shares of restricted common stock valued at $1,170 and were recorded as treasury
stock.
On
December 21, 2015, the Allan Viernes and Benjamin Beaulieu each surrendered 30,000 shares of restricted common stock valued at
$420, which was recorded as treasury stock.
WARRANTS
The
table below summarizes the Company’s warrant activity during the nine month period ended June 30, 2016:
|
|
Shares
|
|
|
Weighted Average
Price
|
|
|
Weighted Average Remaining Contractual Term
|
|
|
Aggregate Intrinsic
Value
|
|
Warrants outstanding at September 30, 2015
|
|
|
1,184,726
|
|
|
$
|
0.114
|
|
|
|
0.9
|
|
|
$
|
739,812
|
|
Warrants issued
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Warrants exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Cancelled/forfeited/expired
|
|
|
(1,184,726
|
)
|
|
$
|
0.114
|
|
|
|
-
|
|
|
|
-
|
|
Warrants outstanding at June 30, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
The
Company’s warrants above are accounted for as derivative liabilities in the accompanying consolidated balance sheets.
NOTE
9.
|
INTELLECTUAL
PROPERTY
|
The
Company plans to rely on a combination of trademark, copyright, trade secret and patent laws in the United States as well as confidentiality
procedures and contractual provisions to protect future proprietary technology and its brands, as they are developed. The
Company has begun to execute on this plan with the acquisition of the patent pending HIVE Ceramic vaporization product and the
HIVE trademark as well as several pending trademark applications. The Company intends to continue to create or acquire
proprietary vaporizers and e-cigarettes, and various trademarks, patents and/or copyrights for brands which are developed.
TRADEMARKS
On
March 27, 2014, the Company and Stone Arch Studio, LLC entered into a Trademark Assignment Agreement whereby the Company acquired
all right, title, priority and interest to the HIVE trademark U.S. Registration No. 44513069 as registered with the U.S. Patent
and Trade Office (“USPTO”). This acquisition further protects the Company’s HIVE Ceramics brand vaporization
line. In addition, the Company has filed for trademark protection with the USPTO on several additional trademarks and tradenames
to be utilized by the Company in the future as the marks register. As of June 30, 2016, the Company has capitalized $123,150 in
costs related to the trademarks.
PATENTS
On
March 27, 2014, the Company formally closed its acquisition of the patent pending HIVE Ceramics vaporization technology. The Company
has already begun exploiting this technology and intends to prosecute the patent application to completion. As of June, 2016,
the Company has no patent costs capitalized.
The
Company is engaged in developing proprietary rights of the type that may be awarded patents for enhancements to its core HIVE
product line as well as proprietary rights in related product lines. The Company also expects that from time to time it is in
discussions to acquire additional patented technology from third parties to further grow and develop branded product lines in
the vaporization market. See Note 1 regarding BetterChem unwind and rights to related patents.
NOTE
10.
|
SUBSEQUENT
EVENTS
|
See
Note 5 regarding subsequent conversions.
Resignation
and Appointment of Chief Executive Officer
On
June 20, 2016, Justin Braune submitted his resignation as Chief Executive Officer and a member of our Board of Directors. Mr.
Braune’s resignation was voluntary and not at the request of the Company’s Board of Directors. Ben Beaulieu was appointed
Chief Executive Officer.
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
is 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 is memorialized in Secured Promissory Note #1,
the funding of which occurred on or immediately after the execution of the Typenex Agreement.
Each Tranche Note, or any
part of it, is convertible into fully paid and non-assessable $0.00001 par value common stock of the Company. The Conversion Price
is as described in the Typenex Agreement and is based on at least a 45% discount to the trading price of 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.
There is no guarantee that
Typenex will fund the remainder of the Typenex Note and in fact it is within Typenex’s sole and absolute discretion whether
it ultimately funds Tranche Notes #2- #12. However, in order to secure Typenex’s performance of its obligations under the
Typenex Note, as well as any subsequent Tranche Notes, Typenex agreed to pledge a 40% membership interest in Typenex Medical, LLC,
an Illinois limited liability company. Should Typenex decide it won’t fund the remainder of the Tranche Notes, the Company’s
operating results will suffer and its ability to remain a going concern will be jeopardized.
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 $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.
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 GHS Note, or any part
of it, is convertible into fully paid and non-assessable $0.00001 par value 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 to the trading price of 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.
Triggering Events That Accelerate or Increase
a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement.
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.
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 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.