Certain information
and footnote disclosures required under accounting principles generally accepted in the United States of America have been condensed
or omitted from the following consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange
Commission (the “SEC”). It is suggested that the following consolidated financial statements be read
in conjunction with the financial statements and notes thereto included in the annual financial statements included on Form 10-K/A
for Vape Holdings, Inc. for the fiscal year ended September 30, 2015.
[B] Stock-based compensation was $34,800 and $612,549 for the three months ended December
31 2015 and 2014, 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.
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.
VAPE is organized and directed
to operate strictly in accordance with all applicable state and federal laws.
AMENDMENT
We have amended this
Form 10-Q/A to correctly account for the following non-cash transactions:
In August 2015 the Company
entered into convertible notes without conversion floors resulting in an unlimited potential of shares to be issued. The notes
were not convertible until six months from the issuance date, and accordingly, we adjusted the consolidated financial statements
to defer recognition of the embedded conversion feature until the instruments are convertible.
On August 13, 2015 and
August 26, 2015, the fixed conversion floors of the Redwood and Typenex notes, respectively, were removed creating a potentially
unlimited number of shares to be issued on the date of the amendment. Accordingly, we amended the Form 10-K/A to account for the
embedded conversion features as derivative financial instruments at fair value. This increased the loss on debt extinguishments
and interest expense previously recorded, as well as the derivative liabilities at fair value. We continued the accounting for
the derivative financial instruments at fair value in this Form 10-Q/A which resulted in a small increase in interest expense
and an increase in loss in change in change of derivative liabilities.
The following was the
effect on the previously reported consolidated financial statements.
|
|
As Previously Reported
|
|
|
|
|
|
As Restated
|
|
|
|
December 31, 2015
|
|
|
Change
|
|
|
December 31, 2015
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
$
|
1,020,350
|
|
|
$
|
875,944
|
|
|
$
|
1,896,294
|
|
Total liabilities
|
|
$
|
1,351,014
|
|
|
$
|
766,611
|
|
|
$
|
2,117,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' deficit
|
|
$
|
(419,297
|
)
|
|
$
|
(766,611
|
)
|
|
$
|
(1,185,908
|
)
|
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
$
|
931,717
|
|
|
$
|
-
|
|
|
$
|
931,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
(710,552
|
)
|
|
$
|
(67,391
|
)
|
|
$
|
(777,943
|
)
|
Change in derivative liabilities
|
|
$
|
20,902
|
|
|
$
|
(212,426
|
)
|
|
$
|
(191,524
|
)
|
Net loss
|
|
$
|
(1,126,720
|
)
|
|
$
|
(279,362
|
)
|
|
$
|
(1,406,082
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share - basic
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
$
|
(0.02
|
)
|
Loss per common share - diluted
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
$
|
(0.02
|
)
|
GOING
CONCERN
VAPE’s consolidated
financial statements reflect a net loss of $1,406,082 during the three months ended December 31, 2015. As of December 31, 2015,
we had cash of $47,605 and a working capital deficit of $1,207,365. VAPE has suffered an accumulated deficit of $29,572,827 and
during the three months ended December 31, 2015, the Company took steps to curtail its Offset, HIVE Glass and HIVE Supply business
lines to focus more on consumer vaporization products including the launch of “Revival” discussed above. The Company
also curtailed 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 expects to obtain funding for
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 10
for subsequent events regarding financing activities.
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 December
31, 2015 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 December
31, 2015:
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and
cash equivalents
|
|
$
|
47,605
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
47,605
|
|
Total
assets measured at fair value
|
|
$
|
47,605
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
47,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
instruments
|
|
$
|
-
|
|
|
$
|
609,669
|
|
|
$
|
-
|
|
|
$
|
609,669
|
|
Total
liabilities measured at fair value
|
|
$
|
-
|
|
|
$
|
609,669
|
|
|
$
|
-
|
|
|
$
|
609,669
|
|
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
|
|
$
|
-
|
|
|
$
|
1,704,127
|
|
|
$
|
-
|
|
|
$
|
1,704,127
|
|
Total liabilities measured at fair
value
|
|
$
|
-
|
|
|
$
|
1,704,127
|
|
|
$
|
-
|
|
|
$
|
1,704,127
|
|
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 80% of our accounts receivable as of December 31, 2015. 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 97% of our purchases during the three months ended December 31, 2015. One (1) supplier accounted for
100% of our purchases during the three months ended December 31, 2014. 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 months ended December 31, 2015 and 2014, the Company did not record any impairment of its trademarks
and pending patents 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 months ended
December 31, 2015 and 2014, research and development costs were $35,599 and $51,853, 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. The embedded conversion features are recorded as discounts
when the notes become convertible. 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. 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.
When
applicable, the Company calculates the fair value of warrants and conversion features issued with the convertible instruments
using the Black-Scholes valuation method, using the same assumptions used for valuing employee options for purposes of ASC 718
“Compensation - Stock Compensation”, except that the contractual life of the warrant or conversion feature is used.
The allocated fair value is recorded as a debt discount, with the excess of fair value of the embedded conversion feature over
the carrying value of the debt, 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
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.
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 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 three
months ended December 31, 2015:
|
|
For the Three Months Ended
|
|
|
|
December 31,
|
|
|
|
2015
|
|
Series A Preferred stock
|
|
|
500,000
|
|
Common stock options
|
|
|
-
|
|
Common stock warrants
|
|
|
1,184,727
|
|
Convertible notes
|
|
|
535,890,076
|
|
|
|
|
537,574,803
|
|
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 December 31, 2014:
|
|
For the Three Months Ended
December 31, 2014
|
|
Weighted average common shares outstanding used in calculating basic earnings per share
|
|
|
10,692,552
|
|
Effect of Series A preferred stock
|
|
|
500,000
|
|
Effect of convertible notes payable
|
|
|
1,465,565
|
|
Effect of options and warrants
|
|
|
144,946
|
|
Weighted average common and common equivalent shares used in calculating diluted earnings per share
|
|
|
12,803,063
|
|
|
|
|
|
|
Net income as reported
|
|
$
|
582,910
|
|
Add - Interest on convertible notes payable
|
|
|
88,865
|
|
Net income available to common stockholders
|
|
$
|
671,775
|
|
The
Company excluded 1,005,000 warrants from the computation for the three months ended December 31, 2014, 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.
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 three months
ended December 31, 2015 and 2014:
Three Months
Ended
December,
|
|
Stock Price at
Grant Date
|
|
|
Dividend
Yield
|
|
|
Exercise
Price
|
|
|
Risk Free
Interest Rate
|
|
|
Volatility
|
|
|
Average
Life
|
|
2015
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
2014
|
|
$
|
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 will adopt 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.
NOTE
3. FIXED ASSETS
The
following is a summary of fixed assets as of December 31, 2015 and September 30, 2015:
|
|
December 31,
2015
|
|
|
September 30,
2015
|
|
Molds and Tooling
|
|
$
|
215,940
|
|
|
$
|
176,015
|
|
Leasehold improvements
|
|
|
-
|
|
|
|
29,795
|
|
Accumulated depreciation
|
|
|
(96,302
|
)
|
|
|
(87,483
|
)
|
|
|
$
|
119,638
|
|
|
$
|
118,327
|
|
During
the three months ended December 31, 2015 and 2014, depreciation expense included in cost of revenue were $38,614 and $13,495,
respectively.
NOTE
4. ACCRUED EXPENSES
The
following is a summary of accrued expenses as of December 31, 2015 and September 30, 2015:
|
|
December
31,
2015
|
|
|
September 30,
2015
|
|
Accrued interest
|
|
$
|
82,143
|
|
|
$
|
46,337
|
|
Accrued interest - related party
|
|
|
28,776
|
|
|
|
24,538
|
|
Accrued wages and taxes
|
|
|
79,462
|
|
|
|
112,322
|
|
Other
|
|
|
18,076
|
|
|
|
24,412
|
|
|
|
$
|
208,457
|
|
|
$
|
207,609
|
|
As
of December 31, 2015, $25,000 for Kyle Tracey, $16,667 for Joe Andreae, $10,000 for Mike Cook, $5,000 for Allan Viernes, and $5,000
for Benjamin Beaulieu are recorded in accrued wages.
NOTE
5. THIRD PARTY DEBT
CONVERTIBLE
NOTES PAYABLE
Beginning on February
11, 2014, the Company issued 6% Convertible Notes (the “6% Notes”) pursuant to subscription agreements to ten (10)
accredited investors (the “Holders”) with the aggregate principal amount of $230,000. The 6% Notes are not secured
by any collateral or any assets pledged to the Holders. The maturity dates are from February 28, 2015 to March 31, 2015, and the
annual rate of interest is six percent (6%). Subject to certain limitations, the Holders can, at their sole discretion, convert
the outstanding and unpaid principal and interest of their notes into fully paid and nonassessable shares of the Company’s
common stock. The conversion price of these 6% Notes is the average of the fifteen (15) lowest daily VWAP’s occurring during
the twenty (20) consecutive trading days immediately preceding the date each Holder elects convert all of their 6% Note minus
a discount of 40%. In no event will the conversion price be less than $1.00 per share or greater than $3.00 per share. The Company
had a preexisting relationship with each of the Holders, and no general solicitation or advertising was used in connection with
the issuance of the 6% Notes.
On March 12, 2015, the
Company offered to pay accrued interest and modify the terms of the six (6) Holders’ outstanding 6% Notes, decreasing the
conversion floor from $1.00 to $0.50 in order to encourage the noteholders to convert their promissory notes. The Company recorded
a loss on debt extinguishment of $23,443 as a result of the fair value in excess of the modified conversion floor. In March 2015,
the Company paid all accrued interest on the 6% notes of $17,200. Five (5) of the six (6) holders converted in full a total of
$80,000 of 6% Notes into 160,000 shares of common stock. The remaining note holder partially converted $20,000 of 6% Notes into
40,000 of common shares and extended the terms on the remaining $30,000 for six (6) months. In December 2015, the Company further
modified the terms for the last remaining holder of the 6% Notes, removing the conversion floor and conversion terms in order
to encourage the holder to convert. On December 14, 2015, the note holder converted $30,000 in principal and $1,351 of accrued
interest into 13,063,013 shares of common stock. As of December 31, 2015, none of the 6% Notes remain outstanding.
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. We amortized $8,333 and $2,778 of the discount to interest expense during the
three months ended December 31, 2015 and 2014, respectively. In addition, the Company recorded $45,940 in deferred financing costs
and amortized $7,657 and $2,552 to interest expense during the three months ended December 31, 2015 and 2014, respectively. As
of December 31, 2015, the Company had unamortized costs of $12,761 in current deferred financing costs. The deferred financing
costs are amortized through the maturity date.
The
Note bears interest at the rate of 10% per annum and is convertible into common stock of the Company at a conversion price per
share of 70% of the average of the three (3) lowest Closing Sale Prices in the ten (10) Trading Days immediately preceding the
applicable Conversion (subject to adjustment in the event of stock splits, stock dividends, and similar transactions, and in the
event of subsequent sales of common stock at a lower purchase price (subject to certain exceptions))(the “Conversion Price”).
In no event will the Conversion Price be less than $0.50 per share. Repayment of principal on the Note, together with accrued
interest thereon, is due in twelve monthly installments, commencing six months from issuance. The Company may make such payments
in cash (in which event the Company will pay a 25% premium) or, subject to certain conditions, in shares of common stock valued
at the lower of the Conversion Price or 70% of the average of the three (3) lowest Closing Sale Prices in the ten (10) Trading
Days immediately preceding the applicable payment date (the “Amortization Conversion Rate”). The Maturity Date of
the Note is seventeen months from the date of issuance. We recorded a discount totaling $168,000 related to the beneficial conversion
feature embedded in the note upon issuance. We amortized $84,000 of the discount to interest expense during the year ended September
30, 2015. 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. As a result, we expensed
the unamortized discount of $84,000 to
loss on debt extinguishment.
On August 26, 2015, the carrying value on the note was $332,666, net of unamortized discounts of $109,000. 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
months ended December 31, 2015, the Company amortized $124,750 of the derivative discount to interest expense, recorded a loss
on the change in fair value of the derivative liability of $206,843, and allocated the fair value of $352,616 of the conversions
below to additional paid-in capital and a reduction in the derivative liability. As of December 31, 2015, the derivative liability
was $498,138. 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.
Between October 2015 and
December 2015, 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
|
|
|
|
$
|
220,160
|
|
|
$
|
-
|
|
|
$
|
220,160
|
|
|
|
|
|
|
|
40,795,402
|
|
Subsequent to year end, the Investor also enacted
the following conversions:
Conversion Date
|
|
Principal
Converted
|
|
|
Accrued
Interest
Converted
|
|
|
Total
Converted
|
|
|
Conversion
Rate
|
|
|
Common
Shares
Issued
|
|
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
|
|
|
|
$
|
45,700
|
|
|
$
|
-
|
|
|
$
|
45,700
|
|
|
|
|
|
|
|
31,340,680
|
|
As a result, as of December
31, 2015, $71,058 and $15,627, net of total unamortized discounts of $136,748 and $30,073 are classified as current and long-term
on the accompanying consolidated balance sheet. As of December 31, 2015, there is $18,541 in accrued interest expense related
to this note and the Company recorded $8,596 in interest expense related to this note during the three months ended December 31,
2015.
$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.
The $2M
Note bears interest at the rate of 10% per annum and is immediately convertible into common stock of the Company at a
conversion price per share of 70% of the lowest daily VWAP in the ten (10) Trading Days immediately preceding the applicable
Conversion (subject to adjustment in the event of stock splits, stock dividends, and similar transactions, and in the event
of subsequent sales of common stock at a lower purchase price (subject to certain exceptions))(the
“Conversion Price”). In no event will the Conversion Price be less than $0.50 per share. Repayment of principal
on the $2M Note, together with accrued interest thereon, is due in twelve bi-monthly installments, commencing approximately
six months from issuance. The Company may make such payments in cash (in which event the Company will pay a 25% premium) or,
subject to certain conditions, in shares of common stock valued at the lower of the Conversion Price or 70% of the lowest
daily VWAP in the ten (10) Trading Days immediately preceding the applicable payment date (the “Amortization Conversion
Rate”). The Maturity Date of the $2M Note is twelve months from the date of issuance.
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, respectively. We amortized $45,600 of the discount to interest expense during the year ended September
30, 2015. In addition, we recorded a discount totaling $108,641 related to the beneficial conversion feature embedded in the note
upon issuance.
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 months ended December 31, 2015, the Company amortized $436,874 of the derivative discount
to interest expense, recorded a loss on the change in fair value of the derivative liability of $11,405, and allocated the fair
value of $933,366 of the conversions below as additional paid-in-capital and a reduction in the derivative liability. As of December
31, 2015, the derivative liability was $106,854.
The following is summary
of conversions by the $2M Note holder (including its assignees) during the three months ended December 31, 2015:
Conversion Date
|
|
Principal Converted
|
|
|
Accrued Interest Converted
|
|
|
Total Converted
|
|
|
Conversion Rate
|
|
|
Common Shares Issued
|
|
October 1, 2015
|
|
$
|
10,000
|
|
|
$
|
-
|
|
|
$
|
10,000
|
|
|
$
|
0.0148
|
|
|
|
675,676
|
|
October 5, 2015
|
|
|
10,000
|
|
|
|
-
|
|
|
|
10,000
|
|
|
$
|
0.0148
|
|
|
|
675,676
|
|
October 6, 2015
|
|
|
13,262
|
|
|
|
-
|
|
|
|
13,262
|
|
|
$
|
0.0138
|
|
|
|
961,000
|
|
October 7, 2015
|
|
|
10,000
|
|
|
|
-
|
|
|
|
10,000
|
|
|
$
|
0.0115
|
|
|
|
865,801
|
|
October 9, 2015
|
|
|
11,728
|
|
|
|
-
|
|
|
|
11,728
|
|
|
$
|
0.0116
|
|
|
|
1,011,000
|
|
October 9, 2015
|
|
|
10,000
|
|
|
|
-
|
|
|
|
10,000
|
|
|
$
|
0.0115
|
|
|
|
865,801
|
|
October 12, 2015
|
|
|
14,680
|
|
|
|
-
|
|
|
|
14,680
|
|
|
$
|
0.0115
|
|
|
|
1,271,000
|
|
October 13, 2015
|
|
|
11,601
|
|
|
|
-
|
|
|
|
11,601
|
|
|
$
|
0.0116
|
|
|
|
1,000,052
|
|
October 15, 2015
|
|
|
14,680
|
|
|
|
-
|
|
|
|
14,680
|
|
|
$
|
0.0115
|
|
|
|
1,271,000
|
|
October 19, 2015
|
|
|
17,400
|
|
|
|
-
|
|
|
|
17,400
|
|
|
$
|
0.0116
|
|
|
|
1,500,000
|
|
October 19, 2015
|
|
|
15,000
|
|
|
|
-
|
|
|
|
15,000
|
|
|
$
|
0.0116
|
|
|
|
1,298,701
|
|
October 20, 2015
|
|
|
16,650
|
|
|
|
-
|
|
|
|
16,650
|
|
|
$
|
0.0111
|
|
|
|
1,500,000
|
|
October 21, 2015
|
|
|
17,500
|
|
|
|
-
|
|
|
|
17,500
|
|
|
$
|
0.0115
|
|
|
|
1,515,152
|
|
October 23, 2015
|
|
|
20,000
|
|
|
|
-
|
|
|
|
20,000
|
|
|
$
|
0.0115
|
|
|
|
1,731,602
|
|
October 26, 2015
|
|
|
24,420
|
|
|
|
-
|
|
|
|
24,420
|
|
|
$
|
0.0111
|
|
|
|
2,200,000
|
|
October 29, 2015
|
|
|
26,640
|
|
|
|
-
|
|
|
|
26,640
|
|
|
$
|
0.0111
|
|
|
|
2,400,000
|
|
November 2, 2015
|
|
|
29,970
|
|
|
|
-
|
|
|
|
29,970
|
|
|
$
|
0.0111
|
|
|
|
2,700,000
|
|
November 2, 2015
|
|
|
20,000
|
|
|
|
-
|
|
|
|
20,000
|
|
|
$
|
0.0111
|
|
|
|
1,809,136
|
|
November 5, 2015
|
|
|
32,190
|
|
|
|
-
|
|
|
|
32,190
|
|
|
$
|
0.0111
|
|
|
|
2,900,000
|
|
November 10, 2015
|
|
|
28,800
|
|
|
|
-
|
|
|
|
28,800
|
|
|
$
|
0.0096
|
|
|
|
3,000,000
|
|
November 12, 2015
|
|
|
23,930
|
|
|
|
-
|
|
|
|
23,930
|
|
|
$
|
0.0072
|
|
|
|
3,323,611
|
|
November 17, 2015
|
|
|
16,500
|
|
|
|
-
|
|
|
|
16,500
|
|
|
$
|
0.0060
|
|
|
|
2,727,273
|
|
November 19, 2015
|
|
|
1,640
|
|
|
|
11,225
|
|
|
|
12,865
|
|
|
$
|
0.0056
|
|
|
|
2,316,013
|
|
November 23, 2015
|
|
|
23,111
|
|
|
|
-
|
|
|
|
23,111
|
|
|
$
|
0.0056
|
|
|
|
4,127,000
|
|
November 27, 2015
|
|
|
24,750
|
|
|
|
-
|
|
|
|
24,750
|
|
|
$
|
0.0055
|
|
|
|
4,500,000
|
|
December 2, 2015
|
|
|
18,450
|
|
|
|
-
|
|
|
|
18,450
|
|
|
$
|
0.0041
|
|
|
|
4,500,000
|
|
December 8, 2015
|
|
|
18,000
|
|
|
|
-
|
|
|
|
18,000
|
|
|
$
|
0.0036
|
|
|
|
5,000,000
|
|
December 11, 2015
|
|
|
13,368
|
|
|
|
-
|
|
|
|
13,368
|
|
|
$
|
0.0024
|
|
|
|
5,570,000
|
|
December 16, 2015
|
|
|
14,181
|
|
|
|
-
|
|
|
|
14,181
|
|
|
$
|
0.0024
|
|
|
|
5,860,000
|
|
December 22, 2015
|
|
|
15,488
|
|
|
|
-
|
|
|
|
15,488
|
|
|
$
|
0.0024
|
|
|
|
6,400,000
|
|
December 29, 2015
|
|
|
17,666
|
|
|
|
|
|
|
|
17,666
|
|
|
$
|
0.0024
|
|
|
|
7,300,000
|
|
|
|
$
|
541,604
|
|
|
$
|
11,225
|
|
|
$
|
552,830
|
|
|
|
|
|
|
|
82,775,494
|
|
As a result, as of December
31, 2015, $25,445, net of total unamortized discounts of $29,541 are classified as current on the accompanying consolidated balance
sheet. During the three months ended December 31, 2015, the Company amortized $28,121 of the original issue discount to interest
expense during the three months ended December 31, 2015 of which an unamortized discount of $3,079 remains as of December 31,
2015. In addition, we recorded a discount totaling $108,641 related to the beneficial conversion feature embedded in the note
upon issuance. As of December 31, 2015, there is $42,867 in accrued interest expense related to this note, respectively, and the
Company recorded $4,781 in interest expense related to this note during the three months ended December 31, 2015.
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 and amortized $1,563 of
the discount to interest expense during the three months ended December 31, 2015. As of December 31, 2015, there is $17,444 of
accrued interest related to these notes and the Company recorded $9,057 in interest expense related to the notes during the three
months ended December 31, 2015. The Company will record an embedded beneficial conversion feature at estimated fair value as a
derivative liability at fair value in six months when the notes become convertible.
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 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 these notes and amortized $1,500 of the discount to interest expense during the three months ended December 31, 2015. As
of December 31, 2015, there is $3,290 of accrued interest related to this note and the Company recorded $2,147 in interest expense
related to the notes during the three months ended December 31, 2015. The Company will record an embedded beneficial conversion
feature at estimated fair value as a derivative liability at fair value in six months when the notes become convertible.
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 and are incorporated herein by reference.
See Note 10 regarding subsequent
events for an update on status of the August 2015 Convertible Note Financing.
As of December 31,
2015 all notes, issuance costs, and discounts, except amounts subsequently converted are recorded as current due to the issues
described in Note 10 related to note conversions.
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. The Company also
recorded $4,000 of issuance costs as deferred financing costs and amortized $167 of the costs to interest expense during the three
months ended December 31, 2015. As of December 31, 2015, deferred financing costs of $3,833 remain and is expected to be amortized
over the life of the note. However, as a result of the issues described in Note 10 related to note conversions, the note, issuance
costs, and accompanying discount have been recorded as current liabilities. The Company will record an embedded beneficial conversion
feature at estimated fair value as a derivative liability at fair value in six months when the notes become convertible.
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 December 31, 2015, there is $1,875 in accrued interest expense
related to this note and the Company recorded $230 in interest expense related to this note during the three months ended December
31, 2015.
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.
As of December 31, 2015,
$300,000 of the Series B Notes along with $26,902 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 December 31, 2015, 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. We believe the issuance of convertible
notes in the three months ended March 31, 2014 triggered the full ratchet anti-dilution adjustment; before the provision was triggered,
the fair value of the warrant liability was not significant as the exercise was so far out of the money. As a result of the above
settlements with warrant holders, the Company recorded a loss on settlement of warrants of $29,528,844 during the six months ended
March 31, 2014 and a long-term warrant liability of $29,430,022 as of March 31, 2014 based on 4,407,200 shares of common stock
under the settlement at the Company’s closing stock prices discussed above. As of December 31, 2015, the estimated
settlement liability is $4,123 based on the fair market value of 1,184,727 remaining warrants and therefore the Company recorded
a gain on the change in warrant liability of $20,902 and $1,409,825 during the three months ended December 31, 2015 and 2014,
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 December 31, 2015, and the
Company recorded a gain on settlement of $0 and $257,930 during the three months ended December 31, 2015 and 2014, respectively.
Resignations
of Kyle Tracey and Joe Andreae; Appointment of Benjamin Beaulieu as Chairman
On
December 10, 2015, the Board accepted the resignation of Kyle Tracey as Chief Executive Officer, Chairman of the Board and all
other officer positions held by him with the Company. Mr. Tracey will remain in a consultant role with the Company focusing on
sales and business development of HIVE Ceramics for a period of two (2) years. Mr. Tracey also retains a large block of voting
control of the Company due to the above issuance of the Series B Notes issued to HIVE Ceramics, LLC an entity he co-owns. The
Board also accepted the resignation of Joe Andreae as President and a director as of December 10, 2015. The President seat will
remain vacant until a qualified candidate is located.
Benjamin
Beaulieu was elevated from his position as a member of the Board to Chairman of the Board on December 10, 2015 to replace Mr.
Tracey. Mr. Beaulieu also currently serves as the Company’s COO and will remain in that role.
Appointment
of Justin Braune as Chief Executive Officer
On
December 10, 2015, the Board appointed Justin Braune to serve as the Company’s Chief Executive Officer and as a director,
effective immediately.
Prior
to joining the Company, Mr. Braune, 33, served as the chief operating officer of Voodoo Science, LLC and Vapor Wild from 2014
to 2015. From 2013 to 2014, Mr. Braune served as the Chief of Operations for Veracity Security, a technology company located in
San Diego. From 2013-2014 Mr. Braune was the Director of Sales at Lear Capital. Since 2010 he owned and operated Braune Enterprises
a real estate and investment brokerage firm. Mr. Braune graduated from the United States Naval Academy with a B.S. degree in electrical
engineering in and was commissioned as an officer in the U.S. Navy. After earning his master’s degree in nuclear engineering,
Mr. Braune operated the nuclear reactors onboard the USS RONALD REAGAN aircraft carrier. He served in the U.S. Navy until 2009
and subsequently earned his MBA at the University of Southern California, Marshall School of Business. Our Board believes that
Mr. Braune’s extensive relationships and experience in the industry of vaporization products and e-cigarettes will bring
added value to the Company’s management team.
In
connection with his appointment as Chief Executive Officer and a member of our Board, Mr. Braune entered into an employment agreement
dated as of December 10, 2015 (the “Employment Agreement”) with the Company pursuant to which he will receive an annual
salary of $150,000, subject to adjustment, and bi-monthly sales-based compensation of $1.00 USD per unit of wholesale sales of
Mr. Braune’s new vaporizer pen product line and $3.00 USD per unit on retail sales. The sales-based compensation and salary
is payable in cash or stock as further described in the Employment Agreement.
In addition, the Company
will issue to Mr. Braune 20,000,000 shares of the Company’s common stock, to be held in escrow and released by the Company
to Mr. Braune in accordance with the following vesting schedule: (i) 5,000,000 shares shall vest on June 10, 2015, (ii) 5,000,000
shares shall vest on December 10, 2016, (iii) 5,000,000 shares shall vest on June 10, 2016, and (iv) 5,000,000 shares shall vest
on December 10, 2016. Mr. Braune also is eligible to participate in any stock option plan maintained by the Company and available
to other employees and standard benefit programs for similarly situated employees. The Employment Agreement continues until terminated
by either party upon 30 days’ prior written notice. The grant date fair value was $100,000, which will be charged to operations
evenly over the vesting period. The shares are considered issued and outstanding.
Chief
Science Officer
On May 1, 2015, the Company
appointed Dr. Mark A. Scialdone to the newly-created executive officer position of Chief Science Officer (“CSO”).
Dr. Scialdone’s Executive
Employment Agreement was for a period of two (2) years. Dr. Scialdone shall receive an annual salary of $102,000 and could have
been eligible for any benefits made generally available by the Company. In connection with the unwind of BetterChem, Dr. Scialdone
resigned from his position as CSO and waived all terms of severance under his agreement in exchange for remaining on the Company’s
health insurance policy for six (6) months.
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 each 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 each to Kyle Tracey 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 each to Michael Cook
at $0.024 per share for payment of $3,000 in accrued wages.
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 SURRENDERS
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.
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 December 31, 2015, proceeds of $90,000 have been recorded as common stock to be issued.
WARRANTS
The table below summarizes
the Company’s warrant activity during the three month period ended December 31, 2015:
|
|
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
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Warrants outstanding at December 31, 2015
|
|
|
1,184,726
|
|
|
$
|
0.003
|
|
|
|
0.4
|
|
|
$
|
18,387
|
|
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 December 31, 2015, 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 December 31,
2015, 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
Third
Party Debt Conversions
See
Note 5 for subsequent conversions related to third party debt.
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 Company has determined at this time not to increase the authorized share count and is instead
in discussions with its convertible noteholders about a consolidation, restructuring and/or buy-out of their notes to resolve
these issues. The position taken by the Company 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.
Common Stock Issued for Wages
In February 2016,
Justin Braune elected to take $11,250 of wages as common stock. The shares will formally be issued once the debt conversions and
capital structure restrictions have been resolved.