Item
1.
|
Financial
Statements
|
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 for Vape Holdings, Inc. for the fiscal year ended September 30, 2016, filed with the Commission on March 7,
2018.
VAPE
HOLDINGS, INC.
CONSOLIDATED
BALANCE SHEETS
(Unaudited)
|
|
June 30,
2017
|
|
|
September 30,
2016
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
13,125
|
|
|
$
|
-
|
|
Accounts receivable, net
|
|
|
2,010
|
|
|
|
2,010
|
|
Inventory
|
|
|
-
|
|
|
|
18,254
|
|
Other current assets
|
|
|
14,836
|
|
|
|
8,219
|
|
Total current assets
|
|
|
29,971
|
|
|
|
28,483
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
29,971
|
|
|
$
|
28,483
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
397,660
|
|
|
$
|
473,654
|
|
Accrued expenses
|
|
|
949,391
|
|
|
|
555,994
|
|
Related party convertible notes payable
|
|
|
200,000
|
|
|
|
300,000
|
|
Convertible notes payable, net of unamortized discount of $105,000 and $119,680, respectively
|
|
|
906,431
|
|
|
|
537,291
|
|
Related party notes payable
|
|
|
15,000
|
|
|
|
15,000
|
|
Settlement liability
|
|
|
281,618
|
|
|
|
422,000
|
|
Derivative liabilities
|
|
|
1,716,439
|
|
|
|
2,755,544
|
|
Total current liabilities
|
|
|
4,466,539
|
|
|
|
5,059,483
|
|
|
|
|
|
|
|
|
|
|
Long term liabilities:
|
|
|
|
|
|
|
|
|
Convertible notes payable, long-term, net of unamortized discount of $0 and $0, respectively
|
|
|
-
|
|
|
|
41,121
|
|
Total liabilities
|
|
|
4,466,539
|
|
|
|
5,100,604
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficit:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.00001 par value - 100,000,000 authorized; 500,000 outstanding at March 31, 2017 and September 30, 2016
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.00001 par value - authorized 1,000,000,000 shares; 666,027,781 issued at June 30, 2017, 666,587,156 outstanding at June 30, 2017 and 588,837,978 issued at September 30, 2016, 588,397,353 outstanding at September 30, 2016
|
|
|
6,665
|
|
|
|
5,883
|
|
Additional paid-in capital
|
|
|
31,038,705
|
|
|
|
30,319,265
|
|
Treasury stock, 1,025,625 shares at June 30, 2017 and September 30, 2016
|
|
|
(372,601
|
)
|
|
|
(372,601
|
)
|
Accumulated deficit
|
|
|
(35,109,337
|
)
|
|
|
(35,024,668
|
)
|
Total stockholders’ deficit
|
|
|
(4,436,568
|
)
|
|
|
(5,072,121
|
)
|
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
$
|
29,971
|
|
|
$
|
28,483
|
|
See
notes to unaudited consolidated financial statements.
VAPE
HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
|
|
For the Three Months Ended
June 30,
|
|
|
For the Nine Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
Revenue
|
|
$
|
24,291
|
|
|
$
|
156,514
|
|
|
$
|
109,051
|
|
|
$
|
890,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
9,513
|
|
|
|
385,705
|
|
|
|
83,308
|
|
|
|
1,040,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
14,778
|
|
|
|
(229,191
|
)
|
|
|
25,743
|
|
|
|
(149,678
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing [A]
|
|
|
22,617
|
|
|
|
84,246
|
|
|
|
85,805
|
|
|
|
342,618
|
|
Research and development
|
|
|
-
|
|
|
|
950
|
|
|
|
-
|
|
|
|
47,648
|
|
General and administrative [B]
|
|
|
218,663
|
|
|
|
280,470
|
|
|
|
486,169
|
|
|
|
841,319
|
|
Total operating expenses
|
|
|
241,280
|
|
|
|
365,666
|
|
|
|
571,974
|
|
|
|
1,231,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(226,502
|
)
|
|
|
(594,857
|
)
|
|
|
(546,231
|
)
|
|
|
(1,381,263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(69,175
|
)
|
|
|
(337,707
|
)
|
|
|
(211,274
|
)
|
|
|
(1,887,152
|
)
|
Interest expense - related party
|
|
|
(3,506
|
)
|
|
|
(4,776
|
)
|
|
|
(13,061
|
)
|
|
|
(13,792
|
)
|
Change in derivative liabilities
|
|
|
537,550
|
|
|
|
3,099,805
|
|
|
|
685,897
|
|
|
|
554,885
|
|
Total other income (expense), net
|
|
|
464,869
|
|
|
|
2,757,322
|
|
|
|
461,562
|
|
|
|
(1,346,059
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
238,367
|
|
|
|
2,162,465
|
|
|
|
(84,669
|
)
|
|
|
(2,727,322
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
238,367
|
|
|
$
|
2,162,465
|
|
|
$
|
(84,669
|
)
|
|
$
|
(2,728,122
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share - basic
|
|
$
|
0.00
|
|
|
$
|
0.01
|
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
Income (loss) per common share - diluted
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares - basic
|
|
|
635,028,015
|
|
|
|
215,717,808
|
|
|
|
631,046,743
|
|
|
|
220,677,405
|
|
Weighted average shares - diluted
|
|
|
993,499,503
|
|
|
|
1,097,384,088
|
|
|
|
631,046,743
|
|
|
|
220,677,405
|
|
|
[A]
|
Stock-based compensation was $0 and $0, and $0 and $34,800
for the three and nine months ended June 30, 2017 and 2016, respectively.
|
|
[B]
|
Stock-based compensation was $0 and $0, and $0 and $128,597
for the three and nine months ended June 30, 2017 and 2016, respectively.
|
See
notes to unaudited consolidated financial statements.
VAPE
HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
For the Nine Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
|
(Restated)
|
|
Net loss
|
|
$
|
(84,669
|
)
|
|
$
|
(2,728,122
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
-
|
|
|
|
106,967
|
|
Accretion of debt discounts
|
|
|
180,533
|
|
|
|
1,696,706
|
|
Fair value in excess of stock issued for conversion of notes payable and accrued interest
|
|
|
-
|
|
|
|
-
|
|
Gain on change in derivative liabilities
|
|
|
(685,897
|
)
|
|
|
(586,287
|
)
|
Forbearance and assignment settlements
|
|
|
-
|
|
|
|
190,718
|
|
Common stock issued for services
|
|
|
-
|
|
|
|
31,689
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
131,708
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
-
|
|
|
|
57,999
|
|
Inventory
|
|
|
18,254
|
|
|
|
220,210
|
|
Other assets
|
|
|
(6,617
|
)
|
|
|
27,214
|
|
Accounts payable
|
|
|
75,006
|
|
|
|
220,152
|
|
Accrued expenses
|
|
|
253,015
|
|
|
|
128,903
|
|
Net cash used in operating activities
|
|
|
(250,375
|
)
|
|
|
(502,143
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
-
|
|
|
|
(43,101
|
)
|
Net cash used in investing activities
|
|
|
-
|
|
|
|
(43,101
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net proceeds from issuances of common stock
|
|
|
-
|
|
|
|
-
|
|
Net proceeds from issuance of convertible notes payable
|
|
|
263,500
|
|
|
|
312,150
|
|
Net proceeds from issuances of related party convertible notes payable
|
|
|
-
|
|
|
|
50,000
|
|
Repayments on convertible notes payable
|
|
|
-
|
|
|
|
(85,400
|
)
|
Net cash provided by financing activities
|
|
|
263,500
|
|
|
|
276,750
|
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
13,125
|
|
|
|
(268,494
|
)
|
Cash, beginning of period
|
|
|
-
|
|
|
|
273,904
|
|
Cash, end of period
|
|
$
|
13,125
|
|
|
$
|
5,410
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
-
|
|
|
$
|
-
|
|
Taxes
|
|
$
|
-
|
|
|
$
|
800
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Conversion of notes payable, accrued interest, and derivatives
|
|
$
|
569,222
|
|
|
$
|
3,707,140
|
|
Issuance of common stock for settlement liability
|
|
$
|
151,000
|
|
|
$
|
-
|
|
See
notes to unaudited consolidated financial statements.
VAPE
HOLDINGS, INC.
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”) was the premier brand under the VAPE umbrella. HIVE outsource manufactures and distributes a proprietarily
blended ceramic vaporization element for torched, electronic and portable vaporizers with countless design and product crossover
capabilities in existing and emerging markets. HIVE is dedicated to bringing the healthiest and cleanest vaporization experience
possible to the market.
HIVE
Ceramics saw a significant decrease in sales due to competition in the market and restricted operations. While sales channels
are still open, without an infusion, the revenues are not large enough to support HIVE Ceramics outside of its existing product
line.
NOTE
2.
|
ACCOUNTING
POLICIES AND BASIS OF PRESENTATION
|
GOING
CONCERN
VAPE’s consolidated
financial statements reflect a net loss of $84,669 during the nine months ended June 30, 2017. As of June 30, 2017, we had cash
of $13,125, a working capital deficit of $4,436,568, and an accumulated deficit of $35,109,337. In addition, the ongoing need to
obtain financing to fund operations also raise substantial doubt about the ability of Vape to continue as a going concern. Management
expects to obtain funding for the new operations for the foreseeable future; however, there are no assurances that the Company
will obtain such funding. VAPE’s financial statements do not include any adjustments to reflect the possible effects
on recoverability and classification of assets or the amounts and classification of liabilities that may result from the inability
to continue as a going concern. See Note 8 for subsequent events regarding financing activities.
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.
Fair-value
estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of June
30, 2017 and September 30, 2016. The respective carrying value of certain on-balance-sheet financial instruments approximated
their fair values. These financial instruments include cash, prepaid expenses, accounts payable, accrued liabilities, and notes
payable. Fair values for these items were assumed to approximate carrying values because of their short-term nature or they are
payable on demand.
The
following table presents the Company’s fair value hierarchy for assets measured at fair value on a recurring basis at June
30, 2017:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
13,125
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
13,125
|
|
Total assets measured at fair value
|
|
$
|
13,125
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
13,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
|
|
$
|
-
|
|
|
$
|
1,716,439
|
|
|
$
|
-
|
|
|
$
|
1,716,439
|
|
Total liabilities measured at fair value
|
|
$
|
-
|
|
|
$
|
1,716,439
|
|
|
$
|
-
|
|
|
$
|
1,716,439
|
|
The
following table presents the Company’s fair value hierarchy for assets measured at fair value on a recurring basis at September
30, 2016:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total assets measured at fair value
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
|
|
$
|
-
|
|
|
$
|
2,755,544
|
|
|
$
|
-
|
|
|
$
|
2,755,544
|
|
Total liabilities measured at fair value
|
|
$
|
-
|
|
|
$
|
2,755,544
|
|
|
$
|
-
|
|
|
$
|
2,755,544
|
|
EARNINGS
(LOSS) PER COMMON SHARE
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, 2017 and 2016:
|
|
For the Three Months Ended
June 30,
|
|
|
For the Three Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Weighted average common shares outstanding used in calculating basic earnings per share
|
|
|
635,028,015
|
|
|
|
215,717,808
|
|
Effect of preferred stock
|
|
|
500,000
|
|
|
|
500,000
|
|
Effect of convertible notes payable
|
|
|
357,971,489
|
|
|
|
881,166,280
|
|
Weighted average common and common equivalent shares used in calculating diluted earnings per share
|
|
|
993,499,503
|
|
|
|
1,097,384,088
|
|
|
|
|
|
|
|
|
|
|
Net income as reported
|
|
$
|
238,367
|
|
|
$
|
2,162,465
|
|
Add - interest on convertible notes payable
|
|
|
69,175
|
|
|
|
337,707
|
|
Net income available to common stockholders
|
|
$
|
307,542
|
|
|
$
|
2,500,171
|
|
The following is a
summary of outstanding securities that would have been included in the calculation of diluted shares outstanding since the exercise
prices did not exceed the average market value of the Company’s common stock had the Company generated net income for the
nine months ended June 30, 2017 and 2016:
|
|
For the Nine Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Series A Preferred stock
|
|
|
500,000
|
|
|
|
500,000
|
|
Common stock warrants
|
|
|
-
|
|
|
|
1,184,726
|
|
Convertible notes
|
|
|
357,971,489
|
|
|
|
631,560,394
|
|
|
|
|
358,471,489
|
|
|
|
633,245,120
|
|
The
Company does not have sufficient shares to accommodate the convertible notes.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers”, which
supersedes most of the current revenue recognition requirements. The core principle of the new guidance is that an entity should
recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for these goods or services. New disclosures about the nature, amount,
timing and uncertainty of revenue and cash flows arising from contracts with customers are also required. This guidance is effective
for the Company in the first quarter of fiscal year 2018 and early application is not permitted. Entities must adopt the new guidance
using one of two retrospective application methods. The Company is currently evaluating the standard but does not expect it to
have a material impact on our financial position, results of operations or cash flows.
The
Financial Accounting Standards Board issues Accounting Standard Updates (“ASUs”) to amend the authoritative literature
in Accounting Standards Codification (“ASC”). There have been a number of ASUs to date that amend the original text
of ASC. The Company believes those issued to date either (i) provide supplemental guidance, (ii) are technical corrections, (iii)
are not applicable to the Company or (iv) are not expected to have a significant impact on the Company.
AMENDMENT
We
have amended the previous three and nine months ended June 30, 2016 in this Form 10-Q 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. Accordingly, we adjusted the consolidated financial statements to recognize the embedded conversion feature of the
instruments.
On
August 13, 2015 and August 26, 2015, the convertible notes due to Redwood and Typenex, respectively, were amended which removed
the fixed conversion floors per common share creating a potentially unlimited number of shares to be issued on the date of the
amendment. Accordingly, we amended this Form 10-Q to account for the embedded conversion features as derivative financial instruments
at fair value upon their original issuance dates. This increased the loss on debt extinguishments and interest expense previously
recorded, as well as the derivative liabilities at fair value.
The
following was the effect on the previously reported consolidated financial statements.
|
|
As
Previously
Reported
|
|
|
|
|
|
As Restated
|
|
|
|
June 30,
2016
|
|
|
Change
|
|
|
June 30,
2016
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
$
|
2,032,366
|
|
|
$
|
414,726
|
|
|
$
|
2,447,092
|
|
Total liabilities
|
|
$
|
2,366,199
|
|
|
$
|
224,309
|
|
|
$
|
2,590,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ deficit
|
|
$
|
(2,116,505
|
)
|
|
$
|
(224,309
|
)
|
|
$
|
(2,340,814
|
)
|
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
$
|
249,694
|
|
|
$
|
-
|
|
|
$
|
249,694
|
|
|
|
As Previously Reported Three Months Ended
June 30,
2016
|
|
|
Change
|
|
|
As Restated Three Months Ended
June 30,
2016
|
|
Interest expense
|
|
$
|
(408,419
|
)
|
|
$
|
70,712
|
|
|
$
|
(337,707
|
)
|
Gain from the effects of derivative liabilities
|
|
$
|
2,579,283
|
|
|
$
|
657,049
|
|
|
$
|
3,236,332
|
|
Net income
|
|
$
|
1,434,703
|
|
|
$
|
727,762
|
|
|
$
|
2,162,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share - basic
|
|
$
|
0.01
|
|
|
|
|
|
|
$
|
0.01
|
|
Income per common share - diluted
|
|
$
|
0.00
|
|
|
|
|
|
|
$
|
0.00
|
|
|
|
As Previously Reported Nine Months Ended
June 30,
2016
|
|
|
Change
|
|
|
As Restated Nine Months Ended
June 30,
2016
|
|
Interest expense
|
|
$
|
(1,727,304
|
)
|
|
$
|
(159,848
|
)
|
|
$
|
(1,887,152
|
)
|
Gain from the effects of derivative liabilities
|
|
$
|
452,425
|
|
|
$
|
1,297,483
|
|
|
$
|
1,749,908
|
|
Net loss
|
|
$
|
(3,865,758
|
)
|
|
$
|
1,137,636
|
|
|
$
|
(2,728,122
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share - basic
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
$
|
(0.01
|
)
|
Loss per common share - diluted
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
$
|
(0.01
|
)
|
The
following is a summary of accrued expenses as of June 30, 2017 and September 30, 2016:
|
|
June 30,
2017
|
|
|
September 30,
2016
|
|
Accrued interest
|
|
$
|
203,513
|
|
|
$
|
183,390
|
|
Accrued interest - related party
|
|
|
56,223
|
|
|
|
43,162
|
|
Accrued wages and taxes
|
|
|
685,087
|
|
|
|
324,086
|
|
Other
|
|
|
4,568
|
|
|
|
5,356
|
|
|
|
$
|
949,391
|
|
|
$
|
555,994
|
|
As
of June 30, 2017, $25,000 for Kyle Tracey, $16,667 for Joe Andreae, $73,742 for Mike Cook, $168,881 for Allan Viernes, $170,548
for Benjamin Beaulieu, $66,333 for Alex Viernes and $65,000 for Justin Braune are recorded in accrued wages.
NOTE
4.
|
CONVERTIBLE
NOTES PAYABLE
|
At
June 30, 2017, convertible notes payable consisted of the following:
Counterparty
|
|
Principal Amount
|
|
|
Unamortized Discount
|
|
|
Carrying Value
|
|
|
Accrued Interest
|
|
|
Derivative Liability
|
|
|
Interest Expense
|
|
GHS Investments
|
|
$
|
457,265
|
|
|
$
|
-
|
|
|
$
|
457,265
|
|
|
$
|
142,854
|
|
|
$
|
975,134
|
|
|
$
|
122,227
|
|
Adar Bays
|
|
|
187,500
|
|
|
|
-
|
|
|
|
187,500
|
|
|
|
36,417
|
|
|
|
190,926
|
|
|
|
11,375
|
|
JMJ Financial
|
|
|
171,666
|
|
|
|
-
|
|
|
|
171,666
|
|
|
|
23,174
|
|
|
|
224,802
|
|
|
|
16,605
|
|
Odyssey Research
|
|
|
90,000
|
|
|
|
-
|
|
|
|
90,000
|
|
|
|
-
|
|
|
|
146,241
|
|
|
|
15,000
|
|
Illiad Research and Trading
|
|
|
105,000
|
|
|
|
105,000
|
|
|
|
-
|
|
|
|
1,068
|
|
|
|
179,336
|
|
|
|
46,067
|
|
|
|
$
|
1,011,431
|
|
|
$
|
105,000
|
|
|
$
|
906,431
|
|
|
$
|
203,513
|
|
|
$
|
1,716,439
|
|
|
$
|
211,274
|
|
At
September 30, 2016, convertible notes payable consisted of the following:
Counterparty
|
|
Principal Amount
|
|
|
Unamortized Discount
|
|
|
Carrying Value
|
|
|
Accrued Interest
|
|
|
Derivative Liability
|
|
|
Interest Expense
|
|
GHS Investments
|
|
$
|
248,926
|
|
|
$
|
88,075
|
|
|
$
|
160,852
|
|
|
$
|
124,872
|
|
|
$
|
1,255,774
|
|
|
$
|
1,323,000
|
|
Adar Bays
|
|
|
187,500
|
|
|
|
-
|
|
|
|
187,500
|
|
|
|
25,042
|
|
|
|
610,117
|
|
|
|
153,174
|
|
JMJ Financial
|
|
|
171,666
|
|
|
|
16,605
|
|
|
|
155,060
|
|
|
|
23,174
|
|
|
|
578,288
|
|
|
|
211,790
|
|
Union
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
90,909
|
|
LG Capital
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
91,017
|
|
Oddyssey Research
|
|
|
90,000
|
|
|
|
15,000
|
|
|
|
75,000
|
|
|
|
-
|
|
|
|
311,365
|
|
|
|
75,341
|
|
|
|
$
|
698,092
|
|
|
$
|
119,680
|
|
|
$
|
578,412
|
|
|
$
|
173,088
|
|
|
$
|
2,755,544
|
|
|
$
|
1,945,231
|
|
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. During the three and nine months ended June 30, 2017, GHS provided other tranches of $0 and $263,500.
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.
During the three and
nine months ended June 30, 2017, GHS converted $0 and $70,795 of principal and accrued interest into 36,398,894 shares of common
stock.
The
following weighted average variables were used in the Black Scholes model for the derivative liabilities as of June 30, 2017 and
September 30, 2016:
Balance Sheet Date
|
|
Stock
Price at
Valuation Date
|
|
|
Dividend
Yield
|
|
|
Exercise
Price
|
|
|
Risk Free
Interest
Rate
|
|
|
Volatility
|
|
|
Average
Life
|
|
June 30, 2017
|
|
$
|
0.003
|
|
|
|
-
|
%
|
|
$
|
0.002
|
|
|
|
1.26
|
%
|
|
|
216
|
%
|
|
|
0.8
|
|
September 30, 2016
|
|
$
|
0.004
|
|
|
|
-
|
%
|
|
$
|
0.001
|
|
|
|
0.45
|
%
|
|
|
298
|
%
|
|
|
0.5
|
|
NOTE
5.
|
RELATED
PARTY DEBT
|
Related
Party Note Payable
The
Company had outstanding accounts payable balance to a related party (shareholder of the Company) in the amount of $15,000 as of
September 30, 2013. This payable was converted into a note payable on December 7, 2013. The note payable bears interest
of 6% per annum with a maturity date of December 1, 2016. As of June 30, 2017, there is $3,243 in accrued interest expense related
to this note and the Company recorded $228 and $683 in interest expense related to this note during the three and nine months
ended June 30, 2017, respectively.
Related
Party Convertible Notes Payable
On
December 10, 2015, the Company entered into two Secured Series B Preferred Stock Convertible Notes (the “Series B Notes”)
for an aggregate principal of $300,000 including 1) $50,000 from Hive Ceramics, LLC in new capital to the Company and 2) an amended
and restated note for Hive Ceramics LLC in the amount of $250,000 for capital previously contributed which is soon to be due and
payable.
The
Company failed to pay the Series B Note and the Amended Note on the Maturity Date (December 10, 2016). On December 15, 2016, the
Company received a Notice of Default from counsel for Holder. Holder’s counsel demanded that all amounts owed under the
Series B Note and the Amended Note be paid no later than December 20, 2016. The Company was unable to pay the demanded amounts
by December 20, 2016. The Company believes that the Holder intends to execute on the security for the Series B Note and the Amended
Note, namely, all of the assets of the Company. The Company is attempting to negotiate a resolution that does not include seizure
of the Company’s assets however there is no guarantee that the Company will be able to work out a satisfactory resolution
that does not include seizure of the Company’s assets.
The
Series B Notes accrue interest at eight percent (8%) per annum, mature one (1) year from issuance and are secured by all of the
assets and property of the Company. Upon the election of the noteholder, the Series B Notes are convertible into newly created
Series B Preferred Stock on a one-for-one (1:1) basis into shares of common stock of the Company at a fixed price per share of
$0.01.
Concurrently,
the Company filed a Certificate of Designation with the Delaware Secretary of State on the Series B Preferred Stock which provides,
in pertinent part, for the following rights and privileges:
Authorized
Amount of Series B Preferred Stock
: There are authorized 30,000,000 shares of Series B Preferred Stock, subject to the Certificate
of Designation. There shall be no additional Series B Shares authorized or issued.
Voting
Rights
: Each share of Series B shall be entitled to five (5) votes for every one (1) vote entitled to each share of Common
Stock.
Rank
:
All shares of Series B shall rank (i) senior to the Company’s Common Stock, (ii)
pari passu
with all other
series of preferred stock whether currently outstanding or hereafter created, including the Series A Preferred Stock, and specifically
ranking, by its terms, on par with Series B, and (iii) junior to any class or series of capital stock of the Company hereafter
created specifically ranking, by its terms, senior to the Series B, in each case as to the distribution of assets upon liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary.
On May 24, 2017, Illiad
Research and Trading purchased $100,000 of the Series B convertible note payable for $125,000 with the reserve to convert into
common stock at 58% of the lowest trading price of the previous thirteen (13) days. During the three and nine months ended June
30, 2017, $20,000 of the note and accrued interest were converted into 9,090,909 shares of common stock. See Note 4 for the principal,
accrued interest, and interest expense related to the convertible note payable.
During the three
and nine months ended June 30, 2017, the Company recorded $3,533 and $12,633, respectively, of interest expense related to
the Series B Notes. As of June 30, 2017, $200,000 of the Series B Notes along with $53,235 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
6.
|
COMMITMENTS
AND CONTINGENCIES
|
Settlement
LiabilitIES
On
or about December 1, 2016, LG Capital Funding, LLC (“LG Capital”) obtained a judgment in the amount of $151,000. On
or about December 10, 2016, the Company learned that LG Capital had placed a judgment lien on the Company’s operating account.
The effect of the lien was that the Company’s operating account was frozen for an amount twice the judgment, or approximately
$300,000. In or around December 2016 and continuing into early January 2017, GHS Investments, LLC (“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 for $161,000. As of September 30, 2016, the Company recorded a settlement liability of $151,000. On
January 25, 2017, the Company issued 32,700,000 shares of common stock in satisfaction of the $151,000 settlement liability.
On
February 22, 2016, a convertible promissory note holder, Union Capital, LLC (“Union”), filed suit against the Company
in the United States District Court for the Southern District of New York claiming breach of contract and conversion and seeking
specific performance, permanent injunction, and damages arising from the Company’s rejection of certain conversion notices
submitted by Union. The Company and Union subsequently settled this matter without further court proceedings for $170,000 in 2017.
As of September 30, 2016, the Company recorded a settlement liability of $170,000.
Justin
Braune v. Vape Holdings, Inc. et.al.
On
May 16, 2017, Justin Braune, the Company’s former Chief Executive Officer filed a civil lawsuit in Los Angeles County Superior
Court against the Company, Allan Viernes and Ben Beaulieu claiming breach of Mr. Braune’s employment contract, including,
but not limited to failure to pay wages including deferred salary and commissions, and wages upon separation of employment and
seeking damages arising from the Company’s breach. The Company and Justin Braune subsequently settled this matter without
further court proceedings. On September 25, 2017, the parties participated in a full-day mediation and agreed to settle and resolve
all matters including the lawsuit. On December 6, 2017, the parties entered into a Settlement Agreement whereby, the Allan Viernes
and Ben Beaulieu 1) shall pay the sum of $15,000 by December 8, 2017 and the Company shall, 2) $40,000 on or before December 31,
2018, and 3) a convertible promissory note in the amount of $100,000.00. The convertible note and/or any shares issued in connection
shall have a buyout cash value of no less than 125% of the cash value. The Company recorded a provision for loss of approximately
$165,000 during the year ended September 30, 2016.
NOTE
7.
|
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
5.
NOTE
8.
|
SUBSEQUENT
EVENTS
|
HIVE
On April 28, 2018,
the Company received a Notice of Default from Hive Ceramics and Kyle Tracey (the “Notice”) with respect to the Company’s
breach of the Settlement Agreement and Release, dated as of April 28, 2017. The breaches consist of failure to pay $234,000 owed
under the Tracey Note and failure to pay the $7,000 monthly payment obligations set forth in the Settlement Agreement, and $216,222 owed for failure to repay the Hive Note. The Company has not been able to resolve the defaults set forth in the Notice and Hive/Tracey
have been informed the Company will hand over possession of the Hive Assets when arrangements can be made. Concurrently, the Company
has proposed to enter into a Sales Representative Agreement whereby the Company may continue to sell Hive products for a period
of 12 months on a non-exclusive basis in exchange for a commission on net sales. The HIVE/Tracey Settlement Agreement and Release
documents are qualified in their entirety by reference to the full text of the agreements, copies of which were filed on Company’s
Current Report on Form 8-K May 3, 2017 as Exhibit 10.1.
Justin Braune
On April 4, 2018, Braune
filed an Ex Parte Application for an Order to Enter Judgement Against the Company for breach of the Settlement Agreement for failure
to pay under the terms of the Settlement Agreement, which the Court granted in favor of Braune. The Ex Parte Application was denied.
On May 23, 2018, Braune
brought a different Ex Parte Application for Appointment of a Receiver. The hearing was held on May 23, 2018, during which the
Company submitted papers opposing the appointment, and which ultimately resulted in the Court denying Braune’s application.
The Ex Parte Application was denied.
Common Stock Issued for Conversion of
Debt
Subsequent to June
30, 2017, the Company issued 332,972,219 shares of common stock for conversion of $468,208 of notes payable and accrued interest.
As of the date of this filing the Company has 1,000,000,000 shares of common stock outstanding.
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
|
The
following discussion and analysis is intended to provide information about VAPE’s financial condition and results of operations
for the three and nine months ended June 30, 2017 and 2016. This information should be read in conjunction with VAPE’s audited
consolidated financial statements for the year ended September 30, 2016 and 2015. Some of the information contained in this Management’s
Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in this report, includes forward-looking
statements based on our current management’s expectations. There can be no assurance that actual results, outcomes, or business
conditions will not differ materially from those projected or suggested in such forward-looking statements.
Background
On
August 9, 2013, PeopleString Corporation, and its wholly-owned subsidiary, RewardString Corporation (“RewardString”),
and Vape Holdings, Inc., a Nevada corporation (the “Private Company”), entered into a Merger and Reorganization Agreement
(the “Agreement”) whereby the Private Company merged with RewardString, with the Private Company being the surviving
entity (the “Merger”). In consideration for the merger, the shareholders of the Private Company received a total of
approximately 4,684,538 shares of common stock of the merged company on a pro rata basis in exchange for 8,875 shares
of the Private Company’s common stock, representing 100% of the outstanding common stock of the Private Company. The total
shares of the merged company issued on a pro rata basis to the Private Company shareholders represented approximately 74.95% of
the total issued and outstanding common stock of the merged company.
The
merger among PeopleString, RewardString and the Private Company was accounted for as a reverse acquisition and change in reporting
entity, whereby the Private Company was the accounting acquirer. The Merger was accounted for using the purchase method of accounting
in accordance with ASC 805 “Business Combinations”, whereby the estimated purchase was allocated to tangible net assets
acquired based upon preliminary fair values at the date of acquisition. Accordingly, the assets and liabilities of PeopleString
and RewardString were recorded at fair value; the assets of PeopleString Corporation were not significant. The historical results
of operations and cash flows of the Private Company are being reported beginning in the quarter ended December 31, 2013 in this
Quarterly Report. The Merger closed on September 30, 2013. On September 30, 2013, the Company approved a change in fiscal year
end of the Company from December 31st to September 30th. The Company’s decision to change the fiscal year end was related
to the Merger.
On
March 27, 2014, the Company formally closed its asset purchase of the HIVE Ceramics LLC (“HIVE”) vaporization product
and related intellectual property and has begun distributing the HIVE products through various wholesale distribution channels. HIVE
had been in development of a ceramic product for use in the vaporization market. The development for one product line
was completed in 2014. No sales of this product line were made prior to Vape’s acquisition of the HIVE ceramic
product line on March 27, 2014. We determined that HIVE’s assets acquired were not deemed a business prior to
being acquired by the Company under Rule 11-01(d) of Regulation S-X since there were no significant revenue activities.
Overview
General
Vape
Holdings, Inc. (formerly PeopleString Corporation) (“Vape,” the “Company,” “we,” “us,”
“our,” “our company”) is a holding company with its primary focus in the manufacturing and distribution
of healthy and sustainable vaporization products. The Company has designed, and recently began marketing, and distributing ceramic
vaporization products under a unique brand. The Company has also introduced a nonporous, non-corrosive, chemically inert medical-grade
ceramic vaporization element as a healthy, sustainable alternative to traditional titanium and quartz vaporization materials,
as well as lower-grade ceramic found in traditional electronic cigarettes and vaporizers. This material can be used for a wide
range of applications, including stand-alone vaporization products and “E-cigs.” Electronic cigarettes come in a variety
of designs ranging from those that look vastly like traditional cigarettes, to larger vaporizer units which are capable of vaporizing
liquid with varying viscosity. The process of vaporization is believed to eliminate the smoke, tar, ash,
and other byproducts of traditional smoking by utilizing lower temperatures in a controlled electronic environment.
HIVE
Ceramics (“HIVE”) was the premier brand under the VAPE umbrella. HIVE manufactured and distributed a proprietarily
blended ceramic vaporization element for torched, electronic and portable vaporizers with countless design and product crossover
capabilities in existing and emerging markets. HIVE was dedicated to bringing the healthiest and cleanest vaporization experience
possible to the market. The HIVE product line currently consists of over 15 distinct ceramic elements, featuring the ONYX 14mm
Domeless, The HIVE x QUAVE – Ceramic Club Banger and the HIVE x Brothership Ceramic Honey Bucket. The HIVE line also showcases
the 2 piece domeless, domeless direct inject, domeless and regular 10mm, 14mm and 18mm elements, Flower Cup, Carb Cap, Stinger
Dabber, and the HIVE x D-Nail 16mm V2 and 20mm attachments.
The
Company’s premiere brand, HIVE Ceramics has seen a significant decrease in sales due to competition in the market and restricted
operations. While sales channels are still open, without a capital infusion, the revenues are not large enough to support HIVE
Ceramics outside of its existing product line.
The
Company intends to take on additional funding to target key brands and products in the vaporization industry as well as revamp
the HIVE Ceramics operations. Diversity in the products we carry will help support the need for variety in today’s rapidly
growing market. With the proper investment, we believe that there are key acquisitions and/or partnerships in the CBD market that
would directly benefit The Company’s need for increased revenue and exposure.
REVIVAL
PRODUCTS
On
December 28, 2015, the Company created a new wholly-owned subsidiary, Revival Products, LLC (“Revival”), which is
in the business of portable vaporization devices. Revival will sell disposable cartridges that complement HIVE Ceramic’s
product lines utilizing its sales and distribution channels and via its own designated e-commerce site at
www.revivalvapes.com
.
The Company ceased the Revival product line upon Justin Braun’s resignation.
Results
of Operations
The
results of operations information below provides details on net loss and general and administrative expenses. General and administrative
expenses provide details on continuing operations and include items such as management compensation, SEC compliance, insurance,
office and other general expenses.
For
the Three Months Ended June 30, 2017 and 2016
Net Income
. For
the three months ended June 30, 2017 and 2016, net income was $238,367 and $2,162,465, net of the gain on change in derivative
liabilities of $537,550 and $3,099,805, respectively.
Revenue.
For
the three months ended June 30, 2017 and 2016, revenue was $24,291 and $156,514, respectively. Revenue decreased in 2017 due to
a decrease in new product releases of HIVE Ceramics and a decline in our ability to generate revenues due to lack of liquidity.
Cost of Revenue.
For
the three months ended June 30, 2017 and 2016, cost of revenue was $9,513 and $385,705, respectively. In 2017, cost of revenue
included approximately $3,000 of freight, $2,000 of quality assurance, and $3,000 of royalties. In 2016, cost of revenue included
approximately $64,000 of ceramic products costs, $30,000 of depreciation, $8,000 of freight, $17,000 of quality assurance, $9,000
of occupancy and warehouse costs, and $13,000 of royalties.
Gross Profit
(Loss).
For the three months ended June 30, 2017 and 2016, gross profit (loss) was $14,778 or 61% and ($229,191) or
(146%), respectively. Gross profit increased due to no further write-offs of inventory and obsolescence of ceramics.
Sales and Marketing.
For
the three months ended June 30, 2017 and 2016, sales and marketing expenses were $22,617 and $84,246, respectively. In 2017, sales
and marketing expenses included approximately $19,000 of outside sales expense and $1,000 of investor relations. In 2016, sales
and marketing expenses included approximately $16,000 of general advertising, $24,000 of outside sales expense, $12,000 off investor
relations, and $12,000 of payroll expenses.
Research and Development.
For the three months ended June 30, 2017 and 2016, there was $0 and $950 in research and development expenses, respectively.
General and Administrative.
For
the three months ended June 30, 2017 and 2016, general and administrative expenses were $218,663 and $280,470, respectively. In
2017, general and administrative expenses included approximately $7,000 of insurance expense, $4,000 of office expense, and $153,000
of payroll expenses. In 2016, general and administrative expenses included approximately $12,000 of insurance expense, $9,000 of
office expense, $143,000 of payroll expenses, $31,000 of accounting fees, and $46,000 of legal fees.
Interest Expense.
For
the three months ended June 30, 2017 and 2016, interest expense was $69,175 and $337,707, respectively. There were significant
increase in conversions into common stock in 2016 versus 2017, which resulted in full accretion of discounts to interest expense
upon conversion.
Interest Expense
- related party.
For the three months ended June 30, 2017 and 2016, related party interest expense was $3,506 and $4,776,
respectively.
Change in Derivative
Liabilities.
For the three months ended June 30, 2017 and 2016, the gain on change in derivative liabilities was $537,550
and $3,099,805, respectively due to the fluctuation in the stock price versus the lowest traded prices during a period of time
prior to notice of conversion.
For the Nine Months Ended June 30, 2017
and 2016
Net Loss.
For
the nine months ended June 30, 2017 and 2016, net loss was $84,669 and $2,728,122, net of the gain on change in derivative liabilities
of $685,897 and $554,885, respectively.
Revenue.
For the nine months ended June 30, 2017 and 2016, revenue was $109,051 and $890,742, respectively. Revenue decreased in 2017
due to a decrease in new product releases of HIVE Ceramics and a decline in our ability to generate revenues due to lack of liquidity.
Cost
of Revenue.
For the nine months ended June 30, 2017 and 2016, cost of revenue was $83,308 and $1,040,420, respectively.
In 2017, cost of revenue included approximately $5,000 of ceramic products costs, $10,000 of freight, $15,000 of quality assurance,
$16,000 of royalties, and $26,000 of obsolescence reserve. In 2016, cost of revenue included approximately $322,000 of ceramic
products costs, $107,000 of depreciation, $36,000 of freight, $31,000 of quality assurance, $38,000 of occupancy and warehouse
costs, and $91,000 of royalties.
Gross Profit (Loss).
For
the nine months ended June 30, 2017 and 2016, gross profit was $25,743 or 24% and ($149,678) or (17%), respectively. Gross profit
increased due to no further write-offs of inventory and obsolescence of ceramics.
Sales and Marketing.
For
the nine months ended June 30, 2017 and 2016, sales and marketing expenses were $85,805 and $342,618, respectively. In 2017, sales
and marketing expenses included approximately $54,000 of outside sales expense and $26,000 of investor relations. In 2016, sales
and marketing expenses included approximately $29,000 of general advertising, $43,000 of outside sales expense, $35,000 of stock
compensation, and $90,000 of payroll expenses.
Research and Development.
For the nine months ended June 30, 2017 and 2016, were $0 and $47,648, respectively. In 2016, research and development included
approximately $20,000 of payroll expenses, $13,000 of benefits, and $7,000 of travel.
General and Administrative. For
the nine months ended June 30, 2017 and 2016, general and administrative expenses were $486,169 and $841,319, respectively. In
2017, general and administrative expenses included approximately $24,000 of insurance expense, $15,000 of office expense, $37,000
of accounting fees, and $438,000 of payroll expenses. In 2016, general and administrative expenses included approximately $35,000
of insurance expense, $31,000 of office expense, $366,000 of payroll expenses, $35,000 of stock compensation, $80,000 of accounting
fees, and $131,000 of legal fees.
Interest Expense.
For
the nine months ended June 30, 2017 and 2016, interest expense was $211,274 and $1,887,152, respectively. There were significant
increase in conversions into common stock in 2016 versus 2017, which resulted in full accretion of discounts to interest expense
upon conversion.
Interest Expense
- related party.
For the nine months ended June 30, 2017 and 2016, related party interest expense was $13,061 and $13,792,
respectively.
Change in Derivative
Liabilities.
For the nine months ended June 30, 2017 and 2016, the gain on change in derivative liabilities was $685,897
and $554,885, respectively due to the fluctuation in the stock price versus the lowest traded prices during a period of time prior
to notice of conversion.
Liquidity
and Capital Resources
As of June 30, 2017,
we had cash of $13,125 and a working capital deficit of $4,436,568 as compared to cash of $0 and a working capital deficit of $5,031,000
as of September 30, 2016. We believe our current liquidity and securities purchase commitments are not sufficient and the Company
requires immediate capital to assume any sort of normal operations, let alone new business initiatives. These factors raise substantial
doubt about the Company’s ability to continue as a going concern. Management plans to raise additional capital to funds immediate
operating needs, and ultimately, work the Company’s creditors to restructure the convertible notes, so we can raise growth
capital to acquire new businesses.
We had total liabilities
of $4,466,539 as of June 30, 2017, including current liabilities of $397,660 of accounts payable, $949,391 of accrued expenses,
$906,431 of convertible notes payable, $15,000 of related party notes payable, $200,000 of related party convertible notes payable,
$1,716,439 of derivative liabilities, and $281,618 of settlement liability. We had total liabilities of $5,100,604 as of September
30, 2016, including current liabilities of $473,654 of accounts payable, $555,994 of accrued expenses, $537,291 of convertible
notes payable, $15,000 of related party notes payable, $300,000 of related party convertible notes payable, $2,755,544 of derivative
liabilities, $422,000 of settlement liability, and long-term liabilities of $41,121 of convertible notes payable.
We had a total stockholders’
deficit of $4,436,568 and an accumulated deficit of $35,109,337 as of June 30, 2017.
We used $250,375 of
cash in operating activities during the nine months ended June 30, 2017, which was attributable to our net loss of $84,669, which
was offset by a $685,897 gain on change in derivative liabilities, $180,533 of accretion of debt discounts, and $339,658 of net
cash provided by the change in operating assets and liabilities. We used $502,143 of cash in operating activities during the nine
months ended June 30, 2016, which was attributable to our net loss of $2,728,122, which was offset by $106,967 of depreciation,
$586,287 gain on change in derivative liabilities, $1,696,706 of accretion of debt discounts, $131,708 of stock-based compensation,
$31,689 of common stock issued for services, and $654,478 of net cash used by the change in operating assets and liabilities.
There were no investing
activities during the nine months ended June 30, 2017. Investing activities used $43,101 during the nine months ended June 30,
2016 consisting of capital expenditures.
We had $263,500 of
net cash provided by financing activities during the nine months ended June 30, 2017 consisting of $263,500 from additional proceeds
towards its GHS Investments convertible notes payable. We had $276,750 of net cash provided by financing activities during the
nine months ended June 30, 2016 consisting of $312,150 of net proceeds from issuance of convertible notes payable, $50,000 of net
proceeds from issuance of related party convertible notes payable, and $85,400 of repayments on convertible notes payable.
Off-Balance
Sheet Arrangements
The
Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect
on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors.