The aggregate market value of the voting and
non-voting common equity held by non-affiliates of the registrant was $2,500,000, based upon the price ($0.0025) at which the
common stock was last sold as of November 15, 2018 multiplied by the approximate number of shares of common stock held by persons
other than executive officers, directors and five percent stockholders of the registrant without conceding that any such person
is an “affiliate” of the registrant for purposes of the federal securities laws.
At November 15, 2018, there were 1,000,000,000
shares of the Registrant’s common stock outstanding.
In some cases, forward-looking
statements can be identified by terminology such as “may,” “will,” “should,” “could,”
“expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,”
“potential” or “continue” or the negative of such terms or other comparable terminology. Although
the Registrant believes that the expectations reflected in the forward-looking statements contained herein are reasonable, the
Registrant cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither the
Registrant, nor any other person, assumes responsibility for the accuracy and completeness of such statements. The
Registrant is under no duty to update any of the forward-looking statements contained herein after the date of this Annual Report
on Form 10-K.
PART
II
Item
5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity
Securities
Market
Information
Our
common stock was qualified for quotation on the OTCQB under the trading symbol “VAPE” on January 8, 2014. Our common
stock is currently quoted on OTCQB. The closing price of our common stock on September 30, 2017 was $0.002 per share. The following
table sets forth, for the periods indicated, the high and low sales prices for our common stock as reported on the OTCQB. This
information reflects inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
From the Year Ended September 30, 2017
|
|
High
|
|
|
Low
|
|
First Quarter
|
|
$
|
0.032
|
|
|
$
|
0.004
|
|
Second Quarter
|
|
$
|
0.020
|
|
|
$
|
0.006
|
|
Third Quarter
|
|
$
|
0.008
|
|
|
$
|
0.003
|
|
Fourth Quarter
|
|
$
|
0.006
|
|
|
$
|
0.002
|
|
From the Year Ended September 30, 2016
|
|
High
|
|
|
Low
|
|
First Quarter
|
|
$
|
0.069
|
|
|
$
|
0.004
|
|
Second Quarter
|
|
$
|
0.017
|
|
|
$
|
0.002
|
|
Third Quarter
|
|
$
|
0.011
|
|
|
$
|
0.002
|
|
Fourth Quarter
|
|
$
|
0.004
|
|
|
$
|
0.001
|
|
The
OTCQB is generally considered to be a less active and less efficient market than the NASDAQ Global Market, the NASDAQ Capital
Market or any national exchange and will not provide investors with the liquidity that the NASDAQ Global Market, the NASDAQ Capital
Market or a national exchange would offer.
Holders
As
of September 30, 2017, the approximate number of registered holders of our common stock was 71. As of September 30, 2017, the
number of outstanding shares of our common stock was 866,861,512; and there were no shares of common stock subject to outstanding
warrants or stock options. As of the date of the filing there are 1,000,000,000 shares outstanding and approximately 74 holders
of our shares of common stock.
Dividends
No
dividends were declared on Vape’s common stock in the years ended September 30, 2017 and 2016, and it is anticipated that
cash dividends will not be declared on Vape’s common stock in the foreseeable future. Our dividend policy is
subject to the discretion of our board of directors and depends upon a number of factors, including operating results, financial
condition and general business conditions. Holders of common stock are entitled to receive dividends as, if and when
declared by our board of directors out of funds legally available therefor. We may pay cash dividends if net income
available to stockholders fully funds the proposed dividends, and the expected rate of earnings retention is consistent with capital
needs, asset quality and overall financial condition.
Details
of Issuance of Shares of Our Common Stock in Connection with Investor Relation Services
None
Securities
Authorized for Issuance under Equity Compensation Plans
As
of September 30, 2017, there were no options issued and outstanding under the 2014 Plan and 2009 Plan as all options were forfeited
and cancelled as of September 30, 2015. There have been no changes during the year ended September 30, 2017.
Recent
Sales of Unregistered Securities
Securities Purchase Agreement with
Typenex Co-Investment, LLC
On November 1, 2016,
the Company closed a Securities Purchase Agreement (the “Typenex Agreement”) with Typenex. Pursuant to the Typenex
Agreement, Typenex purchased a Convertible Promissory Note from the Company in the original principal amount of up to $1,413,000
(the “Typenex Note”), at an interest rate of ten percent (10%) per annum. The Typenex Note is unsecured. The principal
amount of the Typenex Note included an original issue discount of $128,000 and a transaction fee of $5,000.
The investment from
Typenex was scheduled to occur in a series of sixteen (16) tranches, represented each by a separate Secured Investor Promissory
Note (the “Tranche Notes”) in varying amounts. The first Tranche Note of $40,000 was memorialized in Secured Promissory
Note #1, the funding of which occurred on or immediately after the execution of the Typenex Agreement. Net proceeds of $235,500
were received during the year ended September 30, 2017 under the Typenex Agreement.
Each Tranche Note,
or any part of it, is convertible into common stock of the Company. The Conversion Price is as described in the Typenex Agreement
and is based on at least a 45% discount, and up to 55% discount based on events of default, to the lowest trading price during
the prior 20-days of notice of intent to convert by the holder into the Company’s common stock.
As a part of the Typenex
Agreement, the Company agreed to use its best efforts to cause its authorized but unissued stock to be increased in order for the
Company to create a reserve sufficient to meet its conversion obligations under the Typenex Note. The Company is in the process
of taking steps in order to increase its authorized but unissued stock to meet its obligations.
Securities
Purchase Agreement with GHS Investments, LLC
On October 28, 2016, the
Company closed a Securities Purchase Agreement (the “GHS Purchase Agreement”) with GHS. Pursuant to the GHS Purchase
Agreement, GHS agreed to purchase and the Company agreed to sell up to $1,105,000 of convertible securities, in the form of a
Convertible Promissory Note (the “GHS Note”), at an interest rate of ten percent (10%) per annum. The GHS Note is
also attached as Exhibit 10.6 to the 12/27/16 Form 8K and is incorporated herein by this reference. The GHS Note included a ten
percent (10%) original issuance discount (i.e., $100,000) and a $5,000 initial transaction fee, as defined in the GHS Purchase
Agreement. Upon the closing of the GHS Purchase Agreement, GHS funded $38,000, net, to the Company (the “Initial Tranche”).
No other tranches were funded. There is no guarantee that GHS will fund the remainder of the Subsequent Tranches and in fact it
is within GHS’s sole and absolute discretion whether it ultimately funds the Subsequent Tranches. Should GHS decide it won’t
fund the Subsequent Tranches, the Company’s operating results will suffer and its ability to remain a going concern will
be jeopardized.
The GHS Note is convertible
into common stock of the Company. The Conversion Price is as described in the Typenex Agreement and is based on at least a 45%
discount, and up to 55% discount based on events of default, to the lowest trading price during the prior 20-days of notice of
intent to convert by the holder into the Company’s common stock.
As
a part of the GHS Purchase Agreement, the Company agreed to use its best efforts to cause its authorized but unissued stock to
be increased in order for the Company to create a reserve sufficient to meet its conversion obligations.
There
is no guarantee that GHS will fund the remainder of the Subsequent Tranches and in fact it is within GHS’s sole and absolute
discretion whether it ultimately funds the Subsequent Tranches. Should GHS decide it won’t fund the Subsequent Tranches,
the Company’s operating results will suffer and its ability to remain a going concern will be jeopardized.
Item
6.
Selected
Financial Data
Vape
is a smaller reporting company and is therefore not required to provide this information.
Item
7.
Management’s Discussion and Analysis of Financial Condition and Results of Operation
The
following discussion and analysis is intended to provide information about Vape’s financial condition and results of operations
for the years ended September 30, 2017 and 2016. This information should be read in conjunction with Vape’s audited consolidated
financial statements for the years ended September 30, 2017 and 2016, which begin on page F-2 of this report. Some of the information
contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in
this report, includes forward-looking statements based on our current management’s expectations. There can be no assurance
that actual results, outcomes, or business conditions will not differ materially from those projected or suggested in such forward-looking
statements. Some of the factors that may cause results to differ are described in the forward-looking statements cautionary language
on page two of this report.
Background
On
August 9, 2013, PeopleString Corporation, and its wholly-owned subsidiary, RewardString Corporation (“RewardString”),
and Vape Holdings, Inc., a Nevada corporation (the “Private Company”), entered into a Merger and Reorganization Agreement
(the “Agreement”) whereby the Private Company merged with RewardString, with the Private Company being the surviving
entity (the “Merger”). In consideration for the merger, the shareholders of the Private Company received a total of
approximately 4,684,538 shares of common stock of the merged company on a pro rata basis in exchange for 8,875 shares of the Private
Company’s common stock, representing 100% of the outstanding common stock of the Private Company. The total shares of the
merged company issued on a pro rata basis to the Private Company shareholders represented approximately 74.95% of the total issued
and outstanding common stock of the merged company.
The
merger among PeopleString, RewardString and the Private Company was accounted for as a reverse acquisition and change in reporting
entity, whereby the Private Company was the accounting acquirer. The Merger was accounted for using the purchase method of accounting
in accordance with ASC 805 “Business Combinations”, whereby the estimated purchase was allocated to tangible net assets
acquired based upon preliminary fair values at the date of acquisition. Accordingly, the assets and liabilities of PeopleString
and RewardString were recorded at fair value; the assets of PeopleString Corporation were not significant. The historical results
of operations and cash flows of the Private Company are being reported beginning in the quarter ended December 31, 2013 in this
Quarterly Report. The Merger closed on September 30, 2013. On September 30, 2013, the Company approved a change in fiscal year
end of the Company from December 31st to September 30th.
On
March 27, 2014, the Company formally closed its asset purchase of the HIVE Ceramics LLC (“HIVE”) vaporization product
and related intellectual property and has begun distributing the HIVE products through various wholesale distribution channels. HIVE
had been in development of a ceramic product for use in the vaporization market. The development for one product line
was completed in 2014. No sales of this product line were made prior to Vape’s acquisition of the HIVE ceramic
product line on March 27, 2014. We determined that HIVE’s assets acquired were not deemed a business prior to
being acquired by the Company under Rule 11-01(d) of Regulation S-X since there were no significant revenue activities.
Overview
General
Vape
Holdings, Inc. (formerly PeopleString Corporation) (“Vape,” the “Company,” “we,” “us,”
“our,” “our company”) is a holding company with its primary focus in the manufacturing and distribution
of healthy and sustainable vaporization products. The Company has designed, and recently began marketing, and distributing ceramic
vaporization products under a unique brand. The Company has also introduced a nonporous, non-corrosive, chemically inert medical-grade
ceramic vaporization element as a healthy, sustainable alternative to traditional titanium and quartz vaporization materials,
as well as lower-grade ceramic found in traditional electronic cigarettes and vaporizers. This material can be used for a wide
range of applications, including stand-alone vaporization products and “E-cigs.” Electronic cigarettes come in a variety
of designs ranging from those that look vastly like traditional cigarettes, to larger vaporizer units which are capable of vaporizing
liquid with varying viscosity. The process of vaporization is believed to eliminate the smoke, tar, ash,
and other byproducts of traditional smoking by utilizing lower temperatures in a controlled electronic environment.
HIVE
Ceramics (“HIVE”) was the premier brand under the VAPE umbrella. HIVE manufactured and distributed a proprietarily
blended ceramic vaporization element for torched, electronic and portable vaporizers with countless design and product crossover
capabilities in existing and emerging markets. HIVE was dedicated to bringing the healthiest and cleanest vaporization experience
possible to the market. The HIVE product line currently consists of over 15 distinct ceramic elements, featuring the ONYX 14mm
Domeless, The HIVE x QUAVE – Ceramic Club Banger and the HIVE x Brothership Ceramic Honey Bucket. The HIVE line also showcases
the 2 piece domeless, domeless direct inject, domeless and regular 10mm, 14mm and 18mm elements, Flower Cup, Carb Cap, Stinger
Dabber, and the HIVE x D-Nail 16mm V2 and 20mm attachments.
The
Company’s premiere brand, HIVE Ceramics has seen a significant decrease in sales due to competition in the market and restricted
operations. While sales channels are still open, without a capital infusion, the revenues are not large enough to support HIVE
Ceramics outside of its existing product line.
Subsequent
to the year ended September 30, 2017,
on April
28, 2018, the Company received a Notice of Default from Hive Ceramics and Kyle Tracey (the “Notice”) with respect
to the Company’s breach of the Settlement Agreement and Release, dated as of April 28, 2017. The breaches consist of failure
to pay $234,000 owed under the Tracey Note and failure to pay the $7,000 monthly payment obligations set forth in the Settlement
Agreement, and $216,222 owed for failure to repay the Hive Note. The Company has not been able to resolve the defaults set forth
in the Notice and Hive/Tracey have been informed the Company will hand over possession of the Hive Assets when arrangements can
be made. Concurrently, the Company has proposed to enter into a Sales Representative Agreement whereby the Company may continue
to sell Hive products for a period of 12 months on a non-exclusive basis in exchange for a commission on net sales. The HIVE/Tracey
Settlement Agreement and Release documents are qualified in their entirety by reference to the full text of the agreements, copies
of which were filed on Company’s Current Report on Form 8-K May 3, 2017 as Exhibit 10.1.
REVIVAL
PRODUCTS
On
December 28, 2015, the Company created a new wholly-owned subsidiary, Revival Products, LLC (“Revival”), which is
in the business of portable vaporization devices. Revival will sell disposable cartridges that complement HIVE Ceramic’s
product lines utilizing its sales and distribution channels and via its own designated e-commerce site at
www.revivalvapes.com
.
The Company ceased the Revival product line upon Justin Braun’s resignation in June 2016
Critical
Accounting Policies
VAPE’s
discussion and analysis of financial condition and results of operations are based upon VAPE’s consolidated financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation
of these unaudited consolidated financial statements requires Vape to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Vape evaluated its
estimates, including but not limited to those related to such items as costs to complete performance contracts, accruals, depreciable/useful
lives, revenue recognition and valuation allowances for deferred tax assets. Vape based its estimates on historical experience
and on various other assumptions that were believed to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying value of assets and liabilities that were not readily apparent from other sources. Actual
results could differ from those estimates.
CONVERTIBLE
DEBT
Convertible
debt is accounted for under the guidelines established by ASC 470-20 “Debt with Conversion and Other Options.” ASC
470-20 embedded conversion features be assessed under ASC 815 Derivative Instruments to the extent the embedded conversion features
are not conventional. Many of the conversion features embedded in the Company’s notes are variable and are adjusted based
on a discount to market prices which could cause an unlimited number of common stock to be issued. In these cases,
we record the embedded conversion feature as a derivate instrument, at fair value –see Derivative Instruments below. The
embedded conversion features are recorded as discounts generally at the time of issuance. The discounts relating to the initial
recording of the embedded conversion features are accreted over the term of the debt using the effective interest method.
The
Company accounts for modifications of conversion features in accordance with ASC 470-50 “Modifications and Extinguishments.”
ASC 470-50 requires the modification of a convertible debt instrument that changes the fair value of an embedded conversion feature
and the subsequent recognition of interest expense of the associated debt instrument when the modification does not result in
a debt extinguishment. A gain or loss debt extinguishment is recorded when comparing the modified fair value of the associated
debt instrument to its net carrying value as of the modification date.
DERIVATIVE
FINANCIAL INSTRUMENTS
Derivative
financial instruments, as defined in ASC 815, “Accounting for Derivative Financial Instruments and Hedging Activities”,
consist of financial instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate,
security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments
may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and
subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets.
The
Company does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However,
the Company has issued financial instruments including senior convertible notes payable and freestanding stock purchase warrants
with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host
contracts, or (iii) may be net-cash settled by the counterparty. As required by ASC 815, in certain instances, these instruments
are required to be carried as derivative liabilities, at fair value, in our consolidated financial statements.
The
Company estimates the fair values of derivative financial instruments using various techniques (and combinations thereof) that
are considered to be consistent with objectively measuring fair values. In selecting the appropriate technique, consideration
is given to, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement.
For less complex derivative instruments, such as free-standing warrants, the Company generally uses the Black-Scholes option valuation
technique because it embodies all of the requisite assumptions (including trading volatility, estimated terms and risk free rates)
necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development
of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes
in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in
the trading market price of our common stock, which has a high-historical volatility. Since derivative financial instruments are
initially and subsequently carried at fair values, the Company’s operating results will reflect the volatility in these
estimate and assumption changes.
REVENUE
RECOGNITION
The
Company recognizes revenues from product sales when (a) persuasive evidence that an agreement exists; (b) the products have been
delivered; (c) the prices are fixed and determinable and not subject to refund or adjustment; and (d) collection of the amounts
due is reasonably assured. Sales tax is charged on retail sales in the applicable district. We have historically estimated
returns and have reduced revenues for such amounts, which have not been significant
INVENTORY
Inventory
is valued at the lower of cost or market, using the first-in, first-out (FIFO) method. The Company provides for an allowance for
slow moving inventories based on current demand and competition. Management has recorded provisions for loss for obsolete or slow
moving inventory to reduce carrying amounts to net realizable value.
Results
of Operations
The
results of operations information below provides details on net loss and general and administrative expenses. General and administrative
expenses provide details on continuing operations and include items such as management compensation, SEC compliance, insurance,
office and other general expenses.
For
the Years Ended September 30, 2017 and 2016
Net Loss
.
For
the years ended September 30, 2017 and 2016, net loss was $1,326,760 and $6,093,948, respectively. We expect to continue suffering
losses for the foreseeable future.
Revenue.
For
the years ended September 30, 2017 and 2016, revenue was $128,696 and $890,514, respectively. Revenue decreased in 2017 due to
a decrease in new product releases of HIVE Ceramics and a decline in our ability to generate revenues due to lack of liquidity.
Cost of Revenue.
For
the years ended September 30, 2017 and 2016, cost of revenue was $100,033 and $1,112,168, respectively. In 2017, cost of revenue
included approximately $18,000 of ceramic products costs, $12,000 of freight, $15,000 of quality assurance, $16,000 of royalties,
and $26,000 of obsolescence reserve. In 2016, cost of revenue included approximately $345,000 of ceramic products costs, $161,000
of depreciation, $233,000 of obsolescence reserve, $47,000 of vape pen costs, $43,000 of freight, $33,000 of quality assurance,
$46,000 of occupancy and warehouse costs, and $98,000 of royalties.
Gross Profit (Loss).
For
the years ended September 30, 2017 and 2016, gross profit was $28,663 or 22% and ($221,654) or (25%), respectively. Gross profit
increased due to no further write-offs of inventory and obsolescence of ceramics.
Sales and Marketing.
For
the years ended September 30, 2017 and 2016, sales and marketing expenses were $88,202 and $375,807, respectively. In 2017, sales
and marketing expenses included approximately $56,000 of outside sales expense and $26,000 of investor relations. In 2016, sales
and marketing expenses included approximately $68,000 of general advertising, $81,000 of outside sales expense, $34,800 of stock
compensation, and $104,000 of payroll expenses.
Research and Development.
For the years ended September 30, 2017 and 2016, were $0 and $47,648, respectively. In 2016, research and development included
approximately $20,000 of payroll expenses, $4,000 of product design prototypes, and $8,000 of travel.
General and Administrative.
For
the years ended September 30, 2017 and 2016, general and administrative expenses were $515,173 and $1,028,736, respectively. In
2017, general and administrative expenses included approximately $24,000 of insurance expense, $19,000 of office expense, $37,000
of accounting fees, and $504,000 of payroll expenses. In 2016, general and administrative expenses included approximately $45,000
of insurance expense, $46,000 of office expense, $463,000 of payroll expenses, $32,889 of stock compensation, $80,000 of accounting
fees, and $210,000 of legal fees.
Interest Expense
. For
the years ended September 30, 2017 and 2016, interest expense was $549,860 and $1,945,231, respectively. There were significant
increases in conversions into common stock in 2016 versus 2017, which resulted in full accretion of discounts to interest expense
upon conversion.
Interest Expense
- related party.
For years ended September 30, 2017 and 2016, related party interest expense was $16,612 and $18,624,
respectively.
Loss
from Effects of Derivative Liabilities.
For the years ended September 30, 2017 and 2016, the loss from effects of derivative
liabilities was $185,576 and $2,507,067, respectively, due to the excess fair value of derivative discounts and fluctuations in
the stock price versus the lowest traded prices during a period of time prior to notice of conversion
.
Gain on Settlements
.
For
years ended September 30, 2017 and 2016, the net gain on settlements was $0 and $175,769, respectively.
Liquidity and Capital Resources
As of September
30, 2017, we had cash of $5,360 and a working capital deficit of $3,812,094 as compared to cash of $0 and a working capital deficit
of $5,031,000 as of September 30, 2016. We believe our current liquidity and securities purchase commitments are not sufficient
and the Company requires immediate capital to assume any sort of normal operations, let alone new business initiatives. These factors
raise substantial doubt about the Company’s ability to continue as a going concern. Management plans to raise additional
capital to funds immediate operating needs, and ultimately, work the Company’s creditors to restructure the convertible notes,
so we can raise growth capital to acquire new businesses. Our registered public accounting firm included an explanatory paragraph
in their report regarding substantial doubt about the Company’s ability to continue as a going concern.
We had total liabilities of $3,820,751 as of September 30, 2017, including current liabilities of $397,999
of accounts payable, $1,060,023 of accrued expenses, $642,001 of convertible notes payable, net, $15,000 of related party notes
payable, $200,000 of related party convertible notes payable, $1,405,728 of derivative liabilities, and $100,000 of settlement
liability. We had total liabilities of $5,100,604 as of September 30, 2016, including current liabilities of $473,654 of accounts
payable, $555,994 of accrued expenses, $537,291 of convertible notes payable, $15,000 of related party notes payable, $300,000
of related party convertible notes payable, $2,755,544 of derivative liabilities, $422,000 of settlement liability, and long-term
liabilities of $41,121 of convertible notes payable. We must increase the authorized shares in order to convert out the remaining
convertible notes and then reset the capital structure.
We used $268,140 of cash
in operating activities during the year ended September 30, 2017, which was attributable to our net loss of $1,326,760, which
was offset by a $185,576 loss from effects of derivative liabilities, $515,404 of accretion of debt discounts, and $357,640 of
net cash provided by the change in operating assets and liabilities. We used $507,554 of cash in operating activities during the
year ended September 30, 2016, which was attributable to our net loss of $6,093,948, which was offset by $123,150 impairment of
intangibles, $161,427 of depreciation, $2,507,067 loss from effects of derivative liabilities, $175,769 gain on settlements, $1,752,743
of accretion of debt discounts, $67,689 of stock-based compensation, $223,798 of other, and $1,373,885 of net cash provided by
the change in operating assets and liabilities.
There
were no investing activities during the year ended September 30, 2017. Investing activities used $43,100 during the year ended
September 30, 2016 consisting of capital expenditures.
We had $273,500 of net cash provided by financing activities during the year ended September 30, 2017
consisting of $273,500 from additional proceeds towards its Typenex and GHS Investments convertible notes payable. We had $276,750
of net cash provided by financing activities during the year ended September 30, 2016 consisting of $312,150 of net proceeds from
issuance of convertible notes payable, $50,000 of net proceeds from issuance of related party convertible notes payable, and $85,400
of repayments on convertible notes payable.
Item
7A.
Quantitative and Qualitative Disclosure About Market Risk
Vape
is a smaller reporting company and is therefore not required to provide this information.
Item
8.
Financial Statements and Supplementary Data
The
consolidated financial statements and supplementary data of Vape called for by this item are submitted under a separate section
of this report. Reference is made to the Index of Financial Statements contained on page F-1 herein.
Item
9.
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item
9A.
Controls and Procedures
(a)
Evaluation of disclosure controls and procedures.
Management,
with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure
controls and procedures pursuant to Rule 13a-15 under the Exchange Act. In designing and evaluating the disclosure controls
and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures
must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating
the benefits of possible controls and procedures relative to their costs.
Based
on management’s evaluation, our chief executive officer and chief financial officer concluded that, as of September
30, 2017, we have a material weakness with regards to our disclosure controls and procedures not designed at a reasonable assurance
level and not are effective to provide reasonable assurance that information we are required to disclose in reports that we file
or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules
and forms, and that such information is accumulated and communicated to our management, including our chief executive officer
and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
We plan to engage a financial
expert to assist the Company with procedures related to the treatment of convertible debt. We expect to resolve the material weakness
during the year ending September 30, 2019.
(b)
Changes in internal control over financial reporting.
We review
our system of internal control over financial reporting and make changes to our processes and systems to improve controls and
increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities
as implementing new, more efficient systems, consolidating activities, and migrating processes.
(c)
Management’s report on internal control over financial reporting.
Management
is responsible for establishing and maintaining adequate control over financial reporting for Vape. Internal control over
financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal
controls over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records
that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of Vape; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
U.S. generally accepted accounting principles, and that receipts and expenditures of Vape are being made only in accordance with
authorizations of management and directors of Vape; and (3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of Vape’s assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management,
with the participation of our principal executive officer and principal financial and accounting officer, conducted an evaluation
of the effectiveness of Vape’s internal control over financial reporting based on the framework in
Internal Control -
Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation,
management concluded that our internal control over financial reporting was not effective as of September 30, 2017.
Item
9B.
Other Information
None.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1. DESCRIPTION OF BUSINESS, RECENT ACQUISITIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Vape
Holdings, Inc. (“VAPE,” the “Company,” “we,” “us,” “our,” “our
company”) is a holding company with its primary focus in the manufacturing and distribution of healthy and sustainable vaporization
products. The Company designs, markets and distributes ceramic vaporization products under a unique brand. The Company has
introduced a nonporous, non-corrosive, chemically inert medical-grade ceramic vaporization element as a healthy, sustainable alternative
to traditional titanium and quartz vaporization materials, as well as lower-grade ceramic found in traditional electronic cigarettes
and vaporizers. This material can be used for a wide range of applications, including stand-alone vaporization products and “E-cigs.”
Electronic cigarettes come in a variety of designs ranging from those that look vastly like traditional cigarettes, to larger
vaporizer units which are capable of vaporizing liquid with varying viscosity. The process of vaporization is believed to
eliminate the smoke, tar, ash, and other byproducts of traditional smoking by utilizing lower temperatures in a controlled electronic
environment.
HIVE
CERAMICS
HIVE
Ceramics (“HIVE”) was the premier brand under the VAPE umbrella. HIVE outsource manufactures and distributes a proprietarily
blended ceramic vaporization element for torched, electronic and portable vaporizers with countless design and product crossover
capabilities in existing and emerging markets. HIVE is dedicated to bringing the healthiest and cleanest vaporization experience
possible to the market.
HIVE
Ceramics saw a significant decrease in sales due to competition in the market and restricted operations. While sales channels
are still open, without an infusion, the revenues are not large enough to support HIVE Ceramics outside of its existing product
line.
See Note 5 for discussion
of HIVE activity and litigation.
BASIS
OF PRESENTATION
The
accompanying consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC) and Generally Accepted Accounting Principles. In the opinion of management, all adjustments
and disclosures necessary for a fair presentation of these consolidated financial statements have been included. Such adjustments
consist of normal recurring adjustments.
CONSOLIDATION
The
consolidated financial statements include the assets, liabilities, and operating results of the Company and its wholly-owned subsidiaries,
HIVE Ceramics, Revival Offset, and Nouveau after elimination of all material inter-company accounts and transactions. No
segment information is presented as the assets, liabilities, and results of HIVE represent over 95% of the Company’s operations.
USE
OF ESTIMATES
The
preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States
requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates and assumptions
include losses for warrant contingencies and the valuation of conversion features in notes.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
Fair
value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or liability in an orderly transaction between market participants as
of the measurement date. Applicable accounting guidance provides an established hierarchy for inputs used in measuring fair value
that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable
inputs be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability
and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect
the Company’s assumptions about the factors that market participants would use in valuing the asset or liability. There
are three levels of inputs that may be used to measure fair value:
Level
1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level
2 - Include other inputs that are directly or indirectly observable in the marketplace.
Level
3 - Unobservable inputs which are supported by little or no market activity.
The
fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs
when measuring fair value. Derivative instruments include the convertible notes payable derivative liability and warrant liability
(Level 2). Derivative instruments are valued using standard calculations/models that are primarily based on observable inputs,
including volatilities and interest rates. Therefore, derivative instruments are included in Level 2.
Fair-value
estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of September
30, 2017 and 2016. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values.
These financial instruments include cash, prepaid expenses, accounts payable, accrued liabilities, and notes payable. Fair values
for these items were assumed to approximate carrying values because of their short-term nature or they are payable on demand.
The
following table presents the Company’s fair value hierarchy for assets measured at fair value on a recurring basis at September
30, 2017:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,360
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,360
|
|
Total assets measured at fair value
|
|
$
|
5,360
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
|
|
$
|
-
|
|
|
$
|
1,405,728
|
|
|
$
|
-
|
|
|
$
|
1,405,728
|
|
Total liabilities measured at fair value
|
|
$
|
-
|
|
|
$
|
1,405,728
|
|
|
$
|
-
|
|
|
$
|
1,405,728
|
|
The
following table presents the Company’s fair value hierarchy for assets measured at fair value on a recurring basis at September
30, 2016:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total assets measured at fair value
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
|
|
$
|
-
|
|
|
$
|
2,755,544
|
|
|
$
|
-
|
|
|
$
|
2,755,544
|
|
Total liabilities measured at fair value
|
|
$
|
-
|
|
|
$
|
2,755,544
|
|
|
$
|
-
|
|
|
$
|
2,755,544
|
|
CONCENTRATION
Credit
Risk
At
times, the Company maintains cash balances at a financial institution in excess of the FDIC insurance limit. In addition, at we
extend credit to customers in the normal course of business, after we evaluate the credit worthiness. The Company does not expect
to take any unnecessary credit risks causing significant write-offs of potentially uncollectible accounts.
Customers
There
were no customer concentrations during the years ended September 30, 2017 and 2016.
Suppliers
All
purchases were from one (1) supplier during the years ended September 30, 2017 and 2016.
REVENUE
RECOGNITION
The
Company recognizes revenues from product sales when (a) persuasive evidence that an agreement exists; (b) the products have been
delivered; (c) the prices are fixed and determinable and not subject to refund or adjustment; and (d) collection of the amounts
due is reasonably assured. Revenue is recorded when sales orders are shipped.
ALLOWANCE
FOR DOUBTFUL ACCOUNTS
The
Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers
to make required payments. The Company considers the following factors when determining if collection of required payments is
reasonably assured: customer credit-worthiness; past transaction history with the customer; current economic industry trends;
changes in customer payment terms; and bank credit-worthiness for letters of credit. If the Company has no previous experience
with the customer, the Company may request financial information, including financial statements or other documents, to determine
that the customer has the means of making payment. The Company may also obtain reports from various credit organizations to determine
that the customer has a history of paying its creditors. If these factors do not indicate collection is reasonably assured, revenue
is deferred as a reduction to accounts receivable until collection becomes reasonably assured, which is generally upon receipt
of cash. If the financial condition of the Company’s customers was to deteriorate, adversely affecting their ability to
make payments, additional allowances would be required.
INVENTORY
Inventory
is valued at the lower of cost or market, as determined primarily by the average cost inventory method, and are stated using the
first-in, first-out (FIFO) method. Management will record a provision for loss for obsolete or slow moving inventory to reduce
carrying amounts to net realizable value.
IMPAIRMENT
OF LONG-LIVED AND PURCHASED INTANGIBLE ASSETS
The
Company has adopted Accounting Standards Codification (“ASC”) 350 “Intangibles - Goodwill and Other.”
The Statement requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events
relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted
inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived
assets based upon forecasted undercounted cash flows. Should impairment in value be indicated, the carrying value of intangible
assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of
the asset. ASC 350 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less
costs to sell.
Long-lived assets, such
as fixed assets and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Recoverability of the asset is measured by comparison of
its carrying amount to undiscounted future net cash flows the asset is expected to generate. If such assets are considered to
be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds its fair
market value. Estimates of expected future cash flows represent management’s best estimate based on currently available
information and reasonable and supportable assumptions. Any impairment recognized is permanent and may not be restored. During
the years ended September 30, 2017 and 2016, the Company recorded impairments on $0 and $123,150 of its trademarks, respectively,
as its expected cash flows did not exceed its carrying amounts and none towards its trademarks as its expected future cash flows
are in excess of their carrying amounts.
RESEARCH
AND DEVELOPMENT
Research
and development costs are expensed as incurred. The costs of materials and equipment that will be acquired or constructed for
research and development activities, and that have alternative future uses, both in research and development, marketing or sales,
will be classified as fixed assets and depreciated over their estimated useful lives. To date, research and development costs
include the research and development expenses related to prototypes of the Company’s products. During the years ended September
30, 2017 and 2016, research and development costs were $0 and $47,648, respectively.
CONVERTIBLE DEBT AND EMBEDDED DERIVATIVES
The Company accounts
for embedded conversion features (“ECF”s) in convertible notes in accordance with ASC 815. ASC 815 generally requires
companies to bifurcate ECFs in convertible notes from their host instruments and to account for them as free standing derivative
financial instruments.
The Company has
evaluated the terms and conditions of the convertible note under the guidance of ASC 815. The conversion features did not meet
the definition of “indexed to a company’s own stock” provided for in ASC 815 since the conversion prices are
adjustable based on the passage of time or certain events that are out of the Company’s control, including certain events
of default. These convertible instruments have no explicit limit on the number of shares that the holder can convert into. When
these ECF’s exist, we report the ECF as a derivative liability, at fair value under ASC 815 “Derivatives and Hedging”.
The excess of fair value of the embedded conversion feature, together with the original issue discounts and issue costs over the
face value of the debt, is recorded as an immediate charge in the accompanying statements of operations and cash flows. Each reporting
period, the Company will compute the estimated fair value of derivatives and record changes to operations. The discounts are accreted
over the term of the debt, which is generally nine months after the notes become convertible, using the effective interest method.
We accounted for the ECFs in all of our convertible notes as derivative liabilities during the years presented.
The Company
estimates the fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered
to be consistent with objectively measuring fair values. In selecting the appropriate technique, consideration is given to, among
other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex
derivative instruments, such as free-standing warrants, the Company generally uses the Black-Scholes option valuation technique
because it embodies all of the requisite assumptions (including trading volatility, estimated terms and risk free rates) necessary
to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant
and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal
and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market
price of our common stock, which has a high-historical volatility. Since derivative financial instruments are initially and subsequently
carried at fair values, the Company’s operating results will reflect the volatility in these estimate and assumption changes.
ASC 470-50,
Extinguishments
, require entities to record an extinguishment when the terms of the original
note are significantly modified, defined as a greater than 10% change in expected cash flows. Significant modifications accounted
for as extinguishments are reported as a loss in the accompanying statements of operations.
EARNINGS
/ LOSS PER COMMON SHARE
Basic
earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of
common shares outstanding during the reporting period. Diluted earnings per common share is computed by dividing net income available
to common shareholders by the combination of dilutive common share equivalents, comprised of shares issuable under the Company’s
share-based compensation plans and the weighted-average number of common shares outstanding during the reporting period. Dilutive
common share equivalents include the dilutive effect of in-the-money share equivalents, which are calculated, based on the average
share price for each period using the treasury stock method. Under the treasury stock method, the exercise price of an award,
if any, the amount of compensation cost, if any, for future service that the Company has not yet recognized, and the estimated
tax benefits that would be recorded in paid-in capital, if any, when an award is settled are assumed to be used to repurchase
shares in the current period.
The
following is a summary of outstanding securities that would have been included in the calculation of diluted shares outstanding
since the exercise prices did not exceed the average market value of the Company’s common stock had the Company generated
net income for the years ended September 30, 2017 and 2016:
|
|
For the
Year Ended
|
|
|
For the
Year Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Series A Preferred stock
|
|
|
500,000
|
|
|
|
500,000
|
|
Convertible notes
|
|
|
131,612,863
|
|
|
|
878,368,698
|
|
|
|
|
132,112,863
|
|
|
|
878,868,698
|
|
The Company does not
have sufficient shares to accommodate the series A preferred stock and convertible notes, thus, the amounts reflected above are
those that bring total to the amount authorized of one billion. If all holders were to convert, the Company would have outstanding
shares in excess of two billion as of September 30, 2017.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers”, which
supersedes most of the current revenue recognition requirements. The core principle of the new guidance is that an entity should
recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for these goods or services. New disclosures about the nature, amount,
timing and uncertainty of revenue and cash flows arising from contracts with customers are also required. This guidance is effective
for the Company in the first quarter of fiscal year 2018 and early application is not permitted. Entities must adopt the new guidance
using one of two retrospective application methods. The Company is currently evaluating the standard but does not expect it to
have a material impact on our financial position, results of operations or cash flows.
The
Financial Accounting Standards Board issues Accounting Standard Updates (“ASUs”) to amend the authoritative literature
in Accounting Standards Codification (“ASC”). There have been a number of ASUs to date that amend the original text
of ASC. The Company believes those issued to date either (i) provide supplemental guidance, (ii) are technical corrections, (iii)
are not applicable to the Company or (iv) are not expected to have a significant impact on the Company.
RISKS
AND UNCERTAINTIES
The
Company has issued several convertible notes which are generally convertible after 180 days. The notes have conversion features
that adjustable over time or in the event of certain events of default, many of which are out of the control of the Company’s
management. The adjustment provisions do not explicitly limit the number of shares the notes are convertible into. Each of the
Company’s convertible note holders is entitled to a “share reserve” per their agreements with the Company which
entitle them to reserve a certain allotment of common stock out of the authorized but unissued common stock of the Company for
future conversions of their notes. The Company is further obligated under the agreements to increase the Company’s authorized
share count to accommodate for a sufficient amount of share reserves. Due to the declining market price of the Company’s
common stock, the note holders have reserve claims in excess of the common stock authorized at this time. The inability of the
Company to meet its share reserve obligations may be considered a technical violation of their agreements with the note holders.
The Company’s ability to issue common stock other than those presently allocated to note holders is restricted during this
time, since we have lost the ability to increase the share reserves due to the significantly increased outstanding held by convertible
note holders and a shareholder vote is required to increase the authorized amount of shares the Company may issue. Further, the
combination of limited capital and depleted share reserves have severely damaged the Company’s ability to fund operations
or enable us to seek mergers or acquisitions. Also, see Note 2 Going Concern below.
NOTE
2. GOING CONCERN
VAPE’s consolidated financial statements reflect a net loss of $1,326,760 during the year ended
September 30, 2017. As of September 30, 2017, we had $5,360 of cash, a working capital deficit of $3,812,094, and an accumulated
deficit of $36,351,428. In addition, the ongoing need to obtain financing to fund operations also raise substantial doubt about
the ability of Vape to continue as a going concern. Management expects to obtain funding for the new operations for the foreseeable
future; however, there are no assurances that the Company will obtain such funding. VAPE’s financial statements do not
include any adjustments to reflect the possible effects on recoverability and classification of assets or the amounts and classification
of liabilities that may result from the inability to continue as a going concern. See Note 9 for subsequent events regarding financing
activities.
NOTE
3. ACCRUED EXPENSES
The
following is a summary of accrued expenses as of September 30, 2017 and 2016:
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
Accrued interest
|
|
$
|
303,766
|
|
|
$
|
183,390
|
|
Accrued interest - related party
|
|
|
59,774
|
|
|
|
43,162
|
|
Accrued wages and taxes
|
|
|
692,124
|
|
|
|
324,086
|
|
Other
|
|
|
4,359
|
|
|
|
5,356
|
|
|
|
$
|
1,060,023
|
|
|
$
|
555,994
|
|
As
of September 30, 2017, $25,000 for Kyle Tracey, $16,667 for Joe Andreae, $63,742 for Mike Cook, $206,381 for Allan Viernes, $208,048
for Benjamin Beaulieu, $51,333 for Alex Viernes and $65,000 for Justin Braune are recorded in accrued wages.
NOTE
4. CONVERTIBLE NOTES PAYABLE
At
September 30, 2017, convertible notes payable consisted of the following:
Counterparty
|
|
Principal Amount
|
|
|
Unamortized Discount
|
|
|
Carrying Value
|
|
|
Accrued Interest
|
|
|
Derivative Liability
|
|
|
Interest Expense
|
|
GHS Investments
|
|
$
|
281,284
|
|
|
$
|
25,949
|
|
|
$
|
255,335
|
|
|
$
|
240,341
|
|
|
$
|
590,552
|
|
|
$
|
180,356
|
|
Typenex
|
|
|
449,166
|
|
|
|
62,500
|
|
|
|
386,666
|
|
|
|
63,425
|
|
|
|
815,176
|
|
|
|
369,504
|
|
|
|
$
|
730,450
|
|
|
$
|
88,449
|
|
|
$
|
642,001
|
|
|
$
|
303,766
|
|
|
$
|
1,405,728
|
|
|
$
|
549,860
|
|
During the year ended September
30, 2017, Typenex acquired the Adar Bays, JMJ, and Odyssey Research convertible notes payable.
At
September 30, 2016, convertible notes payable consisted of the following:
Counterparty
|
|
Principal Amount
|
|
|
Unamortized Discount
|
|
|
Carrying Value
|
|
|
Accrued Interest
|
|
|
Derivative Liability
|
|
|
Interest Expense
|
|
GHS Investments
|
|
$
|
248,926
|
|
|
$
|
88,075
|
|
|
$
|
160,852
|
|
|
$
|
135,174
|
|
|
$
|
1,255,774
|
|
|
$
|
1,323,000
|
|
Adar Bays
|
|
|
187,500
|
|
|
|
-
|
|
|
|
187,500
|
|
|
|
25,042
|
|
|
|
610,117
|
|
|
|
153,174
|
|
JMJ Financial
|
|
|
171,666
|
|
|
|
16,605
|
|
|
|
155,060
|
|
|
|
23,174
|
|
|
|
578,288
|
|
|
|
211,790
|
|
Union
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
90,909
|
|
LG Capital
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
91,017
|
|
Odyssey Research
|
|
|
90,000
|
|
|
|
15,000
|
|
|
|
75,000
|
|
|
|
-
|
|
|
|
311,365
|
|
|
|
75,341
|
|
|
|
$
|
698,092
|
|
|
$
|
119,680
|
|
|
$
|
578,412
|
|
|
$
|
183,390
|
|
|
$
|
2,755,544
|
|
|
$
|
1,945,231
|
|
Redwood
On
February 10, 2015, the Company issued an unsecured convertible promissory note in the principal amount of $2,000,000 less an OID
of $182,000 and transaction expenses of $10,000 for a total purchase price of $1,808,000. The stated rate interest on the note
was 10%, per annum and a default rate 22%, per annum. In 2015, the Company received $800,000 under the note with an original issue
discount of $148,600 and transaction costs for net proceeds of $651,395. The note was ultimately convertible into common
stock at a discount of 55
% to the lowest trading price during
the prior 15 days from the date of notice to convert, since certain events of default occurred. There was no explicit limit on
the number of shares that the note is convertible into. During the year ended September 30, 2016, the note holder converted $498,150
of principal and accrued interest into 82,775,494 shares.
On February 23, 2016,
the note was assigned to GHS Investments (“GHS”), and $36,038 was added to the principal balance and immediately charged
to interest expense. The assigned note balance and accrued interest of $93,614 was fully converted into 77,722,625 shares during
the year ended September 30, 2016.
Convertible Note Financings –
August 2015
In 2015, the Company
entered into a series of convertible note financings with an aggregate face value of $646,000 for net proceeds of $541,000. The
stated rates of interest on the notes range from 8% to 12%, per annum; one note had a one-time charge of 12% on principal. The
notes were subject to default rates of interest of up to 22%, per annum. In the event of default, the principal and accrued interest
increased 150%. The notes were convertible into common stock based on a discount of 48% of lowest traded price due to events of
default. There was no explicit limit on the number of shares that the note is convertible into.
On March 7, 2016,
an August 5, 2015 note with a face value of $112,000, together with accrued interest of $7,806 was assigned to GHS for a total
of $119,706. Since the notes were not repaid at 180 days at a premium, the notes were convertible into common stock based on a
discount of 45% of the lowest trading price over prior 20 days trading. The assigned note balance and accrued interest of $121,400
was fully converted into 48,223,268 shares during the year ended September 30, 2016.
On March 21, 2016, an August 5, 2015 note with a face value of $105,000, together with accrued interest,
was assigned to GHS for a total of $125,000. In the event the notes were not repaid at 180 days at a premium, the notes
become convertible into common stock based on a discount of 45% of the lowest trading price over prior 20 days trading, subject
to an additional 10% discount in certain events. In the event of default, the note increased 150% of the principal and accrued
interest. During the years ended September 30, 2017 and 2016, the assigned note balance and accrued interest of $70,795 and $102,742,
respectively, were converted into 36,398,894 and 144,242,185 shares, respectively.
See Note 6 for two
notes (Union and LG Capital) that resulted in settlements and are included in Settlement Liabilities in the accompanying balance
sheet at September 30, 2016 aggregating $322,000.
December 15, 2015 Convertible Note
On December 15, 2015,
an accredited investor provided the Company with $50,000 in additional proceeds under the same terms of their original convertible
note with a term of two years in August 2015. A one-time interest charge of 12% and an original issue discount of 10%, aggregating
$11,600, was added to the principal of the note. The total face amount of the note was $61,600 as of December 15, 2015. The note
was subject to a default rate of interest of 18%, per annum. The note had default penalty of 150% principal and accrued interest.
In the event the notes were not repaid at 180 days, the notes become convertible into common stock based on a discount of 60% of
the lowest trading price over the 20 days prior to notice of conversion, subject to further adjustment of up to 15% in certain
events. There is no explicit limit on the number of shares that the note is convertible into.
Upon issuance of the
note, the Company recorded the note as a derivative liability at fair value of $144,127, a derivative discount of $61,600, and
the excess in fair value of $82,527 to loss from effects of derivatives during the year ended September 30, 2016. On November
1, 2017, the note, together with an August 5, 2015 note held by the same investor and accrued interest, was assigned to Typenex
for a total of $128,100. During the years ended September 30, 2017 and 2016, no amounts of this note were converted into shares
of common stock.
GHS Convertible Note
On April 19, 2016,
the Company entered into convertible note financing transaction in the principal amount of $193,765, less fees and costs. The convertible
note bears interest at the stated rate of 10%, per annum, subject to a default rate of 22%, per annum., and is convertible into
common stock of the Company at any time after 180 days from issuance of the note at a conversion price per share equal to 55% of
the lowest trading price in the 20 trading days immediately preceding the applicable conversion date. The conversion rate will
decrease to 45% or 50% from 55% in certain conditions of default. The Company had the option to prepay the convertible note in
the first 180 days from closing subject to a prepayment penalty of 150% of principal plus interest. The maturity date of the convertible
note was January 19, 2017.
The Company recorded
the prepayment penalty of $91,011 as a discount to the convertible note and fully amortized it to interest expense during the year
ended September 30, 2016. Due to default, the principal and accrued interest increased by 150%, and the Company recorded $99,556
to interest expense during the year ended September 30, 2017. As of September 30, 2017, the entire amount was included within unpaid
principal and accrued interest.
Upon issuance of the
note, the Company recorded the note as a derivative liability at fair value of $566,977, a discount of $176,150, and the excess
in fair value of the embedded conversion feature of $390,827 to loss from effects of derivatives during the year ended September
30, 2016. During the years ended September 30, 2017 and 2016, no amounts of this note were converted into shares of common stock.
Odyssey Investment
On December 10, 2015,
an investor purchased $90,000 in common stock at a purchase price equal to 90% of the average of the closing prices of the common
stock for the three (3) trading days immediately preceding the date that is six (6) months from the date of the agreement. As of
June 7, 2016, the Company entered into an agreement for proceeds of $90,000 to be recorded as a convertible note payable with a
conversion feature of 55% of the lowest trading price for the prior twenty (20) days. The Company recorded the ECF in the note
as a derivative liability at estimated fair value of $118,722, a derivative discount of $90,000, and the excess in fair value of
$28,722 to loss from effects of derivatives during the year ended September 30, 2016.
Securities
Purchase Agreement with Typenex Co-Investment, LLC
On
November 1, 2016, the Company closed a Securities Purchase Agreement (the “Typenex Agreement”) with Typenex. Pursuant
to the Typenex Agreement, Typenex purchased a Convertible Promissory Note from the Company in the original principal amount of
up to $1,413,000 (the “Typenex Note”), at an interest rate of ten percent (10%) per annum. The Typenex Note is unsecured.
The principal amount of the Typenex Note included an original issue discount of $128,000 and a transaction fee of $5,000.
The
investment from Typenex was scheduled to occur in a series of sixteen (16) tranches, represented each by a separate Secured Investor
Promissory Note (the “Tranche Notes”) in varying amounts. The first Tranche Note of $40,000 was memorialized in Secured
Promissory Note #1, the funding of which occurred on or immediately after the execution of the Typenex Agreement; net proceeds
of $235,500
were received during the year ended September
30, 2017. As a result of the funding, the Company recorded a loss from effects of derivative liabilities of $374,665 during the
year ended September 30, 2017. The Company recorded a derivative discount of $235,500 against the convertible note payable. The
remaining discount will be amortized to interest expense during the year ended September 30, 2018.
Each Tranche Note, or
any part of it, is convertible into common stock of the Company. The Conversion Price is as described in the Typenex Agreement
and is based on at least a 45% discount, and up to 55% discount based on events of default, to the trading price during the prior
20 days of notice of intent to convert by the holder into the Company’s common stock.
As a part of the Typenex
Agreement, the Company agreed to use its best efforts to cause its authorized but unissued stock to be increased in order for
the Company to create a reserve sufficient to meet its conversion obligations under the Typenex Note. The Company is in the process
of taking steps in order to increase its authorized but unissued stock to meet its obligations of approximately 450,000,000 shares
as of September 30, 2017. The Company is in default and accrued interest at the default rate of twenty-two percent (22 %)
per annum. Due to default, the principal and accrued interest increased by 115%. As a result of these default events, the Company
recorded $118,187 to interest expense during the year ended September 30, 2017. As of September 30, 2017, the entire amount was
included within unpaid principal and accrued interest.
During the years ended
September 30, 2017 and 2016, Typenex converted original and assigned notes totaling $126,826 and $265,860, respectively, of principal
and accrued interest into 87,302,137 and 72,136,082 shares of common stock, respectively.
Securities
Purchase Agreement with GHS Investments, LLC
On October 28, 2016,
the Company closed a Securities Purchase Agreement (the “GHS Purchase Agreement”) with GHS. Pursuant to the GHS Purchase
Agreement, GHS agreed to purchase and the Company agreed to sell up to $1,105,000 of convertible securities, in the form of a Convertible
Promissory Note (the “GHS Note”), at an interest rate of ten percent (10%) per annum. The GHS Note included a ten percent
(10%) original issuance discount (i.e., $100,000) and a $5,000 initial transaction fee, as defined in the GHS Purchase Agreement.
Upon the closing of the GHS Purchase Agreement, GHS funded $40,000 to the Company (the “Initial Tranche”). Within 15
days of certain conditions being met, an additional $40,000 shall be disbursed by GHS to the Company, in its sole discretion (“Second
Tranche”). Within 30 days from the Second Tranche’s issuance, so long as there are no defaults under the GHS Note,
GHS in its discretion may fund an additional $50,000 to the Company every 30 days (“Subsequent Tranches”) until $1,000,000
has been funded to the Company. During the year ended September 30, 2017, GHS provided net proceeds of $38,000. As a result of
the funding, the Company recorded a loss from effects of derivative liabilities of $363,010 during the year ended September 30,
2017. The Company recorded a derivative discount of $38,000 against the convertible note payable and amortized the entire amount
to interest expense during the year ended September 30, 2017.
The principal sum and corresponding
interest due to GHS shall be prorated based on the consideration actually paid by GHS to the Company in accordance with the GHS
Purchase Agreement.
Each Tranche Note,
or any part of it, is convertible into common stock of the Company. The Conversion Price is as described in the GHS Purchase Agreement
and is based on at least a 45% discount, and up to 55% discount based on events of default, to the lowest trading price during
the prior 20 days of notice of intent to convert by the holder into the Company’s common stock.
As a part of the GHS
Purchase Agreement, the Company agreed to use its best efforts to cause its authorized but unissued stock to be increased in order
for the Company to create a reserve sufficient to meet its conversion obligations of approximately. The Company is in default
and accrued interest at the default rate of twenty-two percent (20%) per annum.
There is no guarantee that
GHS will fund the remainder of the Subsequent Tranches and in fact it is within GHS’s sole and absolute discretion whether
it ultimately funds the Subsequent Tranches. Should GHS decide it won’t fund the Subsequent Tranches, the Company’s
operating results will suffer and its ability to remain a going concern will be jeopardized.
During the years ended September 30, 2017 and 2016, GHS converted
original and assigned notes totaling $214,846 and $549,583, respectively, of principal and accrued interest into 158,462,022 and
394,470,363 shares of common stock, respectively
.
The
following weighted average variables were used in the Black Scholes model for all the derivative liabilities as of September
30, 2017 and 2016:
Balance Sheet Date
|
|
Stock
Price at
Valuation Date
|
|
|
Dividend
Yield
|
|
|
Exercise
Price
|
|
|
Risk Free
Interest
Rate
|
|
|
Volatility
|
|
|
Average
Life
|
|
September 30, 2017
|
|
$
|
0.002
|
|
|
|
-
|
%
|
|
$
|
0.001
|
|
|
|
1.47
|
%
|
|
|
118
|
%
|
|
|
0.5
|
|
September 30, 2016
|
|
$
|
0.004
|
|
|
|
-
|
%
|
|
$
|
0.001
|
|
|
|
0.45
|
%
|
|
|
298
|
%
|
|
|
0.5
|
|
NOTE
5. RELATED PARTY DEBT
Related
Party Note Payable
The Company had outstanding
accounts payable balance to a related party (shareholder of the Company) in the amount of $15,000 as of September 30, 2013. This
payable was converted into a note payable on December 7, 2013. The note payable bears interest of 6% per annum with a maturity
date of December 1, 2016. As of September 30, 2017, there is $3,473 in accrued interest expense related to this note and the Company
recorded $913 in interest expense related to this note during the years ended September 30, 2017 and 2016.
Related
Party Convertible Notes Payable
On
December 10, 2015, the Company entered into two Secured Series B Preferred Stock Convertible Notes (the “Series B Notes”)
for an aggregate principal of $300,000 including 1) $50,000 from Hive Ceramics, LLC in new capital to the Company and 2) an amended
and restated note for Hive Ceramics LLC in the amount of $250,000 for capital previously contributed which is soon to be due and
payable.
The
Company failed to pay the Series B Note and the Amended Note on the Maturity Date (December 10, 2016). On December 15, 2016, the
Company received a Notice of Default from counsel for Holder. Holder’s counsel demanded that all amounts owed under the
Series B Note and the Amended Note be paid no later than December 20, 2016. The Company was unable to pay the demanded amounts
by December 20, 2016. The Company believes that the Holder intends to execute on the security for the Series B Note and the Amended
Note, namely, all of the assets of the Company. The Company is attempting to negotiate a resolution that does not include seizure
of the Company’s assets however there is no guarantee that the Company will be able to work out a satisfactory resolution
that does not include seizure of the Company’s assets.
The
Series B Notes accrue interest at eight percent (8%) per annum, mature one (1) year from issuance and are secured by all of the
assets and property of the Company. Upon the election of the noteholder, the Series B Notes are convertible into newly created
Series B Preferred Stock on a one-for-one (1:1) basis into shares of common stock of the Company at a fixed price per share of
$0.01.
Concurrently,
the Company filed a Certificate of Designation with the Delaware Secretary of State on the Series B Preferred Stock which provides,
in pertinent part, for the following rights and privileges:
Authorized
Amount of Series B Preferred Stock
: There are authorized 30,000,000 shares of Series B Preferred Stock, subject to the Certificate
of Designation. There shall be no additional Series B Shares authorized or issued.
Voting
Rights
: Each share of Series B shall be entitled to five (5) votes for every one (1) vote entitled to each share of Common
Stock.
Rank
:
All shares of Series B shall rank (i) senior to the Company’s Common Stock, (ii)
pari passu
with all other
series of preferred stock whether currently outstanding or hereafter created, including the Series A Preferred Stock, and specifically
ranking, by its terms, on par with Series B, and (iii) junior to any class or series of capital stock of the Company hereafter
created specifically ranking, by its terms, senior to the Series B, in each case as to the distribution of assets upon liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary.
On May 24, 2017, Iliad
Research and Trading purchased $100,000 of the Series B convertible note payable for $125,000 with the reserve to convert into
common stock at 58% of the lowest trading price of the previous thirteen (13) days. During the year ended September 30, 2017, $126,826
of the note and accrued interest were converted into 87,302,137 shares of common stock. As a result of the purchase, the Company
recorded a loss from effects of derivative liabilities of $93,325 during the year ended September 30, 2017. The Company recorded
a derivative discount of $125,000 against the convertible note payable and amortized the entire amount to interest expense during
the year ended September 30, 2017.
During
the year ended September 30, 2017, the Company recorded $15,700 of interest expense related to the Series B Notes. As of September
30, 2017, $200,000 of the Series B Notes along with $56,302 of accrued interest are outstanding. The Board of Directors authorized
the designation of the Series B Preferred Stock pursuant to the authority of the Certificate of Incorporation, which confers said
authority on the Board, and the issuance of the Series B Notes pursuant to a unanimous written consent of the Board dated December
10, 2015. The value ascribed to the Series B Notes were based on the fixed conversion price of the instruments into common
stock and such no beneficial conversion feature was recorded.
Subsequent to the year ended September 30, 2017, on April 28, 2018, subsequent to the period covered by this
filing, the Company received a Notice of Default from Hive Ceramics and Kyle Tracey (the “Notice”) with respect to
the Company’s breach of the Settlement Agreement and Release, dated as of April 28, 2017. The breaches consist of failure
to pay $234,000 owed under the Tracey Note and failure to pay the $7,000 monthly payment obligations set forth in the Settlement
Agreement, and $216,222 owed for failure to repay the Hive Note. The Company has not been able to resolve the defaults set forth
in the Notice and Hive/Tracey have been informed the Company will hand over possession of the Hive Assets when arrangements can
be made. Concurrently, the Company has proposed to enter into a Sales Representative Agreement whereby the Company may continue
to sell Hive products for a period of 12 months on a non-exclusive basis in exchange for a commission on net sales. The HIVE/Tracey
Settlement Agreement and Release documents are qualified in their entirety by reference to the full text of the agreements, copies
of which were filed on Company’s Current Report on Form 8-K May 3, 2017 as Exhibit 10.1.
Legal Fees
During the year ended September 30, 2017, the Company’s
law firm waived fees of $122,000, which has been included as a reduction of general and administrative expenses. The law firm was
a former shareholder of the Company.
NOTE
6. COMMITMENTS AND CONTINGENCIES
Settlement
LiabilitIES
On or about December 1,
2016, LG Capital Funding, LLC (“LG Capital”) obtained a judgment in the amount of $151,000. On or about December 10,
2016, the Company learned that LG Capital had placed a judgment lien on the Company’s operating account. The effect of the
lien was that the Company’s operating account was frozen for an amount twice the judgment, or approximately $300,000. As
a result, during the year ended September 30, 2016, the Company recorded a settlement liability of $151,000. In or around December
2016 and continuing into early January 2017, GHS and LG Capital negotiated a transaction whereby GHS purchased the rights to the
LG Capital Convertible Promissory Note and/or the right to collect on the LG Capital judgment. On or about January 10, 2017, GHS
and the Company entered into a Convertible Promissory Note in the amount of $161,000 which represented that amount paid by GHS
to LG Capital. On January 25, 2017, the Company issued 32,700,000 shares of common stock in satisfaction of the debt.
On February 22, 2016,
a convertible promissory note holder, Union Capital, LLC (“Union”), filed suit against the Company in the United States
District Court for the Southern District of New York claiming breach of contract and conversion and seeking specific performance,
permanent injunction, and damages arising from the Company’s rejection of certain conversion notices submitted by Union.
The Company and Union settled this matter in July 2017 without further court proceedings for $170,000. On or about July 21,
2017, GHS purchased the settlement amount from Union, and entered into a Convertible Promissory Note with the Company in the amount
of $170,000, which represented that amount paid by GHS to Union. During the year ended September 30, 2017, $144,051 of the note
and accrued interest were converted into 122,063,128 shares of common stock. As a result of the purchase, the Company recorded
a loss from effects of derivative liabilities of $221,260 during the year ended September 30, 2017. The Company recorded a derivative
discount of $170,000 against the convertible note payable and amortized $144,051 to interest expense during the year ended September
30, 2017, resulting in an unamortized discount of $25,949 as of September 30, 2017.
Justin
Braune v. Vape Holdings, Inc. et.al.
On May 16, 2017, Justin
Braune, the Company’s former Chief Executive Officer filed a civil lawsuit in Los Angeles County Superior Court against the
Company, Allan Viernes and Ben Beaulieu claiming breach of Mr. Braune’s employment contract, including, but not limited to
failure to pay wages including deferred salary and commissions, and wages upon separation of employment and seeking damages arising
from the Company’s breach. The Company and Justin Braune subsequently settled this matter without further court proceedings.
On September 25, 2017, the parties participated in a full-day mediation and agreed to settle and resolve all matters including
the lawsuit. On December 6, 2017, the parties entered into a Settlement Agreement whereby, the Allan Viernes and Ben Beaulieu 1)
shall pay the sum of $15,000 by December 8, 2017 and the Company shall, 2) $40,000 on or before December 31, 2018, and 3) a convertible
promissory note in the amount of $100,000. The convertible note and/or any shares issued in connection shall have a buyout cash
value of no less than 125% of the cash value. The Company recorded a provision for loss of approximately $100,000 during the year
ended September 30, 2016, which remained recorded in settlement liabilities at both September 30, 2017 and 2016 year end.
See Note 5 for discussion of Kyle Tracey and HIVE activity and litigation.
NOTE
7. INCOME TAXES
The
following table presents the current and deferred income tax provision for federal and state income taxes for the years ended
September 30, 2017 and 2016:
|
|
2017
|
|
|
2016
|
|
Current tax provision (benefit):
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
1,800
|
|
Total
|
|
|
-
|
|
|
|
1,800
|
|
Deferred tax provision (benefit)
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(399,000
|
)
|
|
|
(790,000
|
)
|
State
|
|
|
-
|
|
|
|
-
|
|
Valuation allowance
|
|
|
399,000
|
|
|
|
790,000
|
|
Total
|
|
|
-
|
|
|
|
-
|
|
Total provision (benefit) for income taxes
|
|
$
|
-
|
|
|
$
|
1,800
|
|
Reconciliations
of the U.S. federal statutory rate to the actual tax rate for the years ended September 30, 2017 and 2016:
|
|
2017
|
|
|
2016
|
|
US federal statutory income tax rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
State tax
–
net of benefit
|
|
|
(6.0
|
)%
|
|
|
(6.0
|
)%
|
|
|
|
(40.0
|
)%
|
|
|
(40.0
|
)%
|
|
|
|
|
|
|
|
|
|
Permanent differences:
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
0.00
|
%
|
|
|
0.03
|
%
|
Amortization of debt discounts and non-cash interest
|
|
|
15.5
|
%
|
|
|
12.1
|
%
|
Non-deductible gains and losses
|
|
|
(5.6
|
)%
|
|
|
12.2
|
%
|
Increase in valuation allowance
|
|
|
30.1
|
%
|
|
|
15.4
|
%
|
Effective tax rate
|
|
|
-
|
%
|
|
|
-
|
%
|
The
Company incurred certain non-cash transactions which are not includable or deductible for income tax reporting purposes, such
the change in fair value of warrant liability, certain stock-based compensation and accretion of debt discounts.
The
components of the Company’s deferred tax assets and (liabilities) for federal and state income taxes as of September 30,
2017 and 2016:
|
|
As of September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Current deferred tax assets (liabilities):
|
|
|
|
|
|
|
Accrued expenses and other
|
|
$
|
-
|
|
|
$
|
-
|
|
Total current deferred tax assets
|
|
|
-
|
|
|
|
-
|
|
Non-current deferred tax assets and liabilities:
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
-
|
|
|
|
-
|
|
Net operating losses
|
|
|
1,856,000
|
|
|
|
1,457,000
|
|
Total non-current deferred tax assets
|
|
|
1,856,000
|
|
|
|
1,457,000
|
|
Valuation allowance
|
|
|
(1,856,000
|
)
|
|
|
(1,457,000
|
)
|
Total non-current deferred tax assets
|
|
|
-
|
|
|
|
-
|
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
During the years ended
September 30, 2017 and 2016 the valuation allowance decreased and increased by $399,000 and $790,000, respectively. At September
30, 2017, the Company had approximately $4,643,000 of federal and state gross net operating losses allocated to continuing operations
available. The net operating loss carry forwards, if not utilized, will begin to expire in 2034 for federal purposes and 2032 for
state purposes.
Based on the available
objective evidence, including the Company’s limited operating history and current liabilities in excess of assets, management
believes it is more likely than not that some of the net deferred tax assets, specifically certain net operating losses, at September
30, 2017 will not be fully realizable. In addition, subsequent to year end significant shares were issued to shareholders in connection
with the conversion of notes payable and a subscription for the purchase of common stock. In connection, with these issuances the
Company determined that the historical NOLs have probably been impaired due to IRS Section 382 limitations. Due to the uncertainty
surrounding realization of the remaining deferred tax assets, specifically the NOLs, the Company has provided a valuation allowance
of $1,856,000 and $1,457,000 against its net deferred tax assets at September 30, 2017 and 2016, respectively. We will continue
to monitor the recoverability of our net deferred tax assets.
As of September 30,
2017 and 2016, the Company had a California minimum state tax liability of $800 per entity or approximately $2,400.
The Company has not
filed all United States Federal and State tax returns since 2014. The Company has identified the United States Federal tax returns
as its “major” tax jurisdiction. The United States Federal return years since the last ones that were filed are still
subject to tax examination by the United States Internal Revenue Service; however, we do not currently have any ongoing tax examinations.
The Company is subject to examination by the California Franchise Tax Board from 2014 on and currently does not have any ongoing
tax examinations.
NOTE
8. STOCKHOLDERS’ DEFICIT
COMMON
STOCK
On November 15, 2013, the Board and shareholders approved an increase in the authorized number of shares
of common and preferred stock which may be issued by the Company to 1,000,000,000 shares and 100,000,000 shares, respectively. On
December 3, 2013, the certificate of amendment was filed with the Secretary of State of Delaware to reflect the increase in authorized.
PREFERRED
STOCK
On
April 1, 2014, the Board formally approved the filing of a Preferred Stock Designation in connection with the commitment of 500,000
Series A Shares to HIVE on March 27, 2014 pursuant to its authority to issue blank check preferred stock as provided in the Company’s
Certificate of Incorporation. Per the Certificate of Designation (the “Designation”), there are 100,000,000
shares of preferred stock authorized by the Company’s Certificate of Incorporation. The Company is authorized to issue 500,000
shares of Series A Shares pursuant to the Designation. As provided in the Designation (and as set forth in the HIVE
Asset Purchase Agreement), Series A Shares are entitled to vote at a 15-1 ratio to Common Stock. Each share of preferred
stock shall initially be convertible into one share of common stock (500,000 shares of common stock in the aggregate). On
the two-year anniversary of the transaction of HIVE, the preferred stock conversion ratio shall be adjusted as follows: a one-time
pro rata adjustment of up to ten-for-one (10-1) based upon the Company generating aggregate gross revenues over the two years
of at least $8,000,000 (e.g. If the Company generates only $4,000,000 in aggregate gross revenues over the two-year period then
the convertible ratio will adjust to 5-1). In no event will the issuance convert into more than 5,000,000 shares of common
stock of the Company.
On
June 19, 2014, the Company formally issued the 500,000 Series A Shares to HIVE.
The
value ascribed to the Series A Shares was based on the historical costs of the assets acquired on March 27, 2014 from HIVE since
the transfer of assets was made among entities under common control.
On
December 10, 2015, the Company approved the filing of a Preferred Stock Designation for up to 30,000,000 shares of Series B Preferred
Stock. No Series B Preferred Stock are issued or outstanding. See discussion of designation of Series B Preferred Stock in Note
5.
The Company’s
conversions of debt and accrued interest include derivative liabilities associated with the embedded conversion features.
NOTE
9. SUBSEQUENT EVENTS
HIVE
See Note 5 for discussion of Kyle Tracey and HIVE activity subsequent to year end.
Justin
Braune
On
April 4, 2018, Braune filed an Ex Parte Application for an Order to Enter Judgment Against the Company for breach of the Settlement
Agreement for failure to pay under the terms of the Settlement Agreement, which the Court granted in favor of Braune. The Ex Parte
Application was denied.
On
May 23, 2018, Braune brought a different Ex Parte Application for Appointment of a Receiver. The hearing was held on May 23, 2018,
during which the Company submitted papers opposing the appointment, and which ultimately resulted in the Court denying Braune’s
application. The Ex Parte Application was denied. There is a motion to appoint receiver scheduled for November 13, 2018.
Common
Stock Issued for Conversion of Debt
Subsequent to September
30, 2017, the Company issued 132,697,863 shares of common stock for conversion of $217,331 of notes payable and accrued interest.
As of the date of this filing, the Company has 1,000,000,000 shares of common stock outstanding.