UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K/A

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

For the fiscal year ended September 30, 2017 

or

☐   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

For the Transition Period from               to              . 

Commission File Number 000-55328

VAPE HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

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

(Address of principal executive offices) (Zip Code)

(877) 827-3959

(Registrant’s telephone number, including area code)

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

None

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

Common Stock, par value $0.00001

(Title of class)

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

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

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

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

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

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

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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ 

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

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

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

EXPLANATORY NOTE ON AMENDMENT

This Amendment No. 1 to Form 10-K (“Amendment”) amends the Annual Report on Form 10-K for the fiscal year ended September 30, 2017 (the “2017 Form 10-K”) originally filed on November 15, 2018 (the “Original Filing”) by Vape Holdings, Inc. (“Vape,” the “Company,” “we,” or “us”).

On March 18, 2019, management of Vape Holdings, Inc. (the “Company”) concluded that the previously filed audited consolidated financial statements of the Company as of and for the year ended September 30, 2017 required restatement to account for the subsequent determination by management that certain note holders of the Company misstated amounts due and owing under their notes outstanding as of September 30, 2017 and which requires restatement to account for those debt obligations that were not properly provided or disclosed to us and our independent auditors,  and restatement of the Kyle Tracy Settlement Agreement, both of which  were material to our financial statements. As a result, we have amended the previous year ended September 30, 2017 in this Form 10-K to correctly account for the misstatements.

Except as described above, no other changes have been made to the Original Filing. The Original Filing continues to speak as of the date of the Original Filing, and we have not updated the disclosures contained therein to reflect any events which occurred at a date subsequent to the filing of the Original Filing.

VAPE HOLDINGS INC.

INDEX TO FORM 10-K10-K/A

PART I

Item 1.Business

Background

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

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

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

Overview

General

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

HIVE Ceramics

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

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

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

REVIVAL PRODUCTS

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

BETTERCHEM 

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

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

Employees

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

Item 1A.Risk Factors

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

Item 1B.Unresolved Staff Comments

None.

Item 2.Properties

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

Item 3.Legal Proceedings

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

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

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

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

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

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.  

Tracey has asserted that Vape owes him, personally, approximately $200,000 which is represented by lines of credit obtained by various affiliates of HIVE, monies owed to IP licensees, as well as monies owed in royalties pursuant to a consulting agreement between Vape and Tracey. Kyle settled such amounts owed for a Convertible Promissory Note (the “Tracey Note”) in the principal amount of One Hundred Fifty Thousand Dollars ($150,000) with a term of one (1) year from the date of execution by Vape. There shall be no interest on the Tracey Note and the principal amount of the Tracey Note shall be convertible, at the option of Tracey, into common stock of Vape at $0.001 per share. Due to the immediate default of not making payments and having authorized shares available, the Company recorded the related party note payable of $150,000 and began accruing interest at 10% per year until the note is converted or paid off starting from April 28, 2017. In addition due to no authorized shares available to settle such liabilities, the Company recorded a derivative discount of $450,000 against the Hive and Tracey Notes, resulting in a loss on debt modification of $733,392 on the statement of operations during the year ended September 30, 2017. As of September 30, 2017, an unamortized discount of $262,500 remained. As of September 30, 2017, the related party derivative liability was $258,422.

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

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

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

Item 4.Mine Safety Disclosure

Not applicable.

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.

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.

Item6.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$2,438,321 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$512,674 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$430,000 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$823,699 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$210,571 and $18,624, respectively. There were significant increases in accretion of derivative discounts in 2017 versus 2016.

Loss from Effects of Derivative Liabilities.Liabilities. For the years ended September 30, 2017 and 2016, the loss from effects of derivative liabilities was $185,576$831,838 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.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$5,445,842 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$5,454,499 as of September 30, 2017, including current liabilities of $397,999$264,500 of accounts payable, $1,060,023$1,096,453 of accrued expenses, $642,001$1,064,803 of convertible notes payable, net, $15,000 of related party notes payable, $200,000$87,500 of related party convertible notes payable, $1,405,728net, $2,567,821 of derivative liabilities, $258,422 of related party 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,$2,438,321, which was offset by a $185,576$831,838 loss from effects of derivative liabilities, $515,404$862,230 of accretion of debt discounts, and $357,640$476,113 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 inInternal 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.

PART III

Item 10.Directors, Executive Officers and Corporate Governance

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

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

Directors

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

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

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

Biographical Information

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

Executive Officers

Benjamin Beaulieu, 30, Chief Executive Officer and Chairman

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

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

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

Section 16(a) Beneficial Ownership Reporting Compliance

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

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

Committees of the Board of Directors

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

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

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

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

Stockholder Communications

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

Meetings of the Board of Directors

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

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

Board Leadership Structure and Role in Risk Oversight

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

Code of Ethics

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

Item 11.Executive Compensation

EXECUTIVE COMPENSATION

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

Outstanding Equity Awards at Fiscal Year End

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

Risk Management

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

DIRECTOR COMPENSATION

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

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

Principal Stockholders and Security Ownership of Management

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

BENEFICIAL OWNERSHIP OF COMMON STOCK

Item 13.Certain Relationships and Related Transactions and Director Independence

Related Party Transactions

Related Party Note Payable

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

Related Party Convertible Notes Payable

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

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

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

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

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

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

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

Tracey had asserted that Vape owes him, personally, approximately $200,000 which is represented by lines of credit obtained by various affiliates of HIVE, monies owed to IP licensees, as well as monies owed in royalties pursuant to a consulting agreement between Vape and Tracey. Kyle settled such amounts owed for a Convertible Promissory Note (the “Tracey Note”) in the principal amount of One Hundred Fifty Thousand Dollars ($150,000) with a term of one (1) year from the date of execution by Vape. There shall be no interest on the Tracey Note and the principal amount of the Tracey Note shall be convertible, at the option of Tracey, into common stock of Vape at $0.001 per share. Due to the immediate default of not making payments and having authorized shares available, the Company recorded the related party note payable of $150,000 and began accruing interest at 10% per year until the note is converted or paid off starting from April 28, 2017. In addition due to no authorized shares available to settle such liabilities, the Company recorded a derivative discount of $450,000 against the Hive and Tracey Notes, resulting in a loss on debt modification of $733,392 on the statement of operations during the year ended September 30, 2017. As of September 30, 2017, an unamortized discount of $262,500 remained. As of September 30, 2017, the related party derivative liability was $258,422.

On May 24, 2017, Iliad Research and Trading purchased $100,000 of the Series B convertible note payable for $125,000 with the reserve to convert into common stock at 58% of the lowest trading price of the previous thirteen (13) days. During the year ended September 30, 2017, $126,826 of the note and accrued interest were converted into 87,302,137 shares of common stock. See Note 4 forAs a result of the principal, accrued interest, and interest expense related topurchase, 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.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$22,158 of interest expense related to the Series B and Tracey Notes. As of September 30, 2017, $200,000$350,000 of the Series B and Tracey Notes along with $56,302$62,760 of accrued interest areis 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.

Item 14.Principal Accounting Fees and Services.

Audit Fees

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

Audit Related Fees

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

Tax Fees

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

All Other Fees

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

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

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

Item 15.Exhibits and Financial Statement Schedules.

(a)       Exhibits

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

(b)       Financial Statements

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

SIGNATURES

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

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

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

VAPE HOLDINGS, INC.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Vape Holdings, Inc.

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

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

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

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

As discussed in Note 1 to the consolidated financial statements, the accompanying 2017 consolidated financial statements have been restated to correct misstatements.

Vape Holdings, Inc.

Consolidated Balance Sheets