THIRD PARTY DEBT | NOTE 5. THIRD PARTY DEBT CONVERTIBLE NOTES PAYABLE In connection with the Third Party Debt Conversions, each of the Company’s convertible noteholders is entitled to a “share reserve” per their agreements with the Company which entitle them to reserve a certain allotment of common stock out of the authorized but unissued common stock of the Company for future conversions of their notes. The Company is further obligated under the agreements to increase the Company’s authorized share count to accommodate for a sufficient amount of share reserves. Due to the declining market price of the Company’s common stock, the noteholders have reserve claims in excess of the common stock authorized at this time. The Company has determined at this time not to increase the authorized share count and is instead in discussions with its convertible noteholders about a consolidation, restructuring and/or buy-out of their notes to resolve these issues. The position taken by the Company may be considered a technical violation of their agreements with the noteholders but none of the noteholders have called a default under the terms of the notes at this time. The Company’s ability to issue common stock other than those presently allocated to noteholders is restricted during this time. The Company has lost the ability to increase the share reserves due to the significantly increased outstanding held by convertible noteholders and a shareholder vote is required to increase the authorized amount of shares the Company may issue. Further, the combination of limited capital and depleted share reserves have severely damaged the Company’s ability to find continued finance, properly run the Company, and proceed with business to include any mergers or acquisitions or any transactions that would require available stock. The Company has entered into discussions with its convertible noteholders about a consolidation, restructuring and/or buy-out of their notes to resolve these issues. The position taken by the Company may be considered a technical violation of their agreements with the noteholders but none of the noteholders have called a default under the terms of the notes at this time. The Company’s ability to issue common stock other than those presently allocated to noteholders is restricted during this time. The position taken by the Company may be considered a technical violation of their agreements with the noteholders but none of the noteholders have called a default under the terms of the notes at this time. The Company’s ability to issue common stock other than those presently allocated to noteholders is restricted during this time. The Company is currently involved in litigation with 2 noteholders seeking the specific performance of VAPE’s issuance of shares underlying denied conversion notices. VAPE is also currently negotiating with a third noteholder threatening similar litigation. If the noteholders are allowed to convert their respective notes VAPE shareholders will experience substantial dilution. The Company’s denial of the conversion notices has triggered a technical default on its convertible notes and have presented amounts due as current liabilities other than those subsequently converted and began accruing interest at their default interest rates. Further, our funding partner may not commit to purchasing the balance of the notes currently outstanding due to the declining stock market price of the Company’s common stock. Securities Purchase Agreement On December 3, 2014, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with an accredited investor (the “Investor”) pursuant to which the Company agreed to sell, and the Investor agreed to purchase, an unsecured convertible promissory note (the “Note”) in the principal amount of $560,000 less an original issue discount (“OID”) of $50,000 and transaction expenses of $10,000 for a total purchase price of $500,000. The Company also paid a finder’s fee in the amount of $25,000 in connection with this transaction, which was recorded as a discount to the note as it was paid from the proceeds. The closing under the Securities Purchase Agreement occurred on December 3, 2014. The Company received $475,000 net proceeds after transactions costs. On December 10, 2015, the Company and the Investor entered into a forbearance agreement regarding the Investor’s convertible note and added $105,000 to the principal and charged to interest expense during the three months ended December 31, 2015. On February 26, 2016, the note was assigned to an accredited investor and $21,874 was added to the principal balance and charged to interest expense during the three and six months ended March 31, 2016. We amortized $8,333 and $8,333, and $16,667 and $11,111 of the original issue discount to interest expense during the three and six months ended March 31, 2016 and 2015, respectively. In addition, the Company recorded $45,940 in debt issuance costs as a discount on the note and amortized $7,656 and $7,657, and $15,312 and $10,209 to interest expense during the three and six months ended March 31, 2016 and 2015, respectively. As of March 31, 2016, the Company had unamortized current and long-term debt issuance costs of $584 and $4,521, respectively. The original issue discount and debt issuance costs are amortized through the maturity date. On August 26, 2015, the Company and Investor entered into an Amendment whereby the conversion rate of the note was amended to 55% of the lowest price of the prior fifteen (15) trading days and conversion floor removed which amendment was triggered by the dilutive issuances of the August 2015 convertible note financing thereby entitling Investor to the lowest conversion rate granted during the year ended September 30, 2015 per the terms of the Securities Purchase Agreement. On August 26, 2015, the Company recorded the note as a derivative liability at fair value of $830,921, a derivative discount of $332,666, and the excess in fair value of $498,254 to loss on debt extinguishment. The total loss on debt extinguishment on this note was $582,254. During the three and six months ended March 31, 2016, the Company amortized $124,750 and $249,500 of the derivative discount to interest expense, recorded a loss on the change in fair value of the derivative liability of $655,426 and $862,269, and allocated the fair value of $424,596 and $663,353 of the conversions below to additional paid-in capital and a reduction in the derivative liability, respectively. As of March 31, 2016, the derivative liability was $711,523. Between October 2015 and March 31, 2016, the Company issued the following conversions for payment towards Investor: Conversion Date Principal Converted Accrued Interest Converted Total Converted Conversion Rate Common Shares Issued October 8, 2015 $ 21,000 $ - $ 21,000 $ 0.012 1,818,182 October 16, 2015 18,900 - 18,900 $ 0.012 1,636,364 October 22, 2015 25,800 - 25,800 $ 0.011 2,333,786 October 29, 2015 22,460 - 22,460 $ 0.011 2,031,660 November 11, 2015 33,500 - 33,500 $ 0.007 4,649,549 November 18, 2015 24,000 - 24,000 $ 0.006 4,195,804 November 30, 2015 30,000 - 30,000 $ 0.005 5,741,627 December 11, 2015 22,000 - 22,000 $ 0.002 9,090,909 December 28, 2015 22,500 - 22,500 $ 0.002 9,297,521 January 7, 2016 20,000 - 20,000 $ 0.002 10,101,010 January 20, 2016 12,500 - 12,500 $ 0.001 10,330,579 February 2, 2016 13,200 - 13,200 $ 0.001 10,909,091 March 2, 2016 10,627 - 10,627 $ 0.001 10,169,800 March 10, 2016 11,184 - 11,184 $ 0.001 10,702,619 March 17, 2016 8,272 - 8,272 $ 0.001 6,539,200 March 29, 2016 22,797 - 22,797 $ 0.002 12,191,000 March 31, 2016 22,347 - 22,347 $ 0.002 11,950,000 $ 341,087 $ - $ 341,087 123,688,701 Subsequent to quarter end, the Investor also enacted the following conversions: Conversion Date Principal Converted Accrued Interest Converted Total Converted Conversion Rate Common Shares Issued April 4, 2016 $ 25,140 $ - $ 25,140 $ 0.002 13,444,000 April 7, 2016 21,019 - 21,019 $ 0.002 11,240,000 April 13, 2016 35,664 - 35,664 $ 0.002 14,737,000 April 19, 2016 36,711 - 36,711 $ 0.002 15,170,000 April 20, 2016 18,244 - 18,244 $ 0.002 7,538,666 $ 136,778 $ - $ 136,778 62,129,666 As a result, as of March 31, 2016, $13,230 and $102,379, net of total unamortized discounts of $4,445 and $34,399 are classified as current and long-term on the accompanying consolidated balance sheet. As of March 31, 2016, there is $27,869 in accrued interest expense related to this note and the Company recorded $9,328 and $14,000, and $17,924 and $18,356 in interest expense during the three and months ended March 31, 2016 and 2015, respectively. $2M Securities Purchase Agreement On February 10, 2015, the Company entered into a securities purchase agreement (the “February 2015 Securities Purchase Agreement”) with an accredited investor pursuant to which the Company agreed to sell, and the investor agreed to purchase, an unsecured convertible promissory note (the “$2M Note”) in the principal amount of $2,000,000 less an OID of $182,000 and transaction expenses of $10,000 for a total purchase price of $1,808,000. The closing under the February 2015 Securities Purchase Agreement occurred on February 10, 2015. During the year ended September 30, 2015, the Company received $800,000 toward the $2M Note with an original issue discount of $148,600 and transaction costs for net proceeds of $651,395, respectively. On February 23, 2016, the note was assigned to an accredited investor the same accredited investor as the Security Purchase Agreement was and $36,038 was added to the principal balance and charged to interest expense during the three and six months ended March 31, 2016. On August 13, 2015, the Company entered into an Amendment, Waiver and Modification Agreement (the “Amendment”) to its $2M Securities Purchase Agreement and related Transaction Documents with Redwood Management, LLC including any designees and or assignees thereto. Under the terms of the Amendment, the parties agreed to reduce the $2,000,000 outstanding balance of the $2M Note to $800,000 to reflect the total amount funded under the note, to terminate the offsetting investor note securing the additional unfunded balance and to waive any past claims of default or offsetting interest on the $2M Note or investor note. In addition, the conversion rate of the note was amended to 55% of the lowest price of the prior fifteen (15) trading days and conversion floor removed which amendment was triggered by the dilutive issuances of the August 2015 convertible note financing thereby entitling Investor to the lowest conversion rate granted during the year ended September 30, 2015 per the terms of the $2M Securities Purchase Agreement. As a result, we expensed the unamortized discount of $40,000 to loss on debt extinguishment. On August 13, 2015, the carrying value on the note was $655,816, net of unamortized discounts of $94,184. The Company recorded the note as a derivative liability at fair value of $970,956, a derivative discount of $655,816, and the excess in fair value of $315,140 to loss on debt extinguishment. The total loss on debt extinguishment on this note was $369,324. During the three and six months ended March 31, 2016, the Company amortized $47,405 and $472,628 of the derivative discount to interest expense, recorded a loss on the change in fair value of the derivative liability of $312,467 and $323,873, and allocated the fair value of $0 and $324,055 of the conversions below as additional paid-in-capital and a reduction in the derivative liability, respectively. As of March 31, 2016, the derivative liability was $419,321. The following is summary of conversions by the $2M Note holder (including its assignees) during the six months ended March 31, 2016: Conversion Date Principal Converted Accrued Interest Converted Total Converted Conversion Rate Common Shares Issued October 1, 2015 $ 10,000 $ - $ 10,000 $ 0.0148 675,676 October 5, 2015 10,000 - 10,000 $ 0.0148 675,676 October 6, 2015 13,262 - 13,262 $ 0.0138 961,000 October 7, 2015 10,000 - 10,000 $ 0.0115 865,801 October 9, 2015 11,728 - 11,728 $ 0.0116 1,011,000 October 9, 2015 10,000 - 10,000 $ 0.0115 865,801 October 12, 2015 14,680 - 14,680 $ 0.0115 1,271,000 October 13, 2015 11,601 - 11,601 $ 0.0116 1,000,052 October 15, 2015 14,680 - 14,680 $ 0.0115 1,271,000 October 19, 2015 17,400 - 17,400 $ 0.0116 1,500,000 October 19, 2015 15,000 - 15,000 $ 0.0116 1,298,701 October 20, 2015 16,650 - 16,650 $ 0.0111 1,500,000 October 21, 2015 17,500 - 17,500 $ 0.0115 1,515,152 October 23, 2015 20,000 - 20,000 $ 0.0115 1,731,602 October 26, 2015 24,420 - 24,420 $ 0.0111 2,200,000 October 29, 2015 26,640 - 26,640 $ 0.0111 2,400,000 November 2, 2015 29,970 - 29,970 $ 0.0111 2,700,000 November 2, 2015 20,000 - 20,000 $ 0.0111 1,809,136 November 5, 2015 32,190 - 32,190 $ 0.0111 2,900,000 November 10, 2015 28,800 - 28,800 $ 0.0096 3,000,000 November 12, 2015 23,930 - 23,930 $ 0.0072 3,323,611 November 17, 2015 16,500 - 16,500 $ 0.0060 2,727,273 November 19, 2015 1,640 11,225 12,865 $ 0.0056 2,316,013 November 23, 2015 23,111 - 23,111 $ 0.0056 4,127,000 November 27, 2015 24,750 - 24,750 $ 0.0055 4,500,000 December 2, 2015 18,450 - 18,450 $ 0.0041 4,500,000 December 8, 2015 18,000 - 18,000 $ 0.0036 5,000,000 December 11, 2015 13,368 - 13,368 $ 0.0024 5,570,000 December 16, 2015 14,181 - 14,181 $ 0.0024 5,860,000 December 22, 2015 15,488 - 15,488 $ 0.0024 6,400,000 December 29, 2015 17,666 17,666 $ 0.0024 7,300,000 $ 541,605 $ 11,225 $ 552,830 82,775,494 As a result, as of March 31, 2016, $91,024 is classified as current on the accompanying consolidated balance sheet. During the three and six months ended March 31, 2016 and 2015, the Company amortized $5,279 and $3,200, and $30,713 and $3,200 of the original issue discount to interest expense, respectively. As of March 31, 2016, there is $41,845 in accrued interest expense related to this note and the Company recorded $3,811 and $4,389, and $8,592 and $4,389 in interest expense during the three and six months ended March 31, 2016 and 2015, respectively. Convertible Note Financing On August 5, 2015, the Company entered into a series of convertible note financings with several accredited investors totaling an aggregate of $541,000 in aggregate proceeds raised less certain fees and costs as set forth in the financing documents known as the “August 2015 Notes”. The financing was disclosed on the Company’s Current Report on Form 8-K filed on August 11, 2015 and is incorporated herein by reference. The Company recorded an original issue discount of $12,500 along with these notes. On March 7, 2016, $112,000 of these notes were assigned to the same accredited investor previously mentioned and $7,806 was added to the principal balance and recorded as interest expense during the three and six months ended March 31, 2016. August 2015 Notes On August 5, 2015, the carrying value on the notes were $419,626, net of unamortized original issue discounts of $9,374. In six months when the note became convertible, the Company recorded the note as a derivative liability at fair value of $1,181,732, a derivative discount of $419,626, and the excess in fair value of $762,106 to excess of fair value of embedded conversion feature. The Company amortizes the derivative discount over the expected life of the related debt. During the three and six months ended March 31, 2016, the Company amortized $107,736 of the derivative discount to interest expense and recorded a loss on the change in fair value of the derivative liability of $396,268. As of March 31, 2016, the derivative liability was $1,578,000. During the three and six months ended March 31 2016, the Company amortized $1,563 and $3,126 of original issue discounts to interest expense. During the three and six months ended March 31 2016, the Company amortized $17,964 and $35,928 of debt issuance costs to interest expense. As of March 31, 2016, $83,773 is classified as current on the accompanying consolidated balance sheet, net of total unamortized discounts of $345,227. As of March 31, 2016, there is $29,434 in accrued interest expense related to these notes and the Company recorded $17,514 and $23,137 in interest expense during the three and six months ended March 31, 2016, respectively. Additional Funding Under August 2015 Note On December 15, 2015, an accredited investor provided the Company with $50,000 in additional proceeds under the same terms of their original convertible note with a term of two years. A one-time interest charge of $11,600 was added to the principal of the note. The Company also recorded $4,000 of debt issuance costs as a discount. During the three and six months ended March 31 2016, the Company amortized $500 debt issuance costs to interest expense. As a result, as of March 31, 2016, $58,100 is classified as current on the accompanying consolidated balance sheet, net of total unamortized discounts of $3,500. As of March 31, 2016, there is default interest of $1,848 in accrued interest expense related to these notes and the Company recorded $1,848 during the three and six months ended March 31, 2016, respectively. The Company will record an embedded conversion feature at estimated fair value as a derivative liability at fair value in six months if and when the notes become convertible. Assigned 2015 Notes On August 5, 2015, the carrying value on an assigned note was $112,000. In six months when the note became convertible, the Company recorded the note as a derivative liability at fair value of $400,722, a derivative discount of $112,000, and the excess in fair value of $288,722 to loss on debt extinguishment. During the three and six months ended March 31, 2016, the Company amortized $37,333 of the derivative discount to interest expense and recorded a loss on the change in fair value of the derivative liability of $293,003. As of March 31, 2016, the derivative liability was $693,725. During the three and six months ended March 31 2016, the Company amortized $3,429 and $8,571 of debt issuance costs to interest expense. Subsequent to quarter end, the Company enacted the following conversions: Conversion Date Principal Converted Accrued Interest Converted Total Converted Conversion Rate Common Shares Issued April 20, 2016 $ 16,117 $ - $ 16,117 $ 0.0024 6,660,000 April 25, 2016 46,349 - 46,349 $ 0.0029 15,900,000 May 5, 2016 37,744 - 37,744 $ 0.0025 15,250,000 May 18, 2016 19,597 1,594 21,191 $ 0.0020 10,413,268 $ 119,867 $ 1,594 $ 121,401 48,223,268 As a result, as of March 31, 2016, $45,140 is classified as long-term on the accompanying consolidated balance sheet, net of total unamortized discounts of $74,667. As of March 31, 2016, there is $10,937 in accrued interest expense related to these notes and the Company recorded $5,412 and $8,847 in interest expense during the three and six months ended March 31, 2016, respectively. On August 12, 2015, the Company entered into an additional convertible note financing transaction with an accredited investor in the principal amount of $105,000 less fees and costs. The same accredited investor was assigned mentioned above was assigned this note and $20,000 was added to the principal balance and recorded as interest expense during the three and six months ended March 31, 2016. The closing under the financing occurred concurrently with the execution of the financing documents on August 12, 2015. The convertible note bears interest at the rate of 8% per annum and is convertible into common stock of the Company at any time after 180 days from issuance of the note at a conversion price per share equal to 58% of the average of the lowest trading price of the common stock in the thirteen (13) trading days immediately preceding the applicable conversion date. The Company has the option to prepay the convertible note in the first 180 days from closing subject to a prepayment penalty of 150% of principal plus interest. The maturity date of the convertible note is June 12, 2016 subject to the noteholder’s right to extend maturity an additional nine (9) month period. The Company recorded an original issue discount of $5,000 along with this note. In six months when the note became convertible, the Company recorded the note as a derivative liability at fair value of $110,669, a derivative discount of $103,000, and the excess in fair value of $7,669 to loss on debt extinguishment. During the three and six months ended March 31, 2016, the Company amortized $34,333 of the derivative discount to interest expense and recorded a loss on the change in fair value of the derivative liability of $275,424. As of March 31, 2016, the derivative liability was $386,093. During the three and six months ended March 31 2016, the Company amortized $1,500 and $3,000 of original issue discounts to interest expense. During the three and six months ended March 31 2016, the Company amortized $4,920 and $9,840 of debt issuance costs to interest expense. As a result, as of March 31, 2016, $52,053 is classified as current on the accompanying consolidated balance sheet, net of total unamortized discounts of $72,947. As of March 31, 2016, there is $8,597 in accrued interest expense related to these notes and the Company recorded $5,307 and $7,453 in interest expense during the three and six months ended March 31, 2016, respectively. The foregoing descriptions of the August 12, 2015 note financing and related documentation do not purport to be complete and are qualified in their entirety by reference to the full text of the documents, which are filed as exhibits to this Quarterly Report on Form 10-K/A and are incorporated herein by reference. |