Description of Business, Recent Acquisitions and Summary of Significant Accounting Policies

12 Months Ended

Sep. 30, 2017

Organization, Consolidation and Presentation of Financial Statements [Abstract]

DESCRIPTION OF BUSINESS, RECENT ACQUISITIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 1. DESCRIPTION OF BUSINESS, RECENT ACQUISITIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS

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

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

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

See Note 5 for discussion of HIVE activity and litigation.

BASIS OF PRESENTATION

The accompanying consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and Generally Accepted Accounting Principles. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these consolidated financial statements have been included. Such adjustments consist of normal recurring adjustments.

CONSOLIDATION

The consolidated financial statements include the assets, liabilities, and operating results of the Company and its wholly-owned subsidiaries, HIVE Ceramics, Revival Offset, and Nouveau after elimination of all material inter-company accounts and transactions. No segment information is presented as the assets, liabilities, and results of HIVE represent over 95% of the Company’s operations.

USE OF ESTIMATES

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates and assumptions include losses for warrant contingencies and the valuation of conversion features in notes.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants as of the measurement date. Applicable accounting guidance provides an established hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors that market participants would use in valuing the asset or liability. There are three levels of inputs that may be used to measure fair value:

Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 - Include other inputs that are directly or indirectly observable in the marketplace.

Level 3 - Unobservable inputs which are supported by little or no market activity.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Derivative instruments include the convertible notes payable derivative liability and warrant liability (Level 2). Derivative instruments are valued using standard calculations/models that are primarily based on observable inputs, including volatilities and interest rates. Therefore, derivative instruments are included in Level 2.

Fair-value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of September 30, 2017 and 2016. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash, prepaid expenses, accounts payable, accrued liabilities, and notes payable. Fair values for these items were assumed to approximate carrying values because of their short-term nature or they are payable on demand.

The following table presents the Company’s fair value hierarchy for assets measured at fair value on a recurring basis at September 30, 2017:

	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents	$	5,360	$	-	$	-	$	5,360
Total assets measured at fair value	$	5,360	$	-	$	-	$	5,360

Liabilities
Derivative instruments	$	-	$	2,826,243	$	-	$	2,826,243
Total liabilities measured at fair value	$	-	$	2,826,243	$	-	$	2,826,243

The following table presents the Company’s fair value hierarchy for assets measured at fair value on a recurring basis at September 30, 2016:

	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents	$	-	$	-	$	-	$	-
Total assets measured at fair value	$	-	$	-	$	-	$	-

Liabilities
Derivative instruments	$	-	$	2,755,544	$	-	$	2,755,544
Total liabilities measured at fair value	$	-	$	2,755,544	$	-	$	2,755,544

CONCENTRATION

Credit Risk

At times, the Company maintains cash balances at a financial institution in excess of the FDIC insurance limit. In addition, at we extend credit to customers in the normal course of business, after we evaluate the credit worthiness. The Company does not expect to take any unnecessary credit risks causing significant write-offs of potentially uncollectible accounts.

Customers

There were no customer concentrations during the years ended September 30, 2017 and 2016.

Suppliers

All purchases were from one (1) supplier during the years ended September 30, 2017 and 2016.

REVENUE RECOGNITION

The Company recognizes revenues from product sales when (a) persuasive evidence that an agreement exists; (b) the products have been delivered; (c) the prices are fixed and determinable and not subject to refund or adjustment; and (d) collection of the amounts due is reasonably assured. Revenue is recorded when sales orders are shipped.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make required payments. The Company considers the following factors when determining if collection of required payments is reasonably assured: customer credit-worthiness; past transaction history with the customer; current economic industry trends; changes in customer payment terms; and bank credit-worthiness for letters of credit. If the Company has no previous experience with the customer, the Company may request financial information, including financial statements or other documents, to determine that the customer has the means of making payment. The Company may also obtain reports from various credit organizations to determine that the customer has a history of paying its creditors. If these factors do not indicate collection is reasonably assured, revenue is deferred as a reduction to accounts receivable until collection becomes reasonably assured, which is generally upon receipt of cash. If the financial condition of the Company’s customers was to deteriorate, adversely affecting their ability to make payments, additional allowances would be required.

INVENTORY

Inventory is valued at the lower of cost or market, as determined primarily by the average cost inventory method, and are stated using the first-in, first-out (FIFO) method. Management will record a provision for loss for obsolete or slow moving inventory to reduce carrying amounts to net realizable value.

IMPAIRMENT OF LONG-LIVED AND PURCHASED INTANGIBLE ASSETS

The Company has adopted Accounting Standards Codification (“ASC”) 350 “Intangibles - Goodwill and Other.” The Statement requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undercounted cash flows. Should impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. ASC 350 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell.

Long-lived assets, such as fixed assets and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of the asset is measured by comparison of its carrying amount to undiscounted future net cash flows the asset is expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds its fair market value. Estimates of expected future cash flows represent management’s best estimate based on currently available information and reasonable and supportable assumptions. Any impairment recognized is permanent and may not be restored. During the years ended September 30, 2017 and 2016, the Company recorded impairments on $0 and $123,150 of its trademarks, respectively, as its expected cash flows did not exceed its carrying amounts and none towards its trademarks as its expected future cash flows are in excess of their carrying amounts.

RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred. The costs of materials and equipment that will be acquired or constructed for research and development activities, and that have alternative future uses, both in research and development, marketing or sales, will be classified as fixed assets and depreciated over their estimated useful lives. To date, research and development costs include the research and development expenses related to prototypes of the Company’s products. During the years ended September 30, 2017 and 2016, research and development costs were $0 and $47,648, respectively.

CONVERTIBLE DEBT AND EMBEDDED DERIVATIVES

The Company accounts for embedded conversion features (“ECF”s) in convertible notes in accordance with ASC 815. ASC 815 generally requires companies to bifurcate ECFs in convertible notes from their host instruments and to account for them as free standing derivative financial instruments.

The Company has evaluated the terms and conditions of the convertible note under the guidance of ASC 815. The conversion features did not meet the definition of “indexed to a company’s own stock” provided for in ASC 815 since the conversion prices are adjustable based on the passage of time or certain events that are out of the Company’s control, including certain events of default. These convertible instruments have no explicit limit on the number of shares that the holder can convert into. When these ECF’s exist, we report the ECF as a derivative liability, at fair value under ASC 815 “Derivatives and Hedging”. The excess of fair value of the embedded conversion feature, together with the original issue discounts and issue costs over the face value of the debt, is recorded as an immediate charge in the accompanying statements of operations and cash flows. Each reporting period, the Company will compute the estimated fair value of derivatives and record changes to operations. The discounts are accreted over the term of the debt, which is generally nine months after the notes become convertible, using the effective interest method. We accounted for the ECFs in all of our convertible notes as derivative liabilities during the years presented.

The Company estimates the fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered to be consistent with objectively measuring fair values. In selecting the appropriate technique, consideration is given to, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments, such as free-standing warrants, the Company generally uses the Black-Scholes option valuation technique because it embodies all of the requisite assumptions (including trading volatility, estimated terms and risk free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of our common stock, which has a high-historical volatility. Since derivative financial instruments are initially and subsequently carried at fair values, the Company’s operating results will reflect the volatility in these estimate and assumption changes.

ASC 470-50, Extinguishments, require entities to record an extinguishment when the terms of the original note are significantly modified, defined as a greater than 10% change in expected cash flows. Significant modifications accounted for as extinguishments are reported as a loss in the accompanying statements of operations.

EARNINGS / LOSS PER COMMON SHARE

Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per common share is computed by dividing net income available to common shareholders by the combination of dilutive common share equivalents, comprised of shares issuable under the Company’s share-based compensation plans and the weighted-average number of common shares outstanding during the reporting period. Dilutive common share equivalents include the dilutive effect of in-the-money share equivalents, which are calculated, based on the average share price for each period using the treasury stock method. Under the treasury stock method, the exercise price of an award, if any, the amount of compensation cost, if any, for future service that the Company has not yet recognized, and the estimated tax benefits that would be recorded in paid-in capital, if any, when an award is settled are assumed to be used to repurchase shares in the current period.

The following is a summary of outstanding securities that would have been included in the calculation of diluted shares outstanding since the exercise prices did not exceed the average market value of the Company’s common stock had the Company generated net income for the years ended September 30, 2017 and 2016:

	For the Year Ended		For the Year Ended
	September 30,		September 30,
	2017		2016
Series A Preferred stock		500,000		500,000
Convertible notes		1,844,860,603		878,368,698
		1,845,360,603		878,868,698

The Company does not have sufficient shares to accommodate the series A preferred stock and convertible notes, thus, the amounts reflected above are those that bring total to the amount authorized of one billion. If all holders were to convert, the Company would have outstanding shares in excess of two billion as of September 30, 2017.

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers”, which supersedes most of the current revenue recognition requirements. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for these goods or services. New disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers are also required. This guidance is effective for the Company in the first quarter of fiscal year 2018 and early application is not permitted. Entities must adopt the new guidance using one of two retrospective application methods. The Company is currently evaluating the standard but does not expect it to have a material impact on our financial position, results of operations or cash flows.

The Financial Accounting Standards Board issues Accounting Standard Updates (“ASUs”) to amend the authoritative literature in Accounting Standards Codification (“ASC”). There have been a number of ASUs to date that amend the original text of ASC. The Company believes those issued to date either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to the Company or (iv) are not expected to have a significant impact on the Company.

RISKS AND UNCERTAINTIES

The Company has issued several convertible notes which are generally convertible after 180 days. The notes have conversion features that adjustable over time or in the event of certain events of default, many of which are out of the control of the Company’s management. The adjustment provisions do not explicitly limit the number of shares the notes are convertible into. Each of the Company’s convertible note holders is entitled to a “share reserve” per their agreements with the Company which entitle them to reserve a certain allotment of common stock out of the authorized but unissued common stock of the Company for future conversions of their notes. The Company is further obligated under the agreements to increase the Company’s authorized share count to accommodate for a sufficient amount of share reserves. Due to the declining market price of the Company’s common stock, the note holders have reserve claims in excess of the common stock authorized at this time. The inability of the Company to meet its share reserve obligations may be considered a technical violation of their agreements with the note holders. The Company’s ability to issue common stock other than those presently allocated to note holders is restricted during this time, since we have lost the ability to increase the share reserves due to the significantly increased outstanding held by convertible note holders and a shareholder vote is required to increase the authorized amount of shares the Company may issue. Further, the combination of limited capital and depleted share reserves have severely damaged the Company’s ability to fund operations or enable us to seek mergers or acquisitions. Also, see Note 2 Going Concern below.

AMENDMENT

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.

	As Previously Reported September 30, 2017			Change			As Restated September 30, 2017

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Account payable	$	397,999		$	(133,499	)	$	264,500
Accrued expenses		1,060,023			36,430			1,096,453
Related party convertible note payable, net		200,000			(112,500	)		87,500
Convertible note payable, net		642,001			422,802			1,064,803
Related party derivative liabilities		-			258,422			258,422
Derivative liabilities		1,405,728			1,162,093			2,567,821

Total current liabilities	$	3,820,751		$	1,633,748		$	5,454,499
Total liabilities	$	3,820,751		$	1,633,748		$	5,454,499

Total stockholders’ deficit	$	(3,812,094	)	$	(1,633,748	)	$	(5,445,842	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$	8,657		$	-		$	8,657

General and administrative	$	515,173		$	(2,499	)	$	512,674
Interest expense	$	(549,860	)	$	(273,839	)	$	(823,699	)
Interest expense - related party	$	(16,612	)	$	(193,959	)	$	(210,571	)
Loss from the effects of derivative liabilities	$	(185,576	)	$	(646,262	)	$	(831,838	)
Net loss	$	(1,326,760	)	$	(1,111,561	)	$	(2,438,321	)

Net loss available to common shareholders:
Loss per common share - basic	$	(0.00	)				$	(0.00	)
Loss per common share - diluted	$	(0.00	)				$	(0.00	)

Vape Holdings, Inc. 10-K/A