UNITED
STATES

SECURITIES
AND EXCHANGE COMMISSION

Washington,
D.C. 20549



Form
10-K



(Mark
One)

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



For
the fiscal year ended September 30, 2015



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 333-163290



VAPE
HOLDINGS, INC.

(Exact
name of registrant as specified in its charter)



|Delaware                                                                |  | 90-0436540                                   
|----------------------------------------------------------------------- |  | ---------------------------------------------
|(State
    or other jurisdiction of 
    incorporation or organization) |  | (I.R.S.
    Employer 
    Identification No.)



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 or a smaller
reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

|Large
    accelerated filer ☐ | Accelerated
filer ☐ | Non-accelerated
filer ☐ | Smaller
reporting company ☒
|----------------------------- | ------------------- | ----------------------- | ---------------------------



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

At January 11, 2016, the aggregate market
value of shares held by non-affiliates of the Registrant (based upon the closing sale price of such shares on OTCQB on January
11, 2016 of $0.005) was $789,135.

At January 11, 2016, there were 163,026,935
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.





2







VAPE
HOLDINGS INC.



INDEX
TO FORM 10-K



|PART
    I   | PAGE                                                                                                                       
|------------ | ---------------------------------------------------------------------------------------------------------------------------
|             |                                                                                                                            
|Item
    1.  | Business                                                                                                                   
|Item
    1A. | Risk Factors                                                                                                               
|Item
    1B. | Unresolved Staff Comments                                                                                                  
|Item
    2.  | Properties                                                                                                                 
|Item
    3.  | Legal Proceedings                                                                                                          
|Item
    4.  | Mine Safety Disclosure                                                                                                     
|             |                                                                                                                            
|PART
    II  |                                                                                                                            
|             |                                                                                                                            
|Item
    5.  | Market for Registrant’s Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities
|Item
    6.  | Selected Financial Data                                                                                                    
|Item
    7.  | Management’s Discussion and Analysis of Financial Condition and Results of Operation                                       
|Item
    7A. | Quantitative and Qualitative Disclosures About Market Risk                                                                 
|Item
    8.  | Financial Statements and Supplementary Data                                                                                
|Item
    9.  | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure                                       
|Item
    9A. | Controls and Procedures                                                                                                    
|Item
    9B. | Other Information                                                                                                          
|             |                                                                                                                            
|PART
    III |                                                                                                                            
|             |                                                                                                                            
|Item
    10. | Directors, Executive Officers and Corporate Governance                                                                     
|Item
    11. | Executive Compensation                                                                                                     
|Item
    12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                             
|Item
    13. | Certain Relationships and Related Transactions and Director Independence                                                   
|Item
    14. | Principal Accountant Fees and Services                                                                                     
|Item
    15. | Exhibits, Financial Statement Schedules                                                                                    
|             | Index to Consolidated Financial Statements                                                                                 
|             | Index
    of Exhibits                                                                                                      
|             |                                                                                                                            
|Signatures   | 34                                                                                                                         





3







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 September 30, 2013, the Company approved a change in fiscal year end of the Company from
December 31st to September 30th.  The Company’s decision to change the fiscal year end was related
to the Merger. Following such change, the date of the Company’s next fiscal year end is September 30, 2014.



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, physical assets,
employees or customers.



Overview



General



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 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.



The
Company intends to rely on a combination of trademark, copyright, trade secret and patent laws in the United States as well as
confidentiality procedures and contractual provisions to protect future proprietary technology and its brands, as they are developed.
The Company has created or acquired and continues in the process of creating and/or acquiring proprietary vaporizers and e-cigarettes,
and various trademarks, patents and copyrights for brands which are developed or in development. The Company is actively engaged
in improving and expanding lines of branded products through business alliances and acquisitions, as well as developing its branded
retail business expansion.



Vape
is organized and directed to operate strictly in accordance with all applicable state and federal laws.





4









HIVE Ceramics



HIVE Ceramics (“HIVE”)
is the premier brand under the VAPE umbrella. HIVE 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. The HIVE product
line currently consists of over 15 distinct ceramic elements, including the 2 piece domeless, domeless direct inject, and HIVE’s
signature domeless elements covering 10mm, 14mm and 18mm applications as well as regular elements, the HIVE Flower Cup, the HIVE
Carb Cap, HIVE Stinger Dabber, the 14mm HIVE x Quave - Club Banger, the HIVE x D-Nail 16mm and 20mm attachments and the highly
anticipated Brothership Ceramic Honey Bucket developed on collaboration with Mothership Glass.



Revival



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 complement HIVE
Ceramics’ product lines utilizing its sales and distribution channels.



Distribution Channels



HIVECERAMICS.COM is the
Company’s e-commerce site for its premier HIVE Ceramics product line. The website will also be used in connection with the
Company’s new HIVE Glass product line. A beta version of the e-commerce site was successfully launched in April 2014 with
a limited product line and no paid or formal advertising. The e-commerce site has since become fully operational since July 1,
2014 with a full product line and is taking orders daily with same or next day shipping available direct to the consumer on all
orders.



The Company’s AUTHORIZED
DEALER NETWORK has grown to over 1,100 authorized shops for the Company’s wholesale distribution platform. The Company and
its principals have relied on their industry reputation and contacts to rapidly expand this vast wholesale distribution network
in a matter of months. The Company has already funneled the HIVE Ceramics product line through these channels and anticipates parlaying
this expansive network into the success of future product lines and related ventures, including the HIVE Glass line.







5







GOTVAPE.COM
is an Orange County, California based online distributor that boasts the top online vaporizer retail site in the world and sells
a full range of vaporization products for shipment nationwide. The Company has partnered with GotVape.com for the U.S. distribution
of its HIVE product lines through its expansive nationwide distribution chain.



DNA
GENETICS is a world-renowned name in cannabis genetics with a global reach and trusted brand poised to assist the Company
with its expansion into the emerging European markets. DNA Genetics will serve as the Company’s European distributor assisting
the Company in reaching the European market from its base in Amsterdam.



PURE
DNA is DNA Genetics’ South American distributor based in Chile which will partner with the Company to distribute HIVE products
throughout the South American Market. Pure DNA is backed by DNA Genetics’ brand which can be found throughout the world.



PUFF
PIPES is a Vancouver, B.C. Canada based distributor and one of two Canadian distributors partnering with the Company to blanket
the Canadian market. Puff Pipes is one of Canada's leading suppliers of high quality glass works for over 20 years and a trusted
name in the vaporizer industry.





WEST COAST GIFTS is also
based in Vancouver, B.C. Canada and is known for having an excellent reputation as one of the longest-running distributors
of nationally recognized brands of vaporizers and related accessories in Canada.



Subsequent to the Company’s
fiscal year ended September 30, 2015, the Company began taking steps to curtail its Offset, HIVE Glass and HIVE Supply business
lines to focus more on consumer vaporization products including the launch of “Revival” discussed above. The Company
also curtailed its ‘THE HIVE’ retail store in order to reduce overhead costs and focus on HIVE Ceramics. Moreover,
the Company curtailed its exploration into providing real estate, management and consulting solutions to the legal cannabis industry
in states where such cannabis cultivation and extraction is legal. The Company was never able to execute on any of these plans
and ultimately determined that the Company’s capital reserves for such projects as well as the risks inherent in each project
due to the current regulatory environment surrounding the cannabis industry made this line of business too difficult to pursue.



Competition



Vape’s brands and
retail and online distributions channels compete for customers and sales with many different companies and products that are competitive
today and likely to be even more competitive in the future. Accordingly, it is essential that Vape and its HIVE brand product lines
continue to innovate, expand, develop and refine its product and the underlying value offered to consumers. Competition in the
retail and wholesale vaporizer and e-cigarette industries is significant as competing shops, manufacturers and distributors continually
open.



The competition for the
Company’s premier HIVE Ceramics product line, which offers a nonporous, non-corrosive, chemically inert medical-grade ceramic
vaporization element that can be used for a range of applications exists in the form of traditional quartz and titanium vaporization
products and other lesser grade ceramic vaporizers.



With regard to our company’s
size relative to its competition, that is difficult to gauge as most of our competition is privately held and does not publicly
report their earnings. We do know of several competitors who own and operate larger online retail vaporizer and e-cigarette stores
than we currently do, but, like our Company, many are in their initial stages of development and are focusing on different areas
of this industry.



While our management believes
that we have the opportunity to be an innovative group of industry professionals focused on providing the most relevant and effective
products to our consumers, there can be no assurance that we will be successful in accomplishing our business initiatives, or that
we will be able to maintain significant levels of revenues, or recognize net income, from the sale of our products and services.



Intellectual Property
and Proprietary Rights



Our intellectual property
consists of our brands and their related trademarks and websites, expansive customer lists and affiliations, product know-how and
technology and related marketing intangibles plus our pending patent applications on our ceramic vaporizer line of products.



The Company intends to
prosecute all of its pending patent applications to completions as well as its current and planned brand names for which the Company
has applied for federal trademark protection.





6







We
have a policy of entering into confidentiality and non-disclosure agreements with our employees and some of our vendors and customers
as we deem necessary. These agreements and policies are intended to protect our intellectual property, but we cannot ensure that
these agreements or the other steps we have taken to protect our intellectual property will be sufficient to prevent theft, unauthorized
use or adverse infringement claims. We cannot prevent piracy of our methods and features, and we cannot fully determine the extent
to which our methods and features are being pirated.



Employees



As
of September 30, 2015, we had 8 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, 2015, the Company leases a 5,000 square foot office in Chatsworth, California.



|Item 3. | Legal
Proceedings
|------- | -----------------



Vape
is not currently a party to, and none of its property is the subject of, any pending legal proceedings. To Vape’s knowledge,
no governmental authority is contemplating any such proceedings.



|Item 4. | Mine
Safety Disclosure
|------- | ----------------------



Not
applicable.





7







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 commenced 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, 2015 was $0.04 per share. The following table
sets forth, for the periods indicated, the high and low sales prices for our common stock as reported on the OTCQB. This information
reflects inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.



|From the Year Ended September 30, 2015 |  | High |      |  | Low |  
|-------------------------------------- |  | ---- | ---- |  | --- | -
|First Quarter                          |  | $    | 1.92 |  |     | $
|Second Quarter                         |  | $    | 0.92 |  |     | $
|Third Quarter                          |  | $    | 0.60 |  |     | $
|Fourth Quarter                         |  | $    | 0.43 |  |     | $



The
OTCQB is generally considered to be a less active and 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, 2015, the approximate number of registered holders of our common stock was 71. As of September 30, 2015, the
number of outstanding shares of our common stock was 19,455,896; there were 1,184,727 shares of common stock subject to outstanding
warrants, and there were no shares of common stock subject to outstanding stock options.



Dividends



No
dividends were declared on Vape’s common stock in the year ended September 30, 2015 and 2014, 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



On
January 31, 2014, the Company entered into an agreement to issue a 10% convertible promissory note to a consultant as compensation
for investor relations services for a period of up to one (1) year. The agreement was terminated after five (5) months. On July
10, 2014, the holder converted principal of $41,667 and outstanding accrued and unpaid interest of $345 into 21,006 shares of
the Company’s common stock at a per share conversion price of $2.00, which is in accordance with the terms of the convertible
note payable. The conversion of the 10% Note was in full satisfaction of the note payable. See Note 4 for terms of the 10% Note.



On
June 6, 2014, the Company entered into an agreement to issue 20,000 shares of its common stock to a consultant as compensation
for investor relations services for a period of six (6) months valued at $29,600 at the date of issuance and $41,600 as of September
30, 2014. Per the terms of the agreement, 10,000 shares vest immediately, 5,000 shares vest after ninety (90) days, and 5,000
shares vest after one hundred days. The 20,000 shares were formally issued on August 4, 2014. The fair value of the stock vested
and recorded during the year ended September 30, 2014 was $31,200.



Securities
Authorized for Issuance under Equity Compensation Plans



As of September 30, 2015,
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.





8







Recent
Sales of Unregistered Securities



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. Repayment of principal on the Note, together
with accrued interest thereon, is due in twelve monthly installments, commencing six months from issuance. See Note 5 for more
details regarding the Securities Purchase Agreement and Note.



Between June 2015
and September 2015, the Company issued the following conversions for repayment of the Note by Investor:





|Conversion
    Date    |  | Principal
     Converted |         |  | Accrued
     Interest  Converted |   |        | Total
     Converted |  |   | Conversion
     Rate |  |  | Common
     Shares  Issued |      
|---------------------- |  | ------------------------ | ------- |  | -------------------------------- | - | ------ | -------------------- |  | - | -------------------- |  |  | -------------------------- | -----
|June 4, 2015           |  | $                        | 46,667  |  |                                  | $ | 28,871 |                      |  | $ | 75,538               |  |  | $                          | 0.342
|July 3, 2015           |  |                          | 46,667  |  |                                  |   | 4,295  |                      |  |   | 50,962               |  |  | $                          | 0.194
|August 11, 2015        |  |                          | 25,000  |  |                                  |   | -      |                      |  |   | 25,000               |  |  | $                          | 0.138
|September 3, 2015      |  |                          | 25,000  |  |                                  |   | -      |                      |  |   | 25,000               |  |  | $                          | 0.056
|September 23, 2015     |  |                          | 25,000  |  |                                  |   | -      |                      |  |   | 25,000               |  |  | $                          | 0.041
|September 29,
    2015 |  |                          | 23,000  |  |                                  |   | -      |                      |  |   | 23,000               |  |  | $                          | 0.015
|                       |  | $                        | 191,334 |  |                                  | $ | 33,166 |                      |  | $ | 224,500              |  |  |                            |      



Subsequent to year end,
the Company issued the following conversions:



|Conversion Date   |  | Principal  Converted |         |  | Accrued  Interest  Converted |   |   | Total  Converted |  |   | Conversion  Rate |  |  | Common  Shares  Issued |      
|----------------- |  | -------------------- | ------- |  | ---------------------------- | - | - | ---------------- |  | - | ---------------- |  |  | ---------------------- | -----
|October 8, 2015   |  | $                    | 21,000  |  |                              | $ | - |                  |  | $ | 21,000           |  |  | $                      | 0.012
|October 16, 2015  |  |                      | 18,900  |  |                              |   | - |                  |  |   | 18,900           |  |  | $                      | 0.012
|October 22, 2015  |  |                      | 25,800  |  |                              |   | - |                  |  |   | 25,800           |  |  | $                      | 0.011
|October 29, 2015  |  |                      | 22,460  |  |                              |   | - |                  |  |   | 22,460           |  |  | $                      | 0.011
|November 11, 2015 |  |                      | 33,500  |  |                              |   | - |                  |  |   | 33,500           |  |  | $                      | 0.007
|November 18, 2015 |  |                      | 24,000  |  |                              |   | - |                  |  |   | 24,000           |  |  | $                      | 0.006
|November 30, 2015 |  |                      | 30,000  |  |                              |   | - |                  |  |   | 30,000           |  |  | $                      | 0.005
|December 11, 2015 |  |                      | 22,000  |  |                              |   | - |                  |  |   | 22,000           |  |  | $                      | 0.002
|December 28, 2015 |  |                      | 22,500  |  |                              |   | - |                  |  |   | 22,500           |  |  | $                      | 0.002
|January 7, 2016   |  |                      | 20,000  |  |                              |   | - |                  |  |   | 20,000           |  |  | $                      | 0.002
|                  |  | $                    | 240,160 |  |                              | $ | - |                  |  | $ | 240,160          |  |  |                        |      



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 original issue discount (“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. The accredited investor only funded a total of $800,000 in principal under the
$2M Note. See Note 5 for more details regarding $2M Securities Purchase Agreement and $2M Note.





9







The
following is summary of conversions by the $2M Note holder and its assignees during the year ended September 30, 2015:





|Conversion Date    |  | Principal Converted |         |  | Accrued  Interest Converted |   |   | Total Converted |  |   | Conversion Rate |  |  | Common Shares Issued |      
|------------------ |  | ------------------- | ------- |  | --------------------------- | - | - | --------------- |  | - | --------------- |  |  | -------------------- | -----
|August 13, 2015    |  | $                   | 50,000  |  |                             | $ | - |                 |  | $ | 50,000          |  |  | $                    | 0.127
|August 26, 2015    |  |                     | 25,000  |  |                             |   | - |                 |  |   | 25,000          |  |  | $                    | 0.056
|September 8, 2015  |  |                     | 25,000  |  |                             |   | - |                 |  |   | 25,000          |  |  | $                    | 0.056
|September 14, 2015 |  |                     | 25,000  |  |                             |   | - |                 |  |   | 25,000          |  |  | $                    | 0.053
|September 16, 2015 |  |                     | 10,000  |  |                             |   | - |                 |  |   | 10,000          |  |  | $                    | 0.053
|September 17, 2015 |  |                     | 25,000  |  |                             |   | - |                 |  |   | 25,000          |  |  | $                    | 0.053
|September 22, 2015 |  |                     | 10,000  |  |                             |   | - |                 |  |   | 10,000          |  |  | $                    | 0.043
|September 24, 2015 |  |                     | 10,000  |  |                             |   | - |                 |  |   | 10,000          |  |  | $                    | 0.026
|September 25, 2015 |  |                     | 10,000  |  |                             |   | - |                 |  |   | 10,000          |  |  | $                    | 0.019
|September 29, 2015 |  |                     | 13,410  |  |                             |   | - |                 |  |   | 13,410          |  |  | $                    | 0.015
|                   |  | $                   | 203,410 |  |                             | $ | - |                 |  | $ | 203,410         |  |  |                      |      





Subsequent
to year end, the $2M Note holder and its assignees also enacted the following conversions:





|Conversion Date   |  | Principal Converted |         |  | Accrued Interest Converted |   |        | Total Converted |  |   | Conversion Rate |  |  | Common Shares Issued |       
|----------------- |  | ------------------- | ------- |  | -------------------------- | - | ------ | --------------- |  | - | --------------- |  |  | -------------------- | ------
|October 1, 2015   |  | $                   | 10,000  |  |                            | $ | -      |                 |  | $ | 10,000          |  |  | $                    | 0.0148
|October 5, 2015   |  |                     | 10,000  |  |                            |   | -      |                 |  |   | 10,000          |  |  | $                    | 0.0148
|October 6, 2015   |  |                     | 13,262  |  |                            |   | -      |                 |  |   | 13,262          |  |  | $                    | 0.0138
|October 7, 2015   |  |                     | 10,000  |  |                            |   | -      |                 |  |   | 10,000          |  |  | $                    | 0.0115
|October 9, 2015   |  |                     | 11,728  |  |                            |   | -      |                 |  |   | 11,728          |  |  | $                    | 0.0116
|October 9, 2015   |  |                     | 10,000  |  |                            |   | -      |                 |  |   | 10,000          |  |  | $                    | 0.0115
|October 12, 2015  |  |                     | 14,680  |  |                            |   | -      |                 |  |   | 14,680          |  |  | $                    | 0.0115
|October 13, 2015  |  |                     | 11,601  |  |                            |   | -      |                 |  |   | 11,601          |  |  | $                    | 0.0116
|October 15, 2015  |  |                     | 14,680  |  |                            |   | -      |                 |  |   | 14,680          |  |  | $                    | 0.0115
|October 19, 2015  |  |                     | 17,400  |  |                            |   | -      |                 |  |   | 17,400          |  |  | $                    | 0.0116
|October 19, 2015  |  |                     | 15,000  |  |                            |   | -      |                 |  |   | 15,000          |  |  | $                    | 0.0116
|October 20, 2015  |  |                     | 16,650  |  |                            |   | -      |                 |  |   | 16,650          |  |  | $                    | 0.0111
|October 21, 2015  |  |                     | 17,500  |  |                            |   | -      |                 |  |   | 17,500          |  |  | $                    | 0.0115
|October 23, 2015  |  |                     | 20,000  |  |                            |   | -      |                 |  |   | 20,000          |  |  | $                    | 0.0115
|October 26, 2015  |  |                     | 24,420  |  |                            |   | -      |                 |  |   | 24,420          |  |  | $                    | 0.0111
|October 29, 2015  |  |                     | 26,640  |  |                            |   | -      |                 |  |   | 26,640          |  |  | $                    | 0.0111
|November 2, 2015  |  |                     | 29,970  |  |                            |   | -      |                 |  |   | 29,970          |  |  | $                    | 0.0111
|November 2, 2015  |  |                     | 20,000  |  |                            |   | -      |                 |  |   | 20,000          |  |  | $                    | 0.0111
|November 5, 2015  |  |                     | 32,190  |  |                            |   | -      |                 |  |   | 32,190          |  |  | $                    | 0.0111
|November 10, 2015 |  |                     | 28,800  |  |                            |   | -      |                 |  |   | 28,800          |  |  | $                    | 0.0096
|November 12, 2015 |  |                     | 23,930  |  |                            |   | -      |                 |  |   | 23,930          |  |  | $                    | 0.0072
|November 17, 2015 |  |                     | 16,500  |  |                            |   | -      |                 |  |   | 16,500          |  |  | $                    | 0.0060
|November 19, 2015 |  |                     | 1,640   |  |                            |   | 11,225 |                 |  |   | 12,865          |  |  | $                    | 0.0056
|November 23, 2015 |  |                     | 23,111  |  |                            |   | -      |                 |  |   | 23,111          |  |  | $                    | 0.0056
|November 27, 2015 |  |                     | 24,750  |  |                            |   | -      |                 |  |   | 24,750          |  |  | $                    | 0.0055
|December 2, 2015  |  |                     | 18,450  |  |                            |   | -      |                 |  |   | 18,450          |  |  | $                    | 0.0041
|December 8, 2015  |  |                     | 18,000  |  |                            |   | -      |                 |  |   | 18,000          |  |  | $                    | 0.0036
|December 11, 2015 |  |                     | 13,368  |  |                            |   | -      |                 |  |   | 13,368          |  |  | $                    | 0.0024
|December 16, 2015 |  |                     | 14,181  |  |                            |   | -      |                 |  |   | 14,181          |  |  | $                    | 0.0024
|December 22, 2015 |  |                     | 15,488  |  |                            |   | -      |                 |  |   | 15,488          |  |  | $                    | 0.0024
|December 29, 2015 |  |                     | 17,666  |  |                            |   | -      |                 |  |   | 17,666          |  |  | $                    | 0.0024
|                  |  | $                   | 541,604 |  |                            | $ | 11,225 |                 |  | $ | 552,830         |  |  |                      |       





10







On
March 12, 2015, the Board issued bonus stock grants of 30,000 shares of restricted common stock each to Kyle Tracey, Joseph Andreae,
and Allan Viernes. An additional 100,000 shares of restricted common stock each were granted to Kyle Tracey and Joseph Andreae
for serving on the Board. In addition, a total of 60,000 shares were granted to three (3) employees. These immediately vested
issuances resulted in $9,150, $9,150, and $195,200 being charged to cost of revenue, sales and marketing, and general and administrative
expense during the three and six months ended March 31, 2015, respectively.



On
March 12, 2015, the Board issued a bonus stock grant of 60,277 shares of restricted common stock to an outside sales consultant
for services performed. This immediately vested issuance resulted in $36,769 being charged to sales and marketing expense during
the three and six months ended March 31, 2015.



On
March 12, 2015, Kyle Tracey converted $59,718 of accrued wages into 97,898 shares of immediately vested restricted common stock.



On
March 12, 2015, Michael Cook converted $36,769 of accrued wages into 60,277 shares of immediately vested restricted common stock.



On March 12, 2015, the
Company offered to pay accrued interest and modify the terms of the six (6) Holders’ outstanding 6% Notes, decreasing the
conversion floor from $1.00 to $0.50 in order to entice the noteholders to convert their promissory notes. The Company recorded
a loss on debt extinguishment of $23,443 as a result of the fair value in excess of the modified conversion floor. In March 2015,
the Company paid all accrued interest on the 6% notes of $17,200. Five (5) of the six (6) holders converted in full a total of
$80,000 of 6% Notes into 160,000 shares of common stock. The remaining note holder partially converted $20,000 of 6% Notes into
40,000 of common shares and extended the terms on the remaining $30,000 for six (6) months. See Note 5 regarding Convertible Notes
Payable.





On
June 1, 2015, the Board issued 100,000 shares of restricted common stock at $0.50 per share for payment of $82,648 of accrued
legal services.



On
July 1, 2015, the Company issued 250,000 shares of common stock to its Chief Science Officer Dr. Mark Scialdone in exchange for
80% of the outstanding common stock of BetterChem Consulting, Inc. See Note 1 regarding the acquisition of 80% of BetterChem.





11







On
August 5, 2015, and August 12, 2015, the Company issued convertible notes totaling an aggregate of $622,000 pursuant to a series
of convertible note financings with several accredited investors. None of these convertible notes have been converted in whole
or in part to date. See Note 5 regarding convertible note financings.



In
connection with the above stock sales, we did not pay any underwriting discounts or commissions. None of the sales of securities
described or referred to above was registered under the Securities Act of 1933, as amended (the “Securities Act”).
We had or one of our affiliates had a prior business relationship with each of the purchasers, and no general solicitation or
advertising was used in connection with the sales. In making the sales without registration under the Securities Act, we relied
upon the exemption from registration contained in Section 4(a)(2) of the Securities Act.



Item
6.       Selected Financial Data



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



Item
7.        Management’s Discussion and Analysis of Financial Condition and Results
of Operation



The
following discussion and analysis is intended to provide information about Vape’s financial condition and results of operations
for the year ended September 30, 2015 and 2014. This information should be read in conjunction with Vape’s audited consolidated
financial statements for the year ended September 30, 2015 and 2014, 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.





12







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



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



Overview



General



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



HIVE
Ceramics (“HIVE”) is the premier brand under the VAPE umbrella. HIVE 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. The HIVE product line currently consists of over 15 distinct ceramic elements, including the 2 piece domeless,
domeless direct inject, and HIVE’s signature domeless elements covering 10mm, 14mm and 18mm applications as well as regular
elements, the HIVE Flower Cup, the HIVE Carb Cap, HIVE Stinger Dabber, the 14mm HIVE x Quave - Club Banger, and the HIVE x D-Nail
16mm and 20mm attachments.



The
Company has also launched ‘HIVE Glass.’ HIVE Glass is VAPE’s newest line of products under the HIVE brand name.
The HIVE GLASS line is precision made using state of the art manufacturing processes and techniques, and exclusively uses
German Schott glass caliber and fittings through all production phases. The aim with HIVE Glass is to create an affordable, high
quality glass product that is both aesthetically pleasing and a highly functional vaporization product. VAPE’s existing
customer base and distribution network will be the catalyst for expansion of this new HIVE product line. Under HIVE Glass,
the Company also buys and sells high-end collector pieces. Subsequent to year end, the Company curtailed the product line in order
to focus on HIVE Ceramics.





13







VAPE
has also recently launched ‘HIVE Supply.’ HIVE Supply is a packaging and sourcing division of VAPE designed to serve
as a competitively priced, comprehensive “one-stop shop” for all medical and recreational marijuana packaging needs.
As with all of VAPE’s products, HIVE Supply will operate in full compliance with all federal laws and the laws of each individual
state in which it does business. HIVE Supply will focus on providing much-needed support to cannabis businesses in regards to
sourcing consumer products, brand management and marketing services. HIVE Supply is currently operated out of three (3) locations:
HIVE Supply in Southern California, HIVE Supply Washington in Spokane and HIVE Supply Oregon in Portland. Under HIVE Supply,
the Company also buys and sells high-end manufacturing machines. Subsequent to year end, the Company curtailed the product line
in order to focus on HIVE Ceramics.



In
connection with its launch of HIVE Supply and HIVE Glass, the Company opened ‘THE HIVE’ retail store and gallery in
Los Angeles, an end-user experience to showcase the complete line of HIVE Ceramics and HIVE Glass products, while introducing
HIVE Supply and all the new products being tested and developed through each vertical. Subsequent to year end, the Company curtailed
its retail store in order to reduce overhead costs and focus on HIVE Ceramics.



The
Company intends to rely on a combination of trademark, copyright, trade secret and patent laws in the United States as well as
confidentiality procedures and contractual provisions to protect future proprietary technology and its brands, as they are developed.  The
Company has created or acquired and continues in the process of creating and/or acquiring proprietary vaporizers and e-cigarettes,
and various trademarks, patents and copyrights for brands which are developed or in development.  The Company is actively
engaged in improving and expanding lines of branded products through business alliances and acquisitions, as well as developing
its branded retail business expansion.  VAPE and its business units are organized and directed to operate strictly in
accordance with all applicable state and federal laws.



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 Accounting Standards Codification (“ASC”) 470-20 “Debt
with Conversion and Other Options”. ASC 470-20 governs the calculation of an embedded beneficial conversion, which is treated
as an additional discount to the instruments where derivative accounting (explained below) does not apply. The amount of the value
of warrants and beneficial conversion feature may reduce the carrying value of the instrument to zero, but no further. The discounts
relating to the initial recording of the derivatives or beneficial conversion features are accreted over the term of the debt.  Many
of the conversion features embedded in the Company's convertible 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.  The management and board of directors currently
have the ability to authorize additional shares of common stock through their voting power in the Series A Preferred Stock.



When
applicable, the Company calculates the fair value of warrants and conversion features issued with the convertible instruments
using the Black-Scholes valuation method, in lieu of a lattice model for simplicity, using the same assumptions used for valuing
employee options for purposes of ASC 718 “Compensation – Stock Compensation”, except that the contractual life
of the warrant or conversion feature is used. Under these guidelines, the Company allocates the value of the proceeds received
from a convertible debt transaction between the conversion feature and any other detachable instruments (such as warrants) on
a relative fair value basis. The allocated fair value is recorded as a debt discount or premium and is amortized over the expected
term of the convertible debt to interest expense.  If the fair value exceeds the carrying value of the debt, an immediate
charge to operations is recorded by management.





14







The
Company accounts for modifications of its debt 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 or the associated debt instrument when the modification does not result in
a debt extinguishment.



The
Company has the ability to increase the authorized common stock of the Company in the event that the convertible notes require
additional shares to be issued, thus the Company recorded beneficial conversion features related to its convertible debt instead
of derivative liabilities.



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 in the applicable district. Products are warrantied 24
hours of delivery if they are damaged during the shipping.



INVENTORY



Inventory
is valued at the lower of cost or market, using the first-in, first-out (FIFO) method. The provides for an allowance
for slow moving inventories based on current demand and competition.



COMMITMENTS
AND CONTINGENCIES



The
Company recorded the estimated settlement liability as of March 31, 2014 for the Warrant Shares issued and the Warrants that remain
outstanding and unexercised that would be entitled to the same settlement based on the number of shares expected to be issued
and the market price of the Company’s common stock on the dates of the actual settlements from $4.72 per share to $7.25
per share, and market price of the first settlement of $7.25 for the unsettled claims. We believe the issuance of convertible
notes in the three months ended March 31, 2014 triggered the full ratchet anti-dilution adjustment; before the provision was triggered,
the fair value of the warrant liability was not significant as the exercise was so far out of the money. As a result of the above
settlements with warrant holders, the Company recorded a loss on settlement of warrants of $29,528,844 during the six months ended
March 31, 2014 and a long-term warrant liability of $29,430,022 as of March 31, 2014 based on 4,407,200 shares of common stock
under the settlement at the Company’s closing stock prices discussed above. As of September 30, 2015, the estimated
settlement liability is $25,025 based on the fair market value of 1,184,727 remaining warrants and therefore the Company recorded
a gain on the change in warrant liability of $2,439,207 during the year ended September 30, 2015.



PREFERRED
STOCK



On
April 1, 2014, the Board formally approved the filing of a Preferred Stock Designation in connection with the commitment of 500,000
Series A Shares to HIVE Ceramics, LLC on March 27, 2014 pursuant to its authority to issue blank check preferred stock as provided
in the Company’s Certificate of Incorporation.  Per the Certificate of Designation (the “Designation”),
there are 100,000,000 shares of preferred stock authorized by the Company’s Certificate of Incorporation. The Company is
authorized to commit 500,000 shares of Series A pursuant to the Designation.  As provided in the Designation (and as
set forth in the HIVE Asset Purchase Agreement), Series A Shares are entitled to vote at a 15-1 ratio to Common Stock and are
convertible on a maximum 10 for one basis into Common Stock. (See NOTE 1 re HIVE Ceramics Asset Purchase). The acquisition of
HIVE assets was not considered a business combination and was consummated under common control of the Company’s Chief Executive
officer and therefore the carryover basis of the assets was assigned to the Preferred Stock.  The parties to the acquisition
of HIVE closed the transaction on March 27, 2014. On June 19, 2014, the Company formally issued the 500,000 Series A Shares to
HIVE.





15







On
December 10, 2015, the Board formally approved the designation of Series B Preferred Stock. See Note 11 regarding Subsequent Events.



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 Year Ended September 30, 2015 and 2014



Net Loss.For the
year ended September 30, 2015 and 2014, net loss was $1,230,147 and $25,063,658, respectively.



Revenue.For the year ended September 30, 2015 and 2014, revenue was $1,277,657 and $841,724, respectively. Revenue was greater in
2015 as it was HIVE Ceramics’ first full year along with its new products. The Company derived its revenue from the sale
of ceramics, supplies, glass, merchandise, and services.



Cost
of Revenue.For the year ended September 30, 2015 and 2014, cost of revenue was $1,013,641 and $458,387, respectively.
In 2015, cost of revenue included approximately $623,000 of ceramic products costs, $27,000 of supply costs, $97,000 of
glass costs, $66,000 of merchandise costs and $200,000 of inventory reserve. In 2014, the recorded costs were ceramic product
costs.



Gross
Profit.For the year ended September 30, 2015 and 2014, gross profit was $264,016 or 36% and $383,337 or 46%, respectively.
Gross profit decreased due to higher failure rates than expected of ceramics and low margin sales over multiple revenue streams.



Sales and Marketing.For
the year ended September 30, 2015 and 2014, sales and marketing expenses were $715,292 and $219,891, respectively. In 2015, sales
and marketing expenses included approximately $26,000 of general advertising, $54,000 of outside sales expense, $162,000 of payroll
expenses, $156,000 of stock-based compensation, and $65,000 of trade show expenses. In 2014, it mostly consisted of approximately
$92,000 of trade show expenses, $32,000 of promotional items, $21,000 of outside sales expense, $26,000 of E-commerce costs, and
$12,000 of public relations.



Research and
Development. Forthe year ended September 30, 2015 and 2014, research and development expenses were $212,424 and $45,757, respectively.
In 2015, research and development expenses included approximately $117,000 for product design prototypes and research equipment,
$47,000 of payroll expenses, $12,000 of employee benefits, $8,000 of travel expenses, and $27,000 of patent research. In 2014,
it consisted of approximately $46,000 of product design prototypes and research equipment.



General and
Administrative.Forthe year ended September 30, 2015 and 2014, general and administrative expenses were $2,127,594
and $1,315,710, respectively. In 2015, general and administrative expenses included approximately $45,000 of insurance expense,
$110,000 of office expense, $481,000 of payroll expenses, $66,000 of accounting fees, $80,000 of business development expense,
$182,000 of legal fees, $800,000 of stock-based compensation, and $121,000 of travel expense. It 2014, it mostly consisted of
approximately $97,000 of investor relations and filing fees, $359,000 of payroll and taxes, $98,000 of accounting fees, and $114,000
of legal fees, $58,000 of office expense, $41,000 of bank and credit card processing fees, and $53,000 of travel expenses.



Interest
Expense. Forthe year ended September 30, 2015 and 2014, interest expense was $788,038 and $241,065 respectively. In 2015,
interest expense included approximately $609,000 of accretion of debt discounts, $51,000 of amortization of deferred financing
costs, and $128,000 of interest expense. In 2014, interest expense on convertible notes payable was $241,065.





16







Interest
Expense - related party.For the year ended September 30, 2015 and 2014, related party interest expense on convertible notes
was $148,562 and $219,714, respectively. In 2015, interest expense included approximately $118,000 of accretion of debt discounts
and $31,000 of interest expense. In 2014, interest expense on related party notes payable was $219,714.



Change
in Warrant Liability.For the year ended September 30, 2015 and 2014, the gain and loss on change in warrant liability was
$2,439,207 and ($23,404,058), respectively due to the fluctuation in the stock price.



Gain on Settlement.For the year ended September 30, 2015 and 2014, the gain on settlement was $625,461 and $0, respectively due to a confidential
settlement by and between the Company and certain shareholders. On December 15, 2014, the Company recorded a gain on settlement
of $257,930 for a confidential settlement by and between the Company and certain shareholders and related parties as settlement
for certain potential legal claims held by the Company. As a result of the settlement, the Company received net proceeds of $62,930
and vendor credits of $200,000 during the year ended September 30, 2015. A total of $325,000 in vendor credits has been received
in connection with the settlement and no further credits will be given. In January 2015, the Company received 440,625 shares from
the settlement that was to be assigned to the officers of the Company. The officers decided it was in the best interest to return
these shares to the Company to be used for future strategic issuances. Accordingly, the 440,625 shares were recorded as treasury
stock and a gain on settlement valued at $367,531.



Liquidity
and Capital Resources





As of September 30, 2015,
we had cash of $273,904 and working capital of $122,107 as compared to cash of $48,370 and a working capital deficit of $36,138
as of September 30, 2014. See Note 11 for subsequent funding. We believe our current liquidity and securities purchase commitments
will be sufficient to continue operating as a going concern through September 2016.



We had total liabilities
of $1,392,465 as of September 30, 2015, including current liabilities of $115,938 of accounts payable, $208,665 of accrued expenses,
customer deposits of $1,275, and $305,923 of convertible notes payable, and long-term liabilities of $458,404 of convertible notes
payable, $265,000 of related party notes payable, $12,235 of other liabilities, and $25,025 of warrant liability. We had total
liabilities of $3,802,237 as of September 30, 2014, consisting of current liabilities which consisted of $216,388 of accounts
payable, $169,513 of accrued expenses, $187,667 of convertible notes payable, $45,832 of related party convertible notes payable,
and long-term liabilities of $178,200 convertible notes payable, $199,115 of related party convertible notes payable, $341,290
of related party notes payable, and $2,464,232 of warrant liability.



We had a total stockholders’
deficit of $185,013 and an accumulated deficit of $26,611,042 as of September 30, 2015.



We used $1,238,155 of cash
in operating activities during the year ended September 30, 2015, which was primarily attributable to our net loss of $1,230,147,
which was offset by $71,305 of depreciation, $2,439,207 gain on change in warrant liability, $625,461 gain on settlement, $695,795
of accretion of debt discounts, $969,577 of stock-based compensation, and $480,481 of net cash provided by change in operating
assets and liabilities. We used $980,003 of cash in operating activities for the year ended September 30, 2014, which was attributable
primarily to our net loss of $25,063,658, which was offset by $23,404,058 loss on settlement of warrants, $366,431 in accretion
of debt discounts, fair value in excess of stock issued for conversion of notes payable of $1,323, fair value in excess of stock
issued for conversion of related party notes payable of $44,239, fair value of officer services of $15,000, common stock issued
for services of $133,200, stock-based compensation of $450,501, and net use in the change in operating assets and liabilities of
$347,275.



Investing activities used
$31,143 during the year ended September 30, 2015 consisting of $62,930 of net proceeds from settlement offset by $83,255 of capital
expenditures, and $10,818 for trademarks and pending patents. We used $257,020 of cash in investing activities for the year ended
September 30, 2014 consisting of $122,555 of capital expenditures and $134,465 for trademarks and pending patents.





17







We
had $1,494,832 of net cash provided by financing activities during the year ended September 30, 2015 consisting of $1,657,660
of net proceeds from issuance of a convertible notes payable, repayments on convertible notes payable of $40,000, repayments on
related party convertible notes payable of $50,000, and repayments on related party notes payable of $72,828. We had $1,284,825
of net cash provided by financing activities during the year ended September 30, 2014 consisting of $438,000 from convertible
notes payable, $505,535 from related party convertible notes payable, and $341,290 from related party convertible notes payable.



Since
we have limited liquidity and have suffered losses, we depend to a great degree on the ability to attract external financing in
order to conduct our business activities and expand our operations.  These factors raise substantial doubt about the
Company’s ability to continue as a going concern. If we are unable to raise additional capital from conventional sources,
including increases in related party and non-related party loans and/or additional sales of stock, we may be forced to curtail
or cease our operations. Even if we are able to continue our operations, the failure to obtain financing could have a substantial
adverse effect on our business and financial results. We have no commitments to provide us with financing in the future, other
than described above.  Our independent registered public accounting firm included an explanatory paragraph raising substantial
doubt about the Company’s ability to continue as a going concern.



We
anticipate generating losses and therefore may be unable to continue operations in the future. We anticipate that we will require
additional capital in order to grow our business by increasing headcount and our budget for 2016. We may use a combination of
equity and/or debt instruments to funds our growth strategy or enter into a strategic arrangement with a third party.



Related
Party Notes Payable Repayments



On
May 12, 2014, the Company issued a note payable to its President, Joe Andreae in the amount of $40,000 for monies previously borrowed
during the six months ended March 31, 2014 (the “Andreae Note”).  The note is unsecured and bears interest
of 6% per annum and matures on May 1, 2016. On December 4, 2014, the Company repaid the principal balance of $40,000 and
accrued interest of $1,348. See Note 6 to the financial statements.



On
August 11, 2014, the Company issued a 6% note payable to its President, Joe Andreae, for monies borrowed from Mr. Andreae to cover
outstanding accounts payable in the amount of $12,828 (the “Andreae Note II”). Per the terms of the Andreae Note II,
the original principal balance is $12,828, and is not secured by any collateral or any assets pledged to the holder. The maturity
date is November 30, 2014, and the annual rate of interest is six percent (6%). The monies were funded during the three and nine
months ended June 30, 2014. On December 4, 2014, the Company repaid principal balance of $12,828 and accrued interest of $240.
See Note 6 to the financial statements.



Kyle
Tracey Convertible Notes



On
October 28, 2014, the Company received a Notice of Conversion on an 8% Convertible Note issued on February 18, 2014 to its CEO,
Kyle Tracey, to cover expenses of the Company (the “Tracey Note”). Mr. Tracey converted principal of $10,612 and outstanding
accrued and unpaid interest of $584 into 22,481 shares of restricted common stock of the Company at a per share conversion price
of $0.498 in accordance with the terms of the convertible note payable. The conversion of the Tracey Note was in full satisfaction
of the note payable. The shares of common stock under the conversion were issued by the Company on November 7, 2014. See Note
6 to the financial statements.



On
October 28, 2014, the Company received a Notice of Conversion on an 8% Convertible Note issued on May 12, 2014 to Mr. Tracey to
cover expenses of the Company (the “Tracey Note II”). Mr. Tracey converted principal of $11,042 and outstanding accrued
and unpaid interest of $407 into 22,989 shares of restricted common stock of the Company at a per share conversion price of $0.498
in accordance with the terms of the convertible note payable. The conversion of the Tracey Note II was in full satisfaction of
the note payable. The shares of common stock under the conversion were issued by the Company on November 7, 2014. See Note 6 to
the financial statements.





18







On
October 28, 2014, the Company received a Notice of Conversion on an 8% Convertible Note issued on August 11, 2014 to Mr. Tracey
to cover expenses of the Company (the “Tracey Note III”). Mr. Tracey converted principal of $216,001 and outstanding
accrued and unpaid interest of $3,645 into 441,057 shares of restricted common stock of the Company at a per share conversion
price of $0.498 in accordance with the terms of the convertible note payable. The conversion of the Tracey Note III was in full
satisfaction of the note payable. The shares of common stock under the conversion were issued by the Company on November 7, 2014.
See Note 6 to the financial statements.



On
October 28, 2014, the Company received a Notice of Conversion on a 6% Convertible Note issued on May 13, 2014 to Mr. Tracey (the
“Tracey PPM Note”) as part of a private placement transaction in exchange for capital of $40,000. Mr. Tracey converted
principal of $40,000 and outstanding accrued and unpaid interest of $1,098 into 41,098 shares of restricted common stock of the
Company at a per share conversion price of $1.00 in accordance with the terms of the convertible note. The conversion of the Tracey
PPM Note was in full satisfaction of the note. The shares of common stock under the conversion were issued by the Company on November
7, 2014. See Note 6 to the financial statements. See Note 5 to the financial statements.



Michael
Cook Convertible Notes



On
October 28, 2014, the Company received a Notice of Conversion on an 8% Convertible Note issued on May 12, 2014 to its Director
of Business Development, Michael Cook, to cover expenses of the Company (the “Cook Note”). Mr. Cook converted principal
of $11,825 and outstanding accrued and unpaid interest of $435 into 24,619 shares of restricted common stock of the Company at
a per share conversion price of $0.498 in accordance with the terms of the convertible note payable. The conversion of the Cook
Note was in full satisfaction of the note payable. The shares of common stock under the conversion were issued by the Company
on November 7, 2014. See Note 6 to the financial statements.



On
October 28, 2014, the Company received a Notice of Conversion on an 8% Convertible Note issued on August 11, 2014 to Mr. Cook
to cover expenses of the Company (the “Cook Note II”). Mr. Cook converted principal of $15,115 and outstanding accrued
and unpaid interest of $255 into 30,864 shares of restricted common stock of the Company at a per share conversion price of $0.498
in accordance with the terms of the convertible note payable. The conversion of the Cook Note II was in full satisfaction of the
note payable. The shares of common stock under the conversion were issued by the Company on November 7, 2014. See Note 6 to the
financial statements.



Misc.
Convertible Notes



On
October 28, 2014, the Company received a Notice of Conversion on two (2) 8% Convertible Notes issued to third parties on February
18, 2014 to cover expenses of the Company. The noteholders converted aggregate principal of $20,000 and aggregate outstanding
accrued and unpaid interest of $1,100 into an aggregate of 42,370 shares of restricted common stock of the Company at a per share
conversion price of $0.498 in accordance with the terms of their convertible notes payable. The conversion of these notes was
in full satisfaction of the notes payable. The shares of common stock under the conversion were issued by the Company on November
7, 2014. See Note 5 to the financial statements.



On
October 28, 2014, the Company received a Notice of Conversion on an 8% Convertible Note issued to a third party on March 19, 2014.
The noteholder converted principal of $198,000 and outstanding accrued and unpaid interest of $9,764 into 207,764 shares of restricted
common stock of the Company at a per share conversion price of $1.00 in accordance with the terms of the convertible note payable.
The conversion of this note was in full satisfaction of the note payable. The shares of common stock under the conversion were
issued by the Company on November 7, 2014. See Note 5 to the financial statements.



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.





19







The
Note bears interest at the rate of 10% per annum and is convertible into common stock of the Company at a conversion price per
share of 70% of the average of the three (3) lowest Closing Sale Prices in the ten (10) Trading Days immediately preceding the
applicable Conversion (subject to adjustment in the event of stock splits, stock dividends, and similar transactions, and in the
event of subsequent sales of common stock at a lower purchase price (subject to certain exceptions))(the “Conversion Price”).
In no event will the Conversion Price be less than $0.50 per share. Repayment of principal on the Note, together with accrued
interest thereon, is due in twelve monthly installments, commencing six months from issuance. The Company may make such payments
in cash (in which event the Company will pay a 25% premium) or, subject to certain conditions, in shares of common stock valued
at the lower of the Conversion Price or 70% of the average of the three (3) lowest Closing Sale Prices in the ten (10) Trading
Days immediately preceding the applicable payment date (the “Amortization Conversion Rate”). The Maturity Date of
the Note is seventeen months from the date of issuance. 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. See Note 5 to the financial statements.



$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.



The
$2M Note bears interest at the rate of 10% per annum and is immediately convertible into common stock of the Company at a conversion
price per share of 70% of the lowest daily VWAP in the ten (10) Trading Days immediately preceding the applicable Conversion (subject
to adjustment in the event of stock splits, stock dividends, and similar transactions, and in the event of subsequent sales of
common stock at a lower purchase price (subject to certain exceptions))(the “Conversion Price”). In no event will
the Conversion Price be less than $0.50 per share. Repayment of principal on the $2M Note, together with accrued interest thereon,
is due in twelve bi-monthly installments, commencing approximately six months from issuance. The Company may make such payments
in cash (in which event the Company will pay a 25% premium) or, subject to certain conditions, in shares of common stock valued
at the lower of the Conversion Price or 70% of the lowest daily VWAP in the ten (10) Trading Days immediately preceding the applicable
payment date (the “Amortization Conversion Rate”). The Maturity Date of the $2M Note is twelve months from the date
of issuance.



During
the year ended September 30, 2015, the Company received $800,000 toward the $2M Note with an original issue discount of $76,800
and transaction costs for net proceeds of $651,395, respectively. We amortized $45,600 of the discount to interest expense during
the year ended September 30, 2015. In addition, we recorded a discount totaling $108,641 related to the beneficial conversion
feature embedded in the note upon issuance.



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. See Note 5 to the financial statements.





20







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 $517,000 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.



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 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. See Note 5 to the financial statements.



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, 2015, our disclosure controls and procedures are designed at a reasonable assurance level and 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.



(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.





21







(c)
Management’s report on internal control over financial reporting.



Management
is responsible for establishing and maintaining adequate control over financial reporting for Vape. Internal control over
financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.  Internal
controls over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records
that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of Vape; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
U.S. generally accepted accounting principles, and that receipts and expenditures of Vape are being made only in accordance with
authorizations of management and directors of Vape; and (3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of Vape’s assets that could have a material effect on the financial statements.



Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



Management,
with the participation of our principal executive officer and principal financial and accounting officer, conducted an evaluation
of the effectiveness of Vape’s internal control over financial reporting based on the framework in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation,
management concluded that our internal control over financial reporting was effective as of September 30, 2015.



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. 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.



|Name and Address  |  | Age |  | Principal Occupation or Employment                                                                                                                                                                                                                                                                   
|----------------- |  | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                  |  |     |  |                                                                                                                                                                                                                                                                                                      
|Benjamin Beaulieu |  | 29  |  | Chief Operating Officer and Director since May 11, 2015 and Chairman of the Board since December 10, 2015                                                                                                                                                                                            
|                  |  |     |  |                                                                                                                                                                                                                                                                                                      
|Allan Viernes     |  | 30  |  | Chief Financial Officer since June 25, 2014, Director since May 11, 2015                                                                                                                                                                                                                             
|                  |  |     |  |                                                                                                                                                                                                                                                                                                      
|Justin Braune     |  | 34  |  | Chief Executive Officer and Director, since December 10, 2015.                                                                                                                                                                                                                                       
|                  |  |     |  |                                                                                                                                                                                                                                                                                                      
|Kyle Tracey       |  | 34  |  | Former Chief Executive Officer, Secretary and Chairman of Vape beginning on December 30, 2013. Former Chief Financial Officer of Vape beginning on April 16, 2014, resigned June 25, 2014. Resigned as Chief Executive Officer, Chairman of the Board and all officer positions on December 10, 2015.
|                  |  |     |  |                                                                                                                                                                                                                                                                                                      
|Joseph Andreae    |  | 29  |  | Former President and Director of Vape beginning on March 26, 2014. Resigned as President and Director on December 10, 2015.                                                                                                                                                                          





22







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 three 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:



|● | Broad
    training, experience and a successful track record at senior policy-making levels in business, government, education, technology,
    accounting, law, consulting and/or administration;
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|● | The
    highest personal and professional ethics, integrity and values;                                                                                                                           
|● | Commitment
    to representing the long-term interests of the Company and all of its shareholders;                                                                                                
|● | An
    inquisitive and objective perspective, strength of character and the mature judgment essential to effective decision-making;                                                               
|● | Expertise
    that is useful to the Company and complementary to the background and experience of other Board members; and                                                                        
|● | Sufficient
    time to devote to Board and committee activities and to enhance their knowledge of our business, operations and industry.                                                          



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. Tracey, Mr. Andreae, Mr. Viernes, Mr. Beaulieu, and
Mr. Braune.



Executive
Officers



Kyle Tracey, 34, Former Chief Executive Officer and
Chairman



Kyle
Tracey brings extensive developmental and managerial experience in the public cannabis space to the Vape Holdings executive team.



Mr.
Tracey’s diversified experience literally from the ground up to top executive positions includes tenures where he helped
develop several integral brands in the space, working as an R&D Specialist for companies like BC Northern Lights and Eco Growing
Systems, as well as owning and operating a major horticulture light manufacturer.



As
Co-Founder and former President of GrowLife Inc., Mr. Tracey helped to grow the company’s market cap from 10M to over 100M
while establishing a trusted and respected industry brand. Upon his departure from GrowLife in 2013, Kyle recognized the market
opportunity for a more sustainable and efficient vaporization medium, and developed the HIVE Ceramics brand under the VAPE umbrella.





23







Strategically
appointed as Chairman and CEO of VAPE Holdings Inc. on December 30, 2013 for his industry credentials, work ethic, and
capacity to innovate, market, and sell relative industry products, Mr. Tracey delivers the imperative contacts and respect to
achieve market penetration for VAPE Holdings brands and products.



Kyle’s
association and experience with High Times Magazine, various live event promoters and high profile artists, and entertainment
industry powerhouses, all have the potential to position VAPE Holdings business units for expansive sponsorship opportunities
and global success.



Mr.
Tracey holds a B.A. in Business Management from the University of Rhode Island.



Joseph Andreae, 29, Former President and Board of Directors



Joseph
Andreae, a native of the Washington D.C. area, has been an instrumental part of several top brands in the rapidly growing MMJ
industry. After working in the hospitality sector, Joe decided to team with a dispensary and concentrates laboratory in Boulder,
Colorado on a new initiative.



Joe’s
leadership and expertise assisted in making those companies successful and earned him useful relationships and pedigree in the
emerging vertical. Mr. Andreae has spent the last 5 years moving from state to state, following the industry and laws as they’ve
progressed. His most recent project in Colorado boasted an impressive 15,000 square foot cultivation facility, the city’s
first licensed indoor concentrate extraction laboratory, and a beautiful store front that saw a 650% increase to $6M in sales
following Joe’s arrival. Previously, Joe was also a national sales manager of a successful LED lighting company based out
of California and remains an active member on several MMJ brand boards, executing a collective vision and strategy for the industry.



Allan Viernes, 30, Chief Financial Officer
and Board of Directors



Mr.
Viernes, 30, 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.



Benjamin Beaulieu, 29, Chief Operating
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’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.



Justin Braune, 34, Chief Executive Officer
and Board of Directors



On
December 10, 2015, the Board appointed Justin Braune to serve as the Company’s Chief Executive Officer and as a director,
effective immediately.



Prior
to joining the Company, Mr. Braune, 33, served as the chief operating officer of Voodoo Science, LLC and Vapor Wild from 2014
to 2015. From 2013 to 2014, Mr. Braune served as the Chief of Operations for Veracity Security, a technology company located in
San Diego. From 2013-2014 Mr. Braune was the Director of Sales at Lear Capital. Since 2010 he owned and operated Braune Enterprises
a real estate and investment brokerage firm. Mr. Braune graduated from the United States Naval Academy with a B.S. degree in electrical
engineering in and was commissioned as an officer in the U.S. Navy. After earning his master’s degree in nuclear engineering,
Mr. Braune operated the nuclear reactors onboard the USS RONALD REAGAN aircraft carrier. He served in the U.S. Navy until 2009
and subsequently earned his MBA at the University of Southern California, Marshall School of Business. Our Board believes that
Mr. Braune’s extensive relationships and experience in the industry of vaporization products and e-cigarettes will bring
added value to the Company’s management team.





24







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, Hayden I.R., would be brought to the Board’s attention by our
Chief Executive Officer, Kyle Tracey.





25







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, 2015 consisted of: Kyle Tracey, Joe Andreae, Allan Viernes, and Benjamin Beaulieu. None of Mr. Tracey, Mr. Andreae, 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, 2015, the Board held no formal meetings, and the Board acted by
unanimous written consent on multipleoccasions.



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
year ended September 30, 2015 and 2014.



Board
Leadership Structure and Role in Risk Oversight



During the year ended September
30, 2015, we did not separate the roles of Chief Executive Officer and Chairman of the Board because we believe that such roles
are adequately performed by Kyle Tracey. The benefits of Mr. Tracey’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. Tracey 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.
Subsequently, upon Kyle Tracey’s resignation as Chief Executive Officer and Chairman of the Board and Justin Braune’s
appointment as Chief Executive Officer, we separated the roles of Chief Executive Officer and Chairman of the Board as Benjamin
Beaulieu was appointed as Chairman.





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.







26







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 year ended September 30, 2015 and 2014. The Named Executive Officers are
(1) Kyle Tracey, Chief Executive Officer and Chairman, (2) Joseph Andreae, President, (3) Allan Viernes, Chief Financial Officer,
(4) Benjamin Beaulieu, Chief Operating Officer, and (4) Michael Cook, Former Director of Business Development (the “Named
Executive Officers”).







|2015
    SUMMARY COMPENSATION TABLE      
|-----------------------------------------
|Name and Principal  Position             
|Kyle Tracey,                             
|Chief
Executive Officer and Chairman(2)  
|                                         
|Joseph                                   
|Andreae, President (3)                   
|                                         
|Allan                                    
|Viernes, Chief Financial Officer (4)     
|                                         
|Benjamin                                 
|Beaulieu, Chief Operating Officer (5)    
|                                         
|Michael                                  
|Cook, Director of Business Development(6)





|(1) | The
    amounts in this column reflect the dollar amount recognized for financial statement reporting purposes for the year ended
    September 30, 2015 and 2014 in accordance with ASC 718, of stock option awards pursuant to the Equity Incentive Plan (as defined
    below). The fair value of each option award is estimated on the date of grant using the Black-Scholes model.  Assumptions
    used in the calculation of these amounts are included in the footnotes to VAPE’s audited financial statements furnished
    herewith. All issued and outstanding options were cancelled as of September 30, 2015.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(2) | As
    of September 30, 2015 and 2014, $50,000 and $53,885 of Mr. Tracey’s salary remains unpaid, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | On
October 20, 2015, Kyle Tracey surrendered 30,000 shares of stock valued at $18,300 that were issued on March 12, 2015. On October
20, 2015, Kyle Tracey surrendered 100,000 shares valued at $61,000 that were issued on March 12, 2015. All issued and outstanding
options were cancelled as of September 30, 2015.                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(3) | As of September 30, 2015, $13,333 of Mr. Andreae’s salary remains unpaid. On October 20, 2015, Joe Andreae surrendered
        30,000 shares of stock valued at $18,300 that were issued on March 12, 2015. On October 20, 2015, Joe Andreae surrendered
        100,000 shares valued at $61,000 that were issued on March 12, 2015. All issued and outstanding options were cancelled
        as of September 30, 2015.                                                                                                                                                                                                 





27







|(4) | As of September 30, 2015, $1,667 of Mr. Viernes’ salary remains unpaid. On December 21, 2015, Allan Viernes surrendered
        30,000 shares of stock valued at $18,300 that were issued on March 12, 2015. All issued and outstanding options were cancelled
        as of September 30, 2015.                                                                                           
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                            
|(5) | As of September 30, 2015, $1,667 of Mr. Beaulieu’s salary remains unpaid. On December 21, 2015, Benjamin Beaulieu
        surrendered 30,000 shares of stock valued at $18,300 that were issued on March 12, 2015. All issued and outstanding options
        were cancelled as of September 30, 2015.                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                            
|(6) | As
of September 30, 2015 and 2014, $30,000 and $26,769 of Mr. Cook’s salary remains unpaid, respectively. As of May 2015, Mr.
Cook was removed as an officer and refocused as a Product Development Manager. All issued and outstanding options were cancelled
as of September 30, 2015. As of May 2015, Mr. Cook was removed as an officer and refocused as a Product Development Manager.



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 2015 and 2014 that might encourage the taking of unnecessary or excessive risks
that threaten the long-term value of Vape.



DIRECTOR
COMPENSATION



The
following table sets forth information concerning the compensation of the directors of Vape for the year ended September 30, 2015.



2015
DIRECTOR COMPENSATION TABLE



|Name              |  | Fees Earned or Paid in Cash ($)(1) |    |  | Stock Awards ($)(2) |   |        | Option Awards ($) |  |   | Non-Equity Incentive Plan Compensation ($) |  |  | Nonqualified Deferred Compensation Earnings ($) |    |  | All Other Compensation ($) |   |    | Total ($) | 
|----------------- |  | ---------------------------------- | -- |  | ------------------- | - | ------ | ----------------- |  | - | ------------------------------------------ |  |  | ----------------------------------------------- | -- |  | -------------------------- | - | -- | --------- | 
|Kyle Tracey       |  | $                                  | -- |  |                     | $ | 61,000 |                   |  | $ | --                                         |  |  | $                                               | -- |  |                            | $ | -- |           | 
|Joseph Andreae    |  | $                                  | -- |  |                     | $ | 61,000 |                   |  | $ | --                                         |  |  | $                                               | -- |  |                            | $ | -- |           | 
|Benjamin Beaulieu |  | $                                  | -- |  |                     | $ | --     |                   |  | $ | --                                         |  |  | $                                               | -- |  |                            | $ | -- |           | 
|Allan Viernes     |  | $                                  | -- |  |                     | $ | --     |                   |  | $ | --                                         |  |  | $                                               | -- |  |                            | $ | -- |           | 



|(1) | Vape
    does not currently pay its directors any retainer or other fees for service on the Board or any committee thereof. Vape did
    not have non-employee directors as of September 30, 2015.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                   
|(2) | On
    October 20, 2015, Kyle Tracey and Joe Andreae each surrendered 100,000 shares valued at $61,000 that were issued on March 12,
    2015.                                                    





28







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 January 11, 2016 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





|Name and Address of Beneficial Owner(1)(2)                 |  | Amount and Nature of Beneficial Ownership |             |  | Percent of Class(3) | 
|---------------------------------------------------------- |  | ----------------------------------------- | ----------- |  | ------------------- | 
|Kyle Tracey(4)                                             |  |                                           | 33,307,969  |  |                     | 
|Joseph Andreae(5)                                          |  |                                           | 585,555     |  |                     | 
|Michael Cook(6)                                            |  |                                           | 1,365,760   |  |                     | 
|Benjamin Beaulieu(7)                                       |  |                                           | 630,000     |  |                     | 
|Allan Viernes(8)                                           |  |                                           | 600,000     |  |                     | 
|All Officers and Directors as a Group                      |  |                                           | 36,489,284  |  |                     | 
|                                                           |  |                                           |             |  |                     | 
|Shares issued and outstanding as of January 11, 2016       |  |                                           | 163,026,935 |  |                     | 
|Options issued to Officers and Directors                   |  |                                           | 0           |  |                     | 
|Shares of Preferred Stock issued to Officers and Directors |  |                                           | 30,500,000  |  |                     | 
|                                                           |  |                                           | 193,526,935 |  |                     | 





|*   | Indicates
    shareholdings of less than 1%                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In
    accordance with Rule 13d-3 of the Exchange Act, a person is deemed to be the beneficial owner, for purposes of this table,
    of any shares of Vape’s Common Stock if he or she has voting or investment power with respect to such security. This
    includes shares (a) subject to options exercisable within sixty (60) days, and (b)(1) owned by a spouse, (2) owned by other
    immediate family members, or (3) held in trust or held in retirement accounts or funds for the benefit of the named individuals,
    over which shares the person named in the table may possess voting and/or investment power.                                                                                                                                                                                                                                                                                       
|(2) | Except
    as otherwise noted, the address of each person is c/o the Company at 5304 Derry Avenue, Suite C, CA 91301.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(3) | The
    percentage of class is calculated pursuant to Rule 13d-3(d) of the Exchange Act.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(4) | Mr.
    Tracey is the former Chief Executive Officer of the Company.  Includes 30,000,000 shares of Series B Convertible
    Preferred Stock issuable to Hive Ceramics, LLC upon conversion of Secured Series B Preferred Stock Convertible Promissory
    Notes in the aggregate amount of $300,000. Mr. Kyle Tracey is the sole managing member with sole voting and dispositive power.
    Each share of Series B Preferred Stock is currently convertible into one share of common stock of the Issuer.  Also
    includes 500,000 shares of Series A Preferred Stock currently convertible on a 1:1 basis into the Company’s Common Stock
    held in the name of HIVE Ceramics, LLC of which Mr. Tracey is the sole managing member (See “NOTE 9 – STOCKHOLDERS’
    DEFICIT”).  As of the time of this filing, Mr. Tracey has not exercised any of his rights to convert preferred
    stock into common stock.
|(5) | Mr.
    Andreae is the former President of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(6) | On
    May 11, 2015, the Board reassigned Michael Cook from his position of Director of Business Development to HIVE Sales and Product
    Development Manager. In doing so, the Board determined that Mr. Cook's new position does not meet the definition of "Executive
    Officer" under SEC Rules. Therefore, Mr. Cook has not been considered an executive officer since that time.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(7) | Mr.
    Beaulieu is the Chief Operating Officer of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(8) | Mr.
    Viernes is the Chief Financial Officer of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        





29







Item
13.      Certain Relationships and Related Transactions and Director Independence



Related
Party Transactions



SUPPLIER



We
purchased $60,000 in high-end glass from Kyle Tracey for HIVE Glass, which accounted for 10% of purchases during the year ended
September 30, 2015. Kyle Tracey brokered $60,000 of HIVE Glass purchases, which accounted for 10% of total purchases during the
year ended September 30, 2015.



RELATED
PARTY NOTES PAYABLE, LONG-TERM



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, 2015, there is $1,645 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,
2015.



On
December 7, 2013, the Company issued a note payable to a shareholder of the Company in the amount of $23,462 for monies previously
borrowed from shareholder.  The note is unsecured and bears interest of 6% per annum and matures on December 1, 2016. On
January 22, 2015, the Company settled and paid the note and accrued interest of $1,504 for $20,000 and recorded a gain on extinguishment
of the note of $3,462.



On
February 28, 2014, the Company issued a note payable to HIVE (the “HIVE Note”) for the principal amount of $250,000
in connection with the Hive asset acquisition. Per the terms of the HIVE Note, the maturity date is February 27, 2016 and the
annual rate of interest is six percent (6%). No prepayment penalty exists. The HIVE Note is unsecured. As of September 30, 2015,
there is $22,893 in accrued interest expense related to this note and the Company recorded $15,208 in interest expense related
to this note during the year ended September 30, 2015, respectively.



On
May 12, 2014, the Company issued a note payable to its President, Joseph Andreae in the amount of $40,000 for monies previously
borrowed during the three and six months ended March 31, 2014 (the “Andreae Note”).  The note was unsecured
and bears interest of 6% per annum and matures on May 1, 2016. On December 4, 2014, the Company repaid the principal balance
of $40,000 and accrued interest of $1,348 in full satisfaction on the Andreae Note.



On
August 11, 2014, the Company issued a 6% note payable to its President, Joseph Andreae, for monies borrowed from Mr. Andreae to
cover outstanding accounts payable in the amount of $12,828 (the “Andreae Note II”). Per the terms of the Andreae
Note, the original principal balance   was $12,828, and was not secured by any collateral or any assets pledged to the
holder. The maturity date is November 30, 2014, and the annual rate of interest is six percent (6%). The monies were funded during
the three and nine months ended June 30, 2014. On December 4, 2014, the Company repaid principal balance of $12,828 and accrued
interest of $240 in full satisfaction of the Andreae Note II.



RELATED
PARTY CONVERTIBLE NOTES PAYABLE



On
February 18, 2014, the Company issued 8% Convertible Notes to two third parties to cover outstanding accounts payable in the amount
of $20,000.  Per the terms of the notes, the aggregate principal balance is $20,000, and was not secured by any collateral
or any assets pledged to the holders. The maturity date is February 18, 2016, and the annual rate of interest is eight percent
(8%).  Subject to certain limitations, the holders can, at their sole discretion, convert the outstanding and unpaid
principal and interest into fully paid and nonassessable shares of the Company’s common stock. The conversion price for
the notes was the lowest market closing price per share within the previous twenty (20) market days of the date of conversion
minus a discount of forty percent (40%). We recorded a discount totaling $8,000 related to the beneficial conversion feature embedded
in the notes upon issuance.  We amortized $1,000 and $1,667 of the discount to interest expense during the three and
nine months ended June 30, 2014, respectively. On October 28, 2014, the Company received a Notice of Conversion on two (2) 8%
Convertible Notes issued to third parties on February 18, 2014 to cover expenses of the Company. The noteholders converted aggregate
principal of $20,000 and aggregate outstanding accrued and unpaid interest of $1,100 into an aggregate of 42,370 shares of restricted
common stock of the Company at a per share conversion price of $0.498 in accordance with the terms of their convertible notes
payable. The conversion of these notes was in full satisfaction of the notes payable. The shares of common stock under the conversion
were issued by the Company on November 7, 2014. Upon conversion, we expensed the unamortized discount of $5,333 to interest expense.





30







On
February 18, 2014, the Company issued an 8% Convertible Note to Kyle Tracey for monies borrowed from Mr. Tracey to cover
outstanding accounts payable in the amount of $10,612 (the “Tracey Note”). Per the terms of the Tracey Note, the original
principal balance is $10,612, and was not secured by any collateral or any assets pledged to the holder. The maturity date was
February 18, 2016, and the annual rate of interest is eight percent (8%). Subject to certain limitations, the holder can, at its
sole discretion, convert the outstanding and unpaid principal and interest into fully paid and nonassessable shares of the Company’s
common stock. The conversion price for the Tracey Note was the lowest market closing price per share within the previous twenty
(20) market days of the date of conversion minus a discount of forty percent (40%). We recorded a discount totaling $4,245 related
to the beneficial conversion feature embedded in the notes upon issuance. We amortized $1,415 of the discount to interest expense
during the year ended September 30, 2014. On October 28, 2014, the Company received a Notice of Conversion the Tracey Note. Mr.
Tracey converted principal of $10,612 and outstanding accrued and unpaid interest of $584 into 22,481 shares of restricted common
stock of the Company at a per share conversion price of $0.498 in accordance with the terms of the convertible note payable. The
conversion of the Tracey Note was in full satisfaction of the note payable. The shares of common stock under the conversion were
issued by the Company on November 7, 2014. Upon conversion, we expensed the unamortized discount of $2,830 to interest expense.



On
March 17, 2014, the Company issued an 8% Convertible Note to Jerome Kaiser, former CEO, CFO and Director of the Company for services
rendered to the Company in the amount of $50,000 (the “Kaiser Note”) which was charged to expense during the three
months March 31, 2014. Per the terms of the Kaiser Note, the principal balance is $50,000, and is not secured by any collateral
or any assets pledged to the holders. The maturity date is March 17, 2015, and the annual rate of interest is eight percent (8%).
Subject to certain limitations, the holder can, at his sole discretion, convert the outstanding and unpaid principal and interest
into fully paid and nonassessable shares of the Company’s common stock. The conversion price for the Kaiser Note is the
market closing price of the market day immediately preceding the date of conversion minus twenty percent (20%). We recorded a
discount totaling $10,000 related to the beneficial conversion feature embedded in the notes upon issuance. We amortized $4,167
of the discount to interest expense during the year ended September 30, 2015. In March 2015, the Company paid the outstanding
principal and accrued interest in satisfaction on the note of $50,000 and $4,000, respectively.



On
May 12, 2014, in connection with the 6% Notes, the Company issued a note for $40,000 to Kyle Tracey, which was recorded as a related
party convertible note payable. We recorded a discount totaling $16,000 related to the beneficial conversion feature embedded
in the 6% note to Mr. Tracey upon issuance. We amortized $6,667 of the discount to interest expense during the year ended
September 30, 2014. On October 28, 2014, the Company received a Notice of Conversion on the 6% Convertible Note issued on May
13, 2014 to Mr. Tracey (the “Tracey PPM Note”) as part of a private placement transaction in exchange for capital
of $40,000. Mr. Tracey converted principal of $40,000 and outstanding accrued and unpaid interest of $1,098 into 41,098 shares
of restricted common stock of the Company at a per share conversion price of $1.00 in accordance with the terms of the convertible
note. The conversion of the Tracey PPM Note was in full satisfaction of the note. The shares of common stock under the conversion
were issued by the Company on November 7, 2014. Upon conversion, we expensed the unamortized discount of $13,333 to interest expense.



On
May 12, 2014, the Company issued an 8% Convertible Note to Kyle Tracey for monies borrowed from Mr. Tracey to cover outstanding
accounts payable in the amount of $11,042 (the “Tracey Note II”). Per the terms of the Tracey Note II, the original
principal balance is $11,042, and was not secured by any collateral or any assets pledged to the holder. The maturity date was
May 12, 2016, and the annual rate of interest is eight percent (8%). Subject to certain limitations, the holder can, at its sole
discretion, convert the outstanding and unpaid principal and interest into fully paid and nonassessable shares of the Company’s
common stock. The conversion price for the Tracey Note II was the lowest market closing price per share within the previous twenty
(20) market days of the date of conversion minus a discount of forty percent (40%). We recorded a discount totaling $4,417 related
to the beneficial conversion feature embedded in the notes upon issuance. We amortized $920 of the discount to interest expense
during the year ended September 30, 2014. On October 28, 2014, the Company received a Notice of Conversion on the Tracey Note
II. Tracey converted principal of $11,042 and outstanding accrued and unpaid interest of $407 into 22,989 shares of restricted
common stock of the Company at a per share conversion price of $0.498 in accordance with the terms of the convertible note payable.
The conversion of the Tracey Note II was in full satisfaction of the note payable. The shares of common stock under the
conversion were issued by the Company on November 7, 2014. Upon conversion, we expensed the unamortized discount of $3,497 to
interest expense.





31







On
May 12, 2014, the Company issued an 8% Convertible Note to its Director of Business Development, Michael Cook, for monies borrowed
from Mr. Cook to cover outstanding accounts payable in the amount of $11,825 (the “Cook Note”). Per the terms of the
Cook Note, the original principal balance was $11,825, and was not secured by any collateral or any assets pledged to the holder.
The maturity date is May 12, 2016, and the annual rate of interest is eight percent (8%). Subject to certain limitations, the
holder can, at its sole discretion, convert the outstanding and unpaid principal and interest into fully paid and nonassessable
shares of the Company’s common stock. The conversion price for the Cook Note was the lowest market closing price per share
within the previous twenty (20) market days of the date of conversion minus a discount of forty percent (40%). We recorded a discount
totaling $4,730 related to the beneficial conversion feature embedded in the notes upon issuance. We amortized $985 of the discount
to interest expense during the year ended September 30, 2014. On October 28, 2014, the Company received a Notice of Conversion
on the “Cook Note. Mr. Cook converted principal of $11,825 and outstanding accrued and unpaid interest of $435 into 24,619
shares of restricted common stock of the Company at a per share conversion price of $0.498 in accordance with the terms of the
convertible note payable. The conversion of the Cook Note was in full satisfaction of the note payable. The shares of common stock
under the conversion were issued by the Company on November 7, 2014. Upon conversion, we expensed the unamortized discount of
$3,745 to interest expense.



On
August 11, 2014, the Company issued a second 8% Convertible Note to Mr. Cook for monies borrowed from Mr. Cook to cover outstanding
accounts payable in the amount of $15,115 (the “Cook Note II”). Per the terms of the Cook Note II, the original principal
balance was $15,115, and is was secured by any collateral or any assets pledged to the holder. The maturity date is August 11
2016, and the annual rate of interest is eight percent (8%). Subject to certain limitations, the holder can, at its sole discretion,
convert the outstanding and unpaid principal and interest into fully paid and nonassessable shares of the Company’s common
stock. The conversion price for the Cook Note II was the lowest market closing price per share within the previous twenty (20)
market days of the date of conversion minus a discount of forty percent (40%). We recorded a discount totaling $6,046 related
to the beneficial conversion feature embedded in the notes upon issuance. On October 28, 2014, the Company received a Notice of
Conversion on the Cook Note II. Mr. Cook converted principal of $15,115 and outstanding accrued and unpaid interest of $255 into
30,864 shares of restricted common stock of the Company at a per share conversion price of $0.498 in accordance with the terms
of the convertible note payable. The conversion of the Cook Note II was in full satisfaction of the note payable. The shares of
common stock under the conversion were issued by the Company on November 7, 2014. Upon conversion, we expensed the unamortized
discount of $5,542 to interest expense.



On
August 11, 2014, the Company issued an 8% Convertible Note to Mr. Tracey for monies borrowed from Mr. Tracey to cover outstanding
accounts payable in the amount of $216,001 (the “Tracey Note III”). Per the terms of the Tracey Note III, the original
principal balance was $216,001, and is not secured by any collateral or any assets pledged to the holder. The maturity date was
August 11, 2016, and the annual rate of interest is eight percent (8%). Subject to certain limitations, the holder can, at its
sole discretion, convert the outstanding and unpaid principal and interest into fully paid and nonassessable shares of the Company’s
common stock. The conversion price for the Tracey Note III was the lowest market closing price per share within the previous twenty
(20) market days of the date of conversion minus a discount of forty percent (40%). We recorded a discount totaling $86,401 related
to the beneficial conversion feature embedded in the notes upon issuance. On October 28, 2014, the Company received a Notice of
Conversion on the Tracey Note III. Mr. Tracey converted principal of $216,001 and outstanding accrued and unpaid interest of $3,645
into 441,057 shares of restricted common stock of the Company at a per share conversion price of $0.498 in accordance with the
terms of the convertible note payable. The shares of common stock under the conversion were issued by the Company on November
7, 2014. Upon conversion, we expensed the unamortized discount of $79,200 to interest expense.



Item
14.      Principal Accounting Fees and Services.



Audit
Fees



Vape
incurred audit and review fees of $56,000 and $43,000 for the periods ended September 30, 2015 and 2014 to dbbmckennon.



Audit
Related Fees



During
the year ended September 30, 2014, Vape paid $16,000 for audit related services to dbbmckennon in connection with the merger.





32







Tax
Fees



During
the year ended September 30, 2015 and 2014, Vape paid $4,500 and $3,000 for tax services to dbbmckennon.



All
Other Fees



As
of September 30, 2015 and 2014, 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.





33







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.



|                            | VAPE
    HOLDINGS, INC.
|--------------------------- | -----------------------
|                            |                        
|Date:  January
    13, 2016 | By:                    
|                            |                        
|                            |                        
|                            |                        
|Date:  January
    13, 2016 | By:                    
|                            |                        
|                            |                        



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.



|Signatures                    |  | Title                                            |  | Date                
|----------------------------- |  | ------------------------------------------------ |  | --------------------
|                              |  |                                                  |  |                     
|/s/
    Justin Braune         |  | Chief
    Executive Officer, Director            |  | January
    13, 2016
|Justin
    Braune             |  | (Principal
    Executive Officer)                |  |                     
|                              |  |                                                  |  |                     
|/s/
    Allan Viernes         |  | Chief
    Financial Officer, Director            |  | January
    13, 2016
|Allan
    Viernes             |  | (Principal
    Financial and Accounting Officer) |  |                     
|                              |  |                                                  |  |                     
|/s/
        Benjamin Beaulieu |  | Chief
    Operating Officer,                     |  | January
    13, 2016
|Benjamin
        Beaulieu     |  | Chairman of Board of Directors                   |  |                     





34







INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS



VAPE
HOLDINGS, INC.

(FORMERLY
PEOPLESTRING CORPORATION)

|Report of Independent Registered Public Accounting Firm                                          | F-2
|------------------------------------------------------------------------------------------------ | ---
|Consolidated Balance Sheets at September 30, 2015 and 2014                                       | F-3
|Consolidated Statements of Operations for the years ended September 30, 2015 and 2014            | F-4
|Consolidated Statements of Stockholders’ Deficit for the years ended September 30, 2015 and 2014 | F-5
|Consolidated Statements of Cash Flows for the years ended September 30, 2015 and 2014            | F-6
|Notes to Consolidated Financial Statements                                                       | F-7





F-1







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, 2015
and 2014, and the related consolidated statements of operations, stockholders’ deficit and cash flows for the years then
ended September 30, 2015 and 2014.  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,
2015 and 2014, 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, 2015.  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.





/s/ dbbmckennon

dbbmckennon

Newport Beach, California

January 13, 2016





F-2









Vape
Holdings, Inc.

Consolidated
Balance Sheets





|                                                                                                                                                                                                                       |  | September 30, 2015 |             |   | September 30, 2014 |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----------- | - | ------------------ | -
|ASSETS                                                                                                                                                                                                                 |  |                    |             |   |                    |  
|Current assets:                                                                                                                                                                                                        |  |                    |             |   |                    |  
|Cash                                                                                                                                                                                                                   |  | $                  | 273,904     |   |                    | $
|Accounts receivable                                                                                                                                                                                                    |  |                    | 72,401      |   |                    |  
|Inventory                                                                                                                                                                                                              |  |                    | 194,937     |   |                    |  
|Prepaid inventory                                                                                                                                                                                                      |  |                    | 64,079      |   |                    |  
|Other current assets                                                                                                                                                                                                   |  |                    | 40,679      |   |                    |  
|Deferred financing costs                                                                                                                                                                                               |  |                    | 107,908     |   |                    |  
|Total current assets                                                                                                                                                                                                   |  |                    | 753,908     |   |                    |  
|                                                                                                                                                                                                                       |  |                    |             |   |                    |  
|Fixed assets, net of accumulated depreciation                                                                                                                                                                          |  |                    | 118,327     |   |                    |  
|Trademarks                                                                                                                                                                                                             |  |                    | 123,150     |   |                    |  
|Pending patents                                                                                                                                                                                                        |  |                    | -           |   |                    |  
|Deferred financing costs, long-term                                                                                                                                                                                    |  |                    | 12,067      |   |                    |  
|TOTAL ASSETS                                                                                                                                                                                                           |  | $                  | 1,007,452   |   |                    | $
|                                                                                                                                                                                                                       |  |                    |             |   |                    |  
|LIABILITIES AND STOCKHOLDERS' DEFICIT                                                                                                                                                                                  |  |                    |             |   |                    |  
|Current liabilities:                                                                                                                                                                                                   |  |                    |             |   |                    |  
|Accounts payable                                                                                                                                                                                                       |  | $                  | 115,938     |   |                    | $
|Accrued expenses                                                                                                                                                                                                       |  |                    | 208,665     |   |                    |  
|Customer deposits                                                                                                                                                                                                      |  |                    | 1,275       |   |                    |  
|Convertible notes payable, net of unamortized discount of  $369,569 and $32,333, respectively                                                                                                                          |  |                    | 305,923     |   |                    |  
|Related party convertible notes payable, net of unamortized discount of $4,168 at September 30, 2014                                                                                                                   |  |                    | -           |   |                    |  
|Total current liabilities                                                                                                                                                                                              |  |                    | 631,801     |   |                    |  
|                                                                                                                                                                                                                       |  |                    |             |   |                    |  
|Long term liabilities:                                                                                                                                                                                                 |  |                    |             |   |                    |  
|Convertible notes payable, long-term, net of unamortized discount of $507,360 and $19,800, respectively                                                                                                                |  |                    | 458,404     |   |                    |  
|Related party convertible notes payable, long-term, net of  unamortized discount of $125,480 at September 30, 2014                                                                                                     |  |                    | -           |   |                    |  
|Related party notes payable, long-term                                                                                                                                                                                 |  |                    | 265,000     |   |                    |  
|Other liabilities, long-term                                                                                                                                                                                           |  |                    | 12,235      |   |                    |  
|Warrant liability                                                                                                                                                                                                      |  |                    | 25,025      |   |                    |  
|Total liabilities                                                                                                                                                                                                      |  |                    | 1,392,465   |   |                    |  
|                                                                                                                                                                                                                       |  |                    |             |   |                    |  
|Commitments and contingencies                                                                                                                                                                                          |  |                    |             |   |                    |  
|                                                                                                                                                                                                                       |  |                    |             |   |                    |  
|Stockholders' deficit:                                                                                                                                                                                                 |  |                    |             |   |                    |  
|Preferred stock, $0.00001 par value - 100,000,000 authorized;
500,000 outstanding at September 30, 2015 and September 30, 2014                                                                                         |  |                    | -           |   |                    |  
|Common stock, $0.00001 par value - authorized 1,000,000,000 shares; 19,896,521 issued at September 30, 2015, 19,455,896 outstanding at September 30, 2015, and 10,032,436 issued and outstanding at September 30, 2014 |  |                    | 192         |   |                    |  
|Additional paid-in capital                                                                                                                                                                                             |  |                    | 26,660,868  |   |                    |  
|Treasury stock, 690,625 shares at September 30, 2015                                                                                                                                                                   |  |                    | (435,031    | ) |                    |  
|Accumulated deficit                                                                                                                                                                                                    |  |                    | (26,611,042 | ) |                    |  
|Total stockholders' deficit                                                                                                                                                                                            |  |                    | (385,013    | ) |                    |  
|TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT                                                                                                                                                                            |  | $                  | 1,007,452   |   |                    | $



See
notes to consolidated financial statements.





F-3







Vape
Holdings, Inc.

Consoliated
Statements of Operations





|                                           |  | For the Year Ended September 30, |           
|------------------------------------------ |  | -------------------------------- | ----------
|                                           |  | 2015                             |           
|Revenue                                    |  | $                                | 1,277,657 
|                                           |  |                                  |           
|Cost of revenue [A]                        |  |                                  | 1,013,641 
|                                           |  |                                  |           
|Gross profit                               |  |                                  | 264,016   
|                                           |  |                                  |           
|Operating expenses:                        |  |                                  |           
|Sales and marketing [B]                    |  |                                  | 715,292   
|Research and development                   |  |                                  | 212,424   
|General and administrative [C]             |  |                                  | 2,127,594 
|Total operating expenses                   |  |                                  | 3,055,310 
|                                           |  |                                  |           
|Operating loss                             |  |                                  | (2,791,294
|                                           |  |                                  |           
|Other income (expense):                    |  |                                  |           
|Interest expense                           |  |                                  | (788,038  
|Interest expense - related party           |  |                                  | (148,562  
|Change in warrant liability                |  |                                  | 2,439,207 
|Gain on settlement                         |  |                                  | 625,461   
|Loss on debt extinguishments, net          |  |                                  | (564,712  
|Total other income (expense), net          |  |                                  | 1,563,356 
|                                           |  |                                  |           
|Loss before provision for income taxes     |  |                                  | (1,227,938
|                                           |  |                                  |           
|Provision for income taxes                 |  |                                  | 2,209     
|                                           |  |                                  |           
|Net loss                                   |  | $                                | (1,230,147
|                                           |  |                                  |           
|Net loss available to common shareholders: |  |                                  |           
|Loss per common share - basic              |  | $                                | (0.11     
|Loss per common share - diluted            |  | $                                | (0.11     
|                                           |  |                                  |           
|Weighted average shares - basic            |  |                                  | 11,563,247
|Weighted average shares - diluted          |  |                                  | 11,563,247





[A]
Stock-based compensation was $50,558 and $0 for the years ended September 30, 2015 and 2014, respectively.



[B]
Stock-based compensation was $156,086 and $0 for the years ended September 30, 2015 and 2014, respectively.



[C]
Stock-based compensation was $799,699 and $450,501 for the years ended September 30, 2015 and 2014, respectively.



See
notes to consolidated financial statements.





F-4









VAPE
HOLDINGS, INC.

CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ DEFICIT







|                                                                                   |  | Series
    A        |         |  |                  |   |   |         |  |  | Additional  |   |  |          |     |   |               |   |            | Total | 
|---------------------------------------------------------------------------------- |  | ------------------- | ------- |  | ---------------- | - | - | ------- |  |  | ----------- | - |  | -------- | --- | - | ------------- | - | ---------- | ----- | 
|                                                                                   |  | Preferred
    Stock |         |  | Common
    Stock |   |   | Paid-in |  |  | Accumulated |   |  | Treasury |     |   | Stockholders' |  
|                                                                                   |  | Shares              |         |  | Amount           |   |   | Shares  |  |  | Amount      |   |  | Capital  |     |   | Deficit       |   |            | Stock | 
|Balance at September
    30, 2013 - Prior to merger                                |  |                     | -       |  |                  | $ | - |         |  |  | 4,684,537   |   |  | $        | 46  |   |               | $ | -          |       | 
|Shares retained by PeopleString
    shareholders upon merger on September 30, 2013 |  |                     | -       |  |                  |   | - |         |  |  | 1,565,463   |   |  |          | 16  |   |               |   | -          |       | 
|Conversion of related
    party notes payable and accrued interest                 |  |                     | -       |  |                  |   | - |         |  |  | 571,630     |   |  |          | 7   |   |               |   | 341,538    |       | 
|Conversion of note payables
    and accrued interest                               |  |                     | -       |  |                  |   | - |         |  |  | 28,836      |   |  |          | -   |   |               |   | 55,586     |       | 
|Fair value of officer services                                                     |  |                     | -       |  |                  |   | - |         |  |  | -           |   |  |          | -   |   |               |   | 15,000     |       | 
|Common stock issued
    for services                                               |  |                     | -       |  |                  |   | - |         |  |  | 50,000      |   |  |          | -   |   |               |   | 133,200    |       | 
|Discount on convertible
    note payable at 10%                                    |  |                     | -       |  |                  |   | - |         |  |  | -           |   |  |          | -   |   |               |   | 4,424      |       | 
|Discount on convertible
    notes payable at 8%                                    |  |                     | -       |  |                  |   | - |         |  |  | -           |   |  |          | -   |   |               |   | 158,402    |       | 
|Discount on convertible
    note payable at 6%                                     |  |                     | -       |  |                  |   | - |         |  |  | -           |   |  |          | -   |   |               |   | 108,000    |       | 
|Discount on related
    party convertible note payable at 8%                       |  |                     | -       |  |                  |   | - |         |  |  | -           |   |  |          | -   |   |               |   | 193,217    |       | 
|Discount on related
    party convertible note payable at 6%                       |  |                     | -       |  |                  |   | - |         |  |  | -           |   |  |          | -   |   |               |   | 3,000      |       | 
|Common stock issued
    in connection with warrant settlement                      |  |                     | -       |  |                  |   | - |         |  |  | 3,542       |   |  |          | -   |   |               |   | 98,822     |       | 
|Cashless exercise of warrants                                                      |  |                     | -       |  |                  |   | - |         |  |  | 3,128,428   |   |  |          | 31  |   |               |   | 20,840,972 |       | 
|Stock-based compensation
    - employee options                                    |  |                     | -       |  |                  |   | - |         |  |  | -           |   |  |          | -   |   |               |   | 326,812    |       | 
|Stock-based compensation
    - non - employee options                              |  |                     | -       |  |                  |   | - |         |  |  | -           |   |  |          | -   |   |               |   | 123,689    |       | 
|Issuance of preferred
    stock for HIVE asset acquisition                         |  |                     | 500,000 |  |                  |   | - |         |  |  | -           |   |  |          | -   |   |               |   | -          |       | 
|Net
    loss                                                                       |  |                     | -       |  |                  |   | - |         |  |  | -           |   |  |          | -   |   |               |   | -          |       | 
|Balance at September 30, 2014                                                      |  |                     | 500,000 |  |                  | $ | - |         |  |  | 10,032,436  |   |  | $        | 100 |   |               | $ | 22,402,662 |       | 
|Conversion of related
    party notes payable and accrued interest                 |  |                     | -       |  |                  |   | - |         |  |  | 625,478     |   |  |          | 6   |   |               |   | 341,741    |       | 
|Conversion of notes
    payable and accrued interest                               |  |                     | -       |  |                  |   | - |         |  |  | 8,230,155   |   |  |          | 80  |   |               |   | 813,985    |       | 
|Conversion of unpaid
    wages                                                     |  |                     | -       |  |                  |   | - |         |  |  | 158,175     |   |  |          | 2   |   |               |   | 96,485     |       | 
|Common stock issued
    for services                                               |  |                     | -       |  |                  |   | - |         |  |  | 60,277      |   |  |          | 1   |   |               |   | 36,768     |       | 
|Common stock issued
    for bonuses                                                |  |                     | -       |  |                  |   | - |         |  |  | 440,000     |   |  |          | 6   |   |               |   | 288,196    |       | 
|Stock issued for settlement
    of accounts payable                                |  |                     | -       |  |                  |   | - |         |  |  | 100,000     |   |  |          | 1   |   |               |   | 99,999     |       | 
|Discount on convertible
    note payable at 12%                                    |  |                     | -       |  |                  |   | - |         |  |  | -           |   |  |          | -   |   |               |   | 142,800    |       | 
|Discount on convertible
    note payable at 10%                                    |  |                     | -       |  |                  |   | - |         |  |  | -           |   |  |          | -   |   |               |   | 252,079    |       | 
|Discount on convertible
    notes payable at 8%                                    |  |                     | -       |  |                  |   | - |         |  |  | -           |   |  |          | -   |   |               |   | 220,400    |       | 
|Discount on related
    party convertible note payable at 10%                      |  |                     | -       |  |                  |   | - |         |  |  | -           |   |  |          | -   |   |               |   | 641,666    |       | 
|Discount on related
    party convertible note payable at 6%                       |  |                     | -       |  |                  |   | - |         |  |  | -           |   |  |          | -   |   |               |   | 5,410      |       | 
|Extinguishment of related
    party accrued interest                               |  |                     | -       |  |                  |   | - |         |  |  | -           |   |  |          | -   |   |               |   | 1,625      |       | 
|Modification of convertible
    notes payable                                      |  |                     | -       |  |                  |   | - |         |  |  | -           |   |  |          | -   |   |               |   | 568,174    |       | 
|Stock-based compensation
    - employee options                                    |  |                     | -       |  |                  |   | - |         |  |  | -           |   |  |          | -   |   |               |   | 606,362    |       | 
|Stock-based compensation
    - non-employee options                                |  |                     | -       |  |                  |   | - |         |  |  | -           |   |  |          | -   |   |               |   | 75,012     |       | 
|Issuance of common stock
    for BetterChem Acquisition                            |  |                     | -       |  |                  |   | - |         |  |  | 250,000     |   |  |          | 3   |   |               |   | 67,497     |       | 
|Unwinding of BetterChem
    Acquisition                                            |  |                     | -       |  |                  |   | - |         |  |  | (250,000    | ) |  |          | (3  | ) |               |   | 3          |       | 
|Surrender of common
    stock                                                      |  |                     | -       |  |                  |   | - |         |  |  | (440,625    | ) |  |          | (4  | ) |               |   | 4          |       | 
|Net
    income                                                                     |  |                     | -       |  |                  |   | - |         |  |  | -           |   |  |          | -   |   |               |   | -          |       | 
|Balance at September
    30, 2015                                                  |  |                     | 500,000 |  |                  | $ | - |         |  |  | 19,205,896  |   |  | $        | 192 |   |               | $ | 26,660,868 |       | 





See
notes to consolidated financial statements.



F-5









Vape
Holdings, Inc.

Consolidated
Statements of Cash Flows







|                                                                                                        |  | For the Year Ended September 30, |           
|------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ----------
|                                                                                                        |  | 2015                             |           
|Cash flows from operating activities:                                                                   |  |                                  |           
|Net loss                                                                                                |  | $                                | (1,230,147
|Adjustments to reconcile net loss to net cash used in operating activities:                             |  |                                  |           
|Depreciation                                                                                            |  |                                  | 71,305    
|Accretion of debt discounts and deferred financing costs                                                |  |                                  | 695,795   
|Fair value in excess of stock issued for conversion of notes payable and accrued interest               |  |                                  | 15,895    
|Fair value in excess of stock issued for conversion of related party notes payable and accrued interest |  |                                  | 22,128    
|Gain on change in warrant liability                                                                     |  |                                  | (2,439,207
|Gain on settlement                                                                                      |  |                                  | (625,461  
|Loss on debt extinguishments, net                                                                       |  |                                  | 564,712   
|Fair value of officer services                                                                          |  |                                  | -         
|Common stock issued for services                                                                        |  |                                  | 36,769    
|Stock-based compensation                                                                                |  |                                  | 969,577   
|Changes in operating assets and liabilities:                                                            |  |                                  |           
|Accounts receivable                                                                                     |  |                                  | (55,630   
|Inventory                                                                                               |  |                                  | 215,005   
|Other assets                                                                                            |  |                                  | 25,554    
|Accounts payable                                                                                        |  |                                  | 194,549   
|Accrued expenses                                                                                        |  |                                  | 301,001   
|Net cash used in operating activities                                                                   |  |                                  | (1,238,155
|                                                                                                        |  |                                  |           
|Cash flows from investing activities:                                                                   |  |                                  |           
|Capital expenditures                                                                                    |  |                                  | (83,255   
|Purchase of trademarks                                                                                  |  |                                  | (10,818   
|Net proceeds from settlement                                                                            |  |                                  | 62,930    
|Net cash used in investing activities                                                                   |  |                                  | (31,143   
|                                                                                                        |  |                                  |           
|Cash flows from financing activities:                                                                   |  |                                  |           
|Net proceeds from issuance of convertible note payable                                                  |  |                                  | 1,657,660 
|Net proceeds from issuances of related party convertible notes payable                                  |  |                                  | -         
|Net proceeds from issuances of related party notes payable                                              |  |                                  | -         
|Repayments on convertible notes payable                                                                 |  |                                  | (40,000   
|Repayments on related party convertible notes payable                                                   |  |                                  | (50,000   
|Repayments on related party notes payable                                                               |  |                                  | (72,828   
|Net cash provided by financing activities                                                               |  |                                  | 1,494,832 
|                                                                                                        |  |                                  |           
|Net change in cash                                                                                      |  |                                  | 225,534   
|Cash, beginning of period                                                                               |  |                                  | 48,370    
|Cash, end of period                                                                                     |  | $                                | 273,904   
|                                                                                                        |  |                                  |           
|Supplemental disclosures of cash flow information Cash paid during the period for:                      |  |                                  |           
|Interest                                                                                                |  | $                                | 18,788    
|Taxes                                                                                                   |  | $                                | 2,209     
|                                                                                                        |  |                                  |           
|Non-cash investing and financing activities:                                                            |  |                                  |           
|Conversion of notes payable and accrued interest                                                        |  | $                                | 814,065   
|Conversion of related party notes payable and accrued interest                                          |  | $                                | 341,747   
|Issuance of convertible note payable for services                                                       |  | $                                | -         
|Issuance of convertible note payable for  former officer services                                       |  | $                                | -         
|Issuance of common stock in connection with warrant settlement                                          |  | $                                | -         
|Beneficial conversion feature recorded with convertible notes payable                                   |  | $                                | 615,279   
|Beneficial conversion feature recorded with related party convertible note payable                      |  | $                                | 647,076   





See
notes to consolidated financial statements.





F-6







VAPE HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



BUSINESS



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





HIVE CERAMICS



HIVE Ceramics (“HIVE”)
is the premier brand under the VAPE umbrella. HIVE 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. The HIVE product
line currently consists of over 15 distinct ceramic elements, including the 2 piece domeless, domeless direct inject, and HIVE’s
signature domeless elements covering 10mm, 14mm and 18mm applications as well as regular elements, the HIVE Flower Cup, the HIVE
Carb Cap, HIVE Stinger Dabber, the 14mm HIVE x Quave - Club Banger, and the HIVE x D-Nail 16mm and 20mm attachments.



The Company has
recently launched ‘HIVE Glass.’ HIVE Glass is VAPE’s newest line of products under the HIVE brand name. The
HIVE GLASS line is precision made using state of the art manufacturing processes and techniques, and exclusively uses German
Schott glass caliber and fittings through all production phases. The aim with HIVE Glass is to create an affordable, high quality
glass product that is both aesthetically pleasing and a highly functional vaporization product. VAPE’s existing customer
base and distribution network will be the catalyst for expansion of this new HIVE product line. Under HIVE Glass, the Company
also buys and sells high-end collector pieces. Subsequent to year end, the Company curtailed the product line in order to focus
on HIVE Ceramics.



VAPE has also recently
launched ‘HIVE Supply.’ HIVE Supply is a packaging and sourcing division of VAPE designed to serve as a competitively
priced, comprehensive “one-stop shop” for all medical and recreational marijuana packaging needs. As with all of VAPE’s
products, HIVE Supply will operate in full compliance with all federal laws and the laws of each individual state in which it
does business. HIVE Supply will focus on providing much-needed support to cannabis businesses in regards to sourcing consumer
products, brand management and marketing services. HIVE Supply is currently operated out of three (3) locations: HIVE Supply
in Southern California, HIVE Supply Washington in Spokane and HIVE Supply Oregon in Portland. Under HIVE Supply, the Company
also buys and sells high-end manufacturing machines. Subsequent to year end, the Company curtailed the product line in order to
focus on HIVE Ceramics.



In connection with
its launch of HIVE Supply and HIVE Glass, the Company opened ‘THE HIVE’ retail store and gallery in Los Angeles, an
end-user experience to showcase the complete line of HIVE Ceramics and HIVE Glass products, while introducing HIVE Supply
and all the new products being tested and developed through each vertical. Subsequent to year end, the Company curtailed its retail
store in order to reduce overhead costs and focus on HIVE Ceramics.





F-7









The Company intends to
rely on a combination of trademark, copyright, trade secret and patent laws in the United States as well as confidentiality procedures
and contractual provisions to protect future proprietary technology and its brands, as they are developed.  The Company
has created or acquired and continues in the process of creating and/or acquiring proprietary vaporizers and e-cigarettes, and
various trademarks, patents and copyrights for brands which are developed or in development.  The Company is actively
engaged in improving and expanding lines of branded products through business alliances and acquisitions, as well as developing
its branded retail business expansion.  VAPE and its business units are organized and directed to operate strictly in
accordance with all applicable state and federal laws.



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 disposable cartridge complement HIVE Ceramic’s product lines utilizing its
sales and distribution channels and via its own designated e-commerce site at www.revivalvapes.com.



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. The Company
acquired an 80% controlling interest of the business in order to expand its science consulting segment and research and development.
BetterChem had no assets and liabilities upon closing.



An additional up to 150,000
shares of common stock to be issued to Dr. Scialdone will be subject to the following terms:



| | 1. | Due
    to the uncertain nature of the valuation of BetterChem, a privately held consulting business, the parties have agreed that
    Dr. Scialdone shall have a nonassignable contingent contractual right to receive additional shares contingent on the future
    gross revenues of BetterChem as follows:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. | On
    the one year anniversary of the closing, Dr. Scialdone shall be entitled to an additional 75,000 shares if BetterChem has
    generated at least $100,000 in gross revenues beginning on the date of closing and up to the one year anniversary of the closing.
    The additional stock issuance will be calculated on a pro rata basis (i.e. If BetterChem only generates $50,000 in gross revenues
    in the first year then Dr. Scialdone will be entitled to only 37,500 shares).
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





F-8







| | b. | On
    the two year anniversary of the closing, Dr. Scialdone shall be entitled to an additional 75,000 shares if BetterChem has
    generated at least $100,000 in gross revenues beginning on the one year anniversary of the closing up to the two year anniversary
    of the closing. The additional stock issuance will be calculated on a pro rata basis (i.e. If BetterChem only generates $50,000
    in gross revenues in the second year then Dr. Scialdone will be entitled to only 37,500 shares).
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | In
    the event of a change in control of BetterChem or a sale of all or substantially all of the assets of BetterChem during the
    two year period, the additional 150,000 shares shall automatically vest and be payable in full to Dr. Scialdone and any salary
    compensation due Dr. Scialdone under the 2 year term of his employment agreement with the Company dated May 1, 2015, or extensions
    of that Employment Agreement which the parties may thereafter execute, shall be accelerated and shall be due and payable in
    full within 30 days of the event of change in control of BetterChem.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In connection with
the Share Exchange Agreement, on July 1, 2015, Dr. Scialdone and the Company entered into an Intellectual Property Rights Transfer
Agreement (the “I.P. Agreement”) whereby Dr. Scialdone agreed to transfer and assign to Company the entire right,
title and interest in and to any and all intellectual property in which Dr. Scialdone has a right to convey an interest, including
intellectual property conceived, developed, reduced to practice, assigned or acquired by Dr. Scialdone prior to the date of the
I.P. Agreement as well as intellectual property held, conceived, developed, reduced to practice, assigned or acquired by BetterChem.
There were no assets or liabilities assumed by the Company. 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 and reflected such as of September
30, 2015 in the consolidated financial statements. As of September 30, 2015, the 250,000 shares issued to BetterChem were recorded
as treasury stock valued at $67,500 as a result of the settlement to receive the shares back as part of the unwind.



VAPE is organized
and directed to operate strictly in accordance with all applicable state and federal laws. Subsequent to year end, the Company
abandoned such plans in order to reduce overhead costs and focus on HIVE Ceramics.



Subsequent to the
Company’s fiscal year ended September 30, 2015, the Company began taking steps to curtail its Offset, HIVE Glass and HIVE
Supply business lines to focus more on consumer vaporization products including the launch of “Revival” discussed above.
The Company also curtailed its ‘THE HIVE’ retail store in order to reduce overhead costs and focus on HIVE Ceramics.
Moreover, the Company curtailed its exploration into providing real estate, management and consulting solutions to the legal cannabis
industry in states where such cannabis cultivation and extraction is legal. The Company was never able to execute on any of these
plans and ultimately determined that the Company’s capital reserves for such projects as well as the risks inherent in each
project due to the current regulatory environment surrounding the cannabis industry made this line of business too difficult to
pursue.



BASIS OF PRESENTATION



The accompanying
unaudited interim consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of
the SEC. Certain information and disclosures normally included in the annual financial statements prepared in accordance with
the accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules
and regulations. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these consolidated
financial statements have been included. Such adjustments consist of normal recurring adjustments. The current results are not
an indication of the full year.



CONSOLIDATION



The consolidated
financial statements include the assets, liabilities, and operating results of the Company and its wholly-owned subsidiaries,
HIVE Ceramics, 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 90% 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.





F-9







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 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,
2015 and 2014. 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, 2015:



|                                         |  | Level 1 |         |  | Level 2 |   |        | Level 3 |  |   | Total | 
|---------------------------------------- |  | ------- | ------- |  | ------- | - | ------ | ------- |  | - | ----- | 
|Assets                                   |  |         |         |  |         |   |        |         |  |   |       | 
|Cash  and cash equivalents               |  | $       | 273,904 |  |         | $ | -      |         |  | $ | -     | 
|Total assets measured at fair value      |  | $       | 273,904 |  |         | $ | -      |         |  | $ | -     | 
|                                         |  |         |         |  |         |   |        |         |  |   |       | 
|Liabilities                              |  |         |         |  |         |   |        |         |  |   |       | 
|Derivative instruments                   |  | $       | -       |  |         | $ | 25,025 |         |  | $ | -     | 
|Total liabilities measured at fair value |  | $       | -       |  |         | $ | 25,025 |         |  | $ | -     | 



The following table
presents the Company’s fair value hierarchy for assets and liabilities measured at fair value on a recurring basis at September
30, 2014:



|                                         |  | Level 1 |        |  | Level 2 |   |           | Level 3 |  |   | Total | 
|---------------------------------------- |  | ------- | ------ |  | ------- | - | --------- | ------- |  | - | ----- | 
|Assets                                   |  |         |        |  |         |   |           |         |  |   |       | 
|Cash and cash equivalents                |  | $       | 48,370 |  |         | $ | -         |         |  | $ | -     | 
|Total assets measured at fair value      |  | $       | 48,370 |  |         | $ | -         |         |  | $ | -     | 
|                                         |  |         |        |  |         |   |           |         |  |   |       | 
|Liabilities                              |  |         |        |  |         |   |           |         |  |   |       | 
|Derivative instruments                   |  | $       | -      |  |         | $ | 2,464,232 |         |  | $ | -     | 
|Total liabilities measured at fair value |  | $       | -      |  |         | $ | 2,464,232 |         |  | $ | -     | 





F-10







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



One (1) customer
accounted for 37% of our accounts receivable as of September 30, 2015. The loss of this customer would have a significant impact
on the Company’s financial results.



Suppliers



One (1) supplier
accounted for 54% of our purchases during the year ended September 30, 2015. We purchased $60,000 in high-end glass from Kyle
Tracey for HIVE Glass, which accounted for 10% of purchases during the year ended September 30, 2015. The loss of these suppliers
would have a significant impact on the Company’s financial results.





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.



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.



We purchase product
sourced from China which we are required to pay 50% upon placing the order. Amounts paid for products, which have not been received,
are recorded as prepaid inventory. There are no amounts paid which are in dispute or considered impaired.



FIXED ASSETS



Fixed assets are
recorded at cost and depreciation is provided over the estimated useful lives of the related assets using the straight-line method
for financial statement purposes. The estimated life of tooling related to our ceramic products is three (3) years. The estimated
life of our leasehold improvements is the lesser of the term of the related lease and useful life.





F-11







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 year ended September 30, 2015 and 2014, the Company recorded $22,133 and $0 of impairment of its pending patents 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 year ended September 30, 2015 and 2014,
research and development costs were $212,424 and $45,757, respectively.





CONVERTIBLE DEBT



Convertible debt
is accounted for under the guidelines established by ASC 470-20 “Debt with Conversion and Other Options.” ASC 470-20
governs the calculation of an embedded beneficial conversion, which is treated as an additional discount to the instruments where
derivative accounting (explained below) does not apply. The amount of the value of warrants and beneficial conversion feature
may reduce the carrying value of the instrument to zero, but no further. The discounts relating to the initial recording of the
derivatives or beneficial conversion features are accreted over the term of the debt.  Many   of the conversion
features embedded in the Company's convertible 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.  The management and board of directors currently have
the ability to authorize additional shares of common stock primarily through their super voting rights under the Series A Preferred
stock (See “NOTE 8 - STOCKHOLDERS’ DEFICIT”).



When applicable,
the Company calculates the fair value of warrants and conversion features issued with the convertible instruments using the Black-Scholes
valuation method, using the same assumptions used for valuing employee options for purposes of ASC 718 “Compensation - Stock
Compensation”, except that the contractual life of the warrant or conversion feature is used. Under these guidelines, the
Company allocates the value of the proceeds received from a convertible debt transaction between the conversion feature and any
other detachable instruments (such as warrants) on a relative fair value basis. The allocated fair value is recorded as a debt
discount or premium and is amortized over the expected term of the convertible debt to interest expense. If the fair value exceeds
the carrying value of the debt, an immediate charge to operations is recorded by management.  Each reporting period,
the Company will compute the estimated fair value of derivatives and record changes to operations. Currently no instruments are
being recorded as such.



The Company accounts
for modifications of its BCF’s 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 or the associated debt instrument when the modification does not result in a debt extinguishment.





F-12







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.



EARNINGS 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 if the Company generated net income for the
year ended September 30, 2015 and 2014:



|                         |  | For the Year Ended |            |  | For the Year Ended | 
|------------------------ |  | ------------------ | ---------- |  | ------------------ | 
|                         |  | September 30,      |            |  | September 30,      | 
|                         |  | 2015               |            |  | 2014               | 
|Series A Preferred stock |  |                    | 500,000    |  |                    | 
|Common stock options     |  |                    | -          |  |                    | 
|Common stock warrants    |  |                    | 1,184,727  |  |                    | 
|Convertible notes        |  |                    | 79,699,946 |  |                    | 
|                         |  |                    | 81,384,673 |  |                    | 





F-13







The Company would
have excluded 125,000 options from the computation for the year ended September 30, 2014 as their exercise prices were in excess
of the average closing market price of the Company’s common stock, causing their effects to be anti-dilutive using the treasury
stock method.



STOCK-BASED COMPENSATION



ASC 718, “Share-Based
Payment” requires that compensation cost related to share-based payment transactions be recognized in the consolidated financial
statements. Share-based payment transactions within the scope of ASC 718 include stock options, restricted stock plans, performance-based
awards, stock appreciation rights, and employee share purchase plans.



The Company adopted
ASC 718, which requires disclosure of the fair value and other characteristics of stock options and more prominent disclosure
about the effects of an entity’s accounting policy decisions with respect to stock-based compensation on reported net loss.
The Company has reflected the expense of such stock based compensation based on the fair value at the grant date for awards consistent
with the provisions of ASC 718.



In connection with
the adoption of ASC 718, the fair value of our share-based compensation has been determined utilizing the Black-Scholes pricing
model. The fair value of the options granted is amortized as compensation expense on a straight line basis over the requisite
service period of the award, which is generally the vesting period. The fair value calculations involve significant judgments,
assumptions, estimates and complexities that impact the amount of compensation expense to be recorded in current and future periods.
Upon option exercise, the Company issues new shares of stock.



The following weighted
average variables were used in the Black Scholes model for all option issuances valued during the year ended September 30, 2015
and 2014:



|Year Ended September
    30, |  | Stock
    Price at Grant Date |      |  | Dividend 
    Yield |    | Exercise
    Price |   |      | Risk
    Free Interest Rate |  |  | Volatility |   |  | Average
    Life |    
|---------------------------- |  | ----------------------------- | ---- |  | ------------------- | -- | ------------------ | - | ---- | --------------------------- |  |  | ---------- | - |  | ---------------- | ---
|2015                         |  | $                             | 0.73 |  |                     | -% |                    | $ | 0.73 |                             |  |  | 2.2        | % |  |                  | 380
|2014                         |  | $                             | 1.66 |  |                     | -% |                    | $ | 1.66 |                             |  |  | 2.5        | % |  |                  | 401



The Company's accounting
policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of Emerging
Issues Task Force (“EITF”) 96-18, “Accounting for Equity Instruments That are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling, Goods or Services”, codified into ASC 505-50.  The measurement
date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for
performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor's performance is complete.  In
the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the
consulting agreement.



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.



In August 2014,
the FASB issued ASU 2014-15, which provides guidance on determining when and how to disclose going-concern uncertainties in the
financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability
to continue as a going concern within one year of the date the financial statements are issued.2 An entity must provide certain
disclosures if “conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.”
The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter,
with early adoption permitted.





F-14







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



Although forward-looking
statements in this Quarterly Report reflect our good faith judgment, such statements can only be based on facts and factors currently
known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and
outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors
that could cause or contribute to such differences in results and outcomes include without limitation those discussed under the
heading “Risk Factors” below, as well as those discussed elsewhere in this Quarterly Report. Readers are urged not
to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report. We undertake
no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise
after the date of this Quarterly Report. Readers are urged to carefully review and consider the various disclosures made in this
Quarterly Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial
condition, results of operations and prospects.



NOTE 2. GOING CONCERN



VAPE’s consolidated
financial statements reflect a net loss of $1,230,147 during the year ended September 30, 2015. As of September 30, 2015, we had
cash of $273,904 and working capital of $122,107. VAPE has suffered an accumulated deficit of $26,411,042 and subsequent to the
Company’s fiscal year ended September 30, 2015, the Company began taking steps to curtail its Offset, HIVE Glass and HIVE
Supply business lines to focus more on consumer vaporization products including the launch of “Revival” discussed
above. The Company also curtailed its ‘THE HIVE’ retail store in order to reduce overhead costs and focus on HIVE
Ceramics. Moreover, the Company curtailed its exploration into providing real estate, management and consulting solutions to the
legal cannabis industry in states where such cannabis cultivation and extraction is legal. The Company was never able to execute
on any of these plans and ultimately determined that the Company’s capital reserves for such projects as well as the risks
inherent in each project due to the current regulatory environment surrounding the cannabis industry made this line of business
too difficult to pursue. All of which have resulted in losses and opportunity costs. In addition, the ongoing need to obtain financing
to fund operations also raise substantial doubt about the ability of Vape to continue as a going concern. Management expects to
obtain funding for the new operations for the foreseeable future; however, there are no assurances that the Company will obtain
such funding. VAPE’s financial statements do not include any adjustments to reflect the possible effects on recoverability
and classification of assets or the amounts and classification of liabilities that may result from the inability to continue as
a going concern. See Note 11 for subsequent events regarding financing activities.



NOTE 3. FIXED ASSETS



The following is
a summary of fixed assets as of September 30, 2015 and 2014:





|                         |  | September 30, 2015 |         |   | September 30, 2014 |  
|------------------------ |  | ------------------ | ------- | - | ------------------ | -
|Molds and Tooling        |  | $                  | 176,015 |   |                    | $
|Leasehold improvements   |  |                    | 29,795  |   |                    |  
|Accumulated depreciation |  |                    | (87,483 | ) |                    |  
|                         |  | $                  | 118,327 |   |                    | $



During the year
ended September 30, 2015 and 2014, depreciation expense included in cost of revenue were $71,305 and $16,178, respectively.





F-15







NOTE 4. ACCRUED EXPENSES



The following is
a summary of accrued expenses as of September 30, 2015 and 2014:





|                                 |  | September 30, 2015 |         |  | September 30, 2014 |  
|-------------------------------- |  | ------------------ | ------- |  | ------------------ | -
|Accrued interest                 |  | $                  | 46,337  |  |                    | $
|Accrued interest - related party |  |                    | 24,538  |  |                    |  
|Accrued wages and taxes          |  |                    | 112,322 |  |                    |  
|Other                            |  |                    | 25,468  |  |                    |  
|                                 |  | $                  | 208,665 |  |                    | $



As of September
30, 2015 and 2014, the Company recorded accrued wages and taxes for Kyle Tracey of $55,000 and $59,273, Joe Andreae of $14,667
and $0, Allan Viernes of $1,833 and $0, and Benjamin Beaulieu of $1,833 and $0, respectively.





NOTE 5.   THIRD PARTY
DEBT



CONVERTIBLE NOTES PAYABLE



Beginning on February
11, 2014, the Company issued 6% Convertible Notes (the “6% Notes”) pursuant to subscription agreements to ten (10)
accredited investors (the “Holders”) with the aggregate principal amount of $230,000. The 6% Notes are not secured
by any collateral or any assets pledged to the Holders. The maturity dates are from February 28, 2015 to March 31, 2015, and the
annual rate of interest is six percent (6%). Subject to certain limitations, the Holders can, at their sole discretion, convert
the outstanding and unpaid principal and interest of their notes into fully paid and nonassessable shares of the Company’s
common stock. The conversion price of these 6% Notes is the average of the fifteen (15) lowest daily VWAP’s occurring during
the twenty (20) consecutive trading days immediately preceding the date each Holder elects convert all of their 6% Note minus
a discount of 40%. In no event will the conversion price be less than $1.00 per share or greater than $3.00 per share. The Company
had a preexisting relationship with each of the Holders, and no general solicitation or advertising was used in connection with
the issuance of the 6% Notes. We recorded a discount totaling $92,000 related to the beneficial conversion feature embedded in
the notes upon issuance and amortized $32,333 and $57,667 of the discount to interest expense during the year ended September
30, 2015 and 2014, respectively.



On March 12, 2015,
the Company offered to pay accrued interest and modify the terms of the six (6) Holders’ outstanding 6% Notes, decreasing
the conversion floor from $1.00 to $0.50 in order to encourage the noteholders to convert their promissory notes. The Company
recorded a loss on debt extinguishment of $23,443 as a result of the fair value in excess of the modified conversion floor. In
March 2015, the Company paid all accrued interest on the 6% notes of $17,200. Five (5) of the six (6) holders converted in full
a total of $80,000 of 6% Notes into 160,000 shares of common stock. The remaining note holder partially converted $20,000 of 6%
Notes into 40,000 of common shares and extended the terms on the remaining $30,000 for six (6) months. As of September 30, 2015,
there is $1,010 in accrued interest expense related to the one (1) remaining note and the Company recorded $1,010 in interest
expense related to the 6% note during the year ended September 30, 2015. On December 14, 2015, the note holder converted
$30,000 in principal and $1,351 of accrued interest into 13,063,013 shares of common stock. As a result of the subsequent conversion
the principal balance and accrued interest as of September 30, 2015 were classified as long-term.





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. We amortized $27,778 of the discount to interest expense during the year ended
September 30, 2015. In addition, the Company recorded $45,940 in deferred financing costs and amortized $25,522 to interest expense
during the year ended September 30, 2015. As of September 30, 2015, the Company had unamortized costs of $20,418 in current deferred
financing costs. The deferred financing costs are amortized through the maturity date.







F-16







The Note bears
interest at the rate of 10% per annum and is convertible into common stock of the Company at a conversion price per share of 70%
of the average of the three (3) lowest Closing Sale Prices in the ten (10) Trading Days immediately preceding the applicable Conversion
(subject to adjustment in the event of stock splits, stock dividends, and similar transactions, and in the event of subsequent
sales of common stock at a lower purchase price (subject to certain exceptions))(the “Conversion Price”). In no event
will the Conversion Price be less than $0.50 per share. Repayment of principal on the Note, together with accrued interest thereon,
is due in twelve monthly installments, commencing six months from issuance. The Company may make such payments in cash (in which
event the Company will pay a 25% premium) or, subject to certain conditions, in shares of common stock valued at the lower of
the Conversion Price or 70% of the average of the three (3) lowest Closing Sale Prices in the ten (10) Trading Days immediately
preceding the applicable payment date (the “Amortization Conversion Rate”). The Maturity Date of the Note is seventeen
months from the date of issuance. We recorded a discount totaling $168,000 related to the beneficial conversion feature embedded
in the note upon issuance. 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. As a result,
we expensed the unamortized discount of $168,000 to interest expense, recorded a loss on debt extinguishment of $158,916, and
recorded a new discount of $242,916. We amortized $30,365 of the discount to interest expense during the year ended September
30, 2015. 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. See Note 11 to the consolidated financial statements.



Between June 2015
and September 2015, the Company issued the following conversions for payment towards Investor:





|Conversion Date    |  | Principal  Converted |         |  | Accrued  Interest  Converted |   |        | Total  Converted |  |   | Conversion  Rate |  |  | Common  Shares  Issued |      
|------------------ |  | -------------------- | ------- |  | ---------------------------- | - | ------ | ---------------- |  | - | ---------------- |  |  | ---------------------- | -----
|June 4, 2015       |  | $                    | 46,667  |  |                              | $ | 28,871 |                  |  | $ | 75,538           |  |  | $                      | 0.342
|July 3, 2015       |  |                      | 46,667  |  |                              |   | 4,295  |                  |  |   | 50,962           |  |  | $                      | 0.194
|August 11, 2015    |  |                      | 25,000  |  |                              |   | -      |                  |  |   | 25,000           |  |  | $                      | 0.138
|September 3, 2015  |  |                      | 25,000  |  |                              |   | -      |                  |  |   | 25,000           |  |  | $                      | 0.056
|September 23, 2015 |  |                      | 25,000  |  |                              |   | -      |                  |  |   | 25,000           |  |  | $                      | 0.041
|September 29, 2015 |  |                      | 23,000  |  |                              |   | -      |                  |  |   | 23,000           |  |  | $                      | 0.015
|                   |  | $                    | 191,334 |  |                              | $ | 33,166 |                  |  | $ | 224,500          |  |  |                        |      



Subsequent to year
end, the Investor also enacted the following conversions:





|Conversion Date   |  | Principal  Converted |         |  | Accrued  Interest  Converted |   |   | Total  Converted |  |   | Conversion  Rate |  |  | Common  Shares  Issued |      
|----------------- |  | -------------------- | ------- |  | ---------------------------- | - | - | ---------------- |  | - | ---------------- |  |  | ---------------------- | -----
|October 8, 2015   |  | $                    | 21,000  |  |                              | $ | - |                  |  | $ | 21,000           |  |  | $                      | 0.012
|October 16, 2015  |  |                      | 18,900  |  |                              |   | - |                  |  |   | 18,900           |  |  | $                      | 0.012
|October 22, 2015  |  |                      | 25,800  |  |                              |   | - |                  |  |   | 25,800           |  |  | $                      | 0.011
|October 29, 2015  |  |                      | 22,460  |  |                              |   | - |                  |  |   | 22,460           |  |  | $                      | 0.011
|November 11, 2015 |  |                      | 33,500  |  |                              |   | - |                  |  |   | 33,500           |  |  | $                      | 0.007
|November 18, 2015 |  |                      | 24,000  |  |                              |   | - |                  |  |   | 24,000           |  |  | $                      | 0.006
|November 30, 2015 |  |                      | 30,000  |  |                              |   | - |                  |  |   | 30,000           |  |  | $                      | 0.005
|December 11, 2015 |  |                      | 22,000  |  |                              |   | - |                  |  |   | 22,000           |  |  | $                      | 0.002
|December 28, 2015 |  |                      | 22,500  |  |                              |   | - |                  |  |   | 22,500           |  |  | $                      | 0.002
|January 7, 2016   |  |                      | 20,000  |  |                              |   | - |                  |  |   | 20,000           |  |  | $                      | 0.002
|                  |  | $                    | 240,160 |  |                              | $ | - |                  |  | $ | 240,160          |  |  |                        |      



As a result, as
of September 30, 2015, $46,671 and $87,221, net of total unamortized discounts of $81,835 and $152,939 are classified as current
and long-term on the accompanying consolidated balance sheet. As of September 30, 2015, there is $9,945 in accrued interest expense
related to this note and the Company recorded $43,111 in interest expense related to this note during the year ended September
30, 2015.





F-17







$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.



The $2M Note bears
interest at the rate of 10% per annum and is immediately convertible into common stock of the Company at a conversion price per
share of 70% of the lowest daily VWAP in the ten (10) Trading Days immediately preceding the applicable Conversion (subject to
adjustment in the event of stock splits, stock dividends, and similar transactions, and in the event of subsequent sales of common
stock at a lower purchase price (subject to certain exceptions))(the “Conversion Price”). In no event will the Conversion
Price be less than $0.50 per share. Repayment of principal on the $2M Note, together with accrued interest thereon, is due in
twelve bi-monthly installments, commencing approximately six months from issuance. The Company may make such payments in cash
(in which event the Company will pay a 25% premium) or, subject to certain conditions, in shares of common stock valued at the
lower of the Conversion Price or 70% of the lowest daily VWAP in the ten (10) Trading Days immediately preceding the applicable
payment date (the “Amortization Conversion Rate”). The Maturity Date of the $2M Note is twelve months from the date
of issuance.





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. We amortized $45,600 of the discount to interest expense during the year ended September
30, 2015. In addition, we recorded a discount totaling $108,641 related to the beneficial conversion feature embedded in the note
upon issuance.



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 $108,641 to interest expense, recorded a loss on debt extinguishment of $385,815, and recorded
a new discount of $440,000. We amortized $94,131 of the discount to interest expense during the year ended September 30, 2015.





F-18







The following is
summary of conversions by the $2M Note holder during the year ended September 30, 2015:





|Conversion Date    |  | Principal Converted |         |  | Accrued  Interest Converted |   |   | Total Converted |  |   | Conversion Rate |  |  | Common Shares Issued |      
|------------------ |  | ------------------- | ------- |  | --------------------------- | - | - | --------------- |  | - | --------------- |  |  | -------------------- | -----
|August 13, 2015    |  | $                   | 50,000  |  |                             |   | - |                 |  | $ | 50,000          |  |  | $                    | 0.127
|August 26, 2015    |  |                     | 25,000  |  |                             |   | - |                 |  |   | 25,000          |  |  | $                    | 0.056
|September 8, 2015  |  |                     | 25,000  |  |                             |   | - |                 |  |   | 25,000          |  |  | $                    | 0.056
|September 14, 2015 |  |                     | 25,000  |  |                             | $ | - |                 |  |   | 25,000          |  |  | $                    | 0.053
|September 16, 2015 |  |                     | 10,000  |  |                             |   | - |                 |  |   | 10,000          |  |  | $                    | 0.053
|September 17, 2015 |  |                     | 25,000  |  |                             |   | - |                 |  |   | 25,000          |  |  | $                    | 0.053
|September 22, 2015 |  |                     | 10,000  |  |                             |   | - |                 |  |   | 10,000          |  |  | $                    | 0.043
|September 24, 2015 |  |                     | 10,000  |  |                             |   | - |                 |  |   | 10,000          |  |  | $                    | 0.026
|September 25, 2015 |  |                     | 10,000  |  |                             |   | - |                 |  |   | 10,000          |  |  | $                    | 0.019
|September 29, 2015 |  |                     | 13,410  |  |                             |   | - |                 |  |   | 13,410          |  |  | $                    | 0.015
|                   |  | $                   | 203,410 |  |                             | $ | - |                 |  | $ | 203,410         |  |  |                      |      





F-19







Subsequent to year
end, the $2M Note holder also enacted the following conversions:





|Conversion Date   |  | Principal Converted |         |  | Accrued Interest Converted |   |        | Total Converted |  |   | Conversion Rate |  |  | Common Shares Issued |       
|----------------- |  | ------------------- | ------- |  | -------------------------- | - | ------ | --------------- |  | - | --------------- |  |  | -------------------- | ------
|October 1, 2015   |  | $                   | 10,000  |  |                            | $ | -      |                 |  | $ | 10,000          |  |  | $                    | 0.0148
|October 5, 2015   |  |                     | 10,000  |  |                            |   | -      |                 |  |   | 10,000          |  |  | $                    | 0.0148
|October 6, 2015   |  |                     | 13,262  |  |                            |   | -      |                 |  |   | 13,262          |  |  | $                    | 0.0138
|October 7, 2015   |  |                     | 10,000  |  |                            |   | -      |                 |  |   | 10,000          |  |  | $                    | 0.0115
|October 9, 2015   |  |                     | 11,728  |  |                            |   | -      |                 |  |   | 11,728          |  |  | $                    | 0.0116
|October 9, 2015   |  |                     | 10,000  |  |                            |   | -      |                 |  |   | 10,000          |  |  | $                    | 0.0115
|October 12, 2015  |  |                     | 14,680  |  |                            |   | -      |                 |  |   | 14,680          |  |  | $                    | 0.0115
|October 13, 2015  |  |                     | 11,601  |  |                            |   | -      |                 |  |   | 11,601          |  |  | $                    | 0.0116
|October 15, 2015  |  |                     | 14,680  |  |                            |   | -      |                 |  |   | 14,680          |  |  | $                    | 0.0115
|October 19, 2015  |  |                     | 17,400  |  |                            |   | -      |                 |  |   | 17,400          |  |  | $                    | 0.0116
|October 19, 2015  |  |                     | 15,000  |  |                            |   | -      |                 |  |   | 15,000          |  |  | $                    | 0.0116
|October 20, 2015  |  |                     | 16,650  |  |                            |   | -      |                 |  |   | 16,650          |  |  | $                    | 0.0111
|October 21, 2015  |  |                     | 17,500  |  |                            |   | -      |                 |  |   | 17,500          |  |  | $                    | 0.0115
|October 23, 2015  |  |                     | 20,000  |  |                            |   | -      |                 |  |   | 20,000          |  |  | $                    | 0.0115
|October 26, 2015  |  |                     | 24,420  |  |                            |   | -      |                 |  |   | 24,420          |  |  | $                    | 0.0111
|October 29, 2015  |  |                     | 26,640  |  |                            |   | -      |                 |  |   | 26,640          |  |  | $                    | 0.0111
|November 2, 2015  |  |                     | 29,970  |  |                            |   | -      |                 |  |   | 29,970          |  |  | $                    | 0.0111
|November 2, 2015  |  |                     | 20,000  |  |                            |   | -      |                 |  |   | 20,000          |  |  | $                    | 0.0111
|November 5, 2015  |  |                     | 32,190  |  |                            |   | -      |                 |  |   | 32,190          |  |  | $                    | 0.0111
|November 10, 2015 |  |                     | 28,800  |  |                            |   | -      |                 |  |   | 28,800          |  |  | $                    | 0.0096
|November 12, 2015 |  |                     | 23,930  |  |                            |   | -      |                 |  |   | 23,930          |  |  | $                    | 0.0072
|November 17, 2015 |  |                     | 16,500  |  |                            |   | -      |                 |  |   | 16,500          |  |  | $                    | 0.0060
|November 19, 2015 |  |                     | 1,640   |  |                            |   | 11,225 |                 |  |   | 12,865          |  |  | $                    | 0.0056
|November 23, 2015 |  |                     | 23,111  |  |                            |   | -      |                 |  |   | 23,111          |  |  | $                    | 0.0056
|November 27, 2015 |  |                     | 24,750  |  |                            |   | -      |                 |  |   | 24,750          |  |  | $                    | 0.0055
|December 2, 2015  |  |                     | 18,450  |  |                            |   | -      |                 |  |   | 18,450          |  |  | $                    | 0.0041
|December 8, 2015  |  |                     | 18,000  |  |                            |   | -      |                 |  |   | 18,000          |  |  | $                    | 0.0036
|December 11, 2015 |  |                     | 13,368  |  |                            |   | -      |                 |  |   | 13,368          |  |  | $                    | 0.0024
|December 16, 2015 |  |                     | 14,181  |  |                            |   | -      |                 |  |   | 14,181          |  |  | $                    | 0.0024
|December 22, 2015 |  |                     | 15,488  |  |                            |   | -      |                 |  |   | 15,488          |  |  | $                    | 0.0024
|December 29, 2015 |  |                     | 17,666  |  |                            |   |        |                 |  |   | 17,666          |  |  | $                    | 0.0024
|                  |  | $                   | 541,604 |  |                            | $ | 11,225 |                 |  | $ | 552,830         |  |  |                      |       





As a result, as of September
30, 2015, $25,445 and $246,785, net of total unamortized discounts of $29,541 and $294,819 are classified as current and long-term
on the accompanying consolidated balance sheet. As of September 30, 2015, there is $26,861 and $11,225 in current and long-term
accrued interest expense related to this note, respectively, and the Company recorded $38,086 in interest expense related to this
note during the year ended September 30, 2015.



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 and amortized $1,042 of
the discount to interest expense during the year ended September 30, 2015. The Company also recorded a beneficial conversion feature
of $253,617 towards the notes and amortized $48,683 of the discount to interest expense during the year ended September 30, 2015.
As of September 30, 2015, there is $8,388 of accrued interest related to these notes and the Company recorded $8,388 in interest
expense related to the notes during the year ended September 30, 2015.





F-20







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 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 these notes and amortized $1,000 of the discount to interest expense during the year ended September 30, 2015. The Company
also recorded a beneficial conversion feature of $60,900 towards the notes and amortized $12,180 of the discount to interest expense
during the year ended September 30, 2015. As of September 30, 2015, there is f $1,143 of accrued interest related to these notes
and the Company recorded $1,143 in interest expense related to the notes during the year ended September 30, 2015.



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 and are incorporated
herein by reference.



As of September
30, 2015, future minimum principal payments for the years ending September 30, 2016 and 2017 are $1,487,256 and $154,000, respectively.
As of September 30, 2015, expected amortization of debt discounts for the years ending September 30, 2016 and 2017 are $333,013
and $543,916, respectively. As of September 30, 2015, expected amortization of deferred financing costs for the years ending September
30, 2016 and 2017 are $107,909 and $12,067, respectively. The Company has the ability to increase the authorized common stock of
the Company in the event that the convertible notes require more shares than available.





NOTE 6.   RELATED
PARTY DEBT



RELATED PARTY NOTES PAYABLE, LONG-TERM



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, 2015, there is $1,645 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, 2015.



On December 7,
2013, the Company issued a note payable to a shareholder of the Company in the amount of $23,462 for monies previously borrowed
from shareholder.  The note is unsecured and bears interest of 6% per annum and matures on December 1, 2016. On
January 22, 2015, the Company settled and paid the note and accrued interest of $1,504 for $20,000 and recorded a gain on extinguishment
of the note of $3,462.



On February 28,
2014, the Company issued a note payable to HIVE (the “HIVE Note”) for the principal amount of $250,000 in connection
with the Hive asset acquisition. Per the terms of the HIVE Note, the maturity date is February 27, 2016 and the annual rate of
interest is six percent (6%). No prepayment penalty exists. The HIVE Note is unsecured. As of September 30, 2015, there is $22,893
in accrued interest expense related to this note and the Company recorded $15,208 in interest expense related to this note during
the year ended September 30, 2015, respectively. On December 10, 2015, the HIVE Note was converted into a Series B Convertible
Preferred Note payable and the maturity date was extended to December 10, 2016. See Note 11 to the consolidated financial statements.





On May 12, 2014,
the Company issued a note payable to its President, Joseph Andreae in the amount of $40,000 for monies previously borrowed during
the three and six months ended March 31, 2014 (the “Andreae Note”).  The note was unsecured and bears interest
of 6% per annum and matures on May 1, 2016. On December 4, 2014, the Company repaid the principal balance of $40,000 and
accrued interest of $1,348 in full satisfaction on the Andreae Note.





F-21







On August 11, 2014, the Company issued a 6% note payable to its
President, Joseph Andreae, for monies borrowed from Mr. Andreae to cover outstanding accounts payable in the amount of $12,828
(the “Andreae Note II”). Per the terms of the Andreae Note, the original principal balance   was $12,828,
and was not secured by any collateral or any assets pledged to the holder. The maturity date is November 30, 2014, and the annual
rate of interest is six percent (6%). The monies were funded during the three and nine months ended June 30, 2014. On December
4, 2014, the Company repaid principal balance of $12,828 and accrued interest of $240 in full satisfaction of the Andreae Note
II.



RELATED PARTY CONVERTIBLE NOTES
PAYABLE



On February 18,
2014, the Company issued 8% Convertible Notes to two third parties to cover outstanding accounts payable in the amount of $20,000.  Per
the terms of the notes, the aggregate principal balance is $20,000, and was not secured by any collateral or any assets pledged
to the holders. The maturity date is February 18, 2016, and the annual rate of interest is eight percent (8%).  Subject
to certain limitations, the holders can, at their sole discretion, convert the outstanding and unpaid principal and interest into
fully paid and nonassessable shares of the Company’s common stock. The conversion price for the notes was the lowest market
closing price per share within the previous twenty (20) market days of the date of conversion minus a discount of forty percent
(40%). We recorded a discount totaling $8,000 related to the beneficial conversion feature embedded in the notes upon issuance.  We
amortized $1,000 and $1,667 of the discount to interest expense during the three and nine months ended June 30, 2014, respectively.
On October 28, 2014, the Company received a Notice of Conversion on two (2) 8% Convertible Notes issued to third parties on February
18, 2014 to cover expenses of the Company. The noteholders converted aggregate principal of $20,000 and aggregate outstanding
accrued and unpaid interest of $1,100 into an aggregate of 42,370 shares of restricted common stock of the Company at a per share
conversion price of $0.498 in accordance with the terms of their convertible notes payable. The conversion of these notes was
in full satisfaction of the notes payable. The shares of common stock under the conversion were issued by the Company on November
7, 2014. Upon conversion, we expensed the unamortized discount of $5,333 to interest expense.



On February 18,
2014, the Company issued an 8% Convertible Note to Kyle Tracey for monies borrowed from Mr. Tracey to cover outstanding accounts
payable in the amount of $10,612 (the “Tracey Note”). Per the terms of the Tracey Note, the original principal balance
is $10,612, and was not secured by any collateral or any assets pledged to the holder. The maturity date was February 18, 2016,
and the annual rate of interest is eight percent (8%). Subject to certain limitations, the holder can, at its sole discretion,
convert the outstanding and unpaid principal and interest into fully paid and nonassessable shares of the Company’s common
stock. The conversion price for the Tracey Note was the lowest market closing price per share within the previous twenty (20)
market days of the date of conversion minus a discount of forty percent (40%). We recorded a discount totaling $4,245 related
to the beneficial conversion feature embedded in the notes upon issuance. We amortized $1,415 of the discount to interest expense
during the year ended September 30, 2014. On October 28, 2014, the Company received a Notice of Conversion the Tracey Note. Mr.
Tracey converted principal of $10,612 and outstanding accrued and unpaid interest of $584 into 22,481 shares of restricted common
stock of the Company at a per share conversion price of $0.498 in accordance with the terms of the convertible note payable. The
conversion of the Tracey Note was in full satisfaction of the note payable. The shares of common stock under the conversion were
issued by the Company on November 7, 2014. Upon conversion, we expensed the unamortized discount of $2,830 to interest expense.



On March 17, 2014,
the Company issued an 8% Convertible Note to Jerome Kaiser, former CEO, CFO and Director of the Company for services rendered
to the Company in the amount of $50,000 (the “Kaiser Note”) which was charged to expense during the three months March
31, 2014. Per the terms of the Kaiser Note, the principal balance is $50,000, and is not secured by any collateral or any assets
pledged to the holders. The maturity date is March 17, 2015, and the annual rate of interest is eight percent (8%). Subject to
certain limitations, the holder can, at his sole discretion, convert the outstanding and unpaid principal and interest into fully
paid and nonassessable shares of the Company’s common stock. The conversion price for the Kaiser Note is the market closing
price of the market day immediately preceding the date of conversion minus twenty percent (20%). We recorded a discount totaling
$10,000 related to the beneficial conversion feature embedded in the notes upon issuance. We amortized $4,167 of the discount
to interest expense during the year ended September 30, 2015. In March 2015, the Company paid the outstanding principal and accrued
interest in satisfaction on the note of $50,000 and $4,000, respectively.





F-22







On May 12, 2014,
in connection with the 6% Notes, the Company issued a note for $40,000 to Kyle Tracey, which was recorded as a related party convertible
note payable. We recorded a discount totaling $16,000 related to the beneficial conversion feature embedded in the 6% note to
Mr. Tracey upon issuance. We amortized $6,667 of the discount to interest expense during the year ended September 30, 2014.
On October 28, 2014, the Company received a Notice of Conversion on the 6% Convertible Note issued on May 13, 2014 to Mr. Tracey
(the “Tracey PPM Note”) as part of a private placement transaction in exchange for capital of $40,000. Mr. Tracey
converted principal of $40,000 and outstanding accrued and unpaid interest of $1,098 into 41,098 shares of restricted common stock
of the Company at a per share conversion price of $1.00 in accordance with the terms of the convertible note. The conversion of
the Tracey PPM Note was in full satisfaction of the note. The shares of common stock under the conversion were issued by the Company
on November 7, 2014. Upon conversion, we expensed the unamortized discount of $13,333 to interest expense.



On May 12, 2014,
the Company issued an 8% Convertible Note to Kyle Tracey for monies borrowed from Mr. Tracey to cover outstanding accounts payable
in the amount of $11,042 (the “Tracey Note II”). Per the terms of the Tracey Note II, the original principal balance
is $11,042, and was not secured by any collateral or any assets pledged to the holder. The maturity date was May 12, 2016, and
the annual rate of interest is eight percent (8%). Subject to certain limitations, the holder can, at its sole discretion, convert
the outstanding and unpaid principal and interest into fully paid and nonassessable shares of the Company’s common stock.
The conversion price for the Tracey Note II was the lowest market closing price per share within the previous twenty (20) market
days of the date of conversion minus a discount of forty percent (40%). We recorded a discount totaling $4,417 related to the
beneficial conversion feature embedded in the notes upon issuance. We amortized $920 of the discount to interest expense during
the year ended September 30, 2014. On October 28, 2014, the Company received a Notice of Conversion on the Tracey Note II. Tracey
converted principal of $11,042 and outstanding accrued and unpaid interest of $407 into 22,989 shares of restricted common stock
of the Company at a per share conversion price of $0.498 in accordance with the terms of the convertible note payable. The conversion
of the Tracey Note II was in full satisfaction of the note payable. The shares of common stock under the conversion were issued
by the Company on November 7, 2014. Upon conversion, we expensed the unamortized discount of $3,497 to interest expense.



On May 12, 2014,
the Company issued an 8% Convertible Note to its Director of Business Development, Michael Cook, for monies borrowed from Mr.
Cook to cover outstanding accounts payable in the amount of $11,825 (the “Cook Note”). Per the terms of the Cook Note,
the original principal balance was $11,825, and was not secured by any collateral or any assets pledged to the holder. The maturity
date is May 12, 2016, and the annual rate of interest is eight percent (8%). Subject to certain limitations, the holder can, at
its sole discretion, convert the outstanding and unpaid principal and interest into fully paid and nonassessable shares of the
Company’s common stock. The conversion price for the Cook Note was the lowest market closing price per share within the
previous twenty (20) market days of the date of conversion minus a discount of forty percent (40%). We recorded a discount totaling
$4,730 related to the beneficial conversion feature embedded in the notes upon issuance. We amortized $985 of the discount to
interest expense during the year ended September 30, 2014. On October 28, 2014, the Company received a Notice of Conversion on
the “Cook Note. Mr. Cook converted principal of $11,825 and outstanding accrued and unpaid interest of $435 into 24,619
shares of restricted common stock of the Company at a per share conversion price of $0.498 in accordance with the terms of the
convertible note payable. The conversion of the Cook Note was in full satisfaction of the note payable. The shares of common stock
under the conversion were issued by the Company on November 7, 2014. Upon conversion, we expensed the unamortized discount of
$3,745 to interest expense.



On August 11, 2014,
the Company issued a second 8% Convertible Note to Mr. Cook for monies borrowed from Mr. Cook to cover outstanding accounts payable
in the amount of $15,115 (the “Cook Note II”). Per the terms of the Cook Note II, the original principal balance was
$15,115, and is was secured by any collateral or any assets pledged to the holder. The maturity date is August 11 2016, and the
annual rate of interest is eight percent (8%). Subject to certain limitations, the holder can, at its sole discretion, convert
the outstanding and unpaid principal and interest into fully paid and nonassessable shares of the Company’s common stock.
The conversion price for the Cook Note II was the lowest market closing price per share within the previous twenty (20) market
days of the date of conversion minus a discount of forty percent (40%). We recorded a discount totaling $6,046 related to the
beneficial conversion feature embedded in the notes upon issuance. On October 28, 2014, the Company received a Notice of Conversion
on the Cook Note II. Mr. Cook converted principal of $15,115 and outstanding accrued and unpaid interest of $255 into 30,864 shares
of restricted common stock of the Company at a per share conversion price of $0.498 in accordance with the terms of the convertible
note payable. The conversion of the Cook Note II was in full satisfaction of the note payable. The shares of common stock under
the conversion were issued by the Company on November 7, 2014. Upon conversion, we expensed the unamortized discount of $5,542
to interest expense.





F-23







On August 11, 2014,
the Company issued an 8% Convertible Note to Mr. Tracey for monies borrowed from Mr. Tracey to cover outstanding accounts payable
in the amount of $216,001 (the “Tracey Note III”). Per the terms of the Tracey Note III, the original principal balance
was $216,001, and is not secured by any collateral or any assets pledged to the holder. The maturity date was August 11, 2016,
and the annual rate of interest is eight percent (8%). Subject to certain limitations, the holder can, at its sole discretion,
convert the outstanding and unpaid principal and interest into fully paid and nonassessable shares of the Company’s common
stock. The conversion price for the Tracey Note III was the lowest market closing price per share within the previous twenty (20)
market days of the date of conversion minus a discount of forty percent (40%). We recorded a discount totaling $86,401 related
to the beneficial conversion feature embedded in the notes upon issuance. On October 28, 2014, the Company received a Notice of
Conversion on the Tracey Note III. Mr. Tracey converted principal of $216,001 and outstanding accrued and unpaid interest of $3,645
into 441,057 shares of restricted common stock of the Company at a per share conversion price of $0.498 in accordance with the
terms of the convertible note payable. The shares of common stock under the conversion were issued by the Company on November
7, 2014. Upon conversion, we expensed the unamortized discount of $79,200 to interest expense.



NOTE 7.   COMMITMENTS AND CONTINGENCIES



Office Lease



As of September 30, 2015, the Company leases
a 5,000 square foot office in Chatsworth, California for $4,947 per month which expires in November 2015.



Warrant Liability



The Company recorded the estimated settlement
liability as of March 31, 2014 for the Warrant Shares issued and the Warrants that remain outstanding and unexercised that would
be entitled to the same settlement based on the number of shares expected to be issued and the market price of the Company’s
common stock on the dates of the actual settlements from $4.72 per share to $7.25 per share, and market price of the first settlement
of $7.25 for the unsettled claims. We believe the issuance of convertible notes in the three months ended March 31, 2014 triggered
the full ratchet anti-dilution adjustment; before the provision was triggered, the fair value of the warrant liability was not
significant as the exercise was so far out of the money. As a result of the above settlements with warrant holders, the Company
recorded a loss on settlement of warrants of $29,528,844 during the six months ended March 31, 2014 and a long-term warrant liability
of $29,430,022 as of March 31, 2014 based on 4,407,200 shares of common stock under the settlement at the Company’s closing
stock prices discussed above. As of September 30, 2015, the estimated settlement liability is $25,025 based on the fair market
value of 1,184,727 remaining warrants and using the Black-Scholes model and therefore the Company recorded a gain on the change
in warrant liability of $2,439,207 during the year ended September 30, 2015.



Settlement of Company Legal Claims



On December 15,
2014, the Company recorded a gain on settlement of $257,930 for a confidential settlement by and between the Company and certain
shareholders and related parties as settlement for certain potential legal claims held by the Company. As a result of the settlement,
the Company received net proceeds of $62,930 and vendor credits of $200,000 during the year ended September 30, 2015. A total
of $325,000 in vendor credits has been received in connection with the settlement and no further credits will be given. In January
2015, the Company received 440,625 shares from the settlement that was assigned to officers of the Company. The officers decided
it was in the best interest of the Company to return these shares to the Company to be used for future strategic issuances. Accordingly,
the 440,625 shares valued at $367,531 were recorded as treasury stock as of September 30, 2015, and the Company recorded a gain
on settlement of $625,461 during the year ended September 30, 2015.



Chief Science Officer



On May 1, 2015,
the Company appointed Dr. Mark A. Scialdone to the newly-created executive officer position of Chief Science Officer.



Dr. Scialdone’s Executive
Employment Agreement was for a period of two (2) years. Dr. Scialdone shall receive an annual salary of $102,000, he shall be eligible
for any benefits made generally available by the Company, he shall be eligible to receive any bonuses made generally available
by the Company, and he shall be reimbursed for any reasonable expenses incurred while performing his duties as the Company’s
Chief Science Officer. Additionally, Dr. Scialdone is entitled to receive severance equal to six (6) months base salary if terminated
without cause by the Company.





F-24







The Chief Science Officer was also receive bonus compensation associated with revenue generated from consulting
services revenues generated over the term of this Agreement such bonus compensation to be calculated in accordance with the schedule
below.



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
and reflected such as of September 30, 2015 in the consolidated financial statements. As of September 30, 2015, the 250,000 shares
issued to BetterChem were recorded as treasury stock valued at $67,500 as a result of the settlement to receive the shares back
as part of the unwind.



Officer & Director Appointments
and Related Matters



Pursuant to Board
consent on May 11, 2015, the Company made several changes to its management structure.



The Company confirmed
the appointment of Dr. Mark Scialdone to the newly-created officer position of Chief Science Officer which was announced by Current
Report on Form 8-K dated May 5, 2015 which is incorporated by reference herein. See above in this section for more information
about Dr. Scialdone.



NOTE 8. INCOME TAXES



The following table
presents the current and deferred income tax provision for federal and state income taxes for the year ended September 30, 2015
and 2014:





|                                           |  | 2015 |          |   | 2014 |  
|------------------------------------------ |  | ---- | -------- | - | ---- | -
|Current tax provision (benefit):           |  |      |          |   |      |  
|Federal                                    |  | $    | -        |   |      | $
|State                                      |  |      | 2,209    |   |      |  
|Total                                      |  |      | 2,209    |   |      |  
|Deferred tax provision (benefit)           |  |      |          |   |      |  
|Federal                                    |  |      | (418,000 | ) |      |  
|State                                      |  |      | -        |   |      |  
|Valuation allowance                        |  |      | 418,000  |   |      |  
|Total                                      |  |      | -        |   |      |  
|Total provision (benefit) for income taxes |  | $    | 2,209    |   |      | $



Reconciliations of the U.S. federal
statutory rate to the actual tax rate for the year ended September 30, 2015 and 2014:



|                                     |  | 2015 |       |    | 2014 | 
|------------------------------------ |  | ---- | ----- | -- | ---- | 
|US federal statutory income tax rate |  |      | (34.0 | %) |      | 
|State tax–net of benefit             |  |      | (6.0  | %) |      | 
|                                     |  |      | (40.0 | %) |      | 
|                                     |  |      |       |    |      | 
|Permanent differences:               |  |      | -     | %  |      | 
|Stock-based compensation             |  |      | 2.8   | %  |      | 
|Changes in warrant liability         |  |      | -     | %  |      | 
|Increase in valuation allowance      |  |      | 37.2  | %  |      | 
|Effective tax rate                   |  |      | -     | %  |      | 



The Company incurred certain non-cash transactions
which are not includable or deductible for income tax reporting purposes, such the change in fair value of warrant liability, certain
stock-based compensation and accretion of debt discounts.



F-25







The components of the Company’s
deferred tax assets and (liabilities) for federal and state income taxes as of September 30, 2015 and 2014:



|                                                 |  | As of September, |         
|------------------------------------------------ |  | ---------------- | --------
|                                                 |  | 2015             |         
|Current deferred tax assets (liabilities):       |  |                  |         
|Accrued expenses and other                       |  | $                | -       
|Total current deferred tax assets                |  |                  | -       
|Non-current deferred tax assets and liabilities: |  |                  |         
|Property, plant and equipment                    |  |                  | 29,000  
|Net operating losses                             |  |                  | 680,000 
|Total non-current deferred tax assets            |  |                  | 709,000 
|Valuation allowance                              |  |                  | (709,000
|Total non-current deferred tax assets            |  |                  | -       
|Net deferred tax assets                          |  | $                | -       



During
the year ended September 30, 2015 and 2014 the valuation allowance increased by $418,000 and $233,000, respectively. At September
30, 2015, the Company had approximately $680,000 of federal and state gross net operating losses allocated to continuing operations
available. The net operating loss carry forwards, if not utilized, will begin to expire in 2033 for federal purposes and 2031
for state purposes.



Based on the available objective evidence, including the Company’s
limited operating history and current liabilities in excess of assets, management believes it is more likely than not that some
of the net deferred tax assets, specifically certain net operating losses, at September 30, 2014 will not be fully realizable.
In addition, subsequent to year end significant shares were issued to shareholders in connection with the conversion of notes
payable and a subscription for the purchase of common stock. In connection, with these issuances the Company determined that the
historical NOLs have probably been impaired due to IRS Section 382 limitations. Due to the uncertainty surrounding realization
of the remaining deferred tax assets, specifically the NOLs, the Company has provided a valuation allowance of $709,000 and $291,000
against its net deferred tax assets at September 30, 2015 and 2014, respectively. We will continue to monitor the recoverability
of our net deferred tax assets.



As of September
30, 2015 and 2014, the Company has a State tax liability of $0 and $0, respectively. As of September 30, 2015 and 2014, the Company
recorded no estimated taxes payable for Federal and State.



The Company has
filed all United States Federal and State tax returns. The Company has identified the United States Federal tax returns as its
“major” tax jurisdiction. The United States Federal return years 2014 through 2015 are still subject to tax examination
by the United States Internal Revenue Service; however, we do not currently have any ongoing tax examinations. The Company is
subject to examination by the California Franchise Tax Board for the year ended 2014 through 2015 and currently does not have
any ongoing tax examinations.



NOTE 9. STOCKHOLDERS’
DEFICIT



COMMON STOCK



On November 27,
2013, the Board and shareholders approved an increase in the authorized number of shares of common and preferred stock which may
be issued by the Company to 1,000,000,000 shares and 100,000,000 shares, respectively.  On December 3, 2013, the certificate
of amendment was filed with the Secretary of State of Delaware to reflect the increase in authorized.





F-26







PREFERRED STOCK



On April 1, 2014,
the Board formally approved the filing of a Preferred Stock Designation in connection with the commitment of 500,000 Series A
Shares to HIVE on March 27, 2014 pursuant to its authority to issue blank check preferred stock as provided in the Company’s
Certificate of Incorporation.  Per the Certificate of Designation (the “Designation”), there are 100,000,000
shares of preferred stock authorized by the Company’s Certificate of Incorporation. The Company is authorized to issue 500,000
shares of Series A Shares pursuant to the Designation.  As provided in the Designation (and as set forth in the HIVE
Asset Purchase Agreement), Series A Shares are entitled to vote at a 15-1 ratio to Common Stock.  Each share of preferred
stock shall initially be convertible into one share of common stock (500,000 shares of common stock in the aggregate).  On
the two year anniversary of the transaction of HIVE, the preferred stock conversion ratio shall be adjusted as follows: a one-time
pro rata adjustment of up to ten-for-one (10-1) based upon the Company generating aggregate gross revenues over the two years
of at least $8,000,000 (e.g. If the Company generates only $4,000,000 in aggregate gross revenues over the two year period then
the convertible ratio will adjust to 5-1). In no event will the issuance convert into more than 5,000,000 shares of common
stock of the Company.



On June 19, 2014,
the Company formally issued the 500,000 Series A Shares to HIVE.



The value ascribed
to the Series A Shares was based on the historical costs of the assets acquired on March 27, 2014 from HIVE since the transfer
of assets was made among entities under common control.



COMMON
STOCK ISSUED FOR BONUSES



On
October 20, 2014, the Company’s Board of Directors issued bonus stock grants of 30,000 shares of restricted common stock
each to Kyle Tracey, Joseph Andreae, and Benjamin Beaulieu. These issuances were based on the fair market value on the date of
issuance immediately vested and resulted in $24,900, $24,900, and $24,900 being charged to and general and administrative expense
during the year ended September 30, 2015.



On
March 12, 2015, the Company’s Board of Directors issued bonus stock grants of 30,000 shares of restricted common stock each
to Kyle Tracey, Joseph Andreae, and Allan Viernes. In addition, a total of 60,000 shares were granted to three (3) employees.
These issuances were based on the fair market value on the date of issuance immediately vested and resulted in $9,150, $9,150,
and $195,200 being charged to cost of revenue, sales and marketing, and general and administrative expense during the year ended
September 30, 2015.



COMMON
STOCK ISSUED FOR SERVICES



On
March 12, 2015, the Company’s Board of Directors issued a bonus stock grant of 60,277 shares of restricted common stock
to an outside sales consultant for services performed. This issuance based on the fair market value on the date of issuance immediately
vested resulting in $36,769 being charged to sales and marketing expense during the year ended September 30, 2015.



COMMON
STOCK ISSUED FOR ACCRUED WAGES



On
March 12, 2015, Kyle Tracey converted $59,718 of accrued wages into 97,898 shares of immediately vested restricted common stock
based on the fair market value on the date of issuance.



On
March 12, 2015, Michael Cook converted $36,769 of accrued wages into 60,277 shares of immediately vested restricted common stock
based on the fair market value on the date of issuance.



COMMON
STOCK ISSUED AS DIRECTOR COMPENSATION



On
March 12, 2015, the Company’s Board of Directors issued 100,000 shares of restricted common stock each were granted to Kyle
Tracey and Joseph Andreae for serving on the Board of Directors.



COMMON
STOCK ISSUED FOR ACCOUNTS PAYABLE



On
June 1, 2015, the Board issued 100,000 shares of restricted common stock at $1.00 per share for payment of accrued legal services.
This $100,000 issuance was based on the fair market value of $50,000 and additional consideration of $50,000 given on the date
of issuance.





F-27







COMMON
STOCK ISSUED FOR ACQUISITION OF BETTERCHEM



See
Note 1 for common stock issued for the acquisition of BetterChem.



WARRANTS



The table below
summarizes the Company’s warrant activity during the year ended September 30, 2015:



|                                           |  | Shares |           |  | Weighted
    Average Price |   |       | Weighted
    Average Remaining Contractual Term |  |  | Aggregate
    Intrinsic Value | 
|------------------------------------------ |  | ------ | --------- |  | -------------------------- | - | ----- | ----------------------------------------------- |  |  | ----------------------------- | 
|Warrants outstanding at September 30, 2014 |  |        | 1,184,726 |  |                            | $ | 0.114 |                                                 |  |  | 1.6                           | 
|Warrants issued                            |  |        | -         |  |                            |   | -     |                                                 |  |  |                               | 
|Warrants exercised                         |  |        | -         |  |                            |   | -     |                                                 |  |  |                               | 
|Cancelled/forfeited/expired                |  |        | -         |  |                            |   | -     |                                                 |  |  |                               | 
|Warrants outstanding at September 30, 2015 |  |        | 1,184,726 |  |                            | $ | 0.021 |                                                 |  |  | 0.6                           | 



As a result of the anti-dilution
provision of the warrants, the exercise price as of September 30, 2015 was reduced to $0.021 per share using the following weighted
average variables in the Black Scholes model during the year ended September 30, 2015:



|Year Ended September 30, |  | Stock Price at Grant Date |      |  | Dividend  Yield |  |   | Exercise Price |  |   | Risk Free Interest Rate |  |  | Volatility |      |   | Average Life | 
|------------------------ |  | ------------------------- | ---- |  | --------------- |  | - | -------------- |  | - | ----------------------- |  |  | ---------- | ---- | - | ------------ | 
|2015                     |  | $                         | 0.04 |  |                 |  | - | %              |  | $ | 0.023                   |  |  |            | 0.08 | % |              | 



The
Company’s warrants above are accounted for as derivative liabilities in the accompanying consolidated balance sheets.



OPTIONS



On June 27, 2014,
the Company authorized the “2014 Incentive and Nonstatutory Stock Option Plan” (the “Plan”) whereby a
maximum of 2,000,000 shares of the Company’s common stock could be granted in the form of incentive and nonstatutory stock
options. If any shares of common stock subject to an award under the Plan are forfeited, expire, are settled for cash or are tendered
by the participant or withheld by us to satisfy any tax withholding obligation, then, in each case, the shares subject to the
award may be used again for awards under the Plan to the extent of the forfeiture, expiration, cash settlement or withholding.  The
stock option awards issuable under the Plan can be made up of any combination of incentive and nonstatutory stock options.  The
stock options will be granted at fair market value on the date of grant and will vest as directed by the Board.  Incentive
stock options are available to employees only whereas nonstatutory stock options are available to independent contractors and
consultants of the Company.



On June 27, 2014,
concurrent with the formal adoption of the Plan, the Company’s Board granted a total of 1,000,000 stock options to certain
employees, consultants and/or independent contractors of the Company (the “Option Grant”). The Option Grant includes
options to purchase 520,000 shares granted to employees, consultants and/or independent contractors of the Company that are not
executive officers.  In addition, the Board determined that executive officer Michael Cook, Director of Business Development,
should receive options to purchase 100,000 shares and that Kyle Tracey, Chief Executive Officer and Chairman, and Joseph
Andreae, President and member of the Board, should receive options to purchase 190,000 shares each.  The options were
granted at the market price of the Company’s common stock at close of business ($1.66 per share) on June 27, 2014, pursuant
to the Company’s standard form stock option agreements under the Plan.  The options vest 25% at grant and 25%
each subsequent six (6) months from the date of grant. The aggregate value of the 1,000,000 options on the grant date was $1,660,000
and the amount expensed upon the grant date was $415,000 as result of 250,000 options immediately vested. On September 30, 2014
an additional $22,312 was expensed due to the revaluing 212,500 non-employee options.



The description
of the incentive and nonstatutory stock options herein is qualified in its entirety by reference to the full text of the Form
of Incentive Stock Option Agreement and Nonstatutory Stock Option Agreement, which are attached as Exhibits 10.2 and 10.3, respectively,
to the Current Report on Form 8-K filed with the SEC on July 3, 2014.





F-28







Additional Option Grants Under
2014 Stock Option Plan



On October 20,
2014, the Board granted a total of 20,000 stock options to certain employees and canceled 20,000 options previously allocated
(but not issued) to employees. The options were granted at the market price of the Company’s common stock at close of business
($0.83 per share). The options vest 25% at grant and 25% each subsequent six (6) months from the date of grant. The aggregate
value of the 20,000 options on the grant date was $16,600 and the amount expensed upon the grant date was $4,150 as result of
5,000 options immediately vested.



On December 22,
2014, the Company’s Board granted a total of 775,000 stock options to certain employees. The option grant includes options
to purchase 225,000 shares granted to employees that are not executive officers. In addition, the Board determined that executive
officer Michael Cook, Director of Business Development, should receive options to purchase 25,000 shares and that Kyle Tracey,
Chief Executive Officer and Chairman, and Joseph Andreae, President and member of the Board, and Allan Viernes, Chief Financial
Officer should receive options to purchase 175,000 shares each. The options were granted at the market price of the Company’s
common stock at close of business ($0.70 per share). The options vest 25% at grant and 25% each subsequent six (6) months from
the date of grant. The aggregate value of the 775,000 options on the grant date was $542,500 and the amount expensed upon
the grant date was $135,625 as result of 193,750 options immediately vested.



Consulting Agreements



On October 20,
2014, the Company entered into consulting agreements with two consultants to provide business development and acquisition services
to the Company. The consultants were each issued 100,000 options to purchase common stock of the Company by the Board as consideration
for consulting services. The options were granted at the market price of the Company’s common stock at close of business
($0.83 per share). The options vest 25% at grant and 25% each subsequent six (6) months from the date of grant. The aggregate
value of the 200,000 options on the grant date was $166,000 and the amount expensed upon the grant date was $41,500 as result
of 50,000 options immediately vested. On December 31, 2014 an additional $3,000 was expensed due to the revaluing the 200,000
non-employee options.



Cancellation of Option Plans



Collectively, officers,
employees, and consultants of the Company decided to surrender and cancel all options outstanding.



Option activity
during the year ended September 30, 2015, was as follows:



|                                          |  | Shares |            |   | Weighted
     Average  Exercise  Price |   |      | Weighted
     Average  Remaining  Contractual Term |  |  | Aggregate
     Intrinsic  Value | 
|----------------------------------------- |  | ------ | ---------- | - | -------------------------------------- | - | ---- | -------------------------------------------------- |  |  | ------------------------------- | 
|Options outstanding at September 30, 2014 |  |        | 1,150,000  |   |                                        | $ | 2.92 |                                                    |  |  | 8.7                             | 
|Options granted                           |  |        | 995,000    |   |                                        | $ | 0.73 |                                                    |  |  | 10.0                            | 
|Options exercised                         |  |        | -          |   |                                        | $ | -    |                                                    |  |  | -                               | 
|Options cancelled/forfeited/expired       |  |        | (2,145,000 | ) |                                        | $ | 1.91 |                                                    |  |  | 9.0                             | 
|Options outstanding at September 30, 2015 |  |        | -          |   |                                        | $ | -    |                                                    |  |  | -                               | 
|Options exercisable at September 30, 2015 |  |        | -          |   |                                        | $ | -    |                                                    |  |  | -                               | 



The aggregate intrinsic
value in the table above represents the total pre-tax intrinsic value (the aggregate difference between the closing stock prices
of VAPE’s common stock at the specified dates and the exercise prices for in-the-money options) that would have been received
by the option holders if all in-the-money options had been exercised on the specified dates.



The fair value
of each option award is estimated on the date of grant using the Black-Scholes valuation model, consistent with the provisions
of ASC 718. Because option-pricing models require the use of subjective assumptions, changes in these assumptions can materially
affect the fair value of the options. VAPE has limited relevant historical information to support the expected exercise behavior
because no exercises have taken place.



During the year
ended September 30, 2015 and 2014, $1,006,343 and $681,375 were recorded as stock-based compensation related to options, respectively.
As of September 30, 2015, there is no future stock compensation expense related to options.





F-29







NOTE 10. INTELLECTUAL PROPERTY



The Company plans
to rely on a combination of trademark, copyright, trade secret and patent laws in the United States as well as confidentiality
procedures and contractual provisions to protect future proprietary technology and its brands, as they are developed. The Company
has begun to execute on this plan with the acquisition of the patent pending HIVE Ceramic vaporization product and the HIVE trademark
as well as several pending trademark applications. The Company intends to continue to create or acquire proprietary vaporizers
and e-cigarettes, and various trademarks, patents and/or copyrights for brands which are developed.



TRADEMARKS



On March 27, 2014,
the Company and Stone Arch Studio, LLC entered into a Trademark Assignment Agreement whereby the Company acquired all right, title,
priority and interest to the HIVE trademark U.S. Registration No. 44513069 as registered with the U.S. Patent and Trade Office
(“USPTO”). This acquisition further protects the Company’s HIVE Ceramics brand vaporization line. As of September
30, 2015, the Company has capitalized $123,150 in costs paid related to the trademarks.



PATENTS



On March 27, 2014,
the Company formally closed its acquisition of the patent pending HIVE Ceramics vaporization technology. The Company has already
begun exploiting this technology and intends to prosecute the patent application to completion. As of September 30, 2015, the
Company has capitalized had no costs of patents capitalized and recorded impairment to pending patents of $22,133 based on its
expected cash flow not exceeding its carrying amount.



The Company also
has been in discussions to acquire additional patented technology from third parties to further grow and develop its branded product
lines in the vaporization market.





NOTE 11. SUBSEQUENT EVENTS



Common Stock Issued
for Accrued Wages



On
October 22, 2015, the Company’s Board of Directors issued 2,083,333 shares of restricted common stock each to Kyle Tracey
at $0.024 per share for payment of $50,000 in accrued wages. On October 22, 2015, the Company’s Board of Directors issued
555,555 shares of restricted common stock each to Kyle Tracey at $0.024 per share for payment of $13,333 in accrued wages. On October
22, 2015, the Company’s Board of Directors issued 1,250,000 shares of restricted common stock each to Michael Cook at $0.024
per share for payment of $3,000 in accrued wages.



Common Stock Issued
for Bonuses



On
October 22, 2015, the Company’s Board of Directors issued bonus stock grants of 600,000 shares of restricted common stock
each to Allan Viernes and Benjamin Beaulieu at $0.024 per share. In addition, the Company issued 300,000 shares of restricted common
stock to employees at $0.024 per share. These issuances were based on the fair market value on the date of issuance immediately
vested and resulted in $36,000 being charged to general and administrative expense during the three months ended December 31, 2015.



On
October 22, 2015, the Company’s Board of Directors issued bonus stock grants of 1,250,000 shares of restricted common stock
an outside sales consultant at $0.024 per share. The issuance was based on the fair market value on the date of issuance immediately
vested and resulted in $30,000 being charged to sales and marketing expense during the three months ended December 31, 2015.



Common Stock Surrenders



On
October 22, 2015, the Kyle Tracey and Joe Andreae each surrendered 130,000 shares of restricted common stock, with 60,000 shares
valued at $49,800 and 200,000 shares valued at $122,000. As result, 260,000 shares of common stock were recorded as treasury stock
valued at $171,800. In addition, on October 22, 2015, an employee also surrendered 30,000 shares valued at $9,150 which was recorded
as treasury stock.



On
December 21, 2015, the Allan Viernes and Benjamin Beaulieu each surrendered 30,000 shares of restricted common stock valued at
$36,600. As result, 60,000 shares of common stock were recorded as treasury stock valued at $36,600.



Appointment of Justin Braune as
Chief Executive Officer



On December 10,
2015, the Board appointed Justin Braune to serve as the Company’s Chief Executive Officer and as a director, effective immediately.



Prior to joining
the Company, Mr. Braune, 33, served as the chief operating officer of Voodoo Science, LLC and Vapor Wild from 2014 to 2015. From
2013 to 2014, Mr. Braune served as the Chief of Operations for Veracity Security, a technology company located in San Diego. From
2013-2014 Mr. Braune was the Director of Sales at Lear Capital. Since 2010 he owned and operated Braune Enterprises a real estate
and investment brokerage firm. Mr. Braune graduated from the United States Naval Academy with a B.S. degree in electrical engineering
in and was commissioned as an officer in the U.S. Navy. After earning his master’s degree in nuclear engineering, Mr. Braune
operated the nuclear reactors onboard the USS RONALD REAGAN aircraft carrier. He served in the U.S. Navy until 2009 and subsequently
earned his MBA at the University of Southern California, Marshall School of Business. Our Board believes that Mr. Braune’s
extensive relationships and experience in the industry of vaporization products and e-cigarettes will bring added value to the
Company’s management team.



F-30







In connection with
his appointment as Chief Executive Officer and a member of our Board, Mr. Braune entered into an employment agreement dated as
of December 10, 2015 (the “Employment Agreement”) with the Company pursuant to which he will receive an annual salary
of $150,000, subject to adjustment, and bi-monthly sales-based compensation of $1.00 USD per unit of wholesale sales of Mr. Braune’s
new vaporizer pen product line and $3.00 USD per unit on retail sales. The sales-based compensation and salary is payable in cash
or stock as further described in the Employment Agreement.



In addition, the
Company will issue to Mr. Braune 20,000,000 shares of the Company’s common stock, to be held in escrow and released by the
Company to Mr. Braune in accordance with the following vesting schedule: (i) 5,000,000 shares shall vest on June 10, 2015, (ii)
5,000,000 shares shall vest on December 10, 2016, (iii) 5,000,000 shares shall vest on June 10, 2016, and (iv) 5,000,000 shares
shall vest on December 10, 2016. Mr. Braune also is eligible to participate in any stock option plan maintained by the Company
and available to other employees and standard benefit programs for similarly situated employees. The Employment Agreement continues
until terminated by either party upon 30 days’ prior written notice.





Resignations of Kyle Tracey and Joe Andreae;
Appointment of Benjamin Beaulieu as Chairman



On December 10,
2015, the Board accepted the resignation of Kyle Tracey as Chief Executive Officer, Chairman of the Board and all other officer
positions held by him with the Company. Mr. Tracey will remain in a consultant role with the Company focusing on sales and business
development of HIVE Ceramics for a period of two (2) years. Mr. Tracey also retains a large block of voting control of the Company
due to the above issuance of the Series B Notes issued to HIVE Ceramics, LLC an entity he co-owns. The Board also accepted the
resignation of Joe Andreae as President and a director as of December 10, 2015. The President seat will remain vacant until a
qualified candidate is located.



Benjamin Beaulieu
was elevated from his position as a member of the Board to Chairman of the Board on December 10, 2015 to replace Mr. Tracey. Mr.
Beaulieu also currently serves as the Company’s COO and will remain in that role.



Series B Preferred Stock Convertible
Notes



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



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



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



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



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



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.





F-31









Equity Investment by the Investor



On December 10, 2015, the
Investor purchased $90,000 in common stock at a purchase price equal to 90% of the average of the closing prices of the common
stock for the three (3) trading days immediately preceding the date that is 6 months from the date of the agreement.



Forbearance Agreement



On December 10, 2015, the
Company and the Investor entered into a forbearance agreement regarding the Investor’s convertible note. The Investor alleged
certain breaches by the Company of its obligations under the note. The Company denied any breaches or defaults occurred under the
note. However, in an effort to avoid protracted litigation about the dispute, the parties agreed to enter into the forbearance
agreement which provided that the outstanding balance of the note increased by $105,000 as provided for in the original note.



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.



Third Party Debt Conversions



See Note 5 for subsequent
conversions related to third party debt.



Unwinding of BetterChem Acquisition



See Note 1 for the unwinding
of BetterChem.





F-32









INDEX OF EXHIBITS



|Exhibit No. |  | Description of Exhibit                                                                                                                                                                                                                                                                                 
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1         |  | Certificate of Incorporation of Vape Holdings, Inc., as amended, placed into effect on January 2, 2009, incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 (Registration No. 333-163290) filed with the SEC on November 23, 2009.                                      
|3.2         |  | Amended and Restated By-laws of Vape Holdings, Inc., incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1 (Registration No. 333-163290) filed with the SEC on November 23, 2009.                                                                                         
|3.3         |  | Certificate of Designation for Series A Preferred Stock, incorporated by reference to Exhibit 2.1(E) to the Company’s Current Report on Form 8-K filed with the SEC on February 28, 2014.                                                                                                              
|3.4         |  | Certificate of Designation for Series B Preferred Stock, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 11, 2015.                                                                                                                 
|10.1        |  | Securities Purchase Agreement entered into by and between Vape Holdings, Inc. and Redwood Management, LLC dated February 10, 2015, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on February 17, 2015.                                   
|10.2        |  | Unsecured Convertible Promissory Note entered into by and between Vape Holdings, Inc. and Redwood Management, LLC dated February 10, 2015, incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on February 17, 2015.                           
|10.3        |  | Executive Employment Agreement by and between Vape Holdings, Inc. and Dr. Mark Scialdone, dated May 1, 2015, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 5, 2015.                                                                  
|10.4        |  | Form of Stock Surrender Agreement Stock, incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 15, 2015.                                                                                                                                  
|10.5        |  | Form of Option Surrender Agreement, incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 15, 2015.                                                                                                                                       
|10.6        |  | Share Exchange Agreement by and between Vape Holdings, Inc. and BetterChem Consulting, Inc., dated July 1, 2015, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 1, 2015.                                                             
|10.7        |  | Intellectual Property Rights Transfer Agreement by and between Vape Holdings, Inc. and BetterChem Consulting, Inc., dated July 1, 2015, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on July 1, 2015.                                      
|10.8        |  | Form of Securities Purchase Agreement, dated August 5, 2015, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 11, 2015.                                                                                                              
|10.9        |  | Form of 8% Note, dated August 5, 2015, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on August 11, 2015.                                                                                                                                    
|10.10       |  | Form of Back End Note, dated August 5, 2015, incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on August 11, 2015.                                                                                                                              
|10.11       |  | Form of Collateralized Note, dated August 5, 2015, incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on August 11, 2015.                                                                                                                        
|10.12       |  | 12% Note I, dated August 5, 2015, incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the SEC on August 11, 2015.                                                                                                                                         
|10.13       |  | 12% Note II, dated August 5, 2015, incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed with the SEC on August 11, 2015.                                                                                                                                        
|10.14       |  | Securities Purchase Agreement, dated August 12, 2015, by and between Darling Capital LLC and the Company, incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 14, 2015.                                                              
|10.15       |  | 8% Convertible Promissory Note, dated August 12, 2015, by and between Darling Capital LLC and the Company, incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 14, 2015.                                                             
|10.16       |  | Amendment, Waiver and Modification Agreement, dated August 13, 2015, by and among the Company and Redwood Management, LLC including any designees or assignees thereto, incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 14, 2015.
|10.17       |  | Amendment to Unsecured Convertible Promissory Note, dated August 26, 2015, by and between Vape Holdings, Inc. and Typenex Co-Investment, LLC. *                                                                                                                                                        
|10.18       |  | Form of Option Surrender Agreement, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 22, 2015.                                                                                                                                      
|10.19       |  | Form of Stock Surrender Agreement Stock, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on October 22, 2015.                                                                                                                                 
|10.20       |  | Secured Series B Preferred Stock Convertible Promissory Note by and between the Company and Hive Ceramics LLC, dated December 10, 2015, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 11, 2015.                                 
|10.21       |  | Amended and Restated Secured Series B Preferred Stock Convertible Promissory Note by and between the Company and Hive Ceramics LLC, dated December 10, 2015, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on December 11, 2015.            
|10.22       |  | Executive Employment Agreement, dated December 10, 2015, by and between the Company and Justin Braune, incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 11, 2015.                                                                  
|10.23       |  | Consulting Agreement, dated December 10, 2015, by and between the Company and Kyle Tracey, incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed with the SEC on December 11, 2015.                                                                              
|10.24       |  | Common Stock Purchase Agreement, dated December 10, 2015, by and between Vape Holdings, Inc. and Odyssey Research and Trading, LLC. *                                                                                                                                                                  
|10.25       |  | Forbearance Agreement, dated December 10, 2015, by and between Vape Holdings, Inc. and Typenex Co-Investment, LLC. *                                                                                                                                                                                   



|10.26 |  | Share Exchange Unwind Agreement, dated January 12, 2015, by and among Vape Holdings, Inc., BetterChem Consulting, Inc. and Mark Scialdone. *
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------





E-1









|Exhibit No. |  | Description of Exhibit                                                                                                                                        
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|14.1        |  | Code of Ethics, dated May 11, 2015, incorporated by reference to our Quarterly Report on Form 10-Q filed with the SEC on May 15, 2015.                        
|21.1        |  | List of Subsidiaries of Vape Holdings, Inc. *                                                                                                                 
|23.1        |  | Consent
of DBBMcKennon, Independent Registered Public Accountants, as to the report relating to the consolidated financial statements of
Vape Holdings, Inc. *
|31.1        |  | Section 302 Certification of Chief Executive Officer *                                                                                                        
|31.2        |  | Section 302 Certification of Chief Financial Officer *                                                                                                        
|32.1        |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 *                                                                                 
|32.2        |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 *                                                                                 
|99.1        |  | Audit Committee Charter, dated May 11, 2015, incorporated by reference to our Quarterly Report on Form 10-Q filed with the SEC on May 15, 2015.               
|99.2        |  | Compensation Committee Charter, dated May 11, 2015, incorporated by reference to our Quarterly Report on Form 10-Q filed with the SEC on May 15, 2015.        
|99.3        |  | Insider Trading Policy, dated May 11, 2015, incorporated by reference to our Quarterly Report on Form 10-Q filed with the SEC on May 15, 2015.                
|101.INS **  |  | XBRL Instance Document                                                                                                                                        
|101.SCH **  |  | XBRL Taxonomy Schema                                                                                                                                          
|101.CAL **  |  | XBRL Taxonomy Calculation Linkbase                                                                                                                            
|101.DEF **  |  | XBRL Taxonomy Definition Linkbase                                                                                                                             
|101.LAB **  |  | XBRL Taxonomy Label Linkbase                                                                                                                                  
|101.PRE **  |  | XBRL Taxonomy Presentation Linkbase                                                                                                                           



*Filed herewith



**Furnished herewith. XBRL (Extensible
Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes
of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.





E-2