~~20265 Ventura Boulevard,~~21822 Lassen Street, Suite A, ~~Woodland Hills, California 91364~~Chatsworth, CA 91311

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) 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 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.

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

Number of shares of Common Stock outstanding at ~~August 19, 2014:~~February 13, 2015:

Certain information included in this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q, 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 Quarterly Report on Form 10-Q.

Certain information and footnote disclosures required under accounting principles generally accepted in the United States of America have been condensed or omitted from the following financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). It is suggested that the following consolidated financial statements be read in conjunction with the financial statements and notes thereto included in ~~Form 8-K/A for the period ended September 30, 2013 of Vape Holdings, Inc. filed on December 16, 2013, as well as~~ the annual financial statements included in Form 10-K ~~of PeopleString Corporation~~Vape Holdings, Inc. for the year ended ~~December 31, 2012.~~September 30, 2014.

	June 30, 2014			September 30, 2013			December 31, 2014			September 30, 2014
ASSETS
Current assets:
Cash	$	72,860		$	568		$	274,381		$	48,370
Accounts receivable		24,865			-			25,867			16,771
Inventory		140,292			-			331,531			227,530
Prepaid inventory		212,608			-
Prepaid Inventory								220,224			246,491
Other current assets		76,359			-			36,828			44,100
Deferred financing costs								30,627			-
Total current assets		526,984			568			919,458			583,262

Fixed assets, net of accumulated depreciation								112,267			106,377
Trademarks		116,000			-			123,150			119,575
Pending patents		12,245			-			16,340			14,890
Deferred financing costs, long-term								12,761			-
TOTAL ASSETS	$	655,229		$	568		$	1,183,976		$	824,104

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable	$	243,782		$	60,346		$	101,546		$	216,388
Accrued expenses		99,124			7,573			174,045			169,513
Convertible notes payable, net of unamortized discount of $162,244 at June 30, 2014		314,089			-
Related party convertible notes payable, net of unamortized discount of $20,000 at June 30, 2014		70,000			-
Related party notes payable		12,828			234,824
Customer deposits								4,567			-
Convertible notes payable, net of unamortized discount of $155,666 and $32,333, respectively								391,001			187,667
Related party convertible notes payable, net of unamortized discount of $1,669 and $4,168, respectively								48,331			45,832
Total current liabilities		739,823			302,743			719,490			619,400

Long term liabilities:
Convertible notes payable, long-term, net of unamortized discount of $22,841 at June 30, 2014		28,826			-
Related party convertible notes payable, long-term, net of unamortized discount of $49,743 at June 30, 2014		415,792			-
Convertible notes payable, long-term, net of unamortized discount of $60,555 and $19,800, respectively								172,778			178,200
Related party convertible notes payable, long-term, net of unamortized discount of $125,480 at September 30, 2014								-			199,115
Related party notes payable, long-term		328,462			-			288,462			341,290
Accounts payable - related party		-			15,000
Settlement liabilities		9,063,196			-
Other liabilities, long-term								1,504			-
Warrant liability								1,054,407			2,464,232
Total liabilities		10,576,099			317,743			2,236,641			3,802,237

Commitments and contingencies

Stockholders' deficit:
Preferred stock, $0.00001 par value - 100,000,000 authorized;
500,000 outstanding at June 30, 2014		-			-
Common stock, $0.00001 par value - authorized 1,000,000,000 shares;
9,644,935 and 6,250,000 issued and outstanding, respectively		96			62
Preferred stock, $0.00001 par value - 100,000,000 authorized; 500,000 outstanding at December 31, 2014 and September 30, 2014								-			-
Common stock, $0.00001 par value - authorized 1,000,000,000 shares; 10,955,678 and 10,032,436 issued and outstanding, respectively								109			100
Additional paid-in capital		21,560,222			-			23,745,212			22,402,662
Accumulated deficit		(31,481,188	)		(317,237	)		(24,797,985	)		(25,380,895	)
Total stockholders' deficit		(9,920,870	)		(317,175	)		(1,052,665	)		(2,978,133	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	655,229		$	568		$	1,183,976		$	824,104

	For the Three Months Ended June 30						For the Nine Months Ended			For the Period from March 26, 2013 ("Inception") to			For the Three Months Ended December 31,
	2014			2013			June 30, 2014			June 30, 2013			2014			2013
Revenue	$	361,781		$	—		$	392,540		$	—		$	386,643		$	-

Cost of revenue		356,166			—			365,787			—			149,886			-

Gross profit		5,615			—			26,753			—			236,757			-

Operating expense:
Sales and marketing														69,280			-
Research and development		109,540			—			138,627			—			51,853			-
General and administrative [A]		1,058,660			90,771			1,266,511			90,771			974,707			218,819
Total operating expenses		1,168,200			90,771			1,405,138			90,771			1,095,840			218,819

Operating loss		(1,162,585	)		(90,771	)		(1,378,385	)		(90,771	)		(859,083	)		(218,819	)

Other expense:
Other income (expense):
Interest expense		112,812			—			164,471			—			(77,990	)		-
Interest expense - related party		82,390			1,557			91,451			1,557			(145,563	)		(48,508	)
Loss of settlement of warrants		—			—			29,528,844			—
Change in derivative liability														1,409,825			-
Gain on settlement														257,930			-
Total other income (expense), net														1,444,202			(48,508	)

Total other expense, net		195,202			1,557			29,784,766			1,557

Loss before provision for income taxes		(1,357,787	)		(92,328	)		(31,163,151	)		(92,328	)
Income (loss) before provision for income taxes														585,119			(267,327	)

Provision for income taxes		800			—			800			—			2,209			-

Net loss	$	(1,358,587	)	$	(92,328	)	$	(31,163,951	)	$	(92,328	)
Net income (loss)													$	582,910		$	(267,327	)

Weighted average shares - basic and diluted		8,490,049			6,250,000			7,059,138			6,250,000
Loss per common share - basic and diluted	$	(0.17	)	$	(0.01	)	$	(4.41	)	$	(0.01	)
Net income available to common shareholders:
Earnings (loss) per common share - basic													$	0.06		$	(0.04	)
Earnings (loss) per common share - diluted													$	0.05		$	(0.04	)

Weighted average shares - basic														10,692,552			6,277,480
Weighted average shares - diluted														12,803,063			6,277,480

[A] Stock-based compensation was ~~$437,312 for the three and nine months ended June 30, 2014,~~$612,549 and $0 for the ~~period from March 26, 2013 (“Inception”) to June 30,~~three months ended December 31, 2014 and 2013, respectively.

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

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 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 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 1315 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, and the new 14mm HIVE ~~Stinger Dabber.~~ x Quave – Club Banger.

The ~~full~~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 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.

Vape has also announced the launch of ‘HIVE Supply’ coming in early 2015. 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 legal cannabis businesses in regards to sourcing consumer products, brand management and marketing services.

In connection with its launch of HIVE Supply and HIVE Glass, the Company plans to open ‘THE HIVE’ retail store and gallery in Los Angeles; an end-user experience to showcase the complete line ~~is currently~~of HIVE Ceramics and HIVE Glass products, while introducing HIVE Supply and all the new products being ~~manufactured~~tested and ~~distributed and is available now.~~

The Company has ~~recently~~ expanded its distribution network to include several distributors throughout the United States, Canada, Europe and South America to pair with its existing e-commerce website atwww.HiveCeramics.com and its wholesale authorized dealer network of over 1,100 authorized shops.

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.

Vape’s financial statements reflect net income $582,910 primarily as a result of a gain on change in derivative liability and $257,390 gain on settlement. As of December 31, 2014, we had cash of $274,381 and working capital of $199,968. Management has subsequently obtained funding for operations described below and for the foreseeable future. However, there is a risk of default as the funding is subject to completion.

If current and projected revenue growth does not meet Management estimates, the Management may choose to raise additional capital through debt and/or equity transactions, renegotiate current convertible debt obligations, reduce certain overhead costs through the deferral of salaries and other means, and settle liabilities through negotiation. Currently, we cannot provide assurance that such financing will be available to us on favorable terms, or at all. If, after utilizing the existing sources of capital available to us, further capital needs are identified and if we are not successful in obtaining the financing, we may be forced to curtail our existing or planned future operations.

On ~~September 30, 2013,~~February 10, 2015, the ~~then PeopleString Corporation,~~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 ~~its wholly-owned subsidiary, RewardString Corporation~~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 (“~~RewardString”~~OID”), of $182,000 and ~~Vape Holdings, Inc.,~~transaction expenses of $10,000 for a ~~Nevada corporation (the “Private Company”), closed a Merger~~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 Reorganization Agreement whereby the Private Company merged with RewardString, with the Private Company being the surviving entity (the “Merger”). The Private Company shareholders represented approximately 74.95% of the total issued and outstandingis convertible into common stock of the ~~merged company.~~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 Maturity Date of the $2M Note is twelve months from the date of issuance.

On January 22, 2015, the Company created a new wholly-owned subsidiary, Offset LLC (“Offset”), which is in the business of branding, marketing, and ~~the Private Company was accounted for~~merchandising services. Offset will serve as ~~a reverse acquisition~~Vape’s creative marketing, branding 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~~merchandising vehicle working synergistically 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~~Vape’s existing product lines, sales and ~~liabilities of PeopleString~~distribution channels, HIVE Supply retail development while expanding into unique branding, marketing and ~~RewardString were recorded at fair value; the assets of PeopleString~~merchandising avenues both inside and ~~RewardString were not significant. The historical results of operations and cash flows~~outside of the ~~Private Company were reported since~~legal cannabis industry.

The Offset creative team brings an entrepreneurial branding spirit to the Vape Holdings team. The team’s experience covers the legal aspects of intellectual property, licensing, distribution agreements as well as commercial contracts for major brands and entertainers. The Offset team seeks to capitalize on Vape’s existing industry contacts while utilizing its ~~inception on March 26, 2013 (“Inception”). On September 30, 2013,~~existing contacts in other relevant industries to help take Vape Holdings to the ~~Company approved a change in fiscal year end of~~next level by continuing to penetrate new markets.

The Vape management team is extremely excited by the ~~Company from December 31st~~potential Offset has to ~~September 30th due~~offer to ~~a change in reporting entity. Following such change, the date of the Company’s next fiscal year end is September 30, 2014.~~existing Vape businesses and products as well as new, revenue-generating opportunities.

Vape ~~commenced revenue generating operations late~~also plans to leverage its management team’s vast experience in the ~~three month period ended March 31, 2014.~~legal cannabis concentrate industry to provide management, consulting, branding, real estate and compliant packaging solutions to lawfully operating participants in the legal cannabis industry. Although the Company plans to provide services to the industry, it does not grow, transport, harvest, or sell cannabis. Furthermore, it does not currently maintain an ownership interest in any extraction laboratories or concentrate facilities. As for its real estate services, the Company plans to hold properties in strategic locations deemed to be susceptible for large scale manufacturing and extraction of concentrates. Vape plans to purchase this real estate, build the full-scale infrastructure needed for these cultivation and extraction laboratories and then lease the real estate, equipment and infrastructure to these compliant cultivators. The Company also plans to provide property management and leasing services to legally compliant legal cannabis facilities. Vape management has extensive experience operating in the legal cannabis concentrate industry and knowledge of the ever-changing legal hurdles that legal concentrate manufacturer’s face. The Company plans to provide guidance and expertise to assist in the development of standardized labs, processes and packaging. To that end, the Company plans to work closely with the leaders in cultivation, extraction and lab testing in the most relevant markets to form a positive working group to set the standard for how these products are made, packaged and responsibly advertised. Vape plans to forge strategic relationships in the legal concentrate industry, develop intellectual property and standardize the build-out and process of concentrate manufacturing facilities. Vape has already begun deploying management and consultants into areas of interest to evaluate opportunities in this rapidly growing industry.

~~Effective as~~A number of ~~January 8, 2014,~~states, including Oregon, Washington and Colorado, have enacted laws and regulations which allow the ~~Company amended its Certificate~~use, cultivation and production of ~~Incorporation~~medical and recreational marijuana. Vape plans to work with ~~the Delaware Secretary of State pursuant~~these legally compliant cultivation and extraction facilities that are in compliance with applicable state and local laws, rules and regulations.

Vape is organized and directed to ~~a certificate of amendment to formally change its name from PeopleString Corporation to Vape Holdings, Inc. (the “Name Change”). The Company’s Board of Directors~~operate strictly in accordance with all applicable state and ~~shareholders representing approximately 53.3% of the outstanding shares of the Company’s common stock approved the Name Change by written consent on December 24, 2013.~~federal laws.

~~HIVE Ceramics Asset Purchase~~NOTE 2. ACCOUNTING POLICIES AND BASIS OF PRESENTATION

On February 28, 2014, the Company entered into an Asset Purchase Agreement (the “Agreement”) with HIVE Ceramics, LLC (“HIVE”) whereby the Company agreed to acquire all right, title and interest to the HIVE vaporization product line and related intellectual property in exchange for the issuance of 500,000 shares of Series A Preferred Stock ( the “Series A Shares”) to HIVE. The Transaction formally closed on March 27, 2014.

HIVE had been in development of a ceramic product line for use in the vaporization market. The development of this initial product line was completed in 2014. No sales of this product line were made prior to the acquisition of the HIVE product on March 27, 2014.

The Company also received $250,000 in capital from HIVE at closing and, as a result, the Company issued a note payable to HIVE (the “HIVE Note”). The HIVE Note is dated March 27, 2014 payable to HIVE. In accordance with the Agreement, the Company issued the HIVE Note in exchange for the principal amount of $250,000. 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.

Employment Agreements for Michael Cook as Director of Business Development and Kyle Tracey as Chief Executive Officer were also executed at Closing. Per Mr. Cook’s employment agreement, he is entitled to $80,000 per year in salary over a two (2) year employment term In the event that his employment is terminated without cause he will be entitled to payment of his base salary for a six (6) month period following termination. Per Mr. Tracey’s employment agreement, he is entitled to $120,000 per year in salary over a two (2) year employment term. In the event that his employment is terminated without cause he will be entitled to the remaining salary of the two (2) year employment term plus the issuance of five percent (5%) of the Company’s common stock on a fully diluted basis.

~~During the nine months ended June 30, 2014, and as of June 30, 2014, the Company accrued wages and taxes of $18,446 and $34,523 for Mr. Cook and Mr. Tracey, respectively.~~

The accompanying unaudited interim 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 financial statements have been included. Such adjustments consist of normal recurring adjustments. The current results are not an indication of the full year.

As a result of the merger between Vape and PeopleString, the Vape shareholders controlled the Company post-merger. This resulted in a change in reporting entity, whereby the historical financial statements of Vape are presented herein. The assets acquired and liabilities assumed were recorded at fair value; however, there were no significant assets acquired and approximately $24,000 in liabilities assumed.

The preparation of 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates and assumptions include losses for warrant contingencies and the valuation of conversion features in notes.

Fair value 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:

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 December 31, 2014 and September 30, 2014. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash, prepaids, 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 December 31, 2014:

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:

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 causing write-offs of potentially uncollectible accounts.

One supplier accounted for 100% of our ceramic purchases. The loss of this supplier would have a significant impact on the Company’s financial results.

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 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 ~~otherwise~~considered impaired.

Property and equipment 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.

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 ~~which we~~circumstances indicate that the carrying amount of an asset may not ~~recover~~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 ~~recorded~~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 property and equipment 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 three months ended December 31, 2014 and 2013, the Company did not record any impairment of its trademarks and pending patents as its expected future cash flows are in excess of their carrying amounts.

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 property and equipment 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 three ~~and nine~~ months ended ~~June 30,~~December 31, 2014 and 2013, research and development costs were ~~$109,540~~$51,853 and ~~$138,627,~~$0, respectively.

Basic per-share information includes the weighted average shares outstanding during the periods. Dilutive per-share information includes shares available under convertible notes, options and warrants, to the extent these are not anti-dilutive.

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 three and nine months ended June 30, 2014:

The Company would have excluded 125,000 options from the computation for the periods presented, 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.

Convertible debt is accounted for under the guidelines established by ~~Accounting Standards Codification (“ASC”)~~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 58 – ~~CONVERTIBLE NOTES PAYABLE”~~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.

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 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.

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 which have been included in the calculation of diluted net income per share and reconciliation of net income to net income available to common stock holders:

The Company excluded 1,005,000 warrants from the computation for the three months ended December 31, 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.

The following is a summary of outstanding securities which have been excluded from the calculation of diluted net loss per share because the effect would have been anti-dilutive:

The Company excluded 938,668 warrants from the computation for the year ended December 31, 2013, 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.

During the three months ended December 31, 2013, the Company would have excluded 125,000 options from the computation for diluted net income per share 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.

ASC 718, “Share-Based Payment” requires that compensation cost related to share-based payment transactions be recognized in the 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 three months ended December 31, 2014 and 2013:

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.

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

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

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.

~~Vape’s financial statements reflect losses~~The following is a summary of fixed assets as of December 31, 2014 and ~~net cash used~~September 30, 2014:

During the three months ended December 31, 2014 and 2013, depreciation expense included in ~~operations~~cost of $880,345. The Company also has a working capital deficit. These matters 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 recoverabilityrevenue were $13,495 and ~~classification of assets or the amounts and classification of liabilities that may result from the inability to continue as a going concern.~~$0, respectively.

The following is a summary of accrued expenses as of ~~June 30,~~December 31, 2014 and September 30, ~~2013:~~2014:

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 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 three and 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.

~~During the three and nine months ended June 30, 2014, the Company had recorded $4,637 and $5,522 of interest expense related to these notes, respectively.~~

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 $12,827.71 (the “Andreae Note II”). Per the terms of the Andreae Note II, the original principal balance is $12,827.71, 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 October 16, 2013, the Company issued an 8% Convertible Note to a shareholder (“8% Note I”), in exchange for $2,420 which the Company received on April 15, 2013. Per the terms of 8% Note I, the original principal balance was $2,420, and was not secured by any collateral or any assets pledged to the holder. The maturity date was April 15, 2015. Subject to certain limitations, the holder, at its sole discretion, could convert the outstanding and unpaid principal and interest into fully paid and nonassessable shares of the Company’s common stock. The conversion price for 8% Note I 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%). The note was converted on December 23, 2013 into 3,990 shares. We recorded a discount totaling $968 related to the beneficial conversion feature embedded in the note upon issuance. Such amount was fully accreted to interest expense during the three months ended December 31, 2013 due to the conversion, together with accrued interest of $150.

On October 16, 2013, the Company issued an 8% Convertible Note to a shareholder (“8% Note II”), in exchange for $30,300 which the Company received on July 3, 2013. Per the terms of 8% Note II, the original principal balance was $30,300, and was not secured by any collateral or any assets pledged to the holder. The maturity was July 3, 2015. Subject to certain limitations, the holder, at its sole discretion, could convert the outstanding and unpaid principal and interest into fully paid and nonassessable shares of the Company’s common stock. The conversion price for 8% 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%). The note was converted on December 23, 2013 into 49,139 shares of the Company’s common stock. We recorded a discount totaling $12,120 related to the beneficial conversion feature embedded in the note upon issuance. Such amount was fully accreted to interest expense during the three months ended December 31, 2013 due to the conversion, together with accrued interest of $ 1,239.

On October 16, 2013, the Company issued an 8% Convertible Note to a shareholder (“8% Note III”) (collectively, the “8% Notes), in exchange for $180,940 which the Company received on March 5, 2013. Per the terms of 8% Note III, the original principal balance is $180,940, and is not secured by any collateral or any assets pledged to the holder. The maturity date is March 5, 2015, 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 8% Note III is 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 $72,376 related to the beneficial conversion feature embedded in the note upon issuance. We amortized $13,571 and $40,712 of the discount to interest expense during the three and nine months ended June 30, 2014, respectively.

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 is not secured by any collateral or any assets pledged to the holder. The maturity date is 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 is 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 $531 and $884 of the discount to interest expense during the three and nine months ended June 30, 2014, respectively.

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 is 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 Tracey Note II is 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 amortized $368 and $368 of the discount to interest expense during the three and nine months ended June 30, 2014, respectively.

On January 31, 2014, the Company issued a 10% Convertible Note (the “10% Note”) to a third-party consultant (the “Holder”) in the principal amount of $100,000 for services rendered to the Company. The 10% Note is not secured by any collateral or any assets pledged to the Holder. The maturity date is January 31, 2015 and the annual rate of interest is ten percent (10%). 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 10% Note is $2.00 per share. We recorded a discount totaling $84,375 related to the beneficial conversion feature embedded in the note upon issuance. We amortized $21,094 and $35,156 of the discount to interest expense during the three and nine months ended June 30, 2014, respectively. See Note 10 for subsequent conversion. As a result, $21,159 related to this note, net of unamortized discount of $21,159 has been classified as long-term 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 ~~$270,000, of which $40,000 is from Kyle Tracey recorded as a related party convertible note payable.~~$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 ~~$3.00~~$1.00 per share or greater than ~~$8.00~~$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. ~~Excluding the 6% note to Kyle Tracey, we~~We recorded a discount totaling $92,000 related to the beneficial conversion feature embedded in the notes upon issuance and amortized $22,000 of the discount to interest expense during the three months ended December 31, 2014. As of December 31, 2014, there is $11,209 in accrued interest expense related to these notes and the Company recorded $3,372 in interest expense related to these notes during the three months ended December 31, 2014.

On December 3, 2014, Vape Holdings, Inc. (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 $2,778 of the discount to interest expense during the three months ended December 31, 2014. In addition, the Company recorded $45,940 in deferred financing costs and amortized $2,552 to interest expense during the three months ended, December 31, 2014. As of December 31, 2014, the Company capitalized $30,627 and $12,761 as current and long-term deferred financing costs, respectively.

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. ~~Excluding~~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 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. We amortized $9,333 of the discount to interest expense during the three months ended December 31, 2014. As of December 31, 2014, $181,333 and $172,778, net of total unamortized discounts of $145,333 and $60,556, respectively are classified as current and long-term on the accompanying balance sheet. As of December 31, 2014, there is $4,356 in accrued interest expense related to these notes and the Company recorded $4,356 in interest expense related to this note during the three months ended December 31, 2014.

On March 19, 2014, the Company issued an 8% Convertible Note to W-net Fund I, LP in exchange for the contribution of capital to the Company in the amount of $198,000 (the “W-net Note”). Per the terms of the W-net Note, the principal balance is $198,000, and is not secured by any collateral or any assets pledged to the holder. The maturity date is November 19, 2014 and interest accrues at 8% per annum. 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 W-net Note is eighty percent (80%) of the average of the three (3) lowest daily closing bid prices (the 3 lowest prices will be calculated on a VWAP basis) occurring during the ten (10) consecutive Trading Days immediately preceding the applicable conversion date on which the holder elects to convert. In no event shall the conversion price be less than $1.00 or greater than $3.00. We recorded a discount totaling $158,400 related to the beneficial conversion feature embedded in the notes upon issuance. On June 2, 2014, the W-net Note was assigned in its entirety to a third party free of any liens or encumbrances. On October 28, 2014, the Company received a Notice of Conversion for the W-net Note. 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. Upon conversion, we expensed the unamortized discount of $19,800 to non-cash interest expense.

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.

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 December 31, 2014, there is $963 in accrued interest expense related to this note and the Company recorded $231 in interest expense related to this note during the three months ended December 31, 2014.

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 December 31, 2014, there is $11,519 in accrued interest expense related to this note and the Company recorded $3,834 in interest expense related to this note during the three months ended December 31, 2014.

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 ~~Kyle Tracey, we~~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.

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 ~~$23,000~~$1,000 and ~~$35,333~~$1,667 of the discount to interest expense during the three and nine months ended June 30, 2014, respectively. ~~We recorded~~On October 28, 2014, the Company received a ~~discount totaling $16,000 related~~Notice of Conversion on two (2) 8% Convertible Notes issued to ~~the beneficial conversion feature embedded in the 6% note~~third parties on February 18, 2014 to ~~Kyle Tracey upon issuance. We amortized $2,667 and $2,667~~cover expenses of the ~~discount to~~Company. The noteholders converted aggregate principal of $20,000 and aggregate outstanding accrued and unpaid interest ~~expense during~~of $1,100 into an aggregate of 42,370 shares of restricted common stock of the ~~three and nine months ended June 30, 2014, respectively. See Note 10 for subsequent~~Company at a per share conversion price of $0.498 in accordance with the terms of their convertible notes payable. The conversion of ~~$10,000 related to these notes. As a result, $7,667 related to~~ these notes ~~net~~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 ~~$2,333 has been classified as long-term convertible notes, payable.~~

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 $2,500 ~~and $3,333~~ of the discount to interest expense during the ~~three~~year ended December 31, 2014. As of December 31, 2014, there is $3,180 in accrued interest expense related to this note and ~~nine~~the Company recorded $1,021 in interest expense related to this note during the three months ended ~~June 30, 2014, respectively.~~December 31, 2014.

On ~~March 19,~~February 18, 2014, the Company issued an 8% Convertible Note to ~~W-net Fund I, LP in exchange~~Kyle Tracey for ~~the contribution of capital~~monies borrowed from Mr. Tracey to ~~the Company~~cover outstanding accounts payable in the amount of ~~$198,000~~$10,612 (the ~~“W-net~~“Tracey Note”). Per the terms of the ~~W-net~~Tracey Note, the original principal balance is ~~$198,000,~~$10,612, and iswas 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 ~~November 19, 2014 and interest accrues at 8% per annum.~~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 ~~W-net~~Tracey Note is eighty percent (80%) of the average of the three (3) lowest daily closing bid prices (the 3 lowest prices will be calculated on a VWAP basis) occurring during the ten (10) consecutive Trading Days immediately preceding the applicable conversion date on which the holder elects to convert. In no event shall the conversion price be less than $5.50 or greater than $11.00. We recorded a discount totaling $158,400 related to the beneficial conversion feature embedded in the notes upon issuance. On June 2, 2014, the W-net Note was assigned in its entirety to a third party free of any liens or encumbrances. We amortized $59,400 and $79,200 of the discount to interest expense during the three and nine months ended June 30, 2014, respectively.

On May 12, 2014, the Board, by unanimous written consent, elected to amend the conversion prices of the following Notes: 1) the 6% Notes and 2) the W-net Notes by adjusting the “floor” and “ceiling” on their conversion prices to $1.00/$3.00 from $3.00/$8.00 and $5.50/$11.00 respectively due to recent unexpected circumstances (including the exercise of numerous warrants pursuant to a full ratchet anti-dilution adjustment issued by previous management of the Corporation back in 2011) to better reflect the current market and maintain relationships with its noteholders.

~~The Company has the ability to increase the authorized~~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 non-cash interest expense.

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 ~~event that~~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 ~~notes require more~~note. The conversion of the Tracey PPM Note was in full satisfaction of the note. The shares ~~than available.~~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 non-cash interest expense.

~~As of February 1, 2013,~~On May 12, 2014, the Company had incurred certain debt owed to its former legal counsel, Anslow & Jaclin, LLP. In or about May 2013, this debt was sold to certain founding shareholders of the Private Company on a pro rata basis (the “A&J Debt”). The Company later issued ~~a 6%~~an 8% Convertible Note ~~documenting~~to Kyle Tracey for monies borrowed from Mr. Tracey to cover outstanding accounts payable in the ~~convertible A&J Debt acquired by the founding shareholders~~amount of ~~the Private Company~~$11,042 (the ~~“A&J Note”~~“Tracey Note II”). Per the terms of the ~~A&J~~Tracey Note II, the original principal balance is ~~$17,750,~~$11,042, and iswas not secured by any collateral or any assets pledged to the holder. The maturity date ~~is December 31, 2015,~~was May 12, 2016, and the annual rate of interest is ~~six~~eight percent ~~(6%~~(8%). Subject to certain limitations, ~~a majority-in-interest of~~ the ~~shareholders~~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 ~~A&J~~Tracey Note ~~is $0.002~~II was the lowest market closing price per ~~share. Additionally,~~share within the ~~Company shall have the right to call the conversion~~previous twenty (20) market days of the ~~A&J Note upon completion~~date of ~~the merger transaction between the Private Company and Vape and an increase in the authorized common stock~~conversion minus a discount of ~~Vape.~~forty percent (40%). We recorded a discount totaling ~~$17,750~~$4,417 related to the beneficial conversion feature embedded in the ~~note~~notes upon issuance.

We amortized $920 of the discount to interest expense during the year ended September 30, 2014. On ~~December 24, 2013,~~October 28, 2014, the Company received a Notice of Conversion on the Tracey Note II. Tracey converted ~~the entire~~ principal of $11,042 and outstanding accrued and unpaid interest of ~~the A&J Note in the amount of $17,799~~$407 into ~~222,498~~22,989 shares of ~~the Company’s~~restricted common stock of the Company at a per share conversion price of ~~$0.002~~$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 ~~a pro rata basis~~November 7, 2014. Upon conversion, we expensed the unamortized discount of $3,497 to non-cash 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 ~~shareholders~~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 ~~Private Company. All fractional shares created by~~Company’s common stock. The conversion price for the ~~conversion~~Cook Note was the lowest market closing price per share within the previous twenty (20) market days of the ~~A&J Note were rounded~~date of conversion minus a discount of forty percent (40%). We recorded a discount totaling $4,730 related to the ~~nearest whole share. If~~beneficial conversion feature embedded in the ~~fraction created was one half or less, it was rounded down to~~notes upon issuance. We amortized $985 of the ~~nearest whole share. If the fraction was more than one half, it was rounded up to the nearest whole share. Each shareholder received at least one share. We fully accreted the~~ discount ~~of $17,750~~ to interest expense during the ~~three months~~year ended ~~December 31, 2013 due~~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 non-cash 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 ~~together with~~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 ~~$1,592.~~ $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 non-cash 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 non-cash interest expense.

On ~~March 27,~~October 20, 2014, the Company’s Board of Directors issued bonus stock grants of 30,000 shares of restricted common stock each to Joseph Andreae and Kyle Tracey. An additional 30,000 shares of restricted common stock were granted to an employee.

On December 4, 2014 and January 3, 2015, the Company’s Board of Directors increased each of the annual salaries of Joseph Andreae and Allan Viernes to $80,000 and $80,000, respectively.

On December 4, 2014, the Company ~~entered into an Executive Employment Agreement with~~paid bonuses of $3,000, $3,000, $5,000, and $3,500 to Kyle Tracey, (the “Tracey Agreement”) pursuant to which we engaged Mr. Tracey to provide executive services as our Chief Executive Officer for a period of two (2) years. Mr. Tracey shall receive an annual salary of $120,000, 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,Joseph Andreae, Allan Viernes, and ~~he shall be reimbursed for any reasonable expenses incurred while performing his duties as~~Michael Cook, respectively. In addition, on December 4, 2014, the Company’s ~~Chief Executive Officer. Additionally, Mr. Tracey is entitled~~Board of Directors paid $11,000 in bonuses to receive severance in the form of salary continuation of his base salary for the remainder of the two year employment term if terminated without cause plus the issuance of 5% of the Company’s common stock on a fully diluted basis.various employees.

Additionally, on June 28, 2014, Mr. Tracey was granted 190,000 stock options pursuant to the Company’s 2014 Incentive and Nonstatutory Stock Option Plan which was disclosed on a Current Report on Form 8-K filed on July 3, 2014. The stock options were granted at an exercise price of $1.66 which was equal to the fair market value of one share of the Company’s common stock on the date of grant.

On March 27, 2014, the Company entered into an Executive Employment Agreement with Michael Cook (the “Cook Agreement”) pursuant to which we engaged Mr. Cook to provide executive services as our Director of Business Development for a period of two (2) years. Mr. Cook shall receive an annual salary of $80,000, 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 Director of Business Development. Additionally, Mr. Cook is entitled to receive severance equal to six (6) months base salary if terminated without cause by the Company.

Additionally, on June 28, 2014, Mr. Cook was granted 100,000 stock options pursuant to the Company’s 2014 Incentive and Nonstatutory Stock Option Plan which was disclosed on a Current Report on Form 8-K filed on July 3, 2014. The stock options were granted at an exercise price of $1.66 which was equal to the fair market value of one share of the Company’s common stock on the date of grant.

On April 21, 2014 , the Company entered into an Executive Employment Agreement with Joe Andreae (the “Andreae Agreement”) pursuant to which we engaged Mr. Andreae to provide executive services as our President for a period of two (2) years. Mr. Andreae shall receive an annual salary of $75,000, 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 President. Additionally, Mr. Andreae is entitled to receive severance equal to six (6) months base salary if terminated without cause by the Company.

Mr. Andreae is also eligible to participate in the Company’s stock option plan. On June 28, 2014, Mr. Andreae was granted 190,000 stock options pursuant to the Company’s 2014 Incentive and Nonstatutory Stock Option Plan which was disclosed on a Current Report on Form 8-K filed on July 3, 2014. The stock options were granted at an exercise price of $1.66 which was equal to the fair market value of one share of the Company’s common stock on the date of grant (see Note 8).

On June 25, 2014, the Company entered into an Executive Employment Agreement with Allan Viernes (the “Viernes Agreement”) pursuant to which we engaged Mr. Viernes to provide executive services as our Chief Financial Officer for a period of one (1) year. Mr. Viernes shall receive a monthly salary of $4,000, 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 Financial Officer. Mr. Viernes and/or the Company may terminate the Viernes Agreement at any time upon thirty (30) days written notice.

On or about April 4, 2014, Cranshire Capital, LP, a private investment fund with its principal place of business in Northbrook, Illinois (“Cranshire”), filed a lawsuit against the Company. Cranshire alleged that it was a holder of various warrants to purchase common stock ("Warrant Shares") issued by the Company back in May 2011, and that by reason of certain equity issuances made by the Company, the exercise and conversion prices in Cranshire’s warrants should have been reset. Specifically, Cranshire alleged that the warrants contained “full ratchet anti-dilution provisions” whereby certain “subsequent equity sales” made by the Company at any time after 2011 below the exercise price on the warrants resulted in Cranshire’s exercise price adjusting down to the same price at which the equity was issued. In addition, a corresponding increase in the Warrant Shares issuable resulted from the adjustment to maintain the aggregate value of the warrants.

On April 16, 2014, the Company, entered into separate settlement agreements with Cranshire and another warrant holder, Iroquois Master Fund, Ltd. (“Iroquois”). Pursuant to the settlement agreements, the Company agreed to issue an aggregate of 583,427 shares of the Company’s common stock to the settling holders upon partial exercise of their warrant positions pursuant to exercise notices previously submitted by them. An additional 337,626 Warrant Shares remain outstanding and may be exercised by the settling holders in the future at their election. The Company and the settling holders provided mutual general releases. In connection with the settlements, Cranshire agreed to dismiss with prejudice its action filed on April 4, 2014 against the Company.

The settlement agreements also provide for certain selling restrictions on the settling holders. Each holder separately agreed with the Company that (i) on any trading day on which the aggregate dollar volume of the common stock on the principal exchange on which the common stock of the company is then traded is less than $1,000,000, the holders shall not sell a number of Warrant Shares that exceeds 15% of the daily trading volume of the common stock on such trading day as measured on the principal exchange on which such common stock is then traded and (ii) on any trading day on which the aggregate dollar volume of the common stock on the principal exchange on which the common stock of the Company is then traded is greater than or equal to $1,000,000, the holders shall not sell a number of Warrant Shares that exceeds 20% of the daily trading volume of the common stock on such trading day as measured on the principal exchange on which such common stock is then traded. In addition, the settlement agreements contain what is commonly referred to as “most favored nation” provisions whereby the settling holders are entitled to the benefit of more favorable terms if any future agreements are entered into with similar warrant holders on more favorable terms.

Upon learning of the settlements with Cranshire and Iroquois, the Warberg WF I, LP and related entities (collectively, the “Warberg Entities”) disputed their original exercise which resulted in 3,542 shares issued to them

On April 22, 2014, the Company entered into a settlement agreement with the Warberg Entities. Pursuant to the settlement agreement, the Company agreed to issue an aggregate of 356,415 shares of the Company’s common stock in the aggregate to the settling holders upon partial exercise of their warrant positions pursuant to exercise notices previously submitted by them. An additional 378,855 Warrant Shares remained outstanding to be exercised by the settling holders in the future at their election. Warrants Shares of 3,992,800 were cancelled as a result of the settlement.

The Company and the Warberg Entities provided mutual general releases and the settlement agreement with the Warberg Entities included identical selling restrictions to the Cranshire and Iroquois settlements.

On April 24, 2014, the Company entered into a settlement agreement with Sphinx Trading, LP (“Sphinx”). Pursuant to the settlement agreement, the Company agreed to issue an aggregate of 481,569 shares of the Company’s common stock to the settling holder upon partial exercise of its warrants pursuant to exercise notices previously submitted by it. An additional 100 Warrant Shares remain outstanding and may be exercised by the settling holder in the future at its election. Warrants Shares of 9,559 were cancelled as a result of the settlement.

The Company and Sphinx provided mutual general releases and the settlement agreement with Sphinx included identical selling restrictions and most favored nations provisions as provided in the Cranshire and Iroquois settlements.

On April 24, 2014, Cranshire was issued an additional 262,523 shares of common stock of the Company pursuant to a notice of exercise of their outstanding, but unissued warrants as set forth in its settlement agreement with the Company. Following this exercise Cranshire has 2,000 warrants outstanding. Warrants Shares of 5,211 were cancelled as a result of the settlement.

On April 28, 2014, the Warberg Entities were issued an additional 368,903 shares of common stock of the Company pursuant to a notice of exercise in full of their outstanding, but unissued warrants as set forth in their settlement agreement with the Company. Following this exercise, the Warberg Entities had zero warrants outstanding. Warrants Shares of 9,952 were cancelled as a result of the settlement.

On May 14, 2014, Cranshire was issued an additional 99,538 shares of common stock of the Company pursuant to a notice of exercise in full of a warrant that was assigned to Cranshire from an unsettled warrant holder. A total of 3,620 Warrant Shares were cancelled as a result of the conversion and no further Warrant Shares were outstanding in connection with this assignment.

On May 27, 2014, Cranshire was issued an additional 195,359 shares of common stock of the Company pursuant to a notice of exercise of a warrant in full that was assigned to Cranshire from an unsettled warrant holder. A total of 10,956 Warrant Shares were cancelled as a result of the conversion and no further Warrant Shares were outstanding in connection with this assignment.

On June 4, 2014, an unsettled warrant holder was issued 344,456 shares of common stock of the Company pursuant to a partial notice of cashless exercise. A total of 21,044 Warrant Shares were cancelled as a result of the conversion.

On June 12, 2014 the same warrant holder was issued 373,576 shares of common stock of the Company pursuant to notice of exercise in full of the remainder of its warrant position. A total of 28,468 Warrant Shares were cancelled as a result of the conversion. Following this exercise, the warrant holder had zero warrants outstanding.

As a result of the settlements, the exercise price of the Warrants decreased from $28.00 per share to $0.114 per share and the Warrants outstanding increased from 34,200 to 8,400,000. Each of the above Warrant conversions occurred at the same $0.114 per share price. As of the time of this filing, the Company has issued 3,069,308 shares of common stock to its warrant holders at $0.114 per share as a result of the above warrant exercises and has cancelled 4,080,561 Warrants via settlement and/or cashless exercise. An additional 1,250,131 Warrants remain outstanding and unexercised.

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 ~~three and~~ 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 ~~June 30,~~December 31, 2014, the estimated settlement liability is ~~$9,063,196. Management~~$1,054,407 based on the fair market value of 1,184,727 remaining warrants and therefore the Company recorded a gain on the change in derivative liability of $1,409,825 during the three months ended December 31, 2014.

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 three months ended December 31, 2014. A total of $325,000 in vendor credits has been received in connection with the settlement and no further credits will be given. Subsequently, in January 2015, certain employees were assigned 440,625 shares of common stock valued at $370,938 recorded ~~the amounts settled to additional paid-in capital in proportion to the total estimated~~as stock compensation and as a gain on settlement ~~liability.~~after December 31, 2014.

On November 27, 2013, the board of directors 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.

On December 24, 2013, the Company’s Board and a majority of its shareholders approved a one for forty (1:40) reverse stock split of the Company’s common stock (the “Reverse Stock Split”). The Reverse Stock Split became effective on January 8, 2014. As a result of the Reverse Stock Split, all share information has been retroactively adjusted for all periods presented. All fractional shares created by the Reverse Stock Split were rounded to the nearest whole share. If the fraction created was one half or less, it was rounded down to the nearest whole share. If the fraction was more than one half, it was rounded up to the nearest whole share. Each shareholder received at least one share. The number of the Company’s authorized shares of common stock did not change in connection with the Reverse Stock Split.

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

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

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

~~On June 6, 2014, the Company entered into an agreement to issue 20,000 shares of its~~See Note 7 for common stock ~~to a consultant as compensation~~issued 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 June 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 fair value of the stock vested and recorded during the three and nine months ended June 30, 2014 was $20,800. The shares were issued on August 8, 2014, but are reflected as outstanding as of June 30, 2014.

During the period from Inception to March 31, 2014, services were provided by the Company’s Chief Executive Officer at no cost. The Company has recorded $5,000 per month for the services prior to commencing significant operations. The fair value of contributed services were based on previously negotiated monthly salary and has been recognized in the statement of stockholders’ deficit as contributed services, and the accompanying statements of operations as general and administrative expenses. bonuses.

Before the settlements described above in NOTE 7, on March 26, 2014 and March 31, 2014, respectively, the Warberg Entities exercised a total of 19,250 Series A Warrants (the “Warrants”) issued in May 2011 at $28.00 exercise price per share. In connection with this exercise, the Company issued 3,542 shares to the Warberg Entities via cashless exercise as provided in the Warrants.

The table below summarizes the Company’s warrant activity during the ~~nine~~three month period ended ~~June 30,~~December 31, 2014:

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 of Directors. 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 of Directors 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 ~~Joe~~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 ~~June~~September 30, 2014 an additional $22,312 was expensed due to the revaluing ~~212,5000~~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.

On October 20, 2014, the Company’s Board of Directors granted a total of 20,000 stock options to certain employees and canceled 20,000 options previously allocated (but not issued) to employees. The ~~following weighted average variables~~options were ~~used in~~granted at the ~~Black Scholes model for all option issuances valued during~~market price of the ~~nine~~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 ~~ended June 30, 2014:~~

from the date of grant. 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. The measurement date for the fairaggregate value of the ~~equity instruments issued is~~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 of Directors 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 ~~earlier~~market price of ~~(i)~~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 ~~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~~grant. The aggregate value of the ~~equity instrument is recognized over~~775,000 options on the ~~term~~grant date was $542,500 and the amount expensed upon the grant date was $135,625 as result of 193,750 options immediately vested.

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 of Directors as consideration for consulting ~~agreement.~~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.

As of December 31, 2014, no options are available for issuance under the Plan. During the ~~three and nine months~~year ended ~~June~~September 30, 2014, the Company recorded ~~$437,312~~$537,849 of non-cash “stock options expense” related to the options issued/~~granted in June 2014.~~granted. There was no such expense in the same period during fiscal year 2013.

Option activity during the ~~nine~~three months ended ~~June 30,~~December 31 2014, was as follows:

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value		Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Options outstanding at September 30, 2013		125,000	$	13.20		2.3	$	-
Options outstanding at September 30, 2014										1,150,000		$	2.92		8.7	$	4,648,294
Options granted		1,000,000	$	1.66						995,000		$	0.73
Options exercised		-	$	-						-		$	-
Options cancelled/forfeited/expired		-	$	-						(145,000	)	$	11.61
Options outstanding at June 30, 2014		1,125,000	$	2.94		8.9	$	5,919.091
Options exercisable at June 30, 2014		130,556	$	12.71		0.9	$	32,884
Options outstanding at December 31, 2014										2,000,000		$	1.20		9.7	$	317,629
Options exercisable at December 31, 2014										751,250		$	1.36		9.6	$	79,407

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 three months ended December 31, 2014 and 2013, $466,587 and $0 were recorded as stock-based compensation related to employee options, respectively. During the three months ended December 31, 2014 and 2013, $71,262 and $0 were recorded as stock-based compensation related to non-employee options, respectively. As of December 31, 2014, future stock compensation expense related to employee grants for the fiscal years ending September 30, 2015 and 2016 is expected to be $466,587 and $71,262, respectively. As of December 31, 2014, future stock compensation expense related to non-employee grants for the years ending September 30, 2015 and 2016 is expected to be $606,362 and $115,762, respectively.

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.

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 June 30, 2014, the Company has capitalized $116,000 in costs related to the trademarks.~~

In addition, the Company has filed for trademark protection with the USPTO on several additional trademarks and tradenames to be utilized by the Company in the future as the marks register.

As of December 31, 2014, the Company has capitalized $123,150 in costs related to the trademarks.

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 ~~June 30,~~December 31, 2014, the Company has capitalized ~~$12,245~~$16,340 in costs related to the pending patents.

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.

~~On July 10, 2014, a holder~~See Note 1 for formation of the Company’s 10% Convertible Note (See “NOTE 5 – CONVERTIBLE NOTES PAYABLE”) 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.

~~On July 16, 2014, a holder~~See Note 6 for settlement of the Company’s 8% Convertible Note (See “NOTE 5 – CONVERTIBLE NOTES PAYABLE”) converted principal of $180,940 and outstanding accrued and unpaid interest of $19,750 into 296,003 shares of the Company’s common stock at a per share conversion price of $0.678, which is in accordance with the terms of the convertible note payable. The conversion of the 8% Note III was in full satisfaction of thelong-term note payable.

~~Conversion~~Settlement of ~~6% Convertible Note Payable~~Company Legal Claims

On July 28, 2014, a holder of the Company’s 6% Convertible Notes (See “NOTE 5 – CONVERTIBLE NOTES PAYABLE”) converted principal of $10,000 and outstanding accrued and unpaid interest of $251.51

Entry into ~~7,830 shares of the Company’s common stock at a per share conversion price of $1.31, which is~~Securities Purchase Agreement for $1.8M in ~~accordance with the terms of the convertible note payable. The conversion of this 6%~~Financing

See Note ~~was in full satisfaction of the note payable as to this holder.~~ 1 for subsequent financing.

On July 28, 2014, the Company granted 25,000 nonstatutory stock options to a consultant pursuant to the Company’s 2014 Incentive and Nonstatutory Stock Option Plan. The options were granted at an exercise price of $2.14 which was equal to the fair market value of one share of the Company’s common stock on the date of grant.

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”). Per the terms of the Andreae Note, 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 August 4, 2014, the Company announced distribution relationships with several distributors throughout the United States, Canada, Europe and South America.~~

~~The Company partnered with~~ ~~GotVape.com~~ ~~for the U.S. distribution of its HIVE Ceramics product line.~~ ~~GotVape.com~~, founded back in 2001, is an industry leading Vaporizer Health Network, boasting the top online vaporizer retail site in the world as well as an expansive nationwide wholesale distribution chain.

The Company has also partnered with European distributor DNA Genetics and their new South American distribution company, Pure DNA, to distribute HIVE products throughout their respective markets. 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 and South American markets.

~~Additional distributor relationships were finalized to distribute HIVE products throughout Canada. West Coast Gifts (http://westcoastgifts.ca~~), based in Vancouver, Canada, has an excellent reputation as one of the longest-running distributors of nationally recognized brands of vaporizers and related accessories in Canada. Puff Pipes (~~http://www.puffpipes.ca), also based in Vancouver, Canada, is one of Canada's leading suppliers of high quality glass works for over 20 years.~~

~~The Company has also expanded its wholesale authorized dealer network to over 1,100 authorized shops nationwide.~~

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Company has provided below information about Vape’s financial condition and results of operations for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2014 and ~~2013 and period from March 26, 2013 (“Inception) to June 30,~~ 2013. This information should be read in conjunction with Vape’s unaudited consolidated financial statements for the ~~three~~year ended September 30, 2014 and ~~nine months ended June~~period from March 26, 2013 (“Inception”) to September 30, ~~2014,~~2013, including the related notes thereto, which begin on page 1 of this report. These unaudited consolidated financial statements should be read with the year-end financial statements and notes thereto included in Form 8-K/A for the period ended September 30, 2013 of the Company filed on December 16, 2013, as well as the PeopleString Corporation Form 10-K for the year ended December 31, 2012. The following discussion and analysis contains forward-looking statements that reflect the Company’s plans, estimates and beliefs. The Company’s actual results could differ materially from those discussed in the forward-looking statements.

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 ~~187,381,500~~4,684,538 shares of common stock of the merged company on a pro rata basis in exchange for ~~355,000~~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~~ “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.~~activities.

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 is the premier brand under the Vape umbrella. HIVE manufactures and distributes a proprietarily blended ceramic vaporization element for torched, electronic and portable ~~vaporizer~~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 1315 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, and the new 14mm HIVE ~~Stinger Dabber. The full HIVE product line is currently being manufactured and distributed and is available now.~~x Quave – Club Banger.

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 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.

In connection with its launch of HIVE Supply and HIVE Glass, the Company plans to open ‘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.

The Company has expanded its distribution network to include several distributors throughout the United States, Canada, Europe and South America to pair with its existing e-commerce website atwww.HiveCeramics.com and its wholesale authorized dealer network of over 1,100 authorized shops.

On January 22, 2015, the Company created a new wholly-owned subsidiary, Offset LLC (“Offset”), which is in the business of branding, marketing, and merchandising services. Offset will serve as Vape’s creative marketing, branding and merchandising vehicle working synergistically with Vape’s existing product lines, sales and distribution channels, HIVE Supply retail development while expanding into unique branding, marketing and merchandising avenues both inside and outside of the legal cannabis industry.

The Offset creative team brings an entrepreneurial branding spirit to the Vape Holdings team. The team’s experience covers the legal aspects of intellectual property, licensing, distribution agreements as well as commercial contracts for major brands and entertainers. The Offset team seeks to capitalize on Vape’s existing industry contacts while utilizing its existing contacts in other relevant industries to help take Vape Holdings to the next level by continuing to penetrate new markets.

The Vape management team is extremely excited by the potential Offset has to offer to existing Vape businesses and products as well as new, revenue-generating opportunities.

Vape also plans to leverage its management team’s vast experience in the legal cannabis concentrate industry to provide management, consulting, branding, real estate and compliant packaging solutions to lawfully operating participants in the legal cannabis industry. Although the Company plans to provide services to the industry, it does not grow, transport, harvest, or sell cannabis. Furthermore, it does not currently maintain an ownership interest in any extraction laboratories or concentrate facilities. As for its real estate services, the Company plans to hold properties in strategic locations deemed to be susceptible for large scale manufacturing and extraction of concentrates. The company plans to provide property management and leasing services to legally compliant legal cannabis facilities. Vape management has extensive experience operating in the legal cannabis concentrate industry and knowledge of the ever-changing legal hurdles that legal concentrate manufacturer’s face. The Company plans to provide guidance and expertise to assist in the development of standardized labs, processes and packaging. To that end, the Company plans to work closely with the leaders in cultivation, extraction and lab testing in the most relevant markets to form a positive working group to set the standard for how these products are made, packaged and responsibly advertised. Vape plans to forge strategic relationships in the legal concentrate industry, develop intellectual property and standardize the build-out and process of concentrate manufacturing facilities. Vape has already begun deploying management and consultants into areas of interest to evaluate opportunities in this rapidly growing industry.

A number of states, including Oregon, Washington and Colorado, have enacted laws and regulations which allow the use, cultivation and production of medical and recreational marijuana. Vape plans to work with these legally compliant cultivation and extraction facilities that are in compliance with applicable state and local laws, rules and regulations.

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

HIVECERAMICS.COM is the Company’s e-commerce site for its premier HIVE Ceramics 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.

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 Ceramics product line 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~~Canada.

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 premier HIVE Ceramics brand product line 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.

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.

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.

As of ~~June 30,~~December 31, 2014, we had ~~8 employees .~~11 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.

Vape’s discussion and analysis of financial condition and results of operations are based upon Vape’s ~~unaudited~~ 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. ~~Critical accounting policies are described in Vape’s, formerly PeopleString Corporation, Form 10-K for the year ended December 31, 2012, to the extent these are still relevant.~~

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.

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.

Inventory ~~are~~is valued at the lower of cost or market, as determined primarily by the retail inventory method, and are stated using the first-in, first-out (FIFO) method. The Company records an adjustment each quarter, if necessary, for the projected annual effect of inflation or deflation, and these estimates are adjusted to actual results determined at year-end, when actual inflation rates and inventory levels for the year have been determined.

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 ~~three and~~ 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 ~~June 30,~~December 31, 2014, the estimated settlement liability is ~~$9,063,196. Management has recorded~~$1,054,407 based on the ~~amounts settled to additional paid-in capital in proportion to the total estimated settlement liability.~~

~~On April 1, 2014, the Board formally approved the filing~~fair market value 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 officer1,184,727 remaining warrants and therefore the ~~carryover basis~~Company recorded a gain on the change in derivative liability of $1,409,825 during the ~~assets was assigned to the Preferred Stock. The parties to the acquisition of HIVE closed the transaction on March 27,~~three months ended December 31, 2014. ~~On June 19, 2014, the Company formally issued the 500,000 Series A Shares to HIVE.~~

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.

Net ~~Loss.~~Income (Loss). For the three months ended ~~June 30,~~December 31, 2014 and 2013, net income and net loss was ~~$1,358,587~~$582,910 and ~~$92,328,~~($267,327), respectively.

~~Revenue~~.Revenue.For the three months ended ~~June 30,~~December 31, 2014 and 2013, revenue was ~~$361,781~~$386,643 and $0, respectively.

Cost of Revenue.For the three months ended ~~June 30,~~December 31, 2014 and 2013, cost of revenue was ~~$356,166~~$149,886 and $0, respectively. ~~Cost~~In 2014, cost of revenue ~~in 2014~~ includes approximately $69,000 of products costs, $13,000 of depreciation, $2,000 of product insurance, $12,000 warehouse costs, $8,000 of ~~approximately $203,000,~~royalties, $18,000 of freight, $4,000 of ~~$37,000,~~packaging and labeling, and ~~packaging~~$22,000 of ~~$103,000,~~ quality ~~assurance of $4,000, product insurance of $2,000, and warehouse costs of $3,000.~~assurance.

Gross Profit. For the three months ended ~~June 30,~~December 31, 2014 and 2013, gross profit was ~~$5,615~~$236,757 or 2%61% and $0 ~~and~~or 0%, respectively.

Sales and Marketing. For the three months ended December 31, 2014 and 2013, sales and marketing expenses were $69,280 and $0, respectively. In 2014, sales and marketing expenses included approximately $6,000 of trade show expenses, $8,000 of promotional items, $11,000 of outside sales expense, $16,000 of inside sales expense, and $15,000 of E-commerce costs.

Research and Development. Forthe three months ended December 31, 2014 and 2013, research and development costs were $51,853 and $0, respectively.

General and ~~administrative.~~ Administrative.~~General~~Forthe three months ended December 31, 2014 and 2013, general and administrative expenses ~~for the three months ended June 30, 2014~~were $974,707 and ~~2013 were $1,058,660 and $90,771.~~$218,819, respectively. In 2014, ~~it mostly consisted of~~general and administrative expenses included approximately ~~$131,000 of advertising and marketing, $47,000~~$11,000 of investor relations ~~$113,000~~and filing fees, $116,000 of payroll and taxes, ~~$23,000~~$25,000 of accounting fees, $5,000 of legal fees, $34,000 of office expense, $25,000 of bank and ~~$437,000~~credit card processing fees, $13,000 of travel expenses, $75,000 in common stock ~~based compensation related~~bonuses, and $467,000 and $71,000 in stock options expense to ~~options.~~employees and non-employees, respectively. In 2013, it consisted of approximately ~~$58,000~~$43,000 of accounting fees and $47,000 of legal ~~and professional fees, $15,000 of travel expenses, and $10,000 of wages.~~fees.

~~Research and Development.~~Interest Expense. For~~During~~ the three months ended ~~June 30,~~December 31, 2014 and 2013, ~~we incurred $109,540~~interest expense was $77,990 and $0, ~~respectively in research~~respectively. In 2014, interest expense included approximately $34,000 of accretion of debt discounts, $3,000 of amortization of deferred financing costs, $9,000 of interest expense, and ~~development costs.~~$32,000 of non-cash interest expense.

Interest ~~expense.~~~~Interest expense of $112,812 was recorded towards the notes and convertible notes payable and $82,390 towards the~~Expense – related ~~party notes payable and related party convertible notes payable, during~~party.For the three months ended ~~June 30, 2014.~~December 31, 2014 and 2013, related party interest expense was $145,563 and $48,508, respectively. In 2014, related party interest expense included approximately $2,000 of accretion of related party debt discounts, $8,000 of related party interest expense, and $135,000 of related party non-cash interest expense. In 2013, interest expense on related party convertible notes payable was ~~$1,557.~~

~~For the Nine Months Ended June 30, 2014 and Period From March 26, 2013 (“Inception”) to June 30, 2013~~

~~Net Loss.~~ ~~For the nine months ended June 30, 2014 and 2013, net loss was $31,163,951 and $92,328, respectively.~~$48,508.

~~Revenue~~.Change in Derivative Liability.For ~~the nine months ended June 30, 2014 and 2013, revenue was $392,540 revenue and $0, respectively.~~

~~Cost of Revenue.~~ For the nine months ended June 30, 2014 and 2013, cost of revenue was $365,787 and $0, respectively. Cost of revenue includes product costs of approximately $213,000, freight of $37,000, labeling and packaging of $106,000, quality assurance of $4,000, product insurance of $2,000, and warehouse costs of $3,000.

~~Gross Profit.~~~~For the nine months ended June 30, 2014 and the period from March 26, 2013 (“Inception”) to June 30, 2013, gross profit was $26,753 or 7% and $0 and 0%, respectively.~~

~~General and administrative.~~ General and administrative expenses for the nine months ended June 30, 2014 and 2013 were $1,266,511 and $0. It mostly consisted of approximately $164,000 of advertising and marketing, $65,000 of investor relations, $248,000 of payroll and taxes, $78,000 of accounting fees, and $437,000 of stock based compensation related to options. In 2013, it consisted of approximately 58,000 of legal and professional fees, $15,000 of travel expenses, and $10,000 of wages.

~~Research and Development.~~~~During~~ the three months ended ~~June 30,~~December 31, 2014 and 2013, ~~we incurred $138,627~~the gain on change in derivative liability was $1,409,825 and $0, respectively due to the decrease in ~~research and development costs.~~the stock price.

~~Interest expense.~~Gain on Settlement.Interest expense of $164,471 was recorded towards the notes and convertible notes payable and $91,451 towards the related party notes payable and related party convertible notes payable during the nine months ended June 30, 2014. DuringFor the three months ended ~~June 30, 2014. In~~December 31, 2014 and 2013, ~~interest expense~~the gain on ~~related party convertible notes payable~~settlement was ~~$1,557.~~$257,930 and $0, respectively due to a confidential settlement by and between the Company and certain shareholders. See Note 7.

~~Other expense.~~~~During the nine months ended June 30, 2014, we incurred a loss on settlement of stock related to warrant settlements of $29,528,844.~~

As of ~~June 30,~~December 31, 2014, we had cash of ~~$72,860~~$274,381 and working capital of $199,968 as compared to cash of $48,370 and a working capital deficit of ~~$212,839 as compared to cash of $568 and a working capital deficit of $302,175~~$36,138 as of September 30, ~~2013.~~2014.

We ~~have~~had total liabilities of ~~$10,576,099~~$2,236,641 as of ~~June 30,~~December 31, 2014, ~~consisting of~~including current liabilities ~~which consisted~~ of ~~$243,782~~$101,546 of accounts payable, ~~$99,124~~$174,045 of accrued expenses, ~~$314,089~~customer deposits of $4,567, $391,001 of convertible notes payable, ~~$70,000~~$48,331 of related party convertible notes payable, and ~~$12,828~~long-term liabilities of $172,778 convertible notes payable, $288,462 of related party notes payable, and ~~long-term liabilities of $415,792 of convertible notes payable, $28,826 of convertible notes payable, $328,462 of related party convertible notes payable, and $9,063,196~~$1,054,407 of warrant liability. We had total liabilities of ~~$317,743~~$3,802,237 as of September 30, ~~2013, consisting of~~2014, including current liabilities ~~which included $60,346~~of $216,388 of accounts payable, ~~$7,573~~$169,513 of accrued expenses, $187,667 of convertible notes payable, $45,832 of related party convertible notes payable, and ~~$234,824 in amounts due to~~long-term liabilities of $178,200 convertible notes payable, $199,115 of related ~~parties.~~

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 ~~$9,920,870 as of June 30, 2014,~~$1,052,665 and an accumulated deficit of $24,797,985 as of ~~June 30, 2014 of $31,481,188.~~December 31, 2014.

We used ~~$880,345~~$234,681 of cash in operating activities ~~for the nine~~during three months ended ~~June 30,~~December 31, 2014, which was attributable primarily to our net ~~loss~~income of ~~$31,163,951,~~$582,910, which was offset by ~~$29,528,844 loss~~$13,495 of depreciation, $1,409,825 gain on change in derivative liability, $257,930 gain on settlement, $36,609 of ~~warrants, $199,715 in~~ accretion of debt discounts, $167,408 of non-cash interest expense, $12,498 of fair value in excess of ~~officer services of $15,000, common~~ stock issued for ~~services~~conversion of ~~$122,800,~~notes payable and accrued interest, $9,630 of fair value in excess of stock issued for conversion of related party notes payable and accrued interest, $612,549 of stock-based compensation, and $2,025 of ~~$437,312, and~~ net use ~~in the~~of cash change in operating assets and ~~liabilities of $20,065.~~liabilities. During the ~~period from March 26, 2013 (“Inception”) to June 30,~~three months ended December 31, 2013, cash of ~~$21,617~~$18,058 was provided by operating activities, which was primarily attributable to our net loss of ~~$92,328,~~$267,327, which was offset by ~~$10,000 in~~$43,610 of accretion of debt discounts, $15,000 of fair value of officer services, $102,000 of common stock issued for services, and $8,659 of net cash provided by the change in operating assets and ~~liabilities of $103,945.~~ liabilities.

Investing activities ~~for~~provided $38,520 during the ~~nine~~three months ended ~~June 30,~~December 31, 2014 consisting of ~~$116,000~~$62,930 of net proceeds from settlement offset by $19,385 of capital expenditures and $5,025 for trademarks and ~~$12,245 of~~ pending patents. In 2013, there were no investing activities.

We had ~~$1,080,882~~$422,172 of net cash provided by financing activities induring the ~~nine~~three months ended ~~June 30,~~December 31, 2014 consisting of ~~$428,000~~$475,000 of net proceeds from ~~convertible notes payable, $324,419 from related party~~issuance of a convertible notes payable and ~~$328,463 from~~repayments on related party ~~convertible~~ notes ~~payable.~~payable of $52,828. In 2013, ~~there were no~~ financing ~~activities.~~

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 $2M Note bears interest at the rate of 10% per annum and ~~have suffered losses, we depend~~is 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 ~~great degree~~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 ~~ability~~$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 ~~attract external financing~~certain conditions, in ~~order to conduct our business activities and expand our operations. These factors raise substantial doubt about~~shares of common stock valued at 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/~~lower of the Conversion Price or ~~additional sales~~70% 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~~lowest daily VWAP in the ~~future, other than described above. Our independent registered public accounting firm included an explanatory paragraph raising substantial doubt about~~ten (10) Trading Days immediately preceding the ~~Company’s ability to continue as a going concern.~~applicable payment date. The Maturity Date of the $2M Note is twelve months from the date of issuance.

~~Notwithstanding, we anticipate generating losses and therefore may be unable~~Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements that have or are reasonably likely to ~~continue~~have a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, ~~in the future. We anticipate~~liquidity, capital expenditures or capital resources that ~~we will require additional capital in order~~are material to grow our business by increasing headcount and our budget for 2014. 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.investors.

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

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 ~~June 30,~~December 31, 2014, 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.

During the quarter ended March 31, 2014, we evaluated a material weakness in the ability to process, recorded, and report financial information due to not having a separate individual serving as our Chief Financial Officer. We remedied the material weakness during the quarter ended June 30, 2014 by hiring an accounting, finance, and SEC compliance expert to serve as our Chief Financial Officer.

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.

~~During the quarter ended June 30, 2014, we added a Chief Financial Officer as discussed above.~~

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 ~~its~~our principal executive officer and principal financial and accounting officer, conducted an evaluation of the effectiveness of Vape’s internal control over financial reporting based on the framework inInternal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that ~~the Company’s~~our internal control over financial reporting was effective as of ~~June 30,~~December 31, 2014.

On or about April 4, 2014, Cranshire Capital, LP, a private investment fund with its principal place of business in Northbrook, Illinois (“Cranshire”), filed an action against the Company in the Supreme Court of the State of New York, County of New York, Index No. 651059/2014. Cranshire alleged that it was a holder of various warrants issued by the Company back in May 2011, and that by reason of certain equity issuances made by the Company, the exercise and conversion prices in Cranshire’s warrants should have been reset. On April 16, 2014, Cranshire and the Company entered into a settlement and mutual release and Cranshire dismissed its action with prejudice. (See “NOTE 7 – COMMITMENTS AND CONTINGENCIES”).

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.

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

On ~~April 16,~~October 20, 2014, the Company entered into ~~separate settlement~~consulting agreements with ~~Cranshire~~two consultants to provide business development and ~~another warrant holder, Iroquois Master Fund, Ltd. (“Iroquois”). Pursuant~~acquisition services to the ~~settlement agreements,~~Company. The consultants were each issued 100,000 options to purchase common stock of the Company ~~agreed to issue an aggregate~~by the Board of ~~583,427 shares~~Directors as consideration for consulting services. The options were granted at the market price of the Company’s common stock toat close of business ($0.83 per share). The options vest 25% at grant and 25% each subsequent six (6) months from the ~~settling holders upon partial exercise~~date of their warrant positions pursuant to exercise notices previously submitted by them. An additional 337,626 Warrant Shares remain outstanding and may be exercised by the settling holders in the future at their election. The Company and the settling holders provided mutual general releases. (See “NOTE 7 – COMMITMENTS AND CONTINGENCIES”).grant.

On ~~April 22,~~October 20, 2014, the ~~Company entered into~~Company’s Board of Directors issued bonus stock grants of 30,000 shares of restricted common stock each to Joe Andreae and Kyle Tracey. An additional 30,000 shares of restricted common stock were granted to an employee.

On October 20, 2014, the Company’s Board of Directors granted a ~~settlement agreement with~~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 ~~Warberg Entities. Pursuant to the settlement agreement, the Company agreed to issue an aggregate of 356,415 shares~~market price of the Company’s common stock inat close of business ($0.83 per share) on the ~~aggregate to~~date of grant. The options vest 25% at grant and 25% each subsequent six (6) months from the ~~settling holders upon partial exercise~~date of their warrant positions pursuant to exercise notices previously submitted by them. An additional 378,855 Warrant Shares remained outstanding to be exercised by the settling holders in the future at their election. Warrants Shares of 3,992,800 were cancelled as a result of the settlement. (See “NOTE 7 – COMMITMENTS AND CONTINGENCIES”).grant.

On ~~April 24,~~December 22, 2014, the ~~Company entered into~~Company’s Board of Directors granted a ~~settlement agreement with Sphinx Trading, LP (“Sphinx”). Pursuant~~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 ~~settlement agreement,~~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 Joe Andreae, President and member of the ~~Company agreed~~Board, and Allan Viernes, Chief Financial Officer should receive options to ~~issue an aggregate of 481,569~~purchase 175,000 shares each. The options were granted at the market price of the Company’s common stock ~~to the settling holder upon partial exercise~~at close of ~~its warrants pursuant to exercise notices previously submitted by it. An additional 100 Warrant Shares remain outstanding~~business ($0.70 per share). The options vest 25% at grant and ~~may be exercised by the settling holder in the future at its election. Warrants Shares of 9,559 were cancelled as a result of the settlement. (See “NOTE 7 – COMMITMENTS AND CONTINGENCIES”).~~

~~On May 12, 2014, the Company issued an 8% Convertible Note to Kyle Tracey for monies borrowed~~25% each subsequent six (6) months 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 is 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 Tracey Note II is 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%). (See “NOTE 4 – RELATED PARTIES NOTES PAYABLE”).~~

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 is $11,825, and is 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 is 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%). These monies were funded to the Company during the three and six months ended March 31, 2014. (See “NOTE 4 – RELATED PARTIES NOTES PAYABLE”).

On May 14, 2014, Cranshire was issued an additional 99,538 shares of common stock of the Company pursuant to a notice of exercise in full of a warrant that was assigned to Cranshire from an unsettled warrant holder. A total of 3,620Warrant Shares were cancelled as a result of the conversion and no further Warrant Shares were outstanding in connection with this assignment. (See “NOTE 7 – COMMITMENTS AND CONTINGENCIES”).

~~On June 19, 2014, the Company issued 500,000 shares of Series A Preferred Stock (“Series A Shares”) to HIVE Ceramics, LLC pursuant to the HIVE Asset Purchase. (See NOTE 1).~~grant.

In connection with the above stock sales, ~~(excluding the warrant exercises),~~ 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(2)~~4(a)(2) of the Securities Act.

~~In connection with the above warrant exercises, such equity issuances are exempt from registration under the Securities Act pursuant to Section 3(a)(9) of the Securities Act.~~

* The certifications attached as Exhibit 32.1 and Exhibit 32.2 accompanying this Quarterly Report on Form 10-Q are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Vape Holdings, Inc., under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.

** 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.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☒
(Do not check if a smaller reporting company)

Common Stock, par value $0.00001 per share			~~9,969,774~~11,546,303
(Class)			(Number of Shares)

		PAGE
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	1
	Consolidated Balance Sheets (unaudited) at ~~June 30,~~December 31, 2014 and September 30, ~~2013~~2014	2
	Consolidated ~~Statements of Operations~~Income Statement (unaudited) for the Three Months Ended ~~June 30,~~December 31, 2014 and 2013 ~~and the Nine Months Ended June 30, 2014 and Period from March 26, 2013 (“Inception”) to June 30, 2013~~	3
	Consolidated Statements of Stockholder’s Deficit (unaudited) for the ~~Nine months ended June 30,~~Three Months Ended December 31, 2014	4
	Consolidated Statements of Cash Flows (unaudited) for the ~~Nine~~Three Months Ended ~~June 30,~~December 31, 2014 and ~~Period from March 26,~~ 2013 ~~(“Inception”) to June 30, 2013~~	5
	Notes to Unaudited Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2223
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2830
Item 4.	Controls and Procedures	2830

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	2931
Item 1A.	Risk Factors	2931
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3031
Item 3.	Defaults Upon Senior Securities	3132
Item 4.	Mine Safety Disclosures	3132
Item 5.	Other Information	3132
Item 6.	Exhibits	32

	Series A Preferred Stock				Common Stock				Additional Paid-in		Accumulated			Total Stockholders'
	Shares		Amount		Shares		Amount		Capital		Deficit			Deficit
Balance at September 30, 2013 - Prior to merger		-	$	-		4,684,537	$	46	$	-	$	(317,237	)	$	(317,191	)
Shares retained by PeopleString shareholders upon merger on September 30, 2013		-		-		1,565,463		16		-		-			16
Conversion of related party note payable		-		-		275,627		4		64,947		-			64,951
Fair value of officer services		-		-		-		-		15,000		-			15,000
Common stock issued for services		-		-		50,000		-		122,800		-			122,800
Discount on convertible note payable at 10%		-		-		-		-		84,375		-			84,375
Discount on convertible notes payable at 8%		-		-		-		-		158,402		-			158,402
Discount on convertible note payable at 6%		-		-		-		-		108,000		-			108,000
Discount on related party convertible note payable at 8%		-		-		-		-		100,770		-			100,770
Discount on related party convertible note payable at 6%		-		-		-		-		3,000		-			3,000
Common stock issued in connection with warrant settlement		-		-		3,542		-		98,822		-			98,822
Cashless exercise of warrants		-		-		3,065,766		30		20,366,794		-			20,366,824
Stock-based compensation - employees		-		-		-		-		326,812		-			326,812
Stock-based compensation - non employees		-		-		-		-		110,500		-			110,500
Issuance of preferred stock for HIVE asset acquisition		500,000		-		-		-		-		-			-
Net loss		-		-		-		-		-		(31,163,951	)		(31,163,951	)
Balance at June 30, 2014		500,000	$	-		9,644,935	$	96	$	21,560,222	$	(31,481,188	)	$	(9,920,870	)

				For the Period from
	For the Nine Months Ended			March 26, 2013 ("Inception") to
	June 30, 2014			June 30, 2013
Cash flows from operating activities:
Net loss	$	(31,163,951	)	$	(92,328	)
Adjustments to reconcile net loss to net cash used in operating activities:
Accretion of debt discounts		199,715			-
Loss on settlement of warrants		29,528,844			-
Fair value of officer services		15,000			10,000
Common stock issues for services		122,800			-
Stock-based compensation		437,312			-
Changes in operating assets and liabilities:
Accounts receivable		(24,865	)		-
Inventory		(352,900	)		-
Other assets		23,641			20,000
Accounts payable		183,436			81,057
Accrued expenses		150,623			2,888
Net cash used in operating activities		(880,345	)		(21,617	)

Cash flows from investing activities:
Purchase of trademarks and pending patents		(128,245	)		-
Net cash used in investing activities		(128,245	)		-

Cash flows from financing activities:
Proceeds from issuances of convertible notes payable		428,000			-
Proceeds from issuances of related party convertible notes payable		324,419			-
Proceeds from issuances of related party notes payable		328,463			-
Net cash provided by financing activities		1,080,882			-

Net change in cash		72,292			21,617
Cash, beginning of period		568			-
Cash, end of period	$	72,860		$	21,617

Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest	$	-		$	-
Taxes	$	-		$	-

Non-cash investing and financing activities:
Conversion of related party notes payable	$	64,951		$	-
Issuance of convertible note payable for services	$	100,000		$	-
Issuance of convertible note payable for former officer services	$	50,000		$	-
Issuance of common stock in connection with warrant settlement	$	98,822		$	-

		Series A Preferred Stock				Common Stock				Additional Paid-in		Accumulated			Total Stockholders'
		Shares		Amount		Shares		Amount		Capital		Deficit			Deficit
Balance at September 30, 2014			500,000	$	-		10,032,436	$	100	$	22,402,662	$	(25,380,895	)	$	(2,978,133	)
Conversion of related party notes payable and accrued interest			-		-		625,478		6		341,713		-			341,747
Conversion of note payables and accrued interest			-		-		207,764		2		220,260		-			220,262
Common stock issued for bonuses			-		-		90,000		1		74,699		-			74,700
Discount on convertible note payable at 10%			-		-		-		-		168,000		-			168,000
Stock-based compensation - employee options			-		-		-		-		466,587		-			466,587
Stock-based compensation - non-employee options			-		-		-		-		71,262		-			71,262
Net income			-		-		-		-		-		582,910			582,910
Balance at December 31, 2014	��		500,000	$	-		10,955,678	$	109	$	23,745,211	$	(24,797,985	)	$	(1,052,665	)

	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.

	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents	$	274,381	$	–	$	–	$	274,381
Total assets measured at fair value	$	274,381	$	–	$	–	$	274,381

Liabilities
Derivative instruments	$	–	$	1,054,407	$	–	$	1,054,407
Total liabilities measured at fair value	$	–	$	1,054,407	$	–	$	1,054,407

	For the Three Months Ended		For the Nine Months Ended
	June 30,		June 30,
	2014		2014
Series A Preferred stock		5,000,000		5,000,000
Common stock options		642,400		780,976
Common stock warrants		30,701		18,804
Convertible notes		901,228		901,228
		6,562,432		6,712,905

	For the Three Months Ended December 31, 2014
Weighted average common shares outstanding used in calculating basic earnings per share		10,692,552
Effect of preferred stock		500,000
Effect of convertible notes payable		1,465,565
Effect of options and warrants		144,946
Weighted average common and common equivalent shares used in calculating diluted earnings per share		12,803,063

Net income as reported	$	582,910
Add - Interest on convertible notes payable		88,865
Net income available to common stockholders	$	671,775

	For the Three Months Ended December 31, 2013
Common stock options		294,930
Common stock warrants		–
Effect of convertible note payable		1,368,222
		1,663,152

Three Months Ended December 31,		Stock Price at Grant Date		Dividend Yield		Exercise Price		Risk Free Interest Rate		Volatility		Average Life
	2014	$	0.73		-%	$	0.73		2.2%		380%		10.0
	2013		n/a		n/a		n/a		n/a		n/a		n/a

	December 31, 2014			September 30, 2014
Tooling	$	127,505		$	122,555
Leasehold improvements		14,435			-
Accumulated depreciation		(29,673	)		(16,178	)
	$	112,267		$	106,377

	June 30, 2014		September 30, 2013
Accrued interest	$	13,296	$	-
Accrued interest - related party		18,258		7,573
Accrued wages and taxes		66,774		-
Other		796		-
	$	99,124	$	7,573

	Shares			Weighted Average Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Warrants outstanding at September 30, 2013		8,400,000		$	28.00		2.6	$	-
Warrants Issued		-			-
Warrants Exercised		(3,069,308	)	$	0.114
Cancelled/forfeited/expired		(4,080,561	)	$	0.114
Warrants outstanding at June 30, 2014		1,250,131		$	0.114		1.9	$	9,332,342

Exhibit No.		Description of Exhibit
10.1		~~Executive Employment~~Securities Purchase Agreement, ~~by and between the Company and Joe Andreae,~~ dated ~~April 21, 2014.~~ February 10, 2015.
10.2		Unsecured Convertible Promissory Note, dated February 10, 2015.
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.
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

	Vape Holdings, Inc.
	Registrant

Dated: ~~August 19, 2014~~February 17, 2015	/s/ Kyle Tracey
	Kyle Tracey
	Chief Executive Officer
	(Principal Executive Officer)

Dated: ~~August 19, 2014~~February 17, 2015	/s/ Allan Viernes
	Allan Viernes
	Chief Financial Officer
	(Principal Financial and Accounting Officer)