NOTE 5.

THIRD PARTY DEBT

CONVERTIBLE NOTES PAYABLE

In connection with the Third Party Debt Conversions, each of the Company’s convertible noteholders is entitled to a “share reserve” per their agreements with the Company which entitle them to reserve a certain allotment of common stock out of the authorized but unissued common stock of the Company for future conversions of their notes. The Company is further obligated under the agreements to increase the Company’s authorized share count to accommodate for a sufficient amount of share reserves. Due to the declining market price of the Company’s common stock, the noteholders have reserve claims in excess of the common stock authorized at this time. The inability of the Company to meet its share reserve obligations may be considered a technical violation of their agreements with the noteholders but none of the noteholders have called a default under the terms of the notes at this time. The Company’s ability to issue common stock other than those presently allocated to noteholders is restricted during this time.

The Company has lost the ability to increase the share reserves by written consent of shareholders due to the significantly increased outstanding held by convertible noteholders and a shareholder vote is required to increase the authorized amount of shares the Company may issue. Further, the combination of limited capital and depleted share reserves have severely damaged the Company’s ability to find continued financing, properly run the Company, and proceed with business to include any mergers or acquisitions or any transactions that would require available stock.

The Company is currently involved in litigation with 1 noteholder seeking the specific performance of VAPE’s issuance of shares underlying denied conversion notices. VAPE is also currently negotiating with a second noteholder threatening similar litigation. If the noteholders are allowed to convert their respective notes VAPE shareholders will experience substantial dilution.

The Company’s denial of the conversion notices has triggered a technical default on certain of its convertible notes and have presented amounts due as current liabilities other than those subsequently converted and began accruing interest at their default interest rates.

Further, our funding partner may not commit to purchasing the balance of the notes currently outstanding due to the declining stock market price of the Company’s common stock.

Securities Purchase Agreement

On December 3, 2014, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with an accredited investor (the “Investor”) pursuant to which the Company agreed to sell, and the Investor agreed to purchase, an unsecured convertible promissory note (the “Note”) in the principal amount of $560,000 less an original issue discount (“OID”) of $50,000 and transaction expenses of $10,000 for a total purchase price of $500,000. The Company also paid a finder’s fee in the amount of $25,000 in connection with this transaction, which was recorded as a discount to the note as it was paid from the proceeds. The closing under the Securities Purchase Agreement occurred on December 3, 2014. The Company received $475,000 net proceeds after transactions costs. On December 10, 2015, the Company and the Investor entered into a forbearance agreement regarding the Investor’s convertible note and added $105,000 to the principal and charged to interest expense during the three months ended December 31, 2015. On February 26, 2016, the note was assigned to an accredited investor and $21,874 was added to the principal balance and charged to interest expense during the three and six months ended March 31, 2016.

We amortized $5,556 and $8,333, and $22,222 and $19,444 of the original issue discount to interest expense during the three and nine months ended June 30, 2016 and 2015, respectively. In addition, the Company recorded $45,940 in debt issuance costs as a discount on the note and amortized $5,106 and $7,657, and $20,418 and $17,866 to interest expense during the three and nine months ended June 30, 2016 and 2015, respectively. As of June 30, 2016, the Company had fully amortized the discounts.

On August 26, 2015, the Company and Investor entered into an Amendment whereby the conversion rate of the note was amended to 55% of the lowest price of the prior fifteen (15) trading days and conversion floor removed which amendment was triggered by the dilutive issuances of the August 2015 convertible note financing thereby entitling Investor to the lowest conversion rate granted during the year ended September 30, 2015 per the terms of the Securities Purchase Agreement. On August 26, 2015, the Company recorded the note as a derivative liability at fair value of $830,921, a derivative discount of $332,666, and the excess in fair value of $498,254 to loss on debt extinguishment. The total loss on debt extinguishment on this note was $582,254. During the three and nine months ended June 30, 2016, the Company amortized $28,183 and $277,682 of the derivative discount to interest expense, recorded a loss (gain) on the change in fair value of the derivative liability of ($287,888) and $574,381, and allocated the fair value of $401,128 and $1,195,787 of the conversions below to additional paid-in capital and a reduction in the derivative liability, respectively. As of June 30, 2016, the derivative liability was $22,507.

Between October 2015 and June 30, 2016, the Company issued the following conversions for payment towards Investor:

Conversion Date	Principal Converted		Accrued Interest Converted		Total Converted		Conversion Rate		Common Shares Issued
October 8, 2015	$	21,000	$	-	$	21,000	$	0.012		1,818,182
October 16, 2015		18,900		-		18,900	$	0.012		1,636,364
October 22, 2015		25,800		-		25,800	$	0.011		2,333,786
October 29, 2015		22,460		-		22,460	$	0.011		2,031,660
November 11, 2015		33,500		-		33,500	$	0.007		4,649,549
November 18, 2015		24,000		-		24,000	$	0.006		4,195,804
November 30, 2015		30,000		-		30,000	$	0.005		5,741,627
December 11, 2015		22,000		-		22,000	$	0.002		9,090,909
December 28, 2015		22,500		-		22,500	$	0.002		9,297,521
January 7, 2016		20,000		-		20,000	$	0.002		10,101,010
January 20, 2016		12,500		-		12,500	$	0.001		10,330,579
February 2, 2016		13,200		-		13,200	$	0.001		10,909,091
March 2, 2016		10,627		-		10,627	$	0.001		10,169,800
March 10, 2016		11,184		-		11,184	$	0.001		10,702,619
March 17, 2016		8,272		-		8,272	$	0.001		6,539,200
March 29, 2016		22,797		-		22,797	$	0.002		12,191,000
March 31, 2016		22,347		-		22,347	$	0.002		11,950,000
April 4, 2016		25,140		-		25,140	$	0.002		13,444,000
April 7, 2016		21,019		-		21,019	$	0.002		11,240,000
April 13, 2016		35,664		-		35,664	$	0.002		14,737,000
April 19, 2016		36,711		-		36,711	$	0.002		15,170,000
April 20, 2016		18,244		-		18,244	$	0.002		7,538,666

	$	477,865	$	-	$	477,865				185,818,367

As of June 30, 2016, there is $22,632 in accrued interest expense related to this note, and the Company recorded $2,255 and $14,156, and $21,094 and $32,511 in interest expense during the three and nine months ended June 30, 2016 and 2015, respectively.

$2M Securities Purchase Agreement

On February 10, 2015, the Company entered into a securities purchase agreement (the “February 2015 Securities Purchase Agreement”) with an accredited investor pursuant to which the Company agreed to sell, and the investor agreed to purchase, an unsecured convertible promissory note (the “$2M Note”) in the principal amount of $2,000,000 less an OID of $182,000 and transaction expenses of $10,000 for a total purchase price of $1,808,000. The closing under the February 2015 Securities Purchase Agreement occurred on February 10, 2015. During the year ended September 30, 2015, the Company received $800,000 toward the $2M Note with an original issue discount of $148,600 and transaction costs for net proceeds of $651,395. On February 23, 2016, the note was assigned to an accredited investor, the same accredited investor as the Security Purchase Agreement, and $36,038 was added to the principal balance and charged to interest expense during the three and six months ended March 31, 2016.

On August 13, 2015, the Company entered into an Amendment, Waiver and Modification Agreement (the “Amendment”) to its $2M Securities Purchase Agreement and related Transaction Documents with Redwood Management, LLC including any designees and or assignees thereto. Under the terms of the Amendment, the parties agreed to reduce the $2,000,000 outstanding balance of the $2M Note to $800,000 to reflect the total amount funded under the note, to terminate the offsetting investor note securing the additional unfunded balance and to waive any past claims of default or offsetting interest on the $2M Note or investor note. In addition, the conversion rate of the note was amended to 55% of the lowest price of the prior fifteen (15) trading days and conversion floor removed which amendment was triggered by the dilutive issuances of the August 2015 convertible note financing thereby entitling Investor to the lowest conversion rate granted during the year ended September 30, 2015 per the terms of the $2M Securities Purchase Agreement. As a result, we expensed the unamortized discount of $40,000 to loss on debt extinguishment. On August 13, 2015, the carrying value on the note was $655,816, net of unamortized discounts of $94,184. The Company recorded the note as a derivative liability at fair value of $970,956, a derivative discount of $655,816, and the excess in fair value of $315,140 to loss on debt extinguishment. The total loss on debt extinguishment on this note was $369,324. During the three and nine months ended June 30, 2016, the Company amortized $0 and $472,628 of the derivative discount to interest expense, recorded a loss (gain) on the change in fair value of the derivative liability of ($296,142) and $27,730, and allocated the fair value of $123,179 and $1,056,544 of the conversions below as additional paid-in-capital and a reduction in the derivative liability, respectively. As of June 30, 2016, the derivative liability was fully extinguished due to its full conversion.

The following is summary of conversions by the $2M Note holder (including its assignees) during the nine months ended June 30, 2016:

Conversion Date	Principal Converted		Accrued Interest Converted		Total Converted		Conversion Rate		Common Shares Issued
October 1, 2015	$	10,000	$	-	$	10,000	$	0.015		675,676
October 5, 2015		10,000		-		10,000	$	0.015		675,676
October 6, 2015		13,262		-		13,262	$	0.014		961,000
October 7, 2015		10,000		-		10,000	$	0.012		865,801
October 9, 2015		11,728		-		11,728	$	0.012		1,011,000
October 9, 2015		10,000		-		10,000	$	0.012		865,801
October 12, 2015		14,680		-		14,680	$	0.012		1,271,000
October 13, 2015		11,601		-		11,601	$	0.012		1,000,052
October 15, 2015		14,680		-		14,680	$	0.012		1,271,000
October 19, 2015		17,400		-		17,400	$	0.012		1,500,000
October 19, 2015		15,000		-		15,000	$	0.012		1,298,701
October 20, 2015		16,650		-		16,650	$	0.011		1,500,000
October 21, 2015		17,500		-		17,500	$	0.012		1,515,152
October 23, 2015		20,000		-		20,000	$	0.012		1,731,602
October 26, 2015		24,420		-		24,420	$	0.011		2,200,000
October 29, 2015		26,640		-		26,640	$	0.011		2,400,000
November 2, 2015		29,970		-		29,970	$	0.011		2,700,000
November 2, 2015		20,000		-		20,000	$	0.011		1,809,136
November 5, 2015		32,190		-		32,190	$	0.011		2,900,000
November 10, 2015		28,800		-		28,800	$	0.010		3,000,000
November 12, 2015		23,930		-		23,930	$	0.007		3,323,611
November 17, 2015		16,500		-		16,500	$	0.006		2,727,273
November 19, 2015		1,640		11,225		12,865	$	0.006		2,316,013
November 23, 2015		23,111		-		23,111	$	0.006		4,127,000
November 27, 2015		24,750		-		24,750	$	0.006		4,500,000
December 2, 2015		18,450		-		18,450	$	0.004		4,500,000
December 8, 2015		18,000		-		18,000	$	0.004		5,000,000
December 11, 2015		13,368		-		13,368	$	0.002		5,570,000
December 16, 2015		14,181		-		14,181	$	0.002		5,860,000
December 22, 2015		15,488		-		15,488	$	0.002		6,400,000
December 29, 2015		17,666				17,666	$	0.002		7,300,000
May 31, 2016		27,495		-		27,495	$	0.001		19,227,000
June 13, 2016		28,936		-		28,936	$	0.001		20,235,000
June 21, 2016		22,254		-		22,254	$	0.001		21,296,000
June 28, 2016		12,339		2,589		14,928	$	0.001		16,964,625
	$	632,629	$	13,814	$	646,443				160,498,119

During the three and nine months ended June 30, 2016 and 2015, the Company amortized $0 and $17,600, and $30,713 and $22,400 of the original issue discount to interest expense, respectively. As of June 30, 2016, there is $35,319 in accrued interest expense related to this note and the Company recorded $7,617 and $10,111, and $16,209 and $14,500 in interest expense during the three and nine months ended June 30, 2016 and 2015, respectively.

Convertible Note Financing

On August 5, 2015, the Company entered into a series of convertible note financings with several accredited investors totaling an aggregate of $541,000 in aggregate proceeds raised less certain fees and costs as set forth in the financing documents known as the “August 2015 Notes”. The financing was disclosed on the Company’s Current Report on Form 8-K filed on August 11, 2015 and is incorporated herein by reference. The Company recorded an original issue discount of $12,500 along with these notes. On March 7, 2016, $112,000 of these notes were assigned to the same accredited investor previously mentioned and $7,806 was added to the principal balance and recorded as interest expense during the three and six months ended March 31, 2016.

August 2015 Notes

On August 5, 2015, the carrying value on the notes were $419,626, net of unamortized original issue discounts of $9,374. In six months when the note became convertible, the Company recorded the note as a derivative liability at fair value of $1,181,732, a derivative discount of $419,626, and the excess in fair value of embedded conversion feature of $762,106. The Company amortizes the derivative discount over the expected life of the related debt. During the three and nine months ended June 30, 2016, the Company amortized $205,284 and $313,020 of the derivative discount to interest expense and recorded a gain on the change in fair value of the derivative liability of $1,235,526 and $839,257. As of June 30, 2016, the derivative liability was $342,474. During the three and nine months ended June 30 2016, the Company amortized $2,764 and $5,890 of original issue discounts to interest expense. During the three and nine months ended June 30 2016, the Company amortized $17,964 and $53,891 of debt issuance costs to interest expense. As of June 30, 2016, $163,219 and $61,167 is classified as current and long-term on the accompanying consolidated balance sheet, net of total unamortized discounts of $105,381 and $13,833, respectively. As of June 30, 2016, there is $53,241 in accrued interest expense related to these notes and the Company recorded $23,807 and $46,944 in interest expense during the three and nine months ended June 30, 2016, respectively.

Additional Funding Under August 2015 Note

On December 15, 2015, an accredited investor provided the Company with $50,000 in additional proceeds under the same terms of their original convertible note with a term of two years. A one-time interest charge of $11,600 was added to the principal of the note. In six months when the note became convertible, the Company recorded the note as a derivative liability at fair value of $95,251, a derivative discount of $61,600, and the excess in fair value of $33,651 to excess of fair value of embedded conversion feature. The Company amortizes the derivative discount over the expected life of the related debt. During the three and nine months ended June 30, 2016, the Company amortized $3,422 and $3,422 of the derivative discount to interest expense and recorded a gain on the change in fair value of the derivative liability of $9,630 and $9,630, respectively. As of June 30, 2016, the derivative liability was $85,621.The Company also recorded $4,000 of debt issuance costs as a discount. During the three and nine months ended June 30, 2016, the Company amortized $500 and $1,000 of debt issuance costs to interest expense. As a result, as of June 30, 2016, $422 is classified as current on the accompanying consolidated balance sheet, net of total unamortized discounts of $61,178. As of June 30, 2016, there is default interest of $5,605 in accrued interest expense related to these notes and the Company recorded $3,757 and $5,605 during the three and nine months ended June 30, 2016, respectively.

Assigned 2015 Notes

On August 5, 2015, the carrying value on an assigned note was $112,000. In six months when the note became convertible, the Company recorded the note as a derivative liability at fair value of $400,722, a derivative discount of $112,000, and the excess in fair value of $288,722 to loss on debt extinguishment. During the three and nine months ended June 30, 2016, the Company amortized $74,667 and $112,000 of the derivative discount to interest expense and recorded a gain on the change in fair value of the derivative liability of $516,101 and $223,098, respectively. As of June 30, 2016, the derivative liability was fully extinguished due to its full conversion. During the three and nine months ended June 30, 2016, the Company amortized $0 and $8,571 of debt issuance costs to interest expense, respectively.

During the nine months ended June 30, 2016, the Company enacted the following conversions:

Conversion Date	Principal Converted		Accrued Interest Converted		Total Converted		Conversion Rate		Common Shares Issued
April 20, 2016	$	16,117	$	-	$	16,117	$	0.0024		6,660,000
April 25, 2016		46,349		-		46,349	$	0.0029		15,900,000
May 5, 2016		37,744		-		37,744	$	0.0025		15,250,000
May 18, 2016		19,597		1,594		21,191	$	0.0020		10,413,268
	$	119,807	$	1,594	$	121,401				48,223,268

As of June 30, 2016, there is $12,562 in accrued interest expense related to these notes and the Company recorded $3,219 and $12,066 in interest expense during the three and nine months ended June 30, 2016, respectively.

On August 12, 2015, the Company entered into an additional convertible note financing transaction with an accredited investor in the principal amount of $105,000 less fees and costs. The same accredited investor was assigned mentioned above was assigned this note and $20,000 was added to the principal balance and recorded as interest expense during the three and six months ended March 31, 2016. The closing under the financing occurred concurrently with the execution of the financing documents on August 12, 2015. The convertible note bears interest at the rate of 8% per annum and is convertible into common stock of the Company at any time after 180 days from issuance of the note at a conversion price per share equal to 58% of the average of the lowest trading price of the common stock in the thirteen (13) trading days immediately preceding the applicable conversion date. The Company has the option to prepay the convertible note in the first 180 days from closing subject to a prepayment penalty of 150% of principal plus interest. The maturity date of the convertible note is June 12, 2016 subject to the noteholder’s right to extend maturity an additional nine (9) month period. The Company recorded an original issue discount of $5,000 along with this note. In six months when the note became convertible, the Company recorded the note as a derivative liability at fair value of $110,669, a derivative discount of $103,000, and the excess in fair value of $7,669 to loss on debt extinguishment. During the three and nine months ended June 30, 2016, the Company amortized $51,500 and $85,833 of the derivative discount to interest expense and recorded a loss (gain) on the change in fair value of the derivative liability of ($237,246) and $38,179, respectively. As of June 30, 2016, the derivative liability was $148,847. During the three and nine months ended June 30, 2016, the Company amortized $1,000 and $4,000 of original issue discounts to interest expense, respectively. During the three and nine months ended June 30, 2016, the Company amortized $3,280 and $13,120 of debt issuance costs to interest expense, respectively. As a result, as of June 30, 2016, $107,833 is classified as long-term on the accompanying consolidated balance sheet, net of total unamortized discounts of $17,167. As of June 30, 2016, there is $16,366 in accrued interest expense related to these notes and the Company recorded $7,769 and $15,222 in interest expense during the three and nine months ended June 30, 2016, respectively.

Subsequent to June 30, 2016, the note was fully converted as a result of the following conversions:

Conversion Date	Principal Converted		Accrued Interest Converted		Total Converted		Conversion Rate		Common Shares Issued
July 8, 2016	$	19,222	$	-	$	19,222	$	0.0008		23,300,000
July 25, 2016		17,518		-		17,518	$	0.0007		24,500,000
August 3, 2016		17,738		-		17,738	$	0.0007		25,800,000
August 10, 2016		17,919		-		17,919	$	0.0007		27,150,000
September 19, 2016		11,482		-		11,482	$	0.0008		14,912,185
January 10, 2017		41,121		879		42,000	$	0.0014		30,000,000
January 18, 2017		-		28,795		28,795	$	0.0045		6,398,894
	$	125,000	$	29,674	$	154,674				152,061,079

The foregoing descriptions of the August 12, 2015 note financing and related documentation do not purport to be complete and are qualified in their entirety by reference to the full text of the documents, which are filed as exhibits to this Quarterly Report on Form 10-K/A and are incorporated herein by reference.

April 2016 Note

On April 19, 2016, the Company entered into an additional convertible note financing transaction with an accredited investor in the principal amount of $176,150 less fees and costs. The convertible note bears interest at the rate of 10% per annum and is convertible into common stock of the Company at any time after 180 days from issuance of the note at a conversion price per share equal to 55% of the lowest trading price in the thirteen (20) trading days immediately preceding the applicable conversion date. The Company has the option to prepay the convertible note in the first 180 days from closing subject to a prepayment penalty of 150% of principal plus interest. The maturity date of the convertible note is January 19, 2017. The Company recorded the prepayment penalty of $91,011 as a discount to the convertible note and will amortize it through the notes maturity date. During the three and nine months ended June 30, 2016, the Company recorded $45,505 and $45,505 of the discount to interest expense, respectively. As a result, as of June 30, 2016, $130,645 is classified as current on the accompanying consolidated balance sheet, net of total unamortized discounts of $45,505. As of June 30, 2016, there is $5,711 in accrued interest expense related to these notes and the Company recorded $5,711 and $5,711 in interest expense during the three and nine months ended June 30, 2016, respectively. In six months, if and when the note becomes convertible, the Company will record a derivative liability at fair value.

EQUITY INVESTMENT BY THE INVESTOR

On December 10, 2015, the Investor purchased $90,000 in common stock at a purchase price equal to 90% of the average of the closing prices of the common stock for the three (3) trading days immediately preceding the date that is 6 months from the date of the agreement. As of June 7, 2016, the Company entered into an agreement for proceeds of $90,000 to be recorded as a convertible note payable with a conversion feature of 55% of the lowest trading price for the prior twenty (20) days. The Company recorded the note as a derivative liability at fair value of $114,611, a derivative discount of $90,000, and the excess in fair value of $24,611 to excess of fair value of embedded conversion features. During the three and nine months ended June 30, 2016, the Company amortized $15,000 and $15,000 of the derivative discount to interest expense and recorded a loss on the change in fair value of the derivative liability of $10,670 and $10,670, respectively. As a result, as of June 30, 2016, $15,000 is classified as current on the accompanying consolidated balance sheet, net of total unamortized discounts of $75,000.