ACCOUNTING POLICIES AND BASIS OF PRESENTATION | NOTE 2. ACCOUNTING POLICIES AND BASIS OF PRESENTATION GOING CONCERN VAPE’s consolidated financial statements reflect a net loss of $323,036 during the six months ended March 31, 2017. As of March 31, 2017, we had cash of $103,149, a working capital deficit of $4,737,601, and an accumulated deficit of $35,347,704. In addition, the ongoing need to obtain financing to fund operations also raise substantial doubt about the ability of Vape to continue as a going concern. Management expects to obtain funding for the new operations for the foreseeable future; however, there are no assurances that the Company will obtain such funding. VAPE’s financial statements do not include any adjustments to reflect the possible effects on recoverability and classification of assets or the amounts and classification of liabilities that may result from the inability to continue as a going concern. See Note 8 for subsequent events regarding financing activities. BASIS OF PRESENTATION The accompanying unaudited interim consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the SEC. Certain information and disclosures normally included in the annual financial statements prepared in accordance with the accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these consolidated financial statements have been included. Such adjustments consist of normal recurring adjustments. The current results are not an indication of the full year. Fair-value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of March 31, 2017 and September 30, 2016. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash, prepaid expenses, accounts payable, accrued liabilities, and notes payable. Fair values for these items were assumed to approximate carrying values because of their short-term nature or they are payable on demand. The following table presents the Company’s fair value hierarchy for assets measured at fair value on a recurring basis at March 31, 2017: Level 1 Level 2 Level 3 Total Assets Cash and cash equivalents $ 103,149 $ - $ - $ 103,149 Total assets measured at fair value $ 103,149 $ - $ - $ 103,149 Liabilities Derivative instruments $ - $ 2,171,655 $ - $ 2,171,655 Total liabilities measured at fair value $ - $ 2,171,655 $ - $ 2,171,655 The following table presents the Company’s fair value hierarchy for assets measured at fair value on a recurring basis at September 30, 2016: Level 1 Level 2 Level 3 Total Assets Cash and cash equivalents $ - $ - $ - $ - Total assets measured at fair value $ - $ - $ - $ - Liabilities Derivative instruments $ - $ 2,755,544 $ - $ 2,755,544 Total liabilities measured at fair value $ - $ 2,755,544 $ - $ 2,755,544 EARNINGS (LOSS) PER COMMON SHARE The following is a summary of outstanding securities that would have been included in the calculation of diluted shares outstanding since the exercise prices did not exceed the average market value of the Company’s common stock had the Company generated net income for the three and six months ended March 31, 2017 and 2016: For the Three Months Ended For the Three Months Ended For the Six Months Ended For the Six Months Ended March 31, March 31, March 31, March 31, 2017 2016 2017 2016 Series A Preferred stock 500,000 500,000 500,000 500,000 Common stock warrants - 1,184,726 - 1,184,726 Convertible notes 357,971,489 631,560,394 357,971,489 631,560,394 358,471,489 633,245,120 358,471,489 633,245,120 The Company does not have sufficient shares to accommodate the convertible notes. RECENT ACCOUNTING PRONOUNCEMENTS In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers”, which supersedes most of the current revenue recognition requirements. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for these goods or services. New disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers are also required. This guidance is effective for the Company in the first quarter of fiscal year 2018 and early application is not permitted. Entities must adopt the new guidance using one of two retrospective application methods. The Company is currently evaluating the standard but does not expect it to have a material impact on our financial position, results of operations or cash flows. The Financial Accounting Standards Board issues Accounting Standard Updates (“ASUs”) to amend the authoritative literature in Accounting Standards Codification (“ASC”). There have been a number of ASUs to date that amend the original text of ASC. The Company believes those issued to date either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to the Company or (iv) are not expected to have a significant impact on the Company. AMENDMENT We have amended the previous three and six months ended March 31, 2016 in this Form 10-Q to correctly account for the following non-cash transactions: In August 2015 the Company entered into convertible notes without conversion floors resulting in an unlimited potential of shares to be issued. Accordingly, we adjusted the consolidated financial statements to recognize the embedded conversion feature of the instruments. On August 13, 2015 and August 26, 2015, the convertible notes due to Redwood and Typenex, respectively, were amended which removed the fixed conversion floors per common share creating a potentially unlimited number of shares to be issued on the date of the amendment. Accordingly, we amended this Form 10-Q to account for the embedded conversion features as derivative financial instruments at fair value upon their original issuance dates. This increased the loss on debt extinguishments and interest expense previously recorded, as well as the derivative liabilities at fair value. The following was the effect on the previously reported consolidated financial statements. As As Restated March 31, Change March 31, LIABILITIES AND STOCKHOLDERS’ DEFICIT Total current liabilities $ 4,996,192 $ 1,189,589 $ 6,185,781 Total liabilities $ 5,143,710 $ 1,042,071 $ 6,185,781 Total stockholders’ deficit $ (4,514,943 ) $ (1,042,071 ) $ (5,557,014 ) TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT $ 628,767 $ - $ 628,767 As Previously Reported Three Months Ended March 31, Change As Restated Three Months Ended March 31, Interest expense $ (540,942 ) $ (574,967 ) $ (1,115,909 ) Loss from the effects of derivative liabilities $ (1,996,998 ) $ 877,978 $ (1,119,020 ) Net loss $ (3,956,043 ) $ 303,011 $ (3,653,032 ) Net loss available to common shareholders Loss per common share - basic $ (0.03 ) $ (0.03 ) Loss per common share - diluted $ (0.03 ) $ (0.03 ) As Previously Reported Six Months Ended March 31, Change As Restated Six Months Ended March 31, Interest expense $ (1,318,885 ) $ (230,560 ) $ (1,549,445 ) Loss from the effects of derivative liabilities $ (2,126,858 ) $ 640,434 $ (1,486,424 ) Net loss $ (5,300,461 ) $ 409,874 $ (4,890,587 ) Net loss available to common shareholders Loss per common share - basic $ (0.04 ) $ (0.03 ) Loss per common share - diluted $ (0.04 ) $ (0.03 ) |