UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

Amendment No. 1

(Mark One)

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

or

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________to _______________.

 

Commission File Number: 000-52745

 

Electronic Cigarettes International Group, Ltd.

(Exact name of registrant as specified in its charter)

 

Nevada		98-0534859
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

  

14200 Ironwood Drive

Grand Rapids, Michigan 49544

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: (616) 384-3272

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class:		Name of each exchange on which registered:
None		None

 

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.001

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Act. Yes ¨   No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  ¨   No  þ

 

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 periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes     þ   No     ¨

 

Indicate by check mark whether the registrant has submitted electronically 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     þ   No      ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III or this Form 10-K or any amendment to this Form 10-K.    ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer     ¨	Accelerated filer    þ
Non-accelerated filer    ¨	Smaller reporting company    ¨

 

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

 

As of June 30, 2014, 4,975,192 (retroactively adjusted to reflect the March 24, 2015 one-for-fifteen reverse stock split) shares of common stock were outstanding. The aggregate market value of the common stock held by non-affiliates of the registrant, as of June 30, 2014, the last business day of the second fiscal quarter, was approximately $432,092,162, based on price of $132.30 (retroactively adjusted to reflect the March 24, 2015 one-for-fifteen reverse stock split) at which the registrant’s common equity was last sold as quoted on the Over-the-Counter Bulletin Board on that date. Shares of common stock held by each director, each officer and each person who owns 10% or more of the outstanding common stock have been excluded from this calculation in that such persons may be deemed to be affiliates. The determination of affiliate status is not necessarily conclusive.

 

The registrant had 34,879,194 shares of its common stock outstanding as of March 30, 2015.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Part III is incorporated by reference from the proxy statement for the 2015 annual meeting of stockholders.

 

 

 

 

EXPLANATORY NOTE

 

Electronic Cigarettes International Group, Ltd. (the “Company” or “we”) is filing this Amendment No. 1 (the “Amendment”) to our annual report on Form 10-K for the year ended December 31, 2014 (the “Original 10-K”) to include an updated audit report from McGladrey LLP regarding the audited 2013 financials.  Only Item 8 of Part II has been amended in this Amendment, with the only change having been made is the inclusion of the updated 2013 audit report.

 

Additionally, this Amendment replaces the interactive data files required by Item 601(b)(101) of Regulation S-K and Sections 405 of Regulation S-T, that were initially filed on the Original 10-K. As required pursuant to the Securities and Exchange Act of 1934, as amended, this Amendment also includes updated certifications from the Company’s Chief Executive Officer and Chief Financial Officer as Exhibits 31.1, 31.2, 32.1 and 32.2.

 

Unless otherwise disclosed herein, the disclosures contained herein have not been updated to reflect events, results or developments that have occurred after the filing of the Original 10-K, or to modify or update those disclosures affected by subsequent events unless otherwise indicated in this Amendment. This Amendment should be read in conjunction with the Original 10-K and the Company’s filings made with the Commission subsequent to the Original 10-K, including any amendments to those filings.

  

 

TABLE OF CONTENTS

 

PART II
Item 8.	Consolidated Financial Statements and Supplementary Data		1
PART IV
Item 15.	Exhibits and Financial Statement Schedules		2
SIGNATURES			5

 

 

PART II

 

Item 8.   Financial Statements and Supplementary Data.

 

Our consolidated financial statements, notes to the consolidated financial statements and the reports of the Company’s independent registered public accounting firms required to be filed in response to this Item 8 begin on page F-1.

 

 

PART IV

 

Item 15.   Exhibits, Financial Statement Schedules.

 

(a) The following documents are filed as part of this Report:

 

(1)

Financial Statements:

 

The audited consolidated balance sheet of the Company as of December 31, 2014, the related consolidated statements of operations, stockholders’ deficit and cash flows for the year then ended, the footnotes thereto, and the report of Rehmann Robson LLC, independent auditors, are filed herewith.

 

The audited consolidated balance sheet of the Company as of December 31, 2013, the related consolidated statements of operations, stockholders’ deficit and cash flows for the year then ended, the footnotes thereto, and the report of McGladrey LLP, independent auditors, are filed herewith.

 

The audited consolidated balance sheet of the Company as of December 31, 2012, the related consolidated statements of operations, stockholders’ deficit and cash flows for the year then ended, the footnotes thereto, and the report of Accell, Audit & Compliance, P.A., independent auditors, are filed herewith.

 

(2)

Financial Schedules:

 

None

 

Financial statement schedules have been omitted because they are either not applicable or the required information is included in the consolidated financial statements or notes hereto.

 

(3)

Exhibits:

 

The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Report.

 

(b) The following are exhibits to this Report and, if incorporated by reference, we have indicated the document previously filed with the SEC in which the exhibit was included.

 

Certain of the agreements filed as exhibits to this Report contain representations and warranties by the parties to the agreements that have been made solely for the benefit of the parties to the agreement. These representations and warranties:

 

●	may have been qualified by disclosures that were made to the other parties in connection with the negotiation of the agreements, which disclosures are not necessarily reflected in the agreements;

 

●	may apply standards of materiality that differ from those of a reasonable investor; and

 

●	were made only as of specified dates contained in the agreements and are subject to subsequent developments and changed circumstances.

 

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date that these representations and warranties were made or at any other time. Investors should not rely on them as statements of fact.

 

 

 

Exhibit No.		Description of Exhibit
2.1		Share Exchange Agreement dated April 2, 2013 among our Company, Victory Electronic Cigarettes, Inc. and the shareholders of Victory Electronic Cigarettes, Inc. (1)
2.2		Share Exchange Agreement by and among Victory Electronic Cigarettes Corporation, Vapestick Holdings Ltd., and all the shareholders of Vapestick Holdings Ltd., dated December 15, 2013. (2)
2.3		Agreement and Plan of Merger by and among Victory Electronic Cigarettes Corporation, VCIG LLC, FIN Electronic Cigarette Corporation, Inc. and Elliot B. Maisel as Representative, dated February 12, 2014 (3)
2.4		Exchange Agreement by and between Victory Electronic Cigarettes Corporation and the MHL Shareholders, dated as of April 22, 2014. (11)
2.5		Agreement to Buy the Shares in Ten Motives Limited and 10 Motives Limited by and between Victory Electronic Cigarettes Corporation, E-Cigs UK Holding Company Limited, and the Ten Motives Shareholders, dated as of May 30, 2014.(17)
3.1(i)		Articles of Incorporation (4)
3.1(i)(a)		Articles of Merger (5)
3.1(i)(b)		Amendment to Articles of Incorporation(6)
3.1(i)(c)		Amendment to Articles of Incorporation(20)
3.1(i)(d)		Amendment to Articles of Incorporation(34)
3.1(ii)		Bylaws (4)
4.1		Form of Convertible Note issued in January 2013 offering (7)
4.2		Form of Warrant issued in January 2013 Offering (7)
4.3		Form of Convertible Note dated November 4, 2013 (8)
4.4		Form of Warrant issued to E-Cig Acquisition Company LLC and William R. Fields (9)
4.5		Form of 15% Senior Secured Convertible Promissory Note issued in offerings in January and February 2014 (10)
4.6		Form of Warrant issued in offerings in January and February 2014 (10)
4.7		Form of 6% Secured Convertible Promissory Note issued in offering on April 22, 2014(11)
4.8		Form of Amendment to 6% Convertible Note dated June 3, 2014(18)
4.9		Form of Amendment No. 2 to 6% Convertible Note dated August 20, 2014(25)
4.10		Form of Amendment No. 3 to 6% Convertible Note dated October 15, 2014(26)
4.11		Form of Warrant from April 30, 2014 offering(12)
4.12		Form of Agent Warrant (13)
4.13		4% Exchange Convertible Note dated May 30, 2014(23)
4.14		4% Convertible Note dated May 30, 2014(17)
4.15		Form of 12% Convertible Notes dated July 17, 2014(24)
4.16		Form of Warrant dated July 17, 2014(24)
4.17		Form of December 12% Convertible Note (28)
4.18		Form of 10% Convertible Note issued in January 14, 2015 offering (29)
4.19		Form of January 12% Convertible Note issued in January 16, 2015 offering (30)
4.20		Form February 12% Convertible Note issued in February 2015 offering (32)
4.21		Form of Warrant issued in February 2015 offering (32)
4.22		Form March 12% Convertible Note issued in March 2015 offering (33)
4.23		Form of Warrant issued in March 2015 offering (33)
4.24		Form of Prepaid Warrant issued in March 13, 2015 exchange (33)
10.1		$200,000 Debenture dated January 31, 2013 issued by Victory Electronic Cigarettes LLC in favor of our company (2)
10.2		Security Agreement dated March 25, 2013 but effective as of January 31, 2013 between Victory Electronic Cigarettes Inc. as debtor and our company as secured party (2)
10.3		Return To Treasury Agreement dated June 18, 2013 between our company and Stephen Brady (14)
10.4		Non-Broker Private Placement Agreement dated May 1, 2013 between our company and Wolverton Securities Ltd. (14)
10.5		General Financial Advisory Agreement dated June 21, 2013 between our company and Wolverton Securities Ltd. (14)
10.6		Promissory Note with Brent Willis (15)
10.7		Promissory Note with Marc Hardgrove (15)
10.8		Promissory Note with David Martin (15)
10.9		Sales and Consulting Agreement by and among Victory Electronic Cigarettes Corporation and E-Cig Acquisition Company LLC, dated December 30, 2013 (9)
10.10		Form of Securities Purchase Agreement from offerings in January and February 2014 (10)
10.11		Form of Registration Rights Agreement from offerings in January and February 2014 (10)
10.12		Form of Security Agreement from offerings in January and February 2014 (10)
10.13		Form of Amended and Restated Promissory Notes dated February 28, 2014 (23)
10.14		Form of Registration Rights Agreement entered into by and among Victory Electronic Cigarettes Corporation and the FIN shareholders dated February 28, 2014 (10)
10.15		Form of Promissory Notes dated April 22, 2014(11)
10.16		Form of Registration Rights Agreement entered into with MHL Shareholders dated April 22, 2014(11)
10.17		MHL Shareholders Guarantee (11)
10.18		Security Agreement entered into between MHL and the MHL Shareholders(11)
10.19		Form of Securities Purchase Agreement from April 22, 2014 offering(11)
10.20		Form of Amendment to Securities Purchase Agreement dated June 3, 2014(18)
10.21		Form of Amendment No. 2 to Securities Purchase Agreement dated August 20, 2014(25)
10.22		Form of Amendment No. 3 to Securities Purchase Agreement dated October 15, 2014(26)
10.23		Form of Registration Rights Agreement from April 22, 2014 offering(11)
10.24		Form of Amendment to Registration Rights Agreement dated June 3, 2014(18)
10.25		Form of Amendment No. 2 to Registration Rights Agreement dated October 15, 2014(26)
10.26		Purchasers Guarantee from April 22, 2014 offering(11)
10.27		Security Agreement entered into between MHL and purchasers from April 22, 2014 offering(11)
10.28		Pledge and Security Agreement entered into between the Company and purchasers from October 15, 2014 offering(26)
10.29		Share Charge entered into with purchasers from April 22, 2014 offering(11)
10.30		Intercreditor Agreement(11)
10.31		Amendment to Intercreditor Agreement(18)
10.32		Second Amendment to Intercreditor Agreement (27)
10.33		Third Amendment to Intercreditor Agreement(26)
10.34		Form of Securities Purchase Agreement for April 30, 2014, June 19, 2014 and July 16, 2014 offering(12)
10.35		Form of Registration Rights Agreement for April 30, 2014, June 19, 2014 and July 16, 2014 offering(19)
10.36		Exchange Agreement dated May 30, 2014(24)
10.37		Purchase Agreement dated May 30, 2014(17)
10.38		Asset Purchase Agreement entered into on July 2, 2014 (21)
10.39		Securities Purchase Agreement entered into on July 3, 2014(21)
10.40		Voting Agreement entered into on July 15, 2014 (22)
10.41		Registration Rights Agreement entered into with Man FinCo on July 15, 2014 (22)
10.42		Registration Rights Agreement entered into with sellers of Hardwire on July 16, 2014 (22)
10.43		Form of Exchange Agreement dated July 17, 2014(24)
10.44		Advisory Agreement by and among Fields Texas Limited LLC and the Company dated April 28, 2014(25)
10.45		Termination Agreement of Advisory Agreement with Fields Texas Limited LLC(25)
10.46		Form of Securities Purchase Agreement for December 2014 offering(28)
10.47		Form of Securities Purchase Agreement for January 14, 2015 offering(29)
10.48		Form of Securities Purchase Agreement for January 16, 2015 offering(30)
10.49		Form of Securities Purchase Agreement for February 2015 offering(32)
10.50		Form of Securities Purchase Agreement for March 2015 offering(33)
10.51		Form of Exchange Agreement for March 13, 2015 exchange (33)
10.52		Form of 0.04% Unsecured Promissory Note dated March 13, 2014(33)
10.53 †		Employment Agreement with Brent Willis dated June 25, 2013. (14)
10.54 †		Employment Agreement with Marc Hardgrove dated June 25, 2013. (14)
10.55 †		Employment Agreement with Robert Hartford dated July 9, 2013 (16)
10.56†		Amended and Restated Employment Agreement with Brent Willis dated August 22, 2014(25)
10.57†		Amended and Restated Employment Agreement with Marc Hardgrove dated August 22, 2014(25)
10.58†		Employment Agreement with James McCormick dated August 22, 2104(25)
10.59†		Employment Agreement with Philip Anderson, dated January 15, 2015 (31)
10.60†		2013 Stock Option Plan (13)
10.61†		2014 Stock Option Plan (23)
14.1*		Code of Ethics
21.1		List of Subsidiaries (23)
31.1		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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

  

 

* Previously filed on the Original 10-K.

† Management contract or compensatory plan or arrangement.

 

(1)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on April 5, 2013.
(2)		Filed as an Exhibit on Annual Report on Form 10-K with the SEC on March 31, 2014.
(3)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on February 19, 2014.
(4)		Filed as an Exhibit on Registration Statement on Form SB-2 with the SEC on May 15, 2007.
(5)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on July 18, 2013.
(6)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on April 11, 2014.
(7)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on February 6, 2013.
(8)		Filed as an Exhibit on Quarterly Report on Form 10-Q with the SEC on November 14, 2013.
(9)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on January 6, 2014.
(10)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on March 6, 2014.
(11)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on April 29, 2014
(12)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on May 6, 2014.
(13		Filed as an Exhibit on Current Report to Form 8-K with the SEC on January 17, 2014.
(14)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on June 28, 2013.
(15)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on August 21, 2013.
(16)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on July 12, 2013.
(17)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on June 5, 2014.
(18)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on June 9, 2014.
(19)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on June 24, 2014.
(20)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on July 9, 2014.
(21)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on July 10, 2014.
(22)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on July 18, 2014.
(23)		Filed as an Exhibit on Registration Statement on Form S-1/A with the SEC on July 2, 2014.
(24)		Filed as an Exhibit on Registration Statement on Form S-1/A with the SEC on July 28, 2014.
(25)		Filed as an Exhibit on Registration Statement on Form S-1/A with the SEC on September 8, 2014.
(26)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on October 21, 2014.
(27)		Filed as an Exhibit on Registration Statement on Form S-1/A with the SEC on October 23, 2014.
(28)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on December 29, 2014.
(29)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on January 14, 2015.
(30)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on January 22, 2015.
(31)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on January 22, 2015.
(32)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on March 4, 2015.
(33)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on March 17, 2015.
(34)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on March 24, 2015.

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD
Date: April 2, 2015	By:	/s/ Brent David Willis
		Brent David Willis
		Chief Executive Officer, President and Secretary (Principal Executive Officer)

 

Date: April 2, 2015	By:	/s/ Philip Anderson
		Philip Anderson
		Chief Financial Officer and Treasurer (Principal Financial Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Date: April 2, 2015	By:	/s/ Brent David Willis
		Brent David Willis
		Chief Executive Officer, President, Secretary and Director (Principal Executive Officer)
Date: April 2, 2015	By:	/s/Philip Anderson
		Philip Anderson
		Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
Date: April 2, 2015	By:	/s/ Dan O’Neill
		Dan O’Neill
		Executive Chairman and Director
Date: April 2, 2015	By:	/s/ James P. Geiskopf
		James P. Geiskopf
		Director
Date:April 2, 2015	By:	/s/ Craig Colmar
		Craig Colmar
		Director
Date: April 2, 2015	By:	/s/ David Karp
		David Karp
		Director

 

 

FINANCIAL STATEMENTS

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 and 2012

 

Index to Consolidated Financial Statements

 

Report of Independent Registered Public Accounting Firm on 2014 Consolidated Financial Statements	F–1
Report of Independent Registered Public Accounting Firm – 2013	F–2
Report of Independent Registered Public Accounting Firm – 2012	F–3
Consolidated Balance Sheets as of December 31, 2014 and 2013	F–4
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2014, 2013 and 2012	F–5
Consolidated Statements of Stockholders’ Deficit for the years ended December 31, 2014, 2013 and 2012	F–6
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012	F–7
Notes to Consolidated Financial Statements	F–9

  

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

ON 2014 CONSOLIDATED FINANCIAL STATEMENTS

  

Board of Directors and Stockholders

Electronic Cigarettes International Group, Ltd.

Grand Rapids, Michigan

 

We have audited the accompanying consolidated balance sheet of Electronic Cigarettes International Group, Ltd (the Company) as of December 31, 2014, and the related consolidated statements of operations and comprehensive loss, stockholders’ deficit and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the 2014 consolidated financial statements based on our audit.

 

We conducted our audit of the 2014 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the 2014 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Electronic Cigarettes International Group, Ltd. as of December 31, 2014, and the consolidated results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 23 to the 2014 consolidated financial statements, the Company has reported significant operating losses and cash flow deficits and has accumulated net capital deficit. These and other factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 23. The 2014 consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Trendway Commission (COSO) and our separate report thereon dated March 31, 2015, expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of the existence of a material weakness.

 

/s/ Rehmann Robson LLC

 

Grand Rapids, Michigan

March 31, 2015

   

  

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders

Electronic Cigarettes International Group, Ltd.

 

We have audited the accompanying consolidated balance sheet of Electronic Cigarettes International Group, Ltd. (formerly known as Victory Electronic Cigarettes Corporation) as of December 31, 2013, and the related consolidated statements of operations and comprehensive income, stockholders’ deficit and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the 2013 consolidated financial statements, referred to above present fairly, in all material respects, the financial position of Electronic Cigarettes International Group, Ltd. as of December 31, 2013, and the results of their operations and their cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.

 

/s/ McGladrey LLP

 

Fort Lauderdale, Florida

May 6, 2014, except for information presented in Note 1 to the consolidated
financial statements related to the retroactive effect of the one-for-fifteen stock split,
as to which the date is March 31, 2015

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and

Stockholders of Victory Electronic Cigarette s Corporation

 

We have audited the accompanying consolidated balance sheet of Victory Electronic Cigarette s Corporation and subsidiary (the “Company”) as of 2012, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the year then ended.  The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management,   as well as evaluating   the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In  our opinion, the consolidated financial  statements  referred to  above present fairly,  in  all  material respects,  the consolidated financial position of Victory Electronic Cigarette s Corporation  and subsidiary as of December 31, 2012, and the consolidated results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United  States of America.

 

/s/ Accell  Audit & Compliance, P.A.

 

Tampa, FL

February 28, 2013

 

4868 West Gandy Boulevard ● Tampa, Florida 33611 ● 813.440.6380

 

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Consolidated Balance Sheets

 

		December 31,				December 31,
		2014				2013
Assets
Current assets:
Cash		$	2,099,475			$	2,081,963
Accounts receivable, net			4,091,374				112,921
Inventory, net			6,651,210				340,636
Prepaid expenses			3,519,397				42,704
Deposit			2,251,250				-
Other current assets			18,356				6,750
Total current assets			18,631,062				2,584,974
Goodwill			56,658,457				-
Other intangible assets, net			54,693,079				-
Property and equipment, net			1,848,548				27,376
Total assets		$	131,831,146			$	2,612,350
Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable and accrued expenses		$	22,411,444			$	306,200
Current portion of borrowed debt			57,917,913				650,000
Line of credit			402,995				-
Derivative liability			40,090,977				-
Warrant liability			42,335,392				-
Private placement funds received in advance			-				1,100,000
Due to related party			-				448,166
Other liabilities			1,578,811				20,000
Total current liabilities			164,737,532				2,524,366
Warrant liability			81,562,523				16,600,500
Deferred income taxes			5,412,779				-
Total liabilities			251,712,834				19,124,866
Stockholders’ deficit
Common stock, $.001 par value; 300,000,000 and 100,000,000 shares authorized, 12,051,762 and 3,559,600 shares issued and outstanding at December 31, 2014 and December 31, 2013, respectively			12,052				3,560
Additional paid-in capital			284,328,117				4,776,972
Accumulated deficit			(402,868,006	)			(21,293,048	)
Accumulated other comprehensive loss			(1,353,851	)			-
Total stockholders’ deficit			(119,881,688	)			(16,512,516	)
Total liabilities and stockholders’ deficit		$	131,831,146			$	2,612,350

  

See accompanying notes to the consolidated financial statements.

 

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Consolidated Statements of Operations and Comprehensive Loss

 

		Years Ended December 31,
		2014				2013				2012
Revenues
Net internet sales		$	8,952,598			$	1,758,762			$	855,758
Net retail and wholesale revenues			34,523,181				1,343,967				614,446
Total net revenues			43,475,779				3,102,729				1,470,204
Cost of goods sold			31,464,001				1,288,914				526,300
Gross profit			12,011,778				1,813,815				943,904
Operating expenses
Distribution, marketing and advertising			10,397,367				1,078,180				323,167
Selling, general and administrative			56,538,552				3,036,873				1,068,767
Loss on impairment of intangible assets			144,357,493				-				-
Loss on sale of asset			238,917				-				-
Advisory agreement warrants			15,646,280				16,600,500				-
Total operating expenses			227,178,609				20,715,553				1,391,934
Loss from operations			(215,166,831	)			(18,901,738	)			(448,030	)
Other (income) expense
Fair value in excess of proceeds on convertible notes			29,215,500				-				-
Warrant fair value adjustment			108,609,241				-				-
Derivative fair value adjustment			342,254				-				-
Loss on extinguishment of debt			5,643,735				-				-
Interest expense, net			44,135,995				1,804,710				30,140
Loss before income taxes			(403,113,556	)			(20,706,448	)			(478,170	)
Income tax benefit			21,538,598				-				-
Net loss			(381,574,958	)			(20,706,448	)			(478,170	)
Other comprehensive loss			(1,353,851	)			-				-
Comprehensive loss		$	(382,928,809	)		$	(20,706,448	)		$	(478,170	)
Net loss per common share:
Basic		$	(73.06	)		$	(7.24	)		$	(0.22	)
Diluted		$	(73.06	)		$	(7.24	)		$	(0.22	)
Weighted average number of shares outstanding:
Basic			5,222,827				2,858,094				2,166,667
Diluted			5,222,827				2,858,094				2,166,667

 

See accompanying notes to the consolidated financial statements.

 

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Consolidated Statement of Stockholders’ Deficit

 

																		Accumulated
																		other				Total
		Common stock								Additional				Accumulated				comprehensive				stockholders’
		Shares				Amount				paid-in capital				deficit				loss				equity (deficit)
Balance at December 31, 2011			2,166,667			$	2,167			$	67,144			$	(108,430	)		$	-			$	(39,119	)
Net loss			-				-				-				(478,170	)			-				(478,170	)
Balance at December 31, 2012			2,166,667			$	2,167			$	67,144			$	(586,600	)		$	-			$	(517,289	)
Sale of common shares, net of issuance costs			666,667				667				2,208,933				-				-				2,209,600
Issuance of common shares in reverse merger			722,933				723				(723	)			-				-				-
Debt assumed as part of reverse merger			-				-				(210,000	)			-				-				(210,000	)
Retirement of shares returned from shareholder			(106,667	)			(107	)			107				-				-				-
Issuance of common shares			110,000				110				2,276,511				-				-				2,276,621
Stock based compensation			-				-				435,000				-				-				435,000
Net loss			-				-				-				(20,706,448	)			-				(20,706,448	)
Balance at December 31, 2013			3,559,600			$	3,560			$	4,776,972			$	(21,293,048	)		$	-			$	(16,512,516	)
Issuance of common shares - Vapestick acquisition			439,727				440				48,974,118				-				-				48,974,558
Issuance of common shares - FIN acquisition			666,667				667				108,599,333				-				-				108,600,000
Issuance of common shares - Must Have Limited acquisition			153,333				153				15,524,847				-				-				15,525,000
Issuance of common shares -  Hardwire acquisition			200,000				200				18,674,800				-				-				18,675,000
Issuance of common shares - April 30, 2014			32,205				32				2,431,529				-				-				2,431,561
Issuance of common shares - June 19, 2014			9,361				9				734,120				-				-				734,129
Issuance of common shares - July 15, 2014			211,890				212				6,476,824				-				-				6,477,036
Issuance of common shares - July 16, 2014			12,367				12				1,044,880				-				-				1,044,892
Issuance of common shares - November 25, 2014			37,861				38				1,930,866												1,930,904
Extinguishment of warrant liability (Note 11)			-				-				42,972,359				-				-				42,972,359
Stock based compensation			-				-				7,129,316				-				-				7,129,316
Conversion of debt			6,581,144				6,581				14,236,960				-				-				14,243,541
Exercise of stock options			33,333				33				124,967				-				-				125,000
Exercise of warrants			45,541				46				4,261,193				-				-				4,261,239
Purchase of trademark			667				1				134,999				-				-				135,000
Payment of penalty shares, legal fees, and other expenses			68,067				68				6,300,034				-				-				6,300,102
Net loss			-				-				-				(381,574,958	)			-				(381,574,958	)
Foreign currency translation			-				-				-				-				(1,353,851	)			(1,353,851	)
Balance at December 31, 2014			12,051,762			$	12,052			$	284,328,117			$	(402,868,006	)		$	(1,353,851	)		$	(119,881,688	)

  

See accompanying notes to the consolidated financial statements.

 

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Consolidated Statements of Cash Flows

 

		Years Ended December 31,
		2014				2013				2012
Cash flows from operating activities:
Net loss		$	(381,574,958	)		$	(20,706,448	)		$	(478,170	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			831,715				2,009				-
Loss on sale of asset			238,917				-				-
Deferred income tax benefit			(28,551,379	)			-				-
Issuance of warrants for advisory fees			15,646,280				16,600,500				-
Other stock based compensation			7,129,316				435,000				-
Amortization of intangible assets			9,797,226				-				-
Impairment of goodwill			144,357,493				-				-
Derivative fair value adjustment			585,584				-				-
Fair value in excess of financing proceeds			29,215,500				-				-
Warrant fair value adjustment			109,396,720				-				-
Inventory writedowns			11,200,000				-
Bad debts			2,093,205				-				-
Loss on conversion of notes			1,066,083				-				-
Loss on extinguishment of debt			5,643,735				-				-
Common stock issued for professional services			135,000				-				-
Amortization of debt discount			29,210,429				1,451,621
Amortization of deferred financing costs			3,012,046				210,020				-
Changes in operating assets and liabilities:
Accounts receivable			(1,916,701	)			44,374				(156,977	)
Inventory			4,136,676				(53,263	)			(241,177	)
Other prepaid expenses, deposit, advances			(3,031,630	)			107,967				(119,588	)
Other current assets			(11,606	)			(6,750	)			-
Accounts payable and accrued expenses			10,098,080				258,347				37,695
Deferred revenue			-				(17,699	)			17,699
Other liabilities			1,058,811				20,000				-
Deferred compensation			-				(350,003	)			350,003
Net cash used in operating activities			(29,733,458	)			(2,004,325	)			(590,515	)

 

See accompanying notes to the consolidated financial statements.

 

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Consolidated Statements of Cash Flows - Continued

 

		Years Ended December 31,
		2014				2013				2012
Cash flows from investing activities:
Purchases of property and equipment			(1,297,536	)			(29,385	)			-
Acquisition of businesses, net of cash acquired			(26,146,865	)			-				-
Net cash used in investing activities			(27,444,401	)			(29,385	)			-
Cash flows from financing activities:
Revolving line of credit, net			(11,290,086	)			(20,641	)			20,641
Proceeds from issuance of debt			68,495,000				198,379				-
Payments on convertible notes			(450,000	)			-				-
Payments on debt			(31,783,052	)			(1,200,000	)			-
Proceeds from issuance of common stock			30,551,031				4,486,221				-
Deferred financing and offering costs			(3,012,046	)			(210,020	)			-
Proceeds from exercise of stock options and warrants			137,550				-				-
(Repayments) advances from related party, net			(448,166	)			844,296				580,953
Net cash provided by financing activities			52,200,231				4,098,235				601,594
Effect of exchange rate changes on cash			4,995,140				-				-
Net change in cash			17,512				2,064,525				11,079
Cash at beginning of the year			2,081,963				17,438				6,359
Cash at end of the year		$	2,099,475			$	2,081,963			$	17,438
Supplementary Cash Flows Information
Cash paid for interest		$	45,078,330			$	368,028			$	23
Disclosures of Non-Cash Investing and Financing Activities
Derivatives in financing transactions		$	62,868,237			$	-			$	-
Exercise of warrants		$	4,248,688			$	-			$	-
Financing of building acquisition		$	430,572			$	-			$	-
Conversion of convertible promissory notes		$	200,000			$	-			$	-
Stock issued in reverse merger		$	-			$	10,844			$	-
Convertible debenture assumed as part of reverse merger		$	-			$	210,000			$	-
Retirement of shares returned from shareholder		$	-			$	1,600			$	-

 

See accompanying notes to the consolidated financial statements.

 

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

1.

BASIS OF PRESENTATION, RECENT DEVELOPMENTS AND LIQUIDITY AND FINANCIAL CONDITION

 

Basis of Presentation

 

Electronic Cigarettes International Group, Ltd. (formerly Victory Electronic Cigarettes Corporation) and its consolidated subsidiaries, (“ECIG” or the “Company”) have prepared the accompanying consolidated financial statements as of December 31, 2014 and 2013 and for the years ended December 31, 2014, 2013, and 2012, respectively, in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

 

We were incorporated in the state of Nevada on May 19, 2004 as Teckmine Industries, Inc. (“Teckmine”). In July 2007, Teckmine became a public company traded in the over the counter market. On June 25, 2013, pursuant to a share exchange agreement, we acquired Victory Electronic Cigarettes, Inc., a Nevada corporation (“VEC”), in which the existing stockholders of VEC exchanged all of their issued and outstanding shares of common stock for 2,166,667 shares of our common stock. After the consummation of the share exchange, stockholders of VEC owned 60.9% of our outstanding common stock and VEC became our wholly owned subsidiary. For accounting purposes, the share exchange was treated as a reverse acquisition with VEC as the acquirer and Teckmine as the acquired party, and as a result the historical financial statements of the Company prior to the acquisition of VEC included in this prospectus are the historical financial statements of VEC. As a result of the reverse merger with Teckmine, we became a public company in June 2013. On July 11, 2013, we changed our name to “Victory Electronic Cigarettes Corporation.” On July 2, 2014, we changed our name to “Electronic Cigarettes International Group, Ltd.”

 

Recent Developments

 

Reverse Stock Split

 

On March 21, 2015, the Company effected a one-for-fifteen reverse split of our common stock. All references to number of shares and share price have been retroactively restated for all years presented.

 

Business Combinations

 

Vapestick Holdings Limited - On January 9, 2014, the Company completed the acquisition of all of the issued and outstanding ordinary shares of Vapestick Holdings Limited (“Vapestick”) a company incorporated under the laws of England and Wales, pursuant to a share exchange agreement for an aggregate cash payment of £3,500,000 (approximately $5.8 million) and the issuance of 439,727 shares of our common stock. The results of Vapestick’s operations have been included in our consolidated statements of operations and comprehensive (loss) income from the date of acquisition.

 

FIN Electronic Cigarette Corporation, Inc. - On February 28, 2014, the Company completed the acquisition of FIN Electronic Cigarette Corporation, Inc. (“FIN”), a Delaware corporation, for 666,667 shares of common stock, an aggregate cash payment of $10 million and $15 million of promissory notes that became due 90 days from the date of issuance, on May 29, 2014, and were amended on May 30, 2014. The results of FIN’s operations have been included in our consolidated statements of operations and comprehensive (loss) income from the date of acquisition.

 

Must Have Limited - On April 22, 2014, the Company completed the acquisition of Must Have Limited (“VIP”), an England and Wales incorporated limited company for 153,333 shares of the Company’s common stock, GBP £5,345,713.58 (approximately $9 million), $11,000,000 of promissory notes and GBP £6,796,303 (approximately $11.4 million) in respect of VIP’s surplus cash. Additional payments include up to $5 million as an earn-out conditioned upon certain performance and employment conditions. The results of VIP’s operations have been included in our consolidated statement of operations and comprehensive (loss) income from the date of acquisition.

 

Hardwire Interactive Inc. - On July 16, 2014, the Company completed the acquisition of the assets of  Hardwire Interactive Inc., a British Virgin Islands company (“Hardwire”) for an aggregate cash payment of $5,000,000, 200,000 shares of common stock and the assumption of all of Hardwire’s liabilities relating to or arising out of any assigned contracts, the employment of Hardwire’s employees or the ownership, operation or use of the assets being sold.

 

Liquidity and Financial Condition

 

The Company had cash and cash equivalents of $2,099,475 as of December 31, 2014, and negative working capital of $146,106,470. The Company has significant commitments related to various financial instruments, has experienced recurring losses and has incurred significant expense as of and for the year ended December 31, 2014.  The financial instruments, if not converted to equity, may require cash settlement.  In addition, the Company’s acquisition strategy generally requires a cash component and the development of the Company’s infrastructure will require investment.  During the fourth quarter of 2014, the Company was unable to complete an anticipated public offering of its shares and, while management believes that additional private placements are possible, there can be no assurance that these will be available.

 

The Company’s debt contain covenants that could limit our future financing capabilities. These restrictions may interfere with the Company’s ability to obtain new or additional financing or may affect the manner in which the Company structures such new or additional financing or engage in other business activities, which may significantly limit or harm the Company’s results of operations, financial condition and liquidity. A default and resulting acceleration of obligations could also result in an event of default and declaration of acceleration under certain of the Company’s other existing debt agreements. Such an acceleration of the Company’s debt would have a material adverse effect on our liquidity and our ability to continue as a going concern. A default could also significantly limit the Company’s alternatives to refinance both the debt under which the default occurred and other indebtedness. This limitation may significantly restrict the Company’s financing options during times of either market distress or the Company’s financial distress, which are precisely the times when having financing options is most important 

 

The Company’s existing liquidity is not sufficient to fund its operations, anticipated capital expenditures, working capital and other financing requirements until the Company reaches significant revenues.  Until that time. the Company will need to obtain additional equity and/or debt financing, especially if the Company experiences downturns in its business that are more severe or longer than anticipated, or if the Company experiences significant increases in expense levels resulting from being a publicly-traded company or from expansion of operations.  If the Company attempts to obtain additional equity or debt financing, the Company cannot assume that such financing will be available to the Company on favorable terms, or at all.

 

Because of recurring operating losses, net operating cash flow deficits, and an accumulated deficit, there is substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements have been prepared assuming that the Company will continue as a going concern, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets, or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

 

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

2.

Summary of SIGNIFICANT ACCOUNTING POLICIES

 

Revenue Recognition

 

Revenue is derived from product sales and is recognized upon shipment to the customer, when title and risk of loss has passed and collection is reasonably assured. Direct sales to individual customers are recognized within internet sales in the accompanying consolidated statements of operations and comprehensive (loss) income, while all sales to retailers and distributors are recognized within retail and wholesale revenues. Payments received by the Company in advance are recorded as deferred revenue until the merchandise has shipped to the customer.

 

Sales are presented net of allowances for sales returns, discounts, and allowances. Sales returns are determined based on an evaluation of current market conditions and historical returns experience. Discounts are based on open invoices where trade discounts have been extended to customers. Receivables are presented net of these adjustments and an allowance for doubtful accounts.

 

A significant area of judgment affecting reported revenue and net income is estimating sales return reserves, which represent that portion of gross revenues not expected to be realized. A customer can contractually return products during a certain period of time. In particular, retail revenue, including e-commerce sales, is reduced by estimates of returns. In determining estimates of returns, management analyzes historical trends, seasonal results and current economic or market conditions. The actual amount of sales returns subsequently realized may fluctuate from estimates due to several factors, including, merchandise mix, actual or perceived quality, differences between the actual product and its presentation in the website, timeliness of delivery and competitive offerings. The Company continually tracks subsequent sales return experience, compiles customer feedback to identify any pervasive issues, reassesses the marketplace, compares its findings to previous estimates and adjusts the sales return accrual and cost of sales accordingly. As of December 31, 2014 and 2013, the Company had a sales return reserve of approximately $0.1 million and $0, respectively, which is included in the valuation allowance for doubtful accounts as of those dates.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. Actual results could differ from those estimates. Significant estimates inherent in the preparation of the accompanying consolidated financial statements include customer deductions, sales returns, sales discounts the allowance for doubtful accounts, the reserve for excess and obsolete inventory, stock-based compensation, assumptions used to determine ongoing fair value of warrant liability and embedded derivatives, valuation of acquisition intangibles and other net assets acquired or assumed, and as the recoverability of net deferred tax assets.

 

Valuation of Goodwill

 

Goodwill represents the excess of cost over the fair value of net tangible and identifiable intangible assets acquired in business combinations. We review goodwill and other intangibles for impairment at the reporting unit level annually as of November 1 or, when events or circumstances dictate, more frequently. For purposes of goodwill impairment, our reporting units are Vapestick, FIN, VIP, and Hardwire. The impairment review for goodwill consists of a qualitative assessment of whether it is more-likely-than-not that a reporting unit’s fair value is less than its carrying amount, and if necessary, a two-step goodwill impairment test. Factors we consider when performing the qualitative assessment include general economic conditions, limitations on accessing capital, and changes in forecasted operating results, changes in fuel prices and fluctuations in foreign exchange rates. If the qualitative assessment demonstrates that it is more-likely-than-not that the estimated fair value of the reporting unit exceeds its carrying value, it is not necessary to perform the two-step goodwill impairment test. We may elect to bypass the qualitative assessment and proceed directly to step one, for any reporting unit, in any period. We can resume the qualitative assessment for any reporting unit in any subsequent period. When performing the two-step goodwill impairment test, the fair value of the reporting unit is determined and compared to the carrying value of the net assets allocated to the reporting unit. If the fair value of the reporting unit exceeds its carrying value, no further analysis or write-down of goodwill is required. If the fair value of the reporting unit is less than the carrying value of its net assets, the implied fair value of the reporting unit is allocated to all of its underlying assets and liabilities, including both recognized and unrecognized tangible and intangible assets, based on their fair value. If necessary, goodwill is then written down to its implied fair value. In 2014 we recognized goodwill impairment of approximately of $94 million primarily related to our FIN and Vapestick reporting units (Note 18).

 

Valuation of Identifiable Intangible Assets

 

In connection with our acquisitions, we have acquired certain identifiable intangible assets to which value has been assigned based on our estimates. Intangible assets that are deemed to have an indefinite life are not amortized, but are subject to an annual impairment test, or when events or circumstances dictate, more frequently. The indefinite-life intangible asset impairment test consists of a comparison of the fair value of the indefinite-life intangible asset with its carrying amount. If the carrying amount exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. If the fair value exceeds its carrying amount, the indefinite-life intangible asset is not considered impaired. In 2014, an impairment loss of approximately $50 million has been recorded on these assets primarily related to our FIN and Vapestick reporting units (see Note 18).

 

Other intangible assets assigned finite useful lives are amortized on a straight-line basis over their estimated useful lives.

 

 Financial Instruments

 

The carrying amounts of cash, accounts receivable, and accounts payable approximate fair value as of December 31, 2014 and 2013, because of the relatively short maturities of these instruments. The estimated fair values for financial instruments presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair values. The carrying values of certain borrowings approximate fair value because the underlying instruments are fixed-rate notes based on current market rates and current maturities.

 

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

Embedded Derivatives

 

The Company has issued financial instruments such as debt in which a derivative instrument is “embedded.” Upon issuing the financial instrument, the Company assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the financial instrument (i.e., the host contract) and whether a separate, non-embedded instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When it is determined that (1) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract and (2) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract and carried at fair value, with changes in fair value recorded in the income statement.

 

Foreign Currency Translation

 

The Company translates assets and liabilities of its foreign subsidiaries whose functional currency is the local currency, at exchange rates in effect at the balance sheet date. The Company translates revenues and expenses at weighted-average exchange rates during the year. Equity is translated at historical rates and the resulting foreign currency translation adjustments are included as a component of accumulated other comprehensive loss, which is reflected as a separate component of stockholders’ deficit.

 

Concentration of Customers and Suppliers

 

The Company supplies products and services and extends credit where permitted by law. Due to its acquisitions, the majority of the Company’s sales are to large retail chains and distributors servicing convenience stores. Additionally, 43% or $15.8 million of net revenues were generated from five customers in 2014. The Company purchases a majority of its products from two suppliers. The Company also generated $21.6 million and $0 of foreign sales, during the years ended December 31, 2014 and 2013, respectively.

 

Cash and Cash Equivalents

 

Cash consists of funds deposited in checking accounts. Cash also includes other kinds of accounts that have the general characteristics of demand deposits in that the customer may deposit additional funds at any time and also effectively may withdraw funds at any time without prior notice or penalty. While cash held by financial institutions may at times exceed federally insured limits, management believes that no material credit or market risk exposure exists due to the high quality of the institutions that have custody of the Company’s funds. The Company has not incurred any losses on such accounts.

 

Accounts Receivable

 

Accounts receivable are primarily from retail and wholesale customers or third-party internet brokers. Management reviews accounts receivable on a monthly basis to determine if any receivables are potentially uncollectible. An allowance for doubtful accounts is determined based on a combination of historical experience, length of time outstanding, customer credit worthiness, and current economic trends. As of December 31, 2013, the Company expected the amount of any potentially uncollectible receivables to be insignificant; therefore, no allowance for doubtful accounts had been determined necessary by management. As of December 31, 2014 and December 31, 2013, the Company has recorded an allowance for doubtful accounts of approximately $262,000 and $0, respectively.

 

Deferred Financing and Offering Costs

 

The Company capitalizes costs related to the issuance of debt which are included on the accompanying consolidated balance sheet. Deferred financing costs are amortized using a method that approximates the interest method over the life of the related loan and are included as a component of interest expense on the accompanying consolidated statements of operations and comprehensive (loss) income.

 

Offering costs associated with equity financing transactions are deferred and recorded as charge to additional paid in capital upon completion of the offering.

 

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

Stock-based Compensation

 

Stock-based awards are measured based on the fair value of the award as determined in accordance with GAAP and recognized over the required service or vesting period. The fair value of options and warrants are estimated at the date of grant using a binomial option pricing model.

 

Income Taxes

 

Prior to the conversion to a C corporation on March 8, 2013, the Company acted as a pass-through entity for tax purposes. Accordingly, the consolidated financial statements do not include a provision for federal income taxes prior to the conversion. The Company’s earnings and losses were included in the shareholders’ personal income tax returns and the income tax thereon, if any, was paid by the shareholders’.

 

The Company now files income tax returns in the United States, which are subject to examination by the tax authorities in that jurisdiction generally for three years after the filing date. Income taxes are provided for under the liability method, whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The calculation of the Company’s tax liabilities for uncertain income tax positions are based on estimates of whether, and the extent to which, additional taxes will be required.

 

The Company is subject to U.S. federal, state and local income taxes, and U.K. income taxes that are reflected in our consolidated financial statements. The effective tax rate for the year ended December 31, 2014 was 5.4%. The effective tax rate for 2014 was significantly impacted by the recognition of a deferred income tax benefit realized as a result of deferred tax liabilities that were recorded in the Company’s recent acquisitions as discussed below, and also by a valuation allowance placed against our deferred tax assets.

 

The Company recently completed the acquisitions of FIN, Vapestick, VIP and Hardwire. During 2014, certain measurement-period adjustments were made with respect to certain deferred tax liabilities that were identified to exist on the acquisition date for each of these acquisitions. As a result, deferred tax liabilities have been recorded for the identifiable intangibles acquired in these acquisitions as the amounts are non-deductible for income tax. 

 

We account for uncertainty in income taxes using a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more likely than not to be realized upon ultimate settlement. Such amounts are subjective, as a determination must be made on the probability of various possible outcomes. We reevaluate uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition and measurement could result in recognition of a tax benefit or an additional tax provision.

 

For the year ended December 31, 2014, there was no change to our total gross unrecognized tax benefit. We believe that there will not be a significant increase or decrease to the uncertain tax positions within the next twelve months.

 

Principles of Consolidation

 

These consolidated financial statements include the accounts of the Company and its 100% owned subsidiaries. All intercompany balances and transactions have been eliminated.

 

  

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

We evaluate quarterly the positive and negative evidence regarding the realization of net deferred tax assets. The carrying value of our net deferred tax assets is based on our belief that it is more likely than not that we will be unable to realize some of these deferred tax assets., primarily as a result of losses incurred during our limited history. As a result of this analysis, we project that approximately $78.5 million of our deferred tax assets will not be realizable.  

 

Inventory

 

Inventory is stated at the lower of standard cost (which approximates average cost) or market.

 

Property and Equipment

 

Property and equipment are stated at cost less accumulated depreciation. Depreciation is provided using the straight-line method for financial reporting purposes based on the estimated useful lives of the various assets ranging from three to ten years. Maintenance and repair costs are charged to current earnings. Upon disposal of assets, the costs of assets and the related accumulated depreciation are removed from the accounts. Gains or losses are reflected in current earnings.

 

Foreign Currency and Accumulated Other Comprehensive Loss

 

Comprehensive loss is defined as the change in equity of a company during the period resulting from transactions and other events and circumstances excluding transactions resulting from investments by owners and distributions to owners. The primary difference between our net loss and comprehensive loss results from foreign currency translation adjustments in consolidating our UK subsidiary’s financial statements. The financial position of foreign subsidiaries is translated using the exchange rates in effect at the end of the year, while income and expense items are translated at average rates of exchange during the year.

 

The net income and losses resulting from foreign currency transactions are recorded in the consolidated statements of operations in the period incurred were $1,246,149 for the year ended December 31, 2014 and $0 for the year ended December 31, 2013.

 

Loss per Share

 

Basic loss per share is computed on the basis of the weighted average number of shares outstanding for the reporting period. Diluted loss per share is computed on the basis of the weighted average number of common shares plus dilutive potential common shares outstanding using the treasury stock method. Any potentially dilutive securities are anti-dilutive due to the Company’s net losses. Accordingly, for all years presented, there is no difference between the basic and diluted net loss per share.

 

Revenue Concentrations

 

The Company considers significant revenue concentrations to be counterparties who account for 10% or more of the total revenues generated by the Company during the period. For the year ended December 31, 2014, the amount of revenue derived from counterparties representing the top five customers was approximately 43% of total sales. As of December 31, 2014 these five customers owed a total of approximately 2% of accounts receivable.

 

About 80% of the products sold are supplied by two suppliers.

 

Segment Reporting

 

The Company operates as one segment, in which management uses one measure of profitability. The Company is managed and operated as one business. The Company does not operate separate lines of business or separate business entities with respect to any of its product categories. Accordingly, the Company does not have separately reportable segments.

 

Litigation

 

The Company recognizes a liability for a contingency when it is probable that liability has been incurred and when the amount of loss can be reasonably estimated. When a range of probable loss can be estimated, the Company accrues the most likely amount of such loss, and if such amount is not determinable, then the Company accrues the minimum of the range of probable loss. As of December 31, 2014 and 2013, the litigation accrual was zero.

  

Reclassifications

 

Certain reclassifications have been made to the prior year balances in order to conform to the current year presentation. These reclassifications had no impact on working capital, net (loss) income, stockholders’ equity (deficit) or cash flows as previously reported.

 

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

Recent accounting pronouncements

 

In April 2014, the FASB issued ASU No. 2014-08 “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” ASU No. 2014-08 changes the criteria for reporting discontinued operations and modifies related disclosure requirements. The new guidance is effective on a prospective basis for fiscal years beginning after December 15, 2014, and interim periods within annual periods beginning on or after December 15, 2015. The Company is currently assessing the future impact of ASU No. 2014-08 on its financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The Company is currently assessing the potential impact of ASU No. 2014-09 on its financial statements.

 

In June 2014, the FASB issued ASU 2014-12, “Compensation—Stock Compensation (Topic 718)—Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period”, which requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The standard will be effective for fiscal years beginning after December 15, 2015. We do not expect there to be material impact on the consolidated financial statements as a result of this standard.

 

In November 2014, the FASB issued ASU 2014-16, “Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity” (a consensus of the FASB Emerging Issues Task Force). ASU 2014-16 does not change the current criteria in GAAP for determining when separation of certain embedded derivative features in a hybrid financial instrument is required, but clarifies how current GAAP should be interpreted in the evaluation of the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share, reducing existing diversity in practice. The Company is evaluating ASU 2014- 09 to determine if this guidance will have a material impact on the Company’s consolidated financial statements.

 

In November 2014, FASB issued ASU 2014-17, “Business Combinations (Topic 805) Pushdown Accounting a consensus of the FASM Emerging Issues Task Force.” The amendments in this Update provide an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. An acquired entity may elect the option to apply pushdown accounting in the reporting period in which the change-in-control event occurs. An acquired entity should determine whether to elect to apply pushdown accounting for each individual change-in-control event in which an acquirer obtains control of the acquired entity. If pushdown accounting is not applied in the reporting period in which the change-in-control event occurs, an acquired entity will have the option to elect to apply pushdown accounting in a subsequent reporting period to the acquired entity’s most recent change-in-control event. An election to apply pushdown accounting in a reporting period after the reporting period in which the change-in-control event occurred should be considered a change in accounting principle in accordance with Topic 250, Accounting Changes and Error Corrections. If pushdown accounting is applied to an individual change-in-control event, that election is irrevocable. The amendments in this ASU 2014-17 became effective on November 18, 2014 and are not expected to have a material impact on the financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (ASU No. 2014-15) that will require management to evaluate whether there are conditions and events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the financial statements are issued on both an interim and annual basis. Management will be required to provide certain footnote disclosures if it concludes that substantial doubt exists or when its plans alleviate substantial doubt about the Company’s ability to continue as a going concern. ASU No. 2014-15 becomes effective for annual periods beginning in 2016 and for interim reporting periods starting in the first quarter of 2017. The Company is currently evaluating the impact of this ASU on its financial statements.

 

3.

REVERSE MERGER

 

The transaction between Teckmine (renamed Victory) and VEC described in Note 1 was accounted for as a reverse recapitalization of VEC.  VEC is the accounting acquirer (and legal acquiree) based on Teckmine’s status as a non operating, public shell company, VEC stockholders obtaining approximately 60.9% of the post-transaction common shares of stock and post-transaction management and Board composition (VEC).  As a result, the common stock of VEC was retroactively restated to give effect to the 32,500,000 shares issued in the June 25, 2013 share exchange agreement.

 

On June 25, 2013, Victory completed a private placement transaction concurrently with the Reverse Merger to provide post-transaction working capital.  As a result of the private placement, 666,667 shares were issued at $3.75 per share resulting in proceeds of $2,500,000.  During the private placement, Victory incurred issuance costs of $290,400 which were netted against the proceeds.

 

Additionally, in conjunction with the closing of the Reverse Merger, various other share-based transactions occurred as follows:

 

Teckmine shares previously outstanding			1,300,420
Teckmine shares retired			(633,754	)
Shares issued in connection with the Reverse Merger			56,267
Total shares issued in Reverse Merger			722,933

 

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

Teckmine Convertible Promissory Notes and Warrants

 

Effective on January 31, 2013, in anticipation of the Reverse Merger, Teckmine issued $200,000 of convertible promissory notes (the “Teckmine Notes”).  The Teckmine Notes were assumed by the Company in the Reverse Merger and, as such, were recorded at fair value which was considered to approximate face value plus accrued and unpaid interest given the short remaining term to maturity and terms reflective of current market conditions. These notes bear interest at 12% and are due on January 31, 2014 or are convertible to the unregistered common stock of the Company at a conversion price that was set at $3.75 at the time of the Reverse Merger.  On January 31, 2014, the Teckmine Notes were converted to 800,000 shares of the Company’s common stock and accrued and unpaid interest was paid in cash.

 

Concurrent with the issuance of the Teckmine Notes, Teckmine issued 13,333 five-year common stock warrants (the “Teckmine Warrants”). The warrants were assumed in the Reverse Merger and are exercisable for unregistered common stock of the Company at an exercise price of $3.75.  The Teckmine Warrants are considered to be equity instruments based on the fact that the terms are not subject to adjustment and no circumstances exist under which the holder can receive cash in exchange for the warrant and/or the underlying shares.  

 

4.

ACCOUNTS RECEIVABLE, NET

 

The following table sets forth the components of accounts receivable:

 

		December 31,				December 31,
		2014				2013
Accounts receivable, gross		$	4,353,048			$	112,921
Allowance for doubtful accounts, sales returns, and discounts			(261,674	)			-
Accounts receivable, net		$	4,091,374			$	112,921

 

Accounts receivable are primarily from retail and wholesale customers or third-party internet brokers. Management reviews accounts receivable on a monthly basis to determine if any receivables are potentially uncollectible. An allowance for doubtful accounts, sales returns, and discounts is determined based on a combination of historical experience, length of time outstanding, customer credit worthiness, and current economic trends. Bad debt expense of approximately $2,093,000 was recorded in 2014. As of December 31, 2013, the Company expected the amount of any potentially uncollectible receivables to be insignificant; therefore, no allowance for doubtful accounts had been determined necessary by management at that date or for the year then ended.

 

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

5.

BUSINESS ACQUISITIONS

 

The Company completed several strategic business combinations in 2014 that further managements growth strategy and geographic markets expansion.

 

Vapestick Holdings Limited

 

On January 9, 2014, the Company completed its acquisition of Vapestick. The assets and liabilities of Vapestick shown below are based on their acquisition date fair values. The following is the Company’s assignment of the aggregate consideration:

 

 

Fair Value of Consideration Transferred
Cash		$	5,804,240
Issuance of shares of common stock			48,974,558
		$	54,778,798
Assets Acquired and Liabilities Assumed
Cash		$	136,165
Accounts receivable			212,331
Inventory			234,656
Prepaids and other current assets			100,548
Furniture and equipment			47,772
Tradename			6,591,000
Customer relationships			4,098,000
Accounts payable and accrued expenses			(221,210	)
Revolving line of credit			(330,322	)
Long-term debt			(45,577	)
Deferred tax liability			(2,513,440	)
Other liabilities			(72,994	)
Total identifiable net assets			8,236,929
Goodwill			46,541,869
Total fair value of consideration		$	54,778,798

 

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

FIN Electronic Cigarette Corporation, Inc.

 

On February 28, 2014, the Company completed its acquisition of FIN. The assets and liabilities of FIN shown below are based on their acquisition date fair values. The following is the Company’s assignment of the aggregate consideration:

 

Fair Value of Consideration Transferred
Cash		$	10,000,000
Issuance of shares of common stock			108,600,000
Short term promissory notes			15,000,000
		$	133,600,000
Assets Acquired and Liabilities Assumed
Cash		$	177,786
Accounts receivable			1,730,151
Inventory			18,045,580
Prepaids and other current assets			990,289
Furniture and equipment			1,230,774
Tradename			20,375,000
Customer relationships			47,280,000
Accounts payable and accrued expenses			(2,484,203	)
Deferred tax liability			(25,441,968	)
Other liabilities			(11,134,042	)
Total identifiable net assets			50,769,367
Goodwill			82,830,633
Total fair value of consideration		$	133,600,000

  

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

Must Have Limited (VIP)

 

On April 22, 2014, Company completed its acquisition of VIP. The assets and liabilities of VIP shown below are based on acquisition date fair values. The following is the Company’s assignment of the aggregate consideration:

 

Fair Value of Consideration Transferred
Cash		$	20,396,767
Issuance of shares of common stock			15,525,000
Contingent earn-out			5,000,000
Short term promissory notes			11,000,000
		$	51,921,767
Assets Acquired and Liabilities Assumed
Cash		$	14,698,409
Accounts receivable			426,243
Inventory			2,379,159
Prepaids and other current assets			1,315,212
Furniture and equipment			249,863
Tradename			11,025,000
Customer relationships			13,865,000
Domain name/website			1,235,000
Accounts payable and accrued expenses			(4,301,751	)
Deferred tax liability			(6,008,750	)
Total identifiable net assets			34,883,385
Goodwill			17,038,382
Total fair value of consideration		$	51,921,767

 

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

Hardwire Interactive Inc. (Hardwire)

 

On July 16, 2014, Company completed its acquisition of Hardwire. The assets and liabilities of Hardwire shown below are based on acquisition date fair values. The following is the Company’s assignment of the aggregate consideration:

 

Fair Value of Consideration Transferred
Cash		$	5,000,000
Issuance of shares of common stock			18,675,000
		$	23,675,000
Assets Acquired and Liabilities Assumed
Accounts receivable		$	1,786,232
Inventory, net			987,855
Prepaids and other current assets			290,264
Non-compete agreements			420,000
Customer relationships			6,075,000
Trademark			6,045,000
Total identifiable net assets			15,604,351
Goodwill			8,070,649
Total fair value of consideration		$	23,675,000

 

The acquisition date amounts for Vapestick, FIN, VIP, and Hardwire are based upon management’s estimate of the fair values using valuation techniques including income, cost and market approaches. In estimating the fair value of the acquired assets and assumed liabilities, the fair value estimates are based on, but not limited to, expected future revenue and cash flows, expected future growth rates, and estimated discount rates. The customer relationships are being amortized over the estimated useful life of Hardwire customer relationships which is 2 years. Tradenames are being amortized over an estimated useful life of 10 to 15 years. Goodwill is calculated as the excess of the fair value of the consideration transferred over the fair value of the identifiable net assets acquired and liabilities assumed, and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce, as well as expected future synergies.

 

The Company’s consolidated results of operations for year ended December 31, 2014 include the results of Vapestick, FIN, VIP and Hardwire since the respective acquisition dates.  The following table sets forth unaudited pro forma results of operations on a combined basis assuming that the acquisitions of Vapestick, FIN, VIP, and Hardwire occurred on January 1, 2013:

 

		Unaudited Pro Forma Information
		Year Ended
		December 31,				December 31,
		2014				2013
Net revenue		$	76,291,095			$	98,568,106
Loss from operations		$	(36,261,545	)		$	(4,848,541	)

 

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

6.

INVENTORY, NET

 

The following table sets forth the components of inventory:

 

		December 31,				December 31,
		2014				2013
Inventory, gross		$	8,230,741			$	355,636
Reserve for obsolesence			(1,579,531	)			(15,000	)
Inventory, net		$	6,651,210			$	340,636

 

Inventory, which consists of ready for sale disposable and rechargeable e-cigarettes, batteries, cartomizers and other accessories, is carried at the lower of cost or fair market value. Cost is determined using the first-in, first-out method. Historical inventory usage and current revenue trends are considered in estimating both excess and obsolete inventories. Inventory writedowns of $11.2 million and $0 were recorded in 2014 and 2013, respectively.

 

7.

PROPERTY AND EQUIPMENT, NET

 

Property and equipment, net consists of the following at December 31, 2014 and December 31, 2013:

 

		December 31,				December 31,
		2014				2013
Land		$	100,000			$	-
Building			434,037				-
Office furniture and equipment			900,456				29,385
Leasehold improvements			41,421				-
Packaging			1,020,358				-
Other			97,642				-
			2,593,914				29,385
Less: accumulated depreciation and amortization			(745,366	)			(2,009	)
Property and equipment, net		$	1,848,548			$	27,376

 

Depreciation expense was approximately $832,000 and $2,000 for the years ended December 31, 2014 and 2013, respectively.

 

8.

REVOLVING CREDIT LINES

 

The Company has a revolving line of credit agreement with a bank for $621,280 (GBP(£) 400,000), which bears interest at 3.8% in excess of the London Interbank Offered Rate (“LIBOR”) (effective rate of 5.4% at December 31, 2014).  The credit line is secured by accounts receivable and inventory.  The borrowings outstanding on the line as of December 31, 2014 was $402,995 (GBP(£) 259,462).  Under the terms of agreement, the Company is subject to certain customary restrictive covenants relating to, among other things, minimum tangible net worth and asset tests as defined in agreement. The Company has closed its credit cards. The Company had no balance due on these credit cards at December 31, 2014 and 2013.

  

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

9.

BORROWED DEBT

 

All references to common shares and number of warrants reflect the 1 for 15 reverse stock split effected as of March 23,2015.

 

As of December 31, 2014 and 2013, borrowed debt is as follows:

 

		December 31,				December 31,
		2014				2013
January Private Placements		$	9,704,901			$	-
February  Private Placements			13,239,107				-
6% Convertible Notes			10,906,703				-
4% Convertible Notes and 4% Exchange Convertible Notes			3,275,175				-
12% Exchanged Notes			7,345,428				-
VIP Seller Note			11,000,000				-
Mortgage Note Payable - Building			250,000				-
December 12% Convertible Notes			926,599				-
Demand Loans			1,270,000				-
Convertible Promissory Notes settled in 2014			-				650,000
			57,917,913				650,000
Less current portion			(57,917,913	)			(650,000	)
Total long-term debt		$	-			$	-

 

January and February Private Placements

 

Overview. On January 7, 2014, January 14, 2014, January 31, 2014 and February 28, 2014, the Company completed private offerings of $27,375,000 aggregate principal amount of 15% Senior Secured Convertible Promissory Notes, as amended (the “15% Convertible Notes”) and warrants to purchase shares of common stock with accredited investors for total net proceeds to the Company of $25,424,790 after deducting placement agent fees and other expenses.

 

As of December 31, 2014, the principal balance, unamortized discount, and net carrying amount relating to the 15% Convertible Notes are as follows:

 

		Principal Balance				Unamortized Discount				Net Carrying Amount
15% Convertible Notes(January)		$	9,704,901			$	-			$	9,704,901
15% Convertible Notes(February)			15,750,000				(2,510,893	)			13,239,107
Totals		$	25,454,901			$	(2,510,893	)		$	22,944,008

 

Maturity and Interest. The 15% Convertible notes matured on January 7, 2015 and February 28 ,2015, respectively. The notes accrue interest at a rate of 15% on the aggregate unconverted and outstanding principal amount, payable in cash on a quarterly basis. See Note 24 for subsequent events.

  

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

Conversion. The 15% Convertible Notes may be converted, in whole or in part, into shares of common stock at the option of the holder at any time. The shares of common stock issuable upon conversion equal: (i) the outstanding principal amount of the convertible note divided by (ii) a conversion price of $75.00, as adjusted from time to time. The conversion price for the 15% Convertible Notes is subject to adjustment upon certain events, such as stock splits, combinations, dividends, distributions, reclassifications, mergers or other corporate change and dilutive issuances. Additionally, the conversion price of the 15% Convertible Notes will be adjusted should the Company issue any equity or convertible debt at a purchase price that is less than the current exercise price, with certain exceptions as further described in the 15% Convertible Notes. The Conversion Price will also adjust on any subsequent issuance of shares of common stock or common stock equivalents based on a formula intended to maintain the fully diluted percentage ownership the shares underlying the 15% Convertible Notes represent. Furthermore, if the Company or any subsidiary thereof sells or grants any option to purchase, or sells or grants any right to reprice, or otherwise disposes of or issues (or announces any offer, sale, grant or any option to purchase or other disposition) any of its common stock or any securities which would entitle the holder thereof to acquire at any time its common stock, then the conversion price for the 15% Convertible Notes will be adjusted downward by multiplying it by a fraction, the numerator of which shall be 5,277,600 and the denominator of which shall be the number of fully-diluted shares of our common stock outstanding following such issuance. During 2014, the noteholders exercised the conversion options to reduce principal payments by $1,720,100. As a result of the subsequent issuances of our convertible notes, warrants and shares of our common stock described below, as of December 31, 2014, the conversion price of the 15% Convertible Notes was $0.75 per share.

 

Prepayments. The 15% Convertible Notes may be prepaid in cash, in whole or in part, at any time for 115% of sum of the outstanding principal and accrued interest.

 

Collateral. As collateral security for all of the Company’s obligations under the 15% Convertible Notes and related documents executed in connection with the Offerings, the Company granted the purchasers a first priority security interest in all of (i) the Company’s assets and (ii) the equity interests in each subsidiary of the Company, in each case whether owned or existing when the 15% Convertible Notes were issued or subsequently acquired or coming into existence, including any shares of capital stock of any subsidiary.

 

Warrants. The warrants issued in the offerings are exercisable for an aggregate of 365,000 shares of the Company’s common stock. The warrants are exercisable for a period of five years from their respective issue dates. The exercise price with respect to the warrants is $75.00 per share, as adjusted from time to time. The exercise price and the amount of shares of our common stock issuable upon exercise of the warrants are subject to adjustment upon certain events, such as stock splits, combinations, dividends, distributions, reclassifications, mergers or other corporate change and dilutive issuances. Additionally, the exercise price of the warrants will be adjusted should the Company issue any equity or convertible debt at a purchase price that is less than their current exercise price, with certain limited exceptions as further described in the warrant. Furthermore, if the Company or any subsidiary thereof sells or grants any option to purchase, or sells or grants any right to reprice, or otherwise disposes of or issues (or announces any offer, sale, grant or any option to purchase or other disposition) any of its common stock or common stock equivalents, then the exercise price for the warrants will be adjusted downward by multiplying it by a fraction, the numerator of which shall be 5,277,600 and the denominator of which shall be the number of fully-diluted shares of our common stock outstanding following such issuance. As a result of the subsequent issuances of our convertible notes, warrants and shares of our common stock described below, as of December 31, 2014, the exercise price of the warrants was $0.75 per share, and the number of shares issuable upon exercise of the warrants increased to 36,500,000 shares of common stock.

 

These warrants are considered liabilities and will be recorded at fair value each reporting period with adjustments recorded in the consolidated statements of operations and comprehensive loss.

 

 Warrants and Embedded Derivatives

 

The proceeds for the 15% Convertible Notes were allocated at issuance based upon the fair value of the warrants and the embedded derivatives as follows:

 

		January				February				Total
Proceeds		$	11,325,000			$	16,050,000			$	27,375,000
Fair value of warrants			(8,871,000	)			(22,116,900	)			(30,987,900	)
Fair value of conversion and other features			(6,342,600	)			(19,260,000	)			(25,602,600	)
Fair value of amounts in excess of proceeds		$	(3,888,600	)		$	(25,326,900	)		$	(29,215,500	)

 

  

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

At the time of issuance the fair value was determined to be reasonable and because the fair value exceeded the proceeds, greater value was given by us than received in the associated transactions. From a purely financial perspective, the theoretical value of a security does not take into account the speed of execution that is necessary to accomplish the goal of financing a specific acquisition. When we identify specific strategic targets where the identification of the target and the consummation of the transaction encompass a very compressed timeline the mechanics of an “orderly market” are not always present. We accept reduced consideration in certain financings due to the need to execute quickly and the accompanying need to be more aggressive in accepting terms. It is our view that the strategic advantage of acquiring our identified targets in this quickly developing market outweighed the discount on the proceeds.

 

6% Convertible Notes

 

Overview. On April 22, 2014, the Company completed a private offering of $24,175,824 principal amount (the "First Tranche") of 6% Original Issue Discount Senior Secured Convertible Promissory Notes, as amended (the "6% Convertible Notes") with accredited investors for total net proceeds to the Company of $20,511,200 after deducting placement agent fees and other expenses. On June 3, 2014, the Company issued additional 6% Convertible Notes in the principal amount of $4,395,604 (the "Second Tranche") for total net proceeds to the Company of $3,950,000. The third tranche of additional 6% Convertible Notes in the principal amount of $3,596,704 (the "Third Tranche") was purchased on August 20, 2014 for total net proceeds to the Company of $2,975,000. On October 15, 2014, the Company and the holder of the 6% Convertible Notes amended the 6% Convertible Notes, and the Company agreed to issue an additional $5,500,000 principal amount of 6% Convertible Notes for total net proceeds of $4,648,200 (the "Fourth Tranche"). This amendment was accounted for as a debt extinguishment and resulted in a $3,483,000 loss. The Company used a portion of the proceeds from the Fourth Tranche to fully repay and terminate the credit facility of its subsidiary, FIN Branding Group. The remaining proceeds were used by the Company to purchase inventory for its subsidiaries FIN Branding Group, LLC and Hardwire Acquisition Company and for other general corporate purposes, other than the repayment of any other indebtedness.

 

The holder of the 6% Convertible Notes have the right at any time and from time to time until August 15, 2015 to purchase additional 6% Convertible Notes in an aggregate principal amount of up to $12,087,913 for an aggregate purchase price of up to $11,000,000. The conversion price of these additional 6% Convertible Notes would be the lower of (i) 115% of the volume-weighted average price of the Company's common stock on the trading day immediately preceding the date of any purchase of such notes and (ii) the lowest conversion price of any of the outstanding 6% Convertible Notes.

 

As of December 31, 2014, the principal balance, unamortized discount, and net carrying amount relating to the 6% Convertible Notes are as follows:

 

		Principal Balance				Unamortized Discount				Net Carrying Amount
First Tranche		$	7,870,824			$	-			$	7,870,824
Second Tranche			10,000				-				10,000
Third Tranche			10,000				-				10,000
Fourth Tranche			3,015,879				-				3,015,879
Totals		$	10,906,703			$	-			$	10,906,703

 

Maturity and Interest. The 6% Convertible Notes are due December 15, 2016, and accrue interest at a rate of 6% on the aggregate unconverted and outstanding principal amount payable in cash on the last trading day of each month. The Company has also agreed pay to the holders of the 6% Convertible Notes on each such trading day a fixed payment amount in cash in the amount of $128,571.

 

  

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

Conversion. The 6% Convertible Notes may be converted in whole or in part into shares of common stock at the option of the holders of the 6% Convertible Notes at any time and from time to time into a number of shares of our common stock equal to (x) the "conversion amount" of such notes divided by (y) the conversion price. The conversion amount of any 6% Convertible Note to be converted is equal to the sum of (i) the principal amount of such note, (ii) any accrued and unpaid interest with respect to such principal, (iii) any accrued and unpaid late charges with respect to such principal and interest and (iv) the Make-Whole Amount. The conversion price of the 6% Convertible Notes is $0.86, as adjusted from time to time. The conversion prices for the 6% Convertible Notes are subject to adjustment upon certain events, such as stock splits, combinations, dividends, distributions, reclassifications, mergers or other corporate change and dilutive issuances. Additionally, should the Company issue any common stock at, or should the exercise or conversion price of any previously issued option, warrant or convertible security be adjusted to, a purchase price that is less than the current exercise price of the 6% Convertible Notes, the conversion price of the 6% Convertible Notes will be adjusted to 115% of such lower purchase price with certain limited exceptions. Furthermore, should the Company complete an underwritten public offering of a minimum of $25 million, the conversion price would reset to the price that is equal to 115% of the volume weighted average price ("VWAP") of our common stock of the Company's shares of common stock on the trading day immediately following the pricing of such public offering should that price be lower than the conversion price then in effect. During 2014, the noteholders exercised the conversion options to reduce principal payments by $830,000. The conversion price at December 31, 2014 was $0.8625.

 

“Make-Whole Amount” means an amount in cash equal to all of the interest that would have accrued with respect to the applicable principal amount of 6% Convertible Notes being converted or redeemed for the period commencing on the applicable redemption date or conversion date and ending on December 15, 2016.

 

Prepayments and Redemptions. The 6% Convertible Notes include a prepayment clause with certain limitations. Commencing on January 1, 2015, the Purchaser has the right to require the Company to redeem up to $1,000,000 of principal amount of the 6% Convertible Notes, plus any accrued and unpaid interest thereon and the Make-Whole Amount, per calendar month. The holders have the right, in the event of a change of control, to require the Company to redeem all or portions of the 6% Convertible Notes, in exchange for cash equal to 107.5% of the principal amount redeemed plus all accrued and unpaid interest and late charges.

 

Collateral. As security for all of the Company's obligations under the 6% Convertible Notes and related documents executed in connection with the Offering: (i) VIP granted a guarantee in favor of the holders of the 6% Convertible Notes supported by a first priority security interest in all of VIP's assets and (ii) the Company granted such holders a first priority security interest in all of the shares owned by the Company in VIP following the acquisition of VIP. Additionally, the Company is required to maintain a $3 million cash balance that is restricted as to withdrawal, which may be used for redemptions upon instruction from the holders. Additionally, on October 15, 2014, the Company and its subsidiaries VCIG LLC, FIN Branding Group, LLC and Hardwire Acquisition Company entered into a pledge and security agreement pursuant to which the Company pledged the equity interests of such subsidiaries to the holders of the 6% Convertible Notes and each of such subsidiaries granted a security interest in all of its assets to the holders of the 6% Convertible Notes to secure all obligations of the Company under the 6% Convertible Notes. In addition, each of such subsidiaries guaranteed the Company's obligations under the 6% Convertible Notes. Approximately $2.6 million of the gross proceeds from the Fourth Tranche was deposited into a lockbox account over which the holders of the 6% Convertible Notes have a first priority security interest. The Company may withdraw funds from such account to purchase inventory for FIN Branding Group, LLC and Hardwire Acquisition Company with the prior consent of the holders of the 6% Convertible Notes.

 

Certain Covenants. The Company has agreed, subject to certain limited exceptions, not to, and to cause each of VCIG LLC, Must Have Limited, FIN Branding Group, LLC and Hardwire Acquisition Company (collectively, the “Subsidiaries”) not to, (i) pay any dividend on or repurchase any of its capital stock or rights to purchase capital stock or repay or purchase any subordinated debt, (ii) repay any principal under any indebtedness other than with net proceeds from the sale of equity securities of the Company or (iii) pledge any of its assets. The Company also agreed, subject to certain limited exceptions, (i) not to cause or permit any of the Subsidiaries to incur any debt or guarantee any indebtedness or to transfer any of its assets or issue or sell any equity interests and (ii) not to take any action, or fail to take any action, that could materially diminish the business of any of the Subsidiaries or divert the business of any of the Subsidiaries to any other person. The Company has also agreed to cause its subsidiary VIP to maintain a minimum EBITDA of $900,000 each month.

 

  

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

Events of Default. The 6% Convertible Notes include the following events of default, among others: (i) a default in the payment of interest or principal when due, which default, in the case of an interest payment, is not cured within three trading days; (ii) failure to comply with any other covenant or agreement contained in the notes after an applicable cure period; (iii) the occurrence of any default under, redemption of, or acceleration prior to the maturity of any indebtedness (but excluding any indebtedness arising out of the 6% Convertible Notes) (after giving effect to any applicable cure period) of the Company or its subsidiaries; (iv) failure to pay any other obligation of the Company that exceeds $50,000 and causes such obligation to become due and payable earlier that would otherwise become due; (v) the Company or any Significant Subsidiary (as such term is defined in Rule 1-02(w) of Regulation S-X) shall be subject to a bankruptcy or liquidation event; (vi) a judgment for payment of money exceeding $100,000 in the case of VIP and exceeding $1,000,000 in the case of the Company and any of its subsidiaries (other than VIP) remains unvacated, unbonded or unstayed for a period of 30 calendar days; (vii) our common stock is not be eligible for listing on a national exchange or the OTC Bulletin Board; or (viii) failure to have any registration statement declared effective, or the lapsing of such registration statement, by certain deadlines pursuant to the registration rights agreement entered into between the note holders of the 6% Convertible Notes and the Company.

 

If any event of default occurs, the outstanding principal amount of the notes, plus accrued but unpaid interest, liquidated damages and other amounts owing in respect thereof through the date of acceleration, shall become, at the holder’s election, immediately due and payable in cash in the sum of (a) 110% of the outstanding principal amount of the notes and accrued and unpaid interest thereon, and (b) all other amounts, costs, expenses and liquidated damages due in respect of the notes. After the occurrence of any event of default that results in the acceleration of the notes, the interest on the note shall accrue at an interest rate equal to the lesser of 15% per annum or the maximum rate permitted under applicable law.

 

4% Convertible Notes

 

Overview. On May 30, 2014, the Company completed a private offering for total net proceeds to the Company of $2,000,000 after deducting placement agent fees and other expenses, which proceeds the Company used for general working capital. Pursuant to a securities purchase agreement with the purchaser, the Company issued to the purchaser $2,105,263 principal amount of 4% original issue discount convertible promissory notes (the "4% Convertible Notes"). Additionally, on May 30, 2014, the Company exchanged $3,625,000 principal amount of FIN Promissory Notes plus $375,000 of accrued interest with a holder of a portion of our FIN Promissory Notes, for $4,210,526 principal amount of another series of 4% original issue discount convertible promissory notes (the "Exchange Convertible Notes"). The 4% Convertible Notes are unsecured.

 

As of December 31, 2014, the principal balance, unamortized discount, and net carrying amount relating to the 4% convertible and exchanged notes are as follows:

 

		Principal Balance				Unamortized Discount				Net Carrying Amount
May convertible note		$	1,281,376			$	(243,568	)		$	1,037,808
May exchanged note			2,794,736				(557,369	)			2,237,367
Totals		$	4,076,112			$	(800,937	)		$	3,275,175

 

Maturity and Interest. The 4% Convertible Notes and the Exchange Convertible Notes are due on November 30, 2015 less any amounts converted prior to the maturity date and accrue interest at a rate of 4% on the aggregate unconverted and outstanding principal amount payable in cash on a monthly basis. Beginning November 30, 2014, and continuing on each of the following twelve successive months thereafter, the Company are obligated to pay 1/13th of the face amount of the 4% Convertible Notes and accrued interest. Beginning August 30, 2014, and continuing on each of the following fifteen successive months thereafter, the Company are obligated to pay 1/16th of the face amount of the Exchange Convertible Note and accrued interest. In each case such payments shall, at the holder's option, be made in cash or, subject to the Company complying with certain conditions, be made in common stock. For a position of the notes, each share of common stock is ascribed a value that is equal to 75% of the lowest VWAP for the 20 consecutive trading days immediately prior to such payment date. For a portion of the notes each share of common stock is ascribed a value that is equal to 70% of the lowest VWAP for the 20 consecutive trading days immediately prior to such payment date. Such amortization payments in shares of common stock may be requested by the holders up to 12 trading days prior to the amortization payment due date.

 

Subsequent to year end, the discount to the VWAP was increased from 25% to 30%. In addition, the prepayment rate was increased by 5% of the sum of the outstanding principal and any remaining interest through maturity.

 

Conversion. The 4% Convertible Notes and the 4% Exchange Convertible Notes may be converted, in whole or in part, into shares of common stock at the option of the holder at any time and from time to time. The shares of common stock issuable upon conversion of the 4% Convertible Notes or the 4% Exchange Convertible Notes shall equal: (i) the principal amount of the note to be converted (plus accrued interest and unpaid late charges, if any) divided by (ii) a conversion price of $90.00, as adjusted from time to time. The conversion price is subject to adjustment upon certain events, such as stock splits, combinations, dividends, distributions, reclassifications, mergers or other corporate change and dilutive issuances. Additionally, subject to certain limited exceptions, if the Company issues any common stock or warrants or convertible debt entitling any person to acquire common stock at a per share purchase price that is less than the conversion price for the notes, such conversion price will be adjusted to that lower purchase price. As a result of the subsequent issuances of our convertible notes, warrants and shares of our common stock, as of December 31, 2014, the conversion price of the 4% Convertible Notes and the 4% Exchange Convertible Notes was $0.75 per share. During 2014, the noteholders exercised the conversion options to reduce principal payments by $1,976,518.

 

  

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

 Prepayments. The notes may be prepaid in whole or in part at any time upon ten days’ notice for 125% of the sum of the outstanding principal and any remaining interest through maturity.

 

Right to Participate in Future Financings. From May 30, 2014 until May 30, 2015, if the Company or any of its subsidiaries issue any securities subsequent to the issuance of the 4% Convertible Notes, other than any issuance through a public underwritten offering or to an investor or a group of investors that already own common stock or any securities that entitle the holder thereof to acquire at any time our common stock, the holders of the 4% Convertible Notes shall have the right to participate in such subsequent financing in an amount up to 100% of the holder’s subscription amount in the 4% Convertible Notes on the same terms, conditions and price provided for in such subsequent financing.

 

Events of Default. The 4% Convertible Notes and the 4% Exchange Convertible Notes include the following events of default, among others: (i) a default in the payment of interest or principal when due, which default, in the case of an interest payment, is not cured within three trading days; (ii) failure to comply with any other covenant or agreement contained in the notes after an applicable cure period; (iii) a default or event of default under any other material agreement not covered by clause (iv) below to which the Company is obligated (subject to any grace or cure period provided in the applicable agreement); (iv) failure to pay any other obligation of the Company that exceeds $50,000 and causes such obligation to become due and payable earlier that would otherwise become due; (v) the Company or any Significant Subsidiary (as such term is defined in Rule 1-02(w) of Regulation S-X) shall be subject to a bankruptcy or liquidation event; (vi) a judgment for payment of money exceeding $50,000 remains unvacated, unbonded or unstayed for a period of 45 calendar days; (vii) our common stock is not be eligible for listing on a national exchange or the OTC Bulletin Board; (viii) a Change of Control or Fundamental Transaction (as such terms are defined below) occurs, or the Company agrees to sell over 33% of its assets; or (ix) failure to file with the SEC any required reports under Section 13 or 15(d) of the Exchange Act.

 

If any event of default occurs, the outstanding principal amount of the notes, plus accrued but unpaid interest, liquidated damages and other amounts owing in respect thereof through the date of acceleration, shall become, at the holder’s election, immediately due and payable in cash in the sum of (a) 130% of the outstanding principal amount of the notes and accrued and unpaid interest thereon, (b) all other amounts, costs, expenses and liquidated damages due in respect of the notes and (c) an amount in cash equal to all of the interest that, but for the default payment, would have accrued with respect to the applicable principal amount being so redeemed for the period commencing on the default payment date and ending on November 30, 2015. After the occurrence of any event of default that results in the acceleration of the notes, the interest rate on shall accrue at an interest rate equal to the lesser of 24% per annum, or the maximum rate permitted under applicable law. In addition, at any time after the occurrence of any event of default the holder may require the Company to, at such holder’s option, convert all or any part of the 4% Convertible Notes and the 4% Exchange Convertible Notes into common stock at 60% of the lowest VWAP during the 30 trading day-period immediately prior to such conversion date.

 

“Change of Control Transaction” means the occurrence of any of (a) an acquisition by an individual or legal entity or “group” (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of effective control of in excess of 33% of the voting securities of the Company, (b) the Company merges into or consolidates with any other entity, or any entity merges into or consolidates with the Company and, after giving effect to such transaction, the stockholders of the Company immediately prior to such transaction own less than 66% of the aggregate voting power of the Company or the successor entity of such transaction, (c) the Company sells or transfers all or substantially all of its assets to another entity and the stockholders of the Company immediately prior to such transaction own less than 66% of the aggregate voting power of the acquiring entity immediately after the transaction, (d) a replacement at one time or within a three year period of more than one-half of the members of the Company’s Board of Directors which is not approved by a majority of those individuals who are members of the Board of Directors on the issue date of such notes, as applicable (or by those individuals who are serving as members of the Board of Directors on any date whose nomination to the Board of Directors was approved by a majority of the members of the Board of Directors who are members on the date hereof), or (e) the execution by the Company of an agreement to which the Company is a party or by which it is bound, providing for any of the events set forth in clauses (a) through (d) above.

 

  

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

“Fundamental Transaction” means the occurrence of any of the following events: (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another entity, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any direct or indirect purchase offer, tender offer or exchange offer (whether by the Company or another person) is completed pursuant to which holders of the Company’s common stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding common stock, (iv) the Company, directly or indirectly, in one or more related transactions, effects any reclassification, reorganization or recapitalization of the common stock or any compulsory share exchange pursuant to which the common stock is effectively converted into or exchanged for other securities, cash or property or (v) the Company, directly or indirectly, in one or more related transactions, consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another entity whereby such other entity acquires more than 50% of the outstanding shares of common stock of the Company.

 

12% Exchanged Notes

 

Overview. On February 28, 2014, the Company and its wholly owned subsidiary, VCIG LLC, issued $15,000,000 principal amount of promissory notes (the “FIN Promissory Notes”) in connection with our acquisition of FIN. On May 30, 2014, the Company issued 4% Exchange Convertible Notes in exchange for $3,625,000 of principal of the FIN Promissory Notes plus accrued interest. On July 17, 2014, the Company paid back $875,000 of principal of the FIN Promissory Notes plus accrued interest and issued 12% Convertible Notes in exchange for the remaining $10,500,000 of principal of the FIN Promissory Notes. As a result of this exchange, the FIN Promissory Notes were paid in full. The 12% original issue discount convertible promissory notes have an aggregate principal amount of $11,052,632 (the “12% Exchanged Notes”). The Company recognized a loss of $2,161,215 equal to the difference between the carrying value of the old promissory note and the fair value of the new promissory notes and warrants.

 

As of December 31, 2014, the principal balance, unamortized discount, and net carrying amount relating to the 12% Exchanged Notes are as follows:

 

		Principal Balance				Unamortized Discount				Net Carrying Amount
12 % Exchanged Notes		$	7,345,428			$	-			$	7,345,428

 

Maturity and Interest. The 12% Exchanged Notes are due on January 17, 2016, less any amounts converted or repaid prior to the maturity date, and accrue interest at a rate of 12% on the aggregate unconverted and outstanding principal amount payable, at the holder’s option, in cash or common stock on a monthly basis. On November 17, 2014, the Company are obligated to pay 1/8^th of the face amount of the 12% Exchanged Notes and accrued interest, and continuing on each of the following 14 successive months thereafter, the Company are obligated to pay 1/16th of the face amount of the 12% Exchanged Notes and accrued interest. At the holder’s option, the holder can request that our monthly payments be for 5/16th of the face amount of the 12% Exchanged Notes. In each case such payments shall, at the holder’s option, be made in cash or, subject to the Company complying with certain conditions, be made in common stock with each share of common stock being ascribed a value that is equal to 75% of the lowest VWAP for the 20 consecutive trading days immediately prior to such payment date. Such amortization payments in shares of common stock may be requested by the holders up to 12 trading days prior to the amortization payment due date.

 

Conversion. The 12% Exchanged Notes may be converted, in whole or in part, into shares of common stock at the option of the holder at any time and from time to time. The shares of common stock issuable upon conversion of the 12% Exchanged Notes shall equal: (i) the principal amount of the Note to be converted (plus accrued interest and unpaid late charges, if any) divided by (ii) a conversion price of $97.50, as adjusted from time to time. The conversion price is subject to adjustment upon certain events, such as stock splits, combinations, dividends, distributions, reclassifications, mergers or other corporate change and dilutive issuances. Additionally, subject to certain limited exceptions, if the Company issues any common stock or warrants or convertible debt entitling any person to acquire common stock at a per share purchase price that is less than the conversion price for the notes, such conversion price will be adjusted to that lower purchase price. Also, the conversion price of the notes will be adjusted if the closing bid price for the Company’s common stock on January 13, 2015 is below the conversion price, in which case the original conversion price will automatically adjust to 70% of the lowest VWAP in the 15 trading days prior to such date. As a result of the subsequent issuances of our convertible notes, warrants and shares of our common stock, as of December 31, 2014, the conversion price of the 12% Exchanged Notes was $0.75 per share. During 2014, the noteholders exercised the conversion options to reduce principal payments by $3,049,309.

 

  

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

Prepayments and Redemptions. The 12% Exchanged Notes may be prepaid in whole or in part at any time upon ten days’ notice for 105% of the sum of the outstanding principal and accrued interest, subject to the Company complying with certain conditions. On or at any time within 30 days after the date our common stock is listed on either the New York Stock Exchange or a Nasdaq exchange, the holders can require the Company to redeem all or any part of the 12% Exchange Notes for an amount equal to the outstanding principal amount and interest multiplied by 105%.

 

Events of Default. The 12% Exchanged Notes include the following events of default, among others: (i) a default in the payment of interest or principal when due, which default, in the case of an interest payment, is not cured within three trading days; (ii) failure to comply with any other covenant or agreement contained in the notes after an applicable cure period; (iii) a default or event of default under any other material agreement not covered by clause (iv) below to which the Company is obligated (subject to any grace or cure period provided in the applicable agreement); (iv) failure to pay any other obligation of the Company that exceeds $50,000 and causes such obligation to become due and payable earlier that would otherwise become due; (v) the Company or any Significant Subsidiary (as such term is defined in Rule 1-02(w) of Regulation S-X) shall be subject to a bankruptcy or liquidation event; (vi) a judgment for payment of money exceeding $50,000 remains unvacated, unbonded or unstayed for a period of 45 calendar days; (vii) our common stock is not be eligible for listing on a national exchange or the OTC Bulletin Board; (viii) a Change of Control or Fundamental Transaction (as such terms are defined below) occurs, or the Company agrees to sell over 33% of its assets; or (ix) failure to file with the SEC any required reports under Section 13 or 15(d) of the Exchange Act.

 

If any event of default occurs, the outstanding principal amount of the notes, plus accrued but unpaid interest, liquidated damages and other amounts owing in respect thereof through the date of acceleration, shall become, at the holder’s election, immediately due and payable in cash in the sum of (a) 125% of the outstanding principal amount of the notes and accrued and unpaid interest thereon, (b) all other amounts, costs, expenses and liquidated damages due in respect of the notes and (c) an amount in cash equal to all of the interest that, but for the default payment, would have accrued with respect to the applicable principal amount being so redeemed for the period commencing on the default payment date and ending on January 17, 2016. After the occurrence of any event of default that results in the acceleration of the notes, the interest rate on shall accrue at an interest rate equal to the lesser of 24% per annum, or the maximum rate permitted under applicable law. In addition, at any time after the occurrence of any event of default the holder may require the Company to, at such holder’s option, convert all or any part of the FIN July 2014 Convertible Exchange Notes into common stock at 55% of the lowest VWAP during the 30 trading day-period immediately prior to such conversion date.

 

“Change of Control Transaction” means the occurrence of any of (a) an acquisition by an individual or legal entity or “group” (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of effective control of in excess of 33% of the voting securities of the Company, (b) the Company merges into or consolidates with any other entity, or any entity merges into or consolidates with the Company and, after giving effect to such transaction, the stockholders of the Company immediately prior to such transaction own less than 66% of the aggregate voting power of the Company or the successor entity of such transaction, (c) the Company sells or transfers all or substantially all of its assets to another entity and the stockholders of the Company immediately prior to such transaction own less than 66% of the aggregate voting power of the acquiring entity immediately after the transaction, (d) a replacement at one time or within a three year period of more than one-half of the members of the Company’s Board of Directors which is not approved by a majority of those individuals who are members of the Board of Directors on the issue date of such notes, as applicable (or by those individuals who are serving as members of the Board of Directors on any date whose nomination to the Board of Directors was approved by a majority of the members of the Board of Directors who are members on the date hereof), or (e) the execution by the Company of an agreement to which the Company is a party or by which it is bound, providing for any of the events set forth in clauses (a) through (d) above.

 

  

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

  

“Fundamental Transaction” means the occurrence of any of the following events: (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another entity, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any direct or indirect purchase offer, tender offer or exchange offer (whether by the Company or another person) is completed pursuant to which holders of the Company’s common stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding common stock, (iv) the Company, directly or indirectly, in one or more related transactions, effects any reclassification, reorganization or recapitalization of the common stock or any compulsory share exchange pursuant to which the common stock is effectively converted into or exchanged for other securities, cash or property or (v) the Company, directly or indirectly, in one or more related transactions, consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another entity whereby such other entity acquires more than 50% of the outstanding shares of common stock of the Company.

 

Warrants. The warrants issued in the exchange are exercisable for a period of eighteen months from their issue dates. The exercise price with respect to the warrants is $150.00 per share. The exercise price for the warrants is subject to adjustment upon certain events, such as stock splits, combinations, dividends, distributions, reclassifications, mergers or other corporate change and dilutive issuances, but do not contain any down-round ratchet provisions. The warrants issued in the offerings are exercisable for an aggregate of 53,846 shares of the Company’s common stock. The warrants are exercisable for a period of 18 months from their respective issue dates.

 

These warrants are considered liabilities and will be recorded at fair value each reporting period with adjustments recorded in the consolidated statements of operations and comprehensive loss.

 

December 12% Convertible Notes

 

Overview. From December 23, 2014, through December 29, 2014, the Company, completed a private offering of $1,052,632 principal amount 5% Original Issue Discount Convertible Promissory Notes (the “December 12% Convertible Notes”) with accredited investors for total net proceeds to the Company of $917,500. The investors also agreed to purchase up to an additional $2,000,000 of December 2014 Convertible Notes, if certain conditions and milestones were met. See Note 24 for subsequent events.

 

As of December 31, 2014, the principal balance, unamortized discount, and net carrying amount relating to the December 12% Convertible Notes are as follows:

 

		Principal Balance				Unamortized  Discount				Net Carrying Amount
December 12% Convertible Notes		$	1,052,632			$	(126,033	)		$	926,599

 

Maturity and Interest. The December 12% Convertible Notes are due one year from the date of issuance, less any amounts converted or redeemed prior to the maturity date, and accrues interest at an annual rate of 12% on the aggregate unconverted and outstanding principal amount, payable in cash or, should the Company’s common stock be listed on a national exchange, in common stock, on the first day of each calendar month. Beginning on the third month after the original issue date and continuing on each of the following nine successive months thereafter, the Company are obligated to pay 1/10th of the face amount of the December 12% Convertible Notes and accrued interest, which, at the Company’s option, may be paid in cash or, subject to the Company complying with certain conditions, in common stock with each share of common stock being ascribed a value that is equal to 75% of the lowest VWAP for the 20 consecutive trading days immediately prior to such payment date.

 

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

Conversion. The December 12% Convertible Notes may be converted, in whole or in part, into shares of common stock at the option of the holder at any time and from time to time. The shares of common stock issuable upon conversion of the December 12% Convertible Notes shall equal: (i) the principal amount of the note to be converted divided by (ii) a conversion price of $2.10, as adjusted from time to time. The conversion price is subject to adjustment upon certain events, such as stock splits, combinations, dividends, distributions, reclassifications, mergers or other corporate change and dilutive issuances. If, on the day that is the six month anniversary from the original issue date, the closing bid price for the common stock is below conversion price, the conversion price will automatically adjust to 70% of the lowest VWAP in the 15 trading days prior to the six month anniversary. Additionally, should the Company issue any equity at, or should the exercise or conversion price of any previously issued option, warrant convertible security be adjusted to a purchase price that is less than the current Conversion Price, the Conversion Price will be adjusted to such lower purchase price, with certain limited exceptions. As a result of the subsequent issuances of our warrants, as of December 31, 2014, the conversion price of the December 12% Convertible Notes was $0.75 per share.

 

Prepayments and Redemptions. The December 12% Convertible Notes may be prepaid in whole or in part at any time upon ten (10) days written notice to the holders for 120% of outstanding principal and accrued interest. At any time, within thirty (30) days of the Company's common stock being listed on a national exchange, the holders of the December 12% Convertible Notes may "put" to the Company all or any part of the December 12% Convertible Notes, which the Company must purchase within ten (10) days of such notice for 105% the then outstanding principal amount and interest.

 

Right to Participate in Future Financings. For twelve (12) months from the execution of the securities purchase agreement, if the Company or any of its subsidiaries issue any securities subsequent to the issuance of the December 12% Convertible Notes, other than any issuance through a public underwritten offering or to an investor or a group of investors that already own common stock or any securities that entitle the holder thereof to acquire at any time our common stock, the holders shall have the right to participate in such subsequent financing in an amount up to 100% of the holder's subscription amount in the December 12% Convertible Notes on the same terms, conditions and price provided for in such subsequent financing.

 

VIP Seller Note

 

Overview. On April 22, 2014, the Company issued $11,000,000 principal amount of promissory notes (the “VIP Promissory Notes”) to the MHL Shareholders in connection with our acquisition of VIP. The VIP Promissory Notes become due at the earlier of (1) December 13, 2014, (2) the day the Company first trades it shares of a common stock on certain listed exchanges (including the NYSE Market, the Nasdaq Capital Market, the Nasdaq Global Select Market, the Nasdaq Global Market or the New York Stock Exchange) or (3) the Company completes an underwritten public offering of a minimum of $40 million (the “Maturity Date”). Beginning on August 21, 2014, the VIP Promissory Notes will accrue interest at a rate of 10% per annum. The Company may prepay the VIP Promissory Notes at any time without penalty.

 

Collateral. As security for all of the Company’s obligations under the VIP Promissory Notes and related documents executed in connection with the acquisition: (i) the Company granted a guarantee in favor of the holders of the VIP Promissory Notes supported by a second priority security interest in all of VIP’s assets and (ii) the Company granted such holders a second priority security interest in all of the shares owned by the Company in VIP following the acquisition of VIP.

 

  

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

Mortgage Note

 

In September 2014, the Company purchased for $530,000 land and a building to house the Company’s operations and executive office.  As a result of this purchase, the Company financed $430,572 of the purchase price (“Original Mortgage Note”).  The 8.5% Original Mortgage Note was due on December 31, 2014. The Original Mortgage Note was retired and replaced with a new $250,000 Mortgage Note as of December 31, 2014 with a maturity of December 31, 2019. The new $250,000 Mortgage Note has a variable interest rate of the prime rate plus 2.5% with the initial rate being 5.75%.  

 

Demand Loans

 

During November and December 2014, the Company borrowed $1,270,000 from certain note holders. These notes were exchanged for convertible promissory notes in February 2015.

 

Cross Default

 

As of December 31, 2014, the Company was in default on the following instruments: 15% Convertible Notes; the 6% Convertible Notes; the 4% Convertible Notes: the VIP Seller Note and the 12% Exchanged Notes. The primary trigger for these defaults was cross default provisions in each note stemming from the inability of the Company to make interest payments on the 15% Convertible Notes at the end of November 2014. Given these cross default provisions, management has been active in seeking a resolution to cure the violations. These actions include refinancing of certain debt instruments and providing or negotiating viable options for the debt holders to convert on revised terms or sell to third parties. The existence of defaults does not affect the classification on the December 31, 2014 consolidated balance sheet of these obligations since they generally contain terms, such as no restrictions on voluntary rights held by the investor lenders to convert the obligations at their discretion at any time. As such, all borrowed debt as of December 31, 2014 is classified as current liabilities.

 

Warrants and Embedded Derivatives

 

Certain debt notes issued during 2014 included embedded compound derivatives and detachable common stock purchase warrants. The derivatives and warrants were bifurcated from the host, and are accounted for at fair value.  As of December 31, 2014, private placement debt transactions are as follows:

 

		Face				Carrying				Fair Value of				Fair Value of
		Amount				Amount				Derivatives				Warrants
15% Notes(JAN)		$	9,704,901			$	9,704,901			$	8,042,708			$	16,480,140
15% Notes(FEB)			15,750,000				13,239,107				12,955,844				23,433,000
6% Convertible Notes			10,906,703				10,906,703				6,912,271				n/a
4% Convertible Notes			4,076,112				3,275,175				3,626,840				n/a
12% Exchange Notes			7,345,428				7,345,428				7,147,985				10,960
December 12% Convertible Notes			1,052,632				926,599				1,084,211				n/a
Total		$	48,835,776			$	45,397,913			$	39,769,859			$	39,924,100

 

  

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

  

The compounded embedded derivatives reported as debt discounts and common stock warrant discounts are amortized to interest expense using the effective interest method over the remaining terms of the convertible notes. When holders of the convertible notes exercise their rights to convert to common stock, the rate of amortization is accelerated by expensing any unamortized discount associated with the converted debt. Amortization of the convertible debt discount for 2014 is summarized as follows:

 

Balance at beginning of year		$	-
Original face value discount through issuance of convertible notes			4,639,157
Original convertible debt discount through issuance of common stock warrants			15,311,892
Original convertible debt discount through compound embedded derivative			18,340,894
Total convertible note discounts originated during the year			38,291,943
Less discount amortization on convertible debt			(26,074,154	)
Less accelerated discount amortization on convertible debt			(3,136,191	)
Less extinguishment of debt			(5,643,735	)
Balance at end of year		$	3,437,863

 

February 2014 Convertible Notes Discount, May 2014 Convertible Note Discount and December 12% Convertible Note Discount will be fully amortized in February 2015, November 2015 and December 2015, respectively.

 

Interest Expense

 

Interest expense for the years ended December 31, 2014, 2013, and 2012 is as follows:

 

		Years Ended December 31,
		2014				2013				2012
Accretion of and interest on convertible notes		$	38,128,544			$	-			$	-
FIN July 2014 Convertible Exchange Notes			757,136				-				-
FIN Penalty Shares			3,224,813				-				-
Other			2,025,502				1,804,710				30,140
		$	44,135,995			$	1,804,710			$	30,140

 

The payment of 800,000 penalty shares during 2014 is consideration exchanged due to late repayment of the FIN Promissory Notes.

 

10. Equity

 

During 2014, the Company issued common stock and over-allotment rights.  At issuance the proceeds were allocated based upon the fair value of the warrants.  As of and for the year ended December 31, 2014, amounts related to these transactions are as follows:

 

										December 31, 2014
										Fair Value of
		Common				Equity				Warrants and Over-
		Stock				Proceeds				Allotment Rights
April 30, 2014			32,205			$	2,431,561			$	1,152,054
June 19, 2014			9,361				734,129				336,267
July 16, 2014			211,890				6,477,036				324,678
July 16, 2014			12,367				1,044,892				455,342
Total			265,823			$	10,687,618			$	2,268,341

  

The Units Offerings

 

On April 30, 2014, June 19, 2014 and July 16, 2014, the Company completed “best efforts” private offerings of 53,933 units, each unit consisting of (i) one share of our common stock and (ii) a warrant to purchase 1/4 share of our common stock, or a total of 53,933 shares of our common stock and warrants to purchase 13,483 shares of our common stock, at a price of $97.50 per unit to accredited investors for total net proceeds to the Company of $4,732,623 after deducting placement agent fees and other expenses.

 

  

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

Warrants. The warrants issued in these offerings are exercisable for a period of five years from their issue dates. The exercise price with respect to the warrants is $97.50 per full share. The exercise price for the warrants is subject to adjustment upon certain events, such as stock splits, combinations, dividends, distributions, reclassifications, mergers or other corporate change and dilutive issuances. Additionally, the exercise price of the warrants will be adjusted should the Company issue any equity or convertible debt at a purchase price that is less than their current exercise price for two years following the respective issuance date, with certain limited exceptions. Pursuant to the adjustment provision contained in the warrants, as a result of the subsequent issuances of our convertible notes, warrants and shares of our common, as of December 31, 2014, the exercise price of the warrants adjusted to $0.75 per share and the number of shares issuable upon exercise of the warrants increased to 1,752,781 shares of common stock. The fair value of the warrants was based on a binomial model with the following assumptions: risk free interest rate - 1.72%, volatility - 36%, expected term - 5 years, expected dividends- N/A. The Company accounts for the warrants to purchase 3,092 shares of common stock as a liability remeasured at fair value and adjusts the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company’s statements of operations.

 

The Equity Offering

 

Overview. On July 15, 2014, the Company completed a private offering of shares of our common stock with Man FinCo Limited, a company incorporated as an offshore company under the regulations of the Jebel Ali Free Zone Authority (“Man FinCo”), for total net proceeds to the Company of $20,000,000. In the offering, the Company issued 197,531 shares of our common stock at a purchase price of $101.25 per share or $20,000,000 in the aggregate. The Company paid placement agent fees and other expenses in the form of 14,359 shares of Common Stock and warrants to acquire 7,901 shares of Common Stock at an exercise price of $101.25 per share. Pursuant to our agreement with Man FinCo, the Company agreed that if the Company sold shares of Common Stock in a public offering at a price of less than $119.10, then the Company would issue to Man FinCo such additional number of shares of Common Stock equal to (i) $20,000,000 divided by the public offering price multiplied by 0.85 (the “Reset Price”) (ii) less any shares initially issued to Man FinCo. Additionally, the Company granted to Man FinCo an option to purchase an additional number of shares of Common Stock as is derived by dividing $40,000,000 by the lower of $101.25 and the Reset Price. Man FinCo may exercise the option in whole or in part at any time prior to the first anniversary of the closing date of the initial purchase. In the event that Man FinCo does not exercise the option in whole or in part prior to such first anniversary, the option shall remain exercisable in whole or in part until the second anniversary of the closing date of the initial purchase, but only for half the number of additional shares. The fair value of the option was based on a binomial model with the following assumptions: risk free interest rate - 1.74%, volatility - 37%, expected term - 5 years, expected dividends- N/A. The Company recorded a $13.5 million derivative liability in connection with this option. The Company accounts for the option as a liability measured at fair value based on its nature as a free-standing instrument with variability in both the exercise price and shares to be issued. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company’s statements of operations.

 

Voting Agreement. Man FinCo has the ability to designate a director to the Company’s board of directors either within six months from July 15, 2014 or within six months of the date Man FinCo exercises its option to purchase additional shares. If Man FinCo does not designate a director or if there is a vacancy in such director position, then Man FinCo may appoint a board observer whom the Company shall invite to attend all board meeting in a non-voting capacity. Brent Willis, Marc Hardgrove and William Fields have agreed to vote any and all of their shares for the election of any director designated by Man FinCo. The voting agreement will remain in effect until Man FinCo holds fewer than 19,753 shares. Man FinCo did not designate a director in the initial six month period ending January 15, 2015.

 

11.

RELATED PARTY TRANSACTIONS

 

The Company, through the acquisition of Vapestick, became a party to a distribution agreement with MPL Ltd. (“MPL”). Under the terms of the agreement, MPL is licensed to act as the manufacturer, importer and distributor for Vapestick products for specified retailers in return for a royalty payment. Either party may terminate the agreement after January 1, 2016 on six months prior notice and the satisfaction of certain conditions. The Chief Executive Officer of MPL is related to the Company’s President-International. Royalties for the years ended December 31, 2014 and 2013 were approximately $482,000 and $0, respectively.

 

Logistical and service support is provided by Versatile Wood Specialties (“Versatile”) and is owned by a relative of the President. Services have been benchmarked against other providers to ensure the costs are competitive. The relationship began in early 2014 and continues still today. There is no formal signed agreement in place. Services provided by Versatile in 2014 and 2013 totaled $532,000 and $0 respectively.

 

Triangle Fulfillment EU dba Snap Networks provides marketing and logistics support and is wholly owned by the Director of Hardwire. This relationship was established prior to the entity being acquired and continues still today. Services in 2014 and 2013 were $31,000 and $0 respectively.

 

Triangle Holdings Limited Hong Kong provides marketing and logistics support and is wholly owned by the Director of Hardwire. This relationship was established prior to the entity being acquired and continues still today. Services in 2014 and 2013 were $577,000 and $0 respectively.

 

Triangle Fulfillment provides marketing and logistics support and is wholly owned by the Director of Hardwire. This relationship was established prior to the entity being acquired and continues still today. Services in 2014 and 2013 were $393,000 and $0 respectively.

 

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

The Company, through the acquisition of Vapestick, became a party to a supplier agreement with Internet Marketing Hub Ltd. (“IMH”). Under the terms of the agreement, IMH provides the labor and expertise for the design, development and maintenance, including search engine optimization for internet marketing on the websites: www.vapestick.co.uk and www.electroniccigarettedirect.co.uk. The Company’s President-International is a 50% owner of IMH. Pursuant to the terms of the agreement Vapestick will pay £15,000 ($23,367 as of December 31, 2014) for each month during which the agreement continues, and will pay an additional £10,000 ($15,578 as of December 31, 2014) per month for each month during the whole of which the Vapestick website is found at all times on page 1 of Google UK’s organic search listings, following a search of Google UK only, using only the key phrase “electronic cigarette”. Total costs incurred under this agreement were approximately $271,000 and $0 for the years months ended December 31, 2014 and 2013, respectively.

 

On December 30, 2013, the Company entered into a comprehensive partnership agreement with Fields Texas Limited LLC’s affiliate, E-Cig Acquisition Company LLC (“Fields Texas”), which is partially owned by one of the Company’s directors. Pursuant to the agreement, if Fields Texas facilitates a merger or acquisition, strategic partnership, joint venture, licensing or similar transaction, we will pay Fields Texas a one-time fee equal to 5% of the purchase price paid in the same form of consideration as used in the transaction. For the year ended December 31, 2014, amounts due under this agreement included a $200,000 development fee and $500,000 related to the acquisition of FIN of which all amounts have been paid. 

 

On April 28, 2014, the Company entered into an Advisory Agreement with Fields Texas Limited LLC (“FTX”), which is owned by one of the Company’s directors. According to the Advisory Agreement, in the event FTX provides advice related to operational, strategic and synergistic considerations associated with a merger or acquisition which is closed by the Company, which Fields Texas is not receiving a 5% facilitation fee for, the Company shall pay FTX a fee equal to three percent (3%) of the total purchase price paid. The agreement was terminated on September 4, 2014. During 2014, the Company recorded an expense of $600,000 related to this agreement.

 

On November 3, 2014, there was a cashless exercise of 23,341 warrants to receive 15,241 common shares. On November 25, 2014, a warrant holder entered into a warrant exchange agreement with the Company, whereupon he exchanged certain warrants and for 37,861 shares. On December 31, 2014, another warrant holder amended his Director warrants so that the exercise price would be $0.75 (for the 6,667 warrants) and certain adjustment provisions would be removed. Also, on December 31, 2014, Fields Texas entered into a warrant exchange agreement with the Company, where upon it exchanged certain warrants for warrants to purchase 2,000,000 shares at an exercise price of $0.75. The exercise price in subject to adjustment, if at any time after December 31, 2015, there is no effective registration statement registering, or no current prospectus available for, the resale of the warrant shares by the holder. These warrants contain adjustment provision for subsequent stock dividends and splits, rights offerings, pro-rata distributions, and fundamental transactions. These transactions were entered into with a then director who was an influential shareholder. Management determined that this individual (William Fields and affiliates) surrendered rights that were significantly greater in value than the consideration he received. The excess consideration received by the Company in the form of warrant values extinguished approximates $43 million, which in substance is deemed a capital contribution to the Company.

 

Warrants outstanding as of December 31, 2014 include the following:

 

		Original Issue Warrants				Warrant Liability				Loss on fair value adjustment for the year ended December 31, 2014
December 31, 2013			471,667			$	16,600,500			$	(71,506,802	)
Issued:
Advisory services			33,333				3,445,000				(3,851,000	)
Advisory services			4,600				110,400				-
Advisory services			2,000,000				2,233,200				-
Anti-dilution adjustment:
Advisory services			86,171,650				-				-
Exercised:
April 2014			(23,250	)			(3,118,313	)			-
December 2014			(23,341	)			(1,130,375	)			-
Cancelled:
Advisory services			(39,978,363	)			(43,488,463	)			-
Advisory services			(3,333,333	)			(3,648,000	)			-
Advisory services			(4,600	)			(110,400	)			-
Mark-to-market adjustment							75,357,802
December 31, 2014			45,318,363			$	46,251,351			$	(75,357,802	)

 

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

In September 2013, the Company moved its operations from Ballground, Georgia to Nunica, Michigan and entered into a month-to-month agreement with a company related to the Chief Executive Officer to provide office and warehouse facilities, as well as administrative services to include a call center, order fulfillment, purchasing, inventory management and accounting for a monthly fee of approximately $21,000 per month. The contract was terminated during September 2014. 

 

The Company incurred approximately $425,000 in expenses for various services received from Triangle during the year ended December 31, 2014. An executive at the Company also has an ownership interest in Triangle.

 

12.

STOCK BASED COMPENSATION

 

Stock options

 

During 2013, the Company adopted the 2013 Stock Option Plan (the “Plan”) which is intended to advance the interest of the Company’s stockholders by enhancing the Company’s ability to attract, retain, and motivate persons who make (or are expected to make) important contributions to the Company. 

 

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model that uses the assumptions noted in the following table.  The Company calculates expected volatility based on a comparable industry group and estimates the expected term of its stock options using the simplified method.  The expected term represents an estimate of the time options are expected to remain outstanding.  The risk-free interest rate for periods within the contractual life of the option is based on the U.S. treasury yield curve in effect at the time of grant. 

 

The weighted-average grant-date fair value of options granted during the years ended December 31, 2014 and 2013 was $77.25 and $7.05, respectively.

 

On August 19, 2014, a consultant was granted 140,000 stock options exercisable for common shares of the Company expiring December 31, 2015 and immediately vested. The fair value of the award amounted to $2,058,000 and was based on a Black-Scholes option pricing model with the following assumptions: risk free interest rate – 1.59%, volatility – 37%, expected term – 5 years, expected dividends – N/A.

 

										Weighted
										Average
						Weighted				Remaining
						Average				Contractual				Aggregate
		Number of				Exercise				Life				Intrinsic
Stock Options		Shares				Price				(In Years)				Value
Balance at December 31, 2012			-			$	-							$	-
Granted			635,000				7.02
Forfeited			(133,333	)			3.75
Balance at December 31, 2013			501,667				0.53				5.50			$	59,367,000
Granted			140,000				77.25
Exercised			(33,333	)			3.75
Forfeited			(68,333	)			6.97
Balance at December 31, 2014			540,000			$	26.10				3.78			$	-
Vested and exercisable at December 31, 2014			540,000			$	26.10				3.78			$	-

 

Total stock based compensation expense for the year ended December 31, 2014, 2013, and 2012 was $7,129,000, $435,000 and $0, respectively.  As of December 31, 2013, there was $130,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost was recognized during 2014.

 

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

Restricted stock

 

On July 1, 2014, James P. McCormick, our Chief Financial Officer at that time, was granted 66,667 restricted shares of the Company. The fair value of the award amounted to $6,383,000 and was based upon the closing price of the Company’s stock on the date of grant taking into account a 25% discount for lack of marketability. These restricted shares were originally scheduled to vest one third on October 31, 2014, one third on January 1, 2015 and one third on January 1, 2016. On October 29, 2014, the Company modified the terms of this award by extending the vesting dates as follows: one third on April 1, 2015, one third on January 1, 2016 and one third on April 1, 2016. Unrecognized stock compensation related to this grant amounted to $1,445,000 as of December 31, 2014. The Company determined this modification did not change the expectation that the award will ultimately vest. Therefore, the unrecognized stock based compensation cost on the date of the modification will be amortized on a straight line basis over the remaining expected term of this award. 

 

13.

COMMITMENTS AND CONTINGENCIES

 

From time to time we may be involved in various claims and legal actions arising in the ordinary course of our business. When the Company becomes aware of potential litigation, it evaluates the merits of the case in accordance with the applicable accounting literature. The Company evaluates its exposure to the matter, possible legal or settlement strategies and the likelihood of an unfavorable outcome. If the Company determines that an unfavorable outcome is probable and can be reasonably estimated, it establishes the necessary accruals. Certain insurance policies held by the Company may reduce the cash outflows with respect to an adverse outcome on certain of these litigation matters. The Company does not believe it is reasonably possible that any of these matters will have a material adverse effect on the Company’s consolidated financial position, results of operations and cash flows.

 

14.

DISTRIBUTION AGREEMENT

 

On December 30, 2013, the Company entered into an Agreement (Related Party) whereby Fields Texas will act as the exclusive agent to secure sales and distribution agreements for the Company’s products with various retailers and distributors. Fields Texas will also support the Company’s acquisition, product development, marketing, pricing and promotional efforts.

 

Pursuant to the Agreement, the Company paid and recorded an expense of $200,000 related to a development fee and issued Fields Texas five-year warrants to purchase 465,000 shares of the Company’s common stock. The warrants have an original strike price of $135.75, and contain a provision which could reduce the strike price based on certain future events and are thus considered to be a liability. In addition, the Company will pay Fields Texas commissions on the net sales of their products sold.  Also, for every $10,000,000 in annual net sales realized, pursuant to the agreement , up to $100,000,000, the Company will issue Fields Texas additional five-year warrants to purchase 35,333 shares of common stock at an exercise price equal to the closing price on the date the warrants are issued.

 

For a merger or acquisition, strategic partnership, joint venture, licensing or similar transaction that Fields Texas facilitates, Victory will pay a one-time fee of 5% of proceeds. The term of the Agreement is for three years and will automatically be renewed for successive periods upon achieving annual net sales targets.

 

As a result of this Agreement, a liability has been recorded at December 31, 2013 with the related expense recorded in advisory agreement warrants in the accompanying consolidated statements of operations and comprehensive income . The warrants were valued at the balance sheet date using a binomial pricing model based on the terms of the warrant agreement.

 

In order to calculate the fair value of the warrants, certain assumptions are made regarding components of the model including the estimated fair value of the underlying common stock, risk-free interest rate and volatility. Changes to the assumptions could cause significant adjustments to the valuation.   At December 31, 2013, the assumptions are as follows:

 

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

Fair value of common shares		$	108.60
Term (years)			5
Term-matched risk-free interest rate			1.74	%
Term-matched stock volatility			40.00	%
Exercise price		$	135.75

 

The risk-free interest rate is based on the yield of U.S. treasury bonds over the expected term. The expected stock volatility is based on historical common stock prices for comparable publicly traded companies over a period commensurate with the life of the instrument.

 

15.

WARRANTS

 

Warrants outstanding as of December 31, 2014 include the following:

 

		Grant Date		Number of Warrants   on Grant Date				Initial Fair Value				Exercise Price				Number of Warrants Outstanding				Fair Value
January Private Placements:		January 7, 2014			108,000			$	5,751,000			$	75.00				10,800,000			$	11,787,120
		January 14, 2014			23,000				1,449,000				75.00				2,300,000				2,510,220
		January 31, 2014			20,000				1,671,000				75.00				2,000,000				2,182,800
February Private Placements		February 28, 2014			214,000				22,116,900				75.00				21,400,000				23,433,000
Exchanged Notes		July 17, 2014			53,846				129,230				150.00				3,590				10,960
Unit Offerings:
		April 30, 2014			8,051				394,911				97.50				1,046,656				1,152,054
		June 19, 2014			2,340				87,404				97.50				304,217				336,267
		July 16, 2014			7,901				248,890				101.25				7,901				3,559
		July 16, 2014			8,552				89,484				97.50				1,111,699				919,412
Advisory Services:
		December 27, 2013			465,000				16,600,500				135.75				39,978,363				43,488,463
		December 31, 2013			6,667				-				135.75				6,667				7,255
		February 28, 2014			25,550				2,640,593				75.00				2,555,000				2,795,426
		February 28, 2014			33,333				3,445,000				150.00				3,333,333				3,648,000
		April 1, 2014			93,722				3,655,166				90.00				11,246,664				12,343,776
		April 22, 2014			5,698				175,228				135.00				1,025,724				1,128,091
		April 22, 2014			4,600				110,400				135.00				-				-
		May 16, 2014			61,200				2,423,520				90.00				7,344,000				8,094,557
		May 30, 2014			124				74,200				90.00				224,000				247,229
		June 3, 2014			4,603				171,234				97.50				598,399				660,722
		August 1, 2014			46,667				434,000				100.20				6,234,667				6,915,804
		December 31, 2014			2,000,000				2,555,400				0.75				2,000,000				2,233,200
					3,192,854			$	64,223,060								113,520,880			$	123,897,915

 

[a]

Overallotment Rights are not in Warrant Liability as of December 31, 2014. Overallotment Rights are included in Deriviative Liability.

 

A summary of changes in our warrants for the year ended December 31, 2014 is as follows:

 

		Warrants				Warrant Liability				Loss recognized on fair value adjustment for the year ended December 31, 2014
December 31, 2013			471,667			$	16,600,500				(71,506,802	)
Issued:
Fields Texas and FTX			2,037,933				5,788,600				(3,851,000	)
Other advisory warrants			3,569,283				28,319,464				(23,158,399	)
Private Placements			27,923				31,117,131				(8,806,969	)
Warrants issue with common stock			1,790				771,551				(1,175,671	)
Antidilution Adjustment			151,427,441
Exercised:
Fields Texas and FTX			(698,861	)			(4,248,688	)
Cancelled:
Fields Texas and FTX			(43,316,296	)			(47,246,863	)			(110,400	)
Mark-to-market adjustment							109,396,720
December 31, 2014			113,520,880			$	123,897,915			$	(108,609,241	)

 

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

Included in Note 19 are the fair value adjustments related to the advisory agreement warrants, the warrants issued in connection with the 2014 Private Placements and the warrants issued to William Fields as follows:

 

Advisory agreement warrants		$	82,026,592
Warrants issued with private placements			39,924,100
		$	121,950,692

 

A binomial model is used to compute the fair value of the warrants. In order to calculate the fair value of the warrants, certain assumptions are made regarding components of the model. As of December 31, 2014, significant assumptions include the risk-free interest rate ranging from 0.14% to 1.65% and volatility of 140%. Changes to the assumptions could cause significant adjustments to the valuation.

 

The risk-free interest rate is based on the yield of U.S. treasury bonds over the expected term. The expected share price volatility is based on historical common stock prices for comparable publicly traded companies over a period commensurate with the life of the instrument.

 

16.

EARNINGS PER SHARE

 

The following table represents a reconciliation of basic and diluted earnings per share:

 

		Years Ended December 31,
		2014				2013				2012
Net loss used in the computation of basic and diluted earnings per share		$	(381,574,958	)		$	(20,706,448	)		$	(478,170	)
Weighted average shares outstanding - basic and diluted			5,222,827				2,858,094				2,166,667
Per Share Data:
Basic
Net income (loss)		$	(73.06	)		$	(7.24	)		$	(0.22	)
Diluted
Net income (loss)		$	(73.06	)		$	(7.24	)		$	(0.22	)

  

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

For the periods where the Company reported losses, all common stock equivalents are excluded from the computation of diluted earnings per share, since the result would be antidilutive. Common stock equivalents, that were not included in the calculation of diluted earnings per share because to do so would have been antidilutive for the periods presented, are as follows:

 

		Years Ended December 31,
		2014				2013				2012
Stock Options			540,000				484,644				-
Warrants			113,621,140				51,695				-
Convertible debt			64,575,762				113,333				-
Total antidilutive common stock equivalents excluded from dilutive earnings per share			178,736,902				649,672				-

 

17.

INCOME TAXES

 

The income tax benefit recognized for the year ended December 31, 2014 results from the following:

 

US Taxes
Federal - Deferred			(67,904,637	)
State - Deferred			(17,246,920	)
Foreign
Federal - Current			1,639,408
Federal - Deferred			(1,833,864	)
Change in Valuation Allowance			63,807,415
		$	(21,538,598	)

 

Due to the Company’s loss and the valuation allowance related to the resulting tax benefit, there was no domestic income tax expense or benefit recognized for the years ended December 31, 2013, and 2012.

 

The reconciliation between the effective tax rate and the statutory rate is as follows:

 

		Years Ended December 31,
		2014				2013				2012
US Federal statutory income tax rate			35.00	%			35.00	%			0.00	%
State staxes			2.91				-0.27				0.00
Permanent non-deductible items			-0.66				0.00				0.00
Goodwill impairment			-7.13				0.00				0.00
Difference between Federal and Foreign Tax Rate			-1.20				0.00				0.00
Effect of valuation allowance			-21.12				-34.89				0.00
Other			-2.37				0.16				0.00
Effective income tax rate			5.43	%			0.00	%			0.00	%

 

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. The significant components of the deferred income tax asset (liability) are as follows:

 

		Years Ended December 31,
		2014				2013				2012
Deferred tax assets:
Net operating loss (“NOL”) carryforwards		$	15,050,371			$	921,499			$	-
Stock compensation			2,647,482				123,782				-
Derivative liability			57,871,418				6,133,885				-
Tax credits			3,000,000				-				-
Other			1,184,572				-				-
Deferred tax liabilities:
Intangible assets			(11,677,612	)			-				-
Undistributed earnings of foreign subsidiary			(1,400,000	)			-				-
Original issue discount on debt instruments			(1,102,429	)			-				-
Basis difference in fixed assets			(1,429	)			(1,429	)			-
Other			-				-				-
Net deferred tax assets			65,572,373				7,177,737				-
Valuation allowance			(70,985,152	)			(7,177,737	)			-
Total deferred tax assets		$	(5,412,779	)		$	-			$	-

 

The Company has net operating loss carryforwards for federal purposes of $41,039,022 for the year ended December 31, 2014. The losses will begin expiring in 2033. The Company has varying amounts of state net operating losses. Additionally, the Company has approximately $3,433,563 of foreign net operating losses, and approximately $3,000,000 of U.S. foreign tax credits.

 

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

In assessing the possible realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. In making this assessment, management did not believe that it was more likely than not that the Company will realize the benefits of the net deferred tax assets as of December 31, 2014.  This determination was based on cumulative net losses as of the balance sheet date.

 

In 2014, the Company completed the acquisitions of FIN, Vapestick, VIP, and Hardwire. During 2014, certain measurement-period adjustments were made with respect to certain deferred tax liabilities that were identified to exist on the acquisition date for each of these acquisitions. As a result, deferred tax liabilities have been recorded for the identifiable intangibles acquired in these acquisitions as the amounts are non-deductible for income tax. Goodwill and deferred tax liabilities were both increased by $33,964,158 during 2014 as a result of these measurement-period adjustments. The Company has also recognized deferred tax assets of $8,908,900 primarily related to net operating losses and mark to market adjustments on the Company’s warrants and derivatives, which offset the deferred tax liabilities. After subsequent realization of deferred tax liabilities from our acquisitions, the Company had a net long-term deferred tax liability of $5,412,779 as of December 31, 2014.

 

During 2014, there was no change to total gross unrecognized tax benefit. Management believes that there will not be a significant increase or decrease to the uncertain tax positions within 12 months of the reporting.

 

The Company quarterly evaluates the positive and negative evidence regarding the realization of net deferred tax assets. The carrying value of its net deferred tax assets is based on its belief that it is more likely than not that it will be unable to realize some of these deferred tax assets, primarily as a result of losses incurred during its limited history. As a result of this analysis, the Company projects that approximately $10.8 million of its deferred tax assets will not be realizable.

 

The Company recognizes interest and/or penalties related to uncertain tax positions in income tax expenses. To the extent accrued interest and penalties do not ultimately  become payable, amounts accrued will be reduced and reflected  as a reduction  of the overall income tax provision in the period that such determination  is made. There was no interest or penalties related to income tax matters for the years ended December 31, 2014, 2013 and 2012. The Company does not have any open years for audit as of December 31, 2014.

 

18.

GOODWILL AND IDENTIFIABLE INTANGIBLES

 

During 2014, we completed the acquisitions of Vapestick, FIN, VIP, and Hardwire. As a result of these acquisitions, we recorded goodwill and certain other identifiable intangible assets. A summary of changes in our goodwill and other intangible assets for the year ended December 31, 2014 is as follows:

 

Goodwill/Intangibles		Net Balance  as of December 31, 2013				Additions				Translation Adjustment				Valuation loss on Impairment				Periodic Amortization				Net Balance as of  December 31, 2014
Goodwill		$	-			$	154,481,534			$	(3,431,634	)		$	(94,391,443	)		$	-			$	56,658,457
Tradenames			-				44,036,000				(1,189,973	)			(14,678,050	)			(2,545,161	)			21,832,502
Customer Relationships			-				71,318,000				(1,269,386	)			(35,288,000	)			(7,103,898	)			31,447,030
Domain Name and Website			-				1,235,000				(93,286	)			-				(83,729	)			1,057,985
Non-Compete Agreements			-				420,000				-				-				(64,438	)			355,562
		$	-			$	271,490,534			$	(5,984,279	)		$	(144,357,493	)		$	(9,797,226	)		$	111,351,536

 

Amortization expenses for the 5 years following December 31, 2014 are approximately as follows: $8,500,000, $7,100,000, $5,400,000, $5,300,000 and $4,500,000.

 

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

Impairment

 

We incurred a $94.4 million loss on impairment of goodwill in 2014. When estimating the fair value of goodwill, we make assumptions regarding revenue growth rates, operating cash flow margins and discount rates. These assumptions require substantial judgment as we operate in a high growth industry and have recently acquired our reporting units.

 

We consider company specific factors including customers, new products and demand patterns as well as industry information to arrive at these estimates. As of December 31, 2014, we have utilized a 17.5% to 20.0% range of discount rates in determining the loss on impairment. In calculating the discount rate, we considered estimates of the long-term mean market return, industry beta, corporate borrowing rate, average industry debt to capital ratio, average industry equity capital ratio, risk free rate and the tax rate.

 

We also identified and recognized an impairment loss of approximately $50 million on our identifiable intangibles in 2014.  

 

19.

FAIR VALUE MEASUREMENTS

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

 

Level 1 — Quoted prices for identical assets and liabilities traded in active exchange markets, such as the New York Stock Exchange.

 

Level 2 — Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data. Level 2 also includes derivative contracts whose value is determined using a pricing model with observable market inputs or can be derived principally from or corroborated by observable market data.

 

Level 3 — Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for nonbinding single dealer quotes not corroborated by observable market data.

 

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

The Company has various processes and controls in place to attempt to ensure that fair value is reasonably estimated. A model validation policy governs the use and control of valuation models used to estimate fair value. The Company performs due diligence procedures over third-party pricing service providers in order to support their use in the valuation process. Where market information is not available to support internal valuations, independent reviews of the valuations are performed and any material exposures are evaluated through a management review process.

 

While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

 

The following is a description of the valuation methodologies used for complex financial instruments measured at fair value:

 

Warrant liability

 

The Company utilizes a binomial model to derive the estimated fair value of warrants that are classified as liabilities. Key inputs into the model include a discount for lack of marketability on the stock price, expected share price volatility, and a risk-free interest rate.

 

In order to calculate the fair value of our warrants, certain underlying assumptions are made regarding components of the model. As of December 31, 2014, significant assumptions include the estimated $3.66 fair value of the underlying common stock, the risk-free interest rate ranging from 1.53% to 1.74% and share price volatility of 37%. Changes to the assumptions could cause significant adjustments to the valuation.

 

The fair value of the underlying common stock was determined based on the traded price of the Company’s stock with a marketability discount of 25%. The risk-free interest rate is based on the yield of U.S. treasury bonds over the expected term. The expected share price volatility is based on historical common stock prices for comparable publicly traded companies over a period commensurate with the expected term of the instrument.

 

Derivatives

 

Derivatives consisting of complex embedded features pursuant in our debt financings, are valued using a binomial option pricing model. Key inputs into the model include a discount for lack of marketability on the stock price, expected share price volatility, and a risk-free interest rate. Any significant changes to these inputs illegible or other assumptions would have a significant impact on estimated fair value.

 

Assets and liabilities measured at fair value as of December 31, 2014 and 2013 are summarized as follows:

 

		December 31, 2014
Recurring fair value measurements		Total				Level 1				Level 2				Level 3
Liabilities:
Warrant Liability		$	123,897,915			$	-			$	-			$	123,897,915
Derivative Liability		$	40,090,977			$	-			$	-			$	40,090,977
Total Liabilities		$	163,988,892			$	-			$	-			$	163,988,892

 

		December 31, 2013
Recurring fair value measurements		Total				Level 1				Level 2				Level 3
Liabilities:
Warrant Liability		$	-			$	-			$	-			$	16,600,500

 

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

		Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
		Total				Warrant Liability				Derivatives
Balance, January 1, 2014		$	16,600,500			$	16,600,500			$	-
Current activity and issuances			147,388,392				107,297,415				40,090,977
Balance, December 31, 2014		$	163,988,892			$	123,897,915			$	40,090,977

   

		Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
		Total				Warrant Liability				Derivatives
Balance, January 1, 2013		$	-			$	-			$	-
Current activity and issuances			16,600,500				16,600,500				-
Balance, December 31, 2013		$	16,600,500			$	16,600,500			$	-

  

20.

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

As of December 31, 2014 and 2013, accounts payable and accrued expenses are as follows:

 

		December 31, 2014				December 31, 2013
Accounts payable		$	10,599,461			$	137,919
VIP earnout			5,000,000				-
Accrued interest			2,945,186				-
Other accrued expenses			3,866,794				168,281
		$	22,411,444			$	306,200

  

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

21.

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

 

The following is a summary of unaudited quarterly statements of earnings (loss) for the years ended December 31, 2014 and 2013:

 

2014		March				June				September				December				Year
Revenues			4,138,540.00				11,287,723.00				15,901,907.00				12,147,609.00				43,475,779.00
(Loss) earnings before income taxes			(86,411,460.00	)			(24,903,965.00	)			45,171,054.00				(336,969,185.00	)			(403,113,556.00	)
Net (loss) earnings			(86,411,460.00	)			(367,138.00	)			41,415,402.00				(336,211,762.00	)			(381,574,958.00	)
Net (loss) earnings per share:
Basic		$	(20.38	)		$	(0.07	)		$	7.65			$	(64.37	)		$	(73.06	)
Diluted		$	(20.38	)		$	(0.07	)		$	6.15			$	(64.37	)		$	(73.06	)

 

Fourth Quarter Adjustments:

 

During the fourth quarter of 2014, certain events, transactions and economic circumstances resulted in significant adjustments that affected our reported net loss which are summarized as follows:

 

		Approximate Amounts (Millions)
Operating results:
Impairment losses on goodwill and other intangible assets primarily in connection with FIN and Vapestick reporting units		$	135.4
Sales returns, allowances and other customer concessions, credits and price adjustments in connection with FIN acquisition			3.4
Inventory write-downs and disposition			5.2
		$	144.0
Non-operating results:
Fair value adjustments to warrant and derivative liabilities		$	160.0

 

Operating Expenses

 

Management believes none of the operating expense amounts are reasonably attributable to previous quarters because the underlying economic factors were not identifiable until the fourth quarter, including declines in the Company’s common stock values which are a significant factor in determining the valuation estimates related to impairment losses and which are an inherent input to the models used to mark-to-market the warrant and embedded derivative liabilities. Because of the significant numbers of warrants and derivatives we have issued in connection with our convertible debt financings, our financial performance has been, and will continue to be, subject to relatively high levels of volatility.

 

Sales Returns, Allowances and Other Customer Concessions

 

The e-cigarette segment experienced dramatic change in the United States over the last year. This included the shift in consumer preference from first generation “cigalike” products to vaping products such as refillable liquid and closed vaping systems. As a result, the Company worked with its retail trade partners via pricing incentives, promotional activities and other efforts to facilitate the sales of these slower moving products. The costs associated with these activities amounted to $3.4 million in the fourth quarter.

 

Inventory Write-Downs and Disposition

 

The Company entered into an agreement to exchange older slow moving inventory with a third party for media credits which could be used to promote ECIG products. The inventory exchanged for media had a carrying value of approximately $4.5 million. In addition, the Company wrote down $700 thousand in slow moving products not included in the exchange agreement.

 

22.

LEASES

 

Our corporate headquarters is located at 14200 Ironwood Drive, Grand Rapids, Michigan 49534, which the Company purchased in September 2014 for a purchase price of $530,000. At closing the Company paid the seller $105,000 and financed $430,572 of the purchase price through an 8.5% Mortgage Note (“Original Mortgage Note”), which was due at December 31, 2014 with accrued interest. The Original Mortgage Note was retired and replaced with a new $250,000 Mortgage Note as of December 31, 2014 with a maturity of December 31, 2019. The new $250,000 Mortgage Note has a variable interest rate of the prime rate plus 2.5% with the initial rate being 5.75%. The Company believes our new corporate offices are suitable and adequate to operate its business at this time and for the foreseeable future.

 

The Company’s subsidiary, Vapestick leases an area of approximately 3,100 square feet, in Borehamwood, Hertfordshire, England, for £5,727 per month ($9,210 as of December 31, 2014), with an option to terminate the lease after three years. The Company’s subsidiary, VIP, leases its corporate offices as well as a storage and distribution center, in Radcliffe, Manchester, England, at an annual rental rate of £13,420 ($20,935 as of December 31, 2014). This lease expires in November 2015. In October 2014, VIP entered into a new lease for its corporate offices as well as a storage and distribution center, in Radcliffe, Manchester, England, effective February 5, 2015, at an annual rental rate of £118,000 ($182,900 for 2015). This lease expires in February 2025 but has the option to break in February 2020.

 

VIP has 5 year leases on its retail outlets at Gateshead, Doncaster and Middleton. The former lease expires in August 2018 whilst the latter two leases expire in August 2019. All three of these leases contain tenant break option clauses. The rental levels of these leases are £26,000, $40,300, £38,500 $59,675 and £20,000 $31,000 respectively.

 

Period Ending December 31,		Amount
2015		$	1,842,925
2016			521,378
2017			376,449
2018			355,667
2019			331,104
2020 and thereafter			937,258
Total		$	4,364,781

 

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

23.

GOING CONCERN

 

These consolidated financial statements have been prepared assuming that the Company will be able to continue operating in the normal course of business as a going concern. 

 

While operating in a dynamic and fast growing consumer goods segment, the Company has essentially grown from a level of net sales that were minimal to $37 million in less than two years via a combination of organic growth and expansion driven by multiple strategic business acquisitions completed during 2014. This level of business activity equates to approximately $80 million in annual revenue on a pro forma basis.  While there are rapidly changing dynamics in the industry and ECIG’s business, many aspects are performing well and overall the business opportunity is significant. Given the accelerating global demand for electronic cigarettes and vaping systems, we believe the Company is well positioned to benefit from, and take advantage of the attractive trends in this industry.

 

The Company has generated operating losses, had negative operating cash flows, and accumulated a net capital deficit. The lack of profitability thus far has resulted from significant one-time expenses associated with the acquisitions and a planned uplisting onto a more senior exchange in 2014. The pace of the acquisitions and complexity associated with the financing of the Company led to difficulties in fully integrating newly acquired business units, meeting As a result of these and other factors, the Company is in default of its debt obligations as of December 31, 2014 and capital resources may be insufficient to enable full execution of the global business plan in the near term. ongoing regulatory reporting requirements, and incremental costs and inefficiencies in financial reporting. As a result of these and other factors, the Company is in default of its debt obligations as of December 31, 2014 and capital resources may be insufficient to enable full execution of the global business plan in the near term.

 

Management’s plans to address liquidity issues include stabilizing the current financial condition by restructuring the balance sheet and securing new sources of capital. In addition, the Company is also improving cash flows and return on investment from operations through a number of key initiatives already underway, including:

 

·

SKU rationalization

·

Consolidated purchasing and increased scale

·

Improved and more diversified mix (channels, products, customers and markets)

·

Merging of certain of back-office operations

·

Improved management information systems (ERP)

 

The Company acknowledges that there is significant uncertainty about its ability to meet current funding requirements, financial obligations and commitments, and to refinance or repay various debt and other financial instruments. This ability is particularly contingent upon ongoing success in meeting periodic SEC filing requirements in a timely manner to ensure the availability in the marketplace of necessary public information about our business and prospects. While management believes and expects that it has or will generate adequate resources to continue operations in the normal course of business for the foreseeable future, there can be no assurance that it will ultimately be able to do so. These consolidated financial statements do not include any adjustments to the recoverability and valuation of assets or the amounts and classification of liabilities if the Company is unable to continue as a going concern.

 

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

24.

SUBSEQUENT EVENTS

 

Changes to Management and Board of Directors

 

On January 9, 2015, the Board of Directors (the “Board”) of the Company appointed Dan O’Neill as Executive Chairman of the Company, which became effective March 16, 2015. Mr. O’Neill will perform the services and duties that are normally and customarily associated with the Executive Chairman position, as well as other associated duties as the Company’s Board reasonably determines. The Board also appointed Mr. O’Neill as a member of the Board effective March 4, 2015.

 

On January 9, 2015, Jim McCormick notified the Company that he would resign from his position as Chief Financial Officer of the Company, effective immediately. Mr. McCormick’s resignation was not as a result of any disagreement with the Company and he continues to be employed by the Company in other positions. On the same day, the Board appointed Phil Anderson as the Chief Financial Officer of the Company. Mr. Anderson will perform the services and duties that are normally and customarily associated with the Chief Financial Officer position as well as other associated duties as the Company’s Board or Executive Chairman reasonably determines.

 

In conjunction with the recent restructuring, the Company had requested that certain members of the board of directors submit their resignation. As such, on March 6, 2015, William R. Fields, Marc Hardgrove, Charles L. Jarvie, Howard Lefkowitz and Tim McClure each submitted a notice of resignation resigning as director to the Company effective upon receipt of such notice by the Company. The resignations were not as a result of any disagreements with the Company.

 

10% Convertible Notes

 

Overview. On January 14, 2015, the Company completed a private offering of $263,158 principal amount 5% Original Issue Discount Convertible Promissory Notes (the “10% Convertible Notes”) with accredited investors for total net proceeds to the Company of approximately $250,000 after deducting placement agent fees and other expenses. The investors also agreed to purchase up to an additional $250,000 of 10% Convertible Notes, if certain conditions and milestones were met. On February 4, 2015, the second tranche of $263,158 principal amount 10% Convertible Notes was purchased for total net proceeds to the Company of $250,000. 

 

Maturity and Interest. The 10% Convertible Notes are due nine months from the date of issuance, less any amounts converted or redeemed prior to the maturity date, and accrue interest at an annual rate of 10% on the aggregate unconverted and outstanding principal amount, payable in cash or, should the Company’s common stock be listed on a national exchange, in common stock, on the first day of each calendar month. Beginning on the sixth month after the original issue date and continuing on each of the following three successive months thereafter, the Company is obligated to pay 1/4 of the face amount of the 10% Convertible Notes and accrued interest, which, at the Company’s option, may be paid in cash or, subject to the Company complying with certain conditions, in common stock with each share of common stock being converted at a price that is equal to 75% of the average of the two lowest traded prices of the Company’s common stock for the 20 consecutive trading days immediately prior to such payment date.

 

Conversion. The 10% Convertible Notes may be converted, in whole or in part, into shares of common stock at the option of the holder at any time and from time to time. The shares of common stock issuable upon conversion of the 10% Convertible Notes shall equal: (i) the principal amount of the Note to be converted divided by (ii) a conversion price of $2.10, as adjusted from time to time. The conversion price is subject to adjustment upon certain events, such as stock splits, combinations, dividends, distributions, reclassifications, mergers or other corporate change and dilutive protection issuances. Additionally, should the Company issue any equity at, or should the exercise or conversion price of any previously issued option, warrant convertible security be adjusted to a purchase price that is less than the current conversion price, the conversion price will be adjusted to such lower purchase price, with certain limited exceptions. Following the issuance by the Company of warrants on February 26, 2015, the conversion price of the 10% Convertible Notes adjusted to $0.45.

 

Prepayment. The 10% Convertible Notes may be prepaid in whole or in part at any time upon ten (10) days written notice for 120% of outstanding principal and accrued interest. At any time, within thirty (30) days of the Company’s common stock being listed on a national exchange, the holders of the 10% Convertible Notes may “put” to the Company all or any part of the 10% Convertible Notes, which the Company must purchase within ten (10) days of such notice for 105% the then outstanding principal amount and interest.

 

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

Rights to Participate in Future Financings. For twelve (12) months from the execution of the securities purchase agreement, if the Company or any of its subsidiaries issue any securities subsequent to the issuance of the 10% Convertible Notes, other than any issuance through a public underwritten offering or to an investor or a group of investors that already own common stock or any securities that entitle the holder thereof to acquire at any time the Company’s common stock, the holder shall have the right to participate in such subsequent financing in an amount up to 100% of the holder’s subscription amount in the 10% Convertible Notes on the same terms, conditions and price provided for in such subsequent financing. 

 

December 12% Convertible Notes - Additional Tranches

 

Between January 8, 2015 and January 12, 2015 the Company and the holders of the December 12% Convertible Notes completed a second tranche of $789,473.68 principal amount of December 12% Convertible Notes for a purchase price of $750,000. On February [xx], 2015, the Company and the holders of the December 12% Convertible Notes completed the third tranche of $263,158 principal amount of December 12% Convertible Notes for a purchase price of $250,000. For a further discussion of the terms of the second tranche and third tranche of December 12% Convertible Notes, please see “—December 12% Convertible Notes” above.

 

January 12% Convertible Notes

 

On January 16, 2015, the Company completed a private offering of $1,052,632 principal amount of 5% Original Issue Discount Convertible Promissory Notes (the “January 12% Convertible Notes”) with accredited investors for total net proceeds to the Company of approximately $1 million after deducting placement agent fees and other expenses.

 

Maturity and Interest. The January 12% Convertible Notes are due twelve months from the date of issuance, less any amounts converted or redeemed prior to the maturity date, and accrue interest at an annual rate of 12% on the aggregate unconverted and outstanding principal amount, payable in cash or, should the Company’s common stock be listed on a national exchange, in common stock, on the first day of each calendar month. Beginning on the third month after the original issue date and continuing on each of the following nine successive months thereafter, the Company is obligated to pay 1/10 of the face amount of the January 12% Convertible Notes and accrued interest, which, at the Company’s option, may be paid in cash or, subject to the Company complying with certain conditions, in common stock with each share of common stock being converted at a price that is equal to 75% of the lowest VWAP for the 20 consecutive trading days immediately prior to such payment date.

 

Conversion. The January 12% Convertible Notes may be converted, in whole or in part, into shares of common stock at the option of the holder at any time and from time to time. The shares of common stock issuable upon conversion of the January 12% Convertible Notes shall equal: (i) the principal amount of the Note to be converted divided by (ii) a conversion price of $0.75, as adjusted from time to time. The conversion price is subject to adjustment upon certain events, such as stock splits, combinations, dividends, distributions, reclassifications, mergers or other corporate change and dilutive issuances. Additionally, should the Company issue any equity at, or should the exercise or conversion price of any previously issued option, warrant convertible security be adjusted to a purchase price that is less than the current conversion price, the conversion price will be adjusted to such lower purchase price, with certain limited exceptions. Following the issuance by the Company of warrants on February 26, 2015, the conversion price of the January 12% Convertible Notes adjusted to $0.45.

 

Prepayment. The January 12% Convertible Note may be prepaid in whole or in part at any time upon ten (10) days written notice for 120% of outstanding principal and accrued interest. At any time, within thirty (30) days of the Company’s common stock being listed on a national exchange, the holders of the January 12% Convertible Notes may “put” to the Company all or any part of the January 12% Convertible Notes, which the Company must purchase within ten (10) days of such notice for 105% the then outstanding principal amount and interest.

 

Rights to Participate in Future Financings. For twelve (12) months from the execution of the securities purchase agreement, if the Company or any of its subsidiaries issue any securities subsequent to the issuance of the January 12% Convertible Notes, other than any issuance through a public underwritten offering or to an investor or a group of investors that already own common stock or any securities that entitle the holder thereof to acquire at any time the Company’s common stock, the holders shall have the right to participate in such subsequent financing in an amount up to 100% of the holder’s subscription amount in the 12% Convertible Notes on the same terms, conditions and price provided for in such subsequent financing.

 

February 12% Convertible Notes

 

Overview. On February 26, 2015, the Company completed a private offering of $3,157,895 principal amount of 5% Original Issue Discount Convertible Promissory Notes (the “February 12% Convertible Notes”) and warrants to purchase shares of common stock with accredited investors for total net proceeds to the Company of approximately $3 million after deducting placement agent fees and other expenses.

 

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

Maturity and Interest. The February 12% Convertible Notes are due four months from the date of issuance, less any amounts converted or redeemed prior to the maturity date, and accrue interest at an annual rate of 12% on the aggregate unconverted and outstanding principal amount, payable in cash or in Common Stock, on the maturity date.

 

Conversion. The February 12% Convertible Notes may be converted, in whole or in part, into shares of Common Stock at the option of the holder at any time and from time to time. The shares of Common Stock issuable upon conversion of the February 12% Convertible Notes shall equal: (i) the principal amount of the Note to be converted divided by (ii) a conversion price of $0.75, as adjusted from time to time. The conversion price is subject to adjustment upon certain events, such as stock splits, combinations, dividends, distributions, reclassifications, mergers or other corporate change.

 

Prepayment. The February 12% Convertible Notes may be prepaid in whole or in part at any time upon ten (10) days written notice.

 

Rights to Participate in Future Financings. For twelve (12) months from the execution of the securities purchase agreement, if the Company or any of its subsidiaries issue any securities subsequent to the issuance of the February 12% Convertible Notes, other than any issuance through a public underwritten offering or to an investor or a group of investors that already own Common Stock or any securities that entitle the holder thereof to acquire at any time the Common Stock, the holder shall have the right to participate in such subsequent financing in an amount up to 100% of the holder’s subscription amount in the February 12% Convertible Notes on the same terms, conditions and price provided for in such subsequent financing.

 

Warrants. The warrants are exercisable for an aggregate of 1,897,084 shares of Common Stock. The warrants are exercisable for a period of five years from the original issue date. The exercise price with respect to the warrants is $0.45 per share. The exercise price for the warrants is subject to adjustment upon certain events, such as stock splits, combinations, dividends, distributions, reclassifications, mergers or other corporate change. In the event the Company repays the February 12% Convertible Notes in full within three months of the original issue date, the number of warrant shares shall automatically be reduced by 50%.

 

March 12% Convertible Notes

 

Overview. On March 13, 2015, the Company completed a private offering of $13,684,211 principal amount of 5% Original Issue Discount Convertible Promissory Notes (the “March 12% Convertible Notes”) and warrants to purchase shares of common stock with accredited investors for total net proceeds to the Company of approximately $13 million after deducting placement agent fees and other expenses.

 

Maturity and Interest. The March 12% Convertible Notes are due on April 24, 2015, less any amounts converted or redeemed prior to the maturity date, and accrue interest at an annual rate of 12% on the aggregate unconverted and outstanding principal amount, payable, at the Purchaser’s option, in cash or in Common Stock, on each conversion date and on the Maturity Date.

 

Conversion. The March 12% Convertible Notes may be converted, in whole or in part, into shares of Common Stock at the option of the Purchaser at any time and from time to time. The shares of Common Stock issuable upon conversion of the March 12% Convertible Notes shall equal: (i) the principal amount of the Note to be converted divided by (ii) a conversion price of $0.75, as adjusted from time to time. The conversion price is subject to adjustment upon certain events, such as stock splits, combinations, dividends, distributions, reclassifications, mergers or other corporate changes.

 

Prepayment. The March 12% Convertible Notes may be prepaid in whole or in part at any time upon ten (10) days written notice at 100% of the outstanding principal amount.

 

Right to Participate in Future Financings. For twelve (12) months from the execution of the securities purchase agreement, if the Company or any of its subsidiaries issue any securities subsequent to the issuance of the March 12% Convertible Notes, other than any issuance through a public underwritten offering or to an investor or a group of investors that already own Common Stock or any securities that entitle the holder thereof to acquire at any time Common Stock, the holder shall have the right to participate in such subsequent financing in an amount up to 100% of the holder’s subscription amount in the March 12% Convertible Notes on the same terms, conditions and price provided for in such subsequent financing.

 

Warrants. The warrants are exercisable for an aggregate of 15,104,149 shares of Common Stock. The warrants are exercisable for a period of five years from the original issue date. The exercise price with respect to the warrants is $0.45 per share. The exercise price for the warrants is subject to adjustment upon certain events, such as stock splits, combinations, dividends, distributions, reclassifications, mergers or other corporate change. The number of warrants is subject to increase if the number of warrant shares issuable upon exercise of the warrant is less than a stated percentage of the fully-diluted Common Stock and Common Stock equivalents of the Company as of the date of the warrant. In the event the Company repays the March 12% Convertible Notes in full by April 3, 2015, the number of Warrants shall automatically be reduced by 50%.

 

 

ELECTRONIC CIGARETTES INTERNATIONAL GROUP, LTD

Notes to Consolidated Financial Statements

 

Exchange of 6% Convertible Notes

 

On March 13, 2015, the Company exchanged the remaining approximately $7.9 million principal amount of the 6% Convertible Notes with an accredited investor for (i) $13,000,000, (ii) a 0.04% Unsecured Note in the principal amount of $1.8 million (the “0.04% Unsecured Note”) and (iii) a prepaid $0.45 warrant for 6,250,000 shares of Common Stock and a prepaid warrant for 2,083,333 shares of Common Stock (collectively, the “Prepaid Warrants”).

 

0.04% Unsecured Note. The 0.04% Unsecured Note is due March 1, 2016 and accrues interest at a rate of 0.04% per annum. The principal amount of the 0.04% Unsecured Note is payable in twelve equal monthly installments of $150,000 in cash on the 1^st business day of each calendar month starting on April 1, 2015 with the last payment being due on March 1, 2016.

 

Prepaid Warrants. The Prepaid Warrants are exercisable for an aggregate of 8,333,333 shares of Common Stock. The Prepaid Warrants are exercisable for a period of ten years from the original issue date. The exercise price with respect to the Prepaid Warrants is $0.45 per share and has been prepaid. The number of shares of Common Stock to be issued pursuant to the Prepaid Warrants is subject to adjustment upon certain events, such as stock splits, combinations, dividends, distributions, reclassifications, mergers or other corporate change. 

 

January and February 2014 Convertible Notes

 

Overview. In January 2015 the Company approached the January and February 2014 convertible Note holders and provided them with three alternatives for their notes given the impending maturation:

 

1) The Company offered to amend the terms of the notes by extending the maturity date of the Notes by eighteen (18) months and lowering the interest rate from 15% to 8%. In addition, the holder agreed to a reset of the conversion price to $0.75. This would result in new maturity dates of June 7^th, 2016 and July 28, 2016 for the January and February placements respectively.

 

2) The Company offered to convert the entire Note at $0.75 or $.45. The conversion will be effective following the Company increasing its authorized shares, which was expected to occur on or about mid February 2015.

 

3) The Company offered the Holder to have the Holder’s outstanding Note plus outstanding interest paid within 30 days from the maturity date by a third party. The Company had a cap on this option of up to $10 million of principal amount of Notes. The Notes would then be held by the new Note holder under the same terms and conditions set forth for the respective class of Note holder i.e., the January or February tranche.

 

Maturity and Interest. The results of the offer to the January and February 2014 Senior Note holders was as follows:

 

1) The Note holders electing to extend under the amended terms and conditions totaled $21,333,600 ($7,083,600 from January 2014 Notes and $14,250,000 from the February Notes).

 

2) Note holders electing to convert at $0.75 or $.45 totaled $660,000 ($410,000 of the January 2014 Notes and $250,000 of the February 2015 Notes).

 

3) Note holders electing to have their principal and interest paid by a third party totaled $3,459,475 (2,209,475 from January 2014 Notes and $1,250,000 from the February Notes).

 

The following amendment to the original January and February 2014 Convertible Notes regarding interest was also implemented “Payment of Interest in Cash or Kind. The Company shall pay interest to the Holder on the aggregate unconverted and then outstanding principal amount of this Note at the rate of 8% per annum, payable on the 1st day of each month or if such day is not a Business Day on the next Business day, payable monthly or on each Conversion Date and on the Maturity Date in cash or, at the Company’s option, in duly authorized, validly issued, fully paid and non-assessable shares of Common Stock or a combination thereof.”

 

Additionally, holders of the warrants agreed to amend their warrants to (1) remove the adjustment provisions stemming from any subsequent issuances and (2) add a cashless exercise provision. 

 

Conversion and Prepayment. Under the revised terms and conditions the January and February 2014 Convertible Note holders may convert at $0.75. There were no other amendments to the underlying Notes.

 

 

INDEX TO EXHIBITS

 

Exhibit No.		Description of Exhibit
2.1		Share Exchange Agreement dated April 2, 2013 among our Company, Victory Electronic Cigarettes, Inc. and the shareholders of Victory Electronic Cigarettes, Inc. (1)
2.2		Share Exchange Agreement by and among Victory Electronic Cigarettes Corporation, Vapestick Holdings Ltd., and all the shareholders of Vapestick Holdings Ltd., dated December 15, 2013. (2)
2.3		Agreement and Plan of Merger by and among Victory Electronic Cigarettes Corporation, VCIG LLC, FIN Electronic Cigarette Corporation, Inc. and Elliot B. Maisel as Representative, dated February 12, 2014 (3)
2.4		Exchange Agreement by and between Victory Electronic Cigarettes Corporation and the MHL Shareholders, dated as of April 22, 2014. (11)
2.5		Agreement to Buy the Shares in Ten Motives Limited and 10 Motives Limited by and between Victory Electronic Cigarettes Corporation, E-Cigs UK Holding Company Limited, and the Ten Motives Shareholders, dated as of May 30, 2014.(17)
3.1(i)		Articles of Incorporation (4)
3.1(i)(a)		Articles of Merger (5)
3.1(i)(b)		Amendment to Articles of Incorporation(6)
3.1(i)(c)		Amendment to Articles of Incorporation(20)
3.1(i)(d)		Amendment to Articles of Incorporation(34)
3.1(ii)		Bylaws (4)
4.1		Form of Convertible Note issued in January 2013 offering (7)
4.2		Form of Warrant issued in January 2013 Offering (7)
4.3		Form of Convertible Note dated November 4, 2013 (8)
4.4		Form of Warrant issued to E-Cig Acquisition Company LLC and William R. Fields (9)
4.5		Form of 15% Senior Secured Convertible Promissory Note issued in offerings in January and February 2014 (10)
4.6		Form of Warrant issued in offerings in January and February 2014 (10)
4.7		Form of 6% Secured Convertible Promissory Note issued in offering on April 22, 2014(11)
4.8		Form of Amendment to 6% Convertible Note dated June 3, 2014(18)
4.9		Form of Amendment No. 2 to 6% Convertible Note dated August 20, 2014(25)
4.10		Form of Amendment No. 3 to 6% Convertible Note dated October 15, 2014(26)
4.11		Form of Warrant from April 30, 2014 offering(12)
4.12		Form of Agent Warrant (13)
4.13		4% Exchange Convertible Note dated May 30, 2014(23)
4.14		4% Convertible Note dated May 30, 2014(17)
4.15		Form of 12% Convertible Notes dated July 17, 2014(24)
4.16		Form of Warrant dated July 17, 2014(24)
4.17		Form of December 12% Convertible Note (28)
4.18		Form of 10% Convertible Note issued in January 14, 2015 offering (29)
4.19		Form of January 12% Convertible Note issued in January 16, 2015 offering (30)
4.20		Form February 12% Convertible Note issued in February 2015 offering (32)
4.21		Form of Warrant issued in February 2015 offering (32)
4.22		Form March 12% Convertible Note issued in March 2015 offering (33)
4.23		Form of Warrant issued in March 2015 offering (33)
4.24		Form of Prepaid Warrant issued in March 13, 2015 exchange (33)
10.1		$200,000 Debenture dated January 31, 2013 issued by Victory Electronic Cigarettes LLC in favor of our company (2)
10.2		Security Agreement dated March 25, 2013 but effective as of January 31, 2013 between Victory Electronic Cigarettes Inc. as debtor and our company as secured party (2)
10.3		Return To Treasury Agreement dated June 18, 2013 between our company and Stephen Brady (14)
10.4		Non-Broker Private Placement Agreement dated May 1, 2013 between our company and Wolverton Securities Ltd. (14)
10.5		General Financial Advisory Agreement dated June 21, 2013 between our company and Wolverton Securities Ltd. (14)
10.6		Promissory Note with Brent Willis (15)
10.7		Promissory Note with Marc Hardgrove (15)
10.8		Promissory Note with David Martin (15)
10.9		Sales and Consulting Agreement by and among Victory Electronic Cigarettes Corporation and E-Cig Acquisition Company LLC, dated December 30, 2013 (9)
10.10		Form of Securities Purchase Agreement from offerings in January and February 2014 (10)
10.11		Form of Registration Rights Agreement from offerings in January and February 2014 (10)
10.12		Form of Security Agreement from offerings in January and February 2014 (10)
10.13		Form of Amended and Restated Promissory Notes dated February 28, 2014 (23)
10.14		Form of Registration Rights Agreement entered into by and among Victory Electronic Cigarettes Corporation and the FIN shareholders dated February 28, 2014 (10)
10.15		Form of Promissory Notes dated April 22, 2014(11)
10.16		Form of Registration Rights Agreement entered into with MHL Shareholders dated April 22, 2014(11)
10.17		MHL Shareholders Guarantee (11)
10.18		Security Agreement entered into between MHL and the MHL Shareholders(11)
10.19		Form of Securities Purchase Agreement from April 22, 2014 offering(11)
10.20		Form of Amendment to Securities Purchase Agreement dated June 3, 2014(18)
10.21		Form of Amendment No. 2 to Securities Purchase Agreement dated August 20, 2014(25)
10.22		Form of Amendment No. 3 to Securities Purchase Agreement dated October 15, 2014(26)
10.23		Form of Registration Rights Agreement from April 22, 2014 offering(11)
10.24		Form of Amendment to Registration Rights Agreement dated June 3, 2014(18)
10.25		Form of Amendment No. 2 to Registration Rights Agreement dated October 15, 2014(26)
10.26		Purchasers Guarantee from April 22, 2014 offering(11)
10.27		Security Agreement entered into between MHL and purchasers from April 22, 2014 offering(11)
10.28		Pledge and Security Agreement entered into between the Company and purchasers from October 15, 2014 offering(26)
10.29		Share Charge entered into with purchasers from April 22, 2014 offering(11)
10.30		Intercreditor Agreement(11)
10.31		Amendment to Intercreditor Agreement(18)
10.32		Second Amendment to Intercreditor Agreement (27)
10.33		Third Amendment to Intercreditor Agreement(26)
10.34		Form of Securities Purchase Agreement for April 30, 2014, June 19, 2014 and July 16, 2014 offering(12)
10.35		Form of Registration Rights Agreement for April 30, 2014, June 19, 2014 and July 16, 2014 offering(19)
10.36		Exchange Agreement dated May 30, 2014(24)
10.37		Purchase Agreement dated May 30, 2014(17)
10.38		Asset Purchase Agreement entered into on July 2, 2014 (21)
10.39		Securities Purchase Agreement entered into on July 3, 2014(21)
10.40		Voting Agreement entered into on July 15, 2014 (22)
10.41		Registration Rights Agreement entered into with Man FinCo on July 15, 2014 (22)
10.42		Registration Rights Agreement entered into with sellers of Hardwire on July 16, 2014 (22)
10.43		Form of Exchange Agreement dated July 17, 2014(24)
10.44		Advisory Agreement by and among Fields Texas Limited LLC and the Company dated April 28, 2014(25)
10.45		Termination Agreement of Advisory Agreement with Fields Texas Limited LLC(25)
10.46		Form of Securities Purchase Agreement for December 2014 offering(28)
10.47		Form of Securities Purchase Agreement for January 14, 2015 offering(29)
10.48		Form of Securities Purchase Agreement for January 16, 2015 offering(30)
10.49		Form of Securities Purchase Agreement for February 2015 offering(32)
10.50		Form of Securities Purchase Agreement for March 2015 offering(33)
10.51		Form of Exchange Agreement for March 13, 2015 exchange (33)
10.52		Form of 0.04% Unsecured Promissory Note dated March 13, 2014(33)
10.53 †		Employment Agreement with Brent Willis dated June 25, 2013. (14)
10.54 †		Employment Agreement with Marc Hardgrove dated June 25, 2013. (14)
10.55 †		Employment Agreement with Robert Hartford dated July 9, 2013 (16)
10.56†		Amended and Restated Employment Agreement with Brent Willis dated August 22, 2014(25)
10.57†		Amended and Restated Employment Agreement with Marc Hardgrove dated August 22, 2014(25)
10.58†		Employment Agreement with James McCormick dated August 22, 2104(25)
10.59†		Employment Agreement with Philip Anderson, dated January 15, 2015 (31)
10.60†		2013 Stock Option Plan (13)
10.61†		2014 Stock Option Plan (23)
14.1*		Code of Ethics
21.1		List of Subsidiaries (23)
31.1		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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

 

 

* Previously filed on the Original 10-K.

† Management contract or compensatory plan or arrangement.

 

(1)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on April 5, 2013.
(2)		Filed as an Exhibit on Annual Report on Form 10-K with the SEC on March 31, 2014.
(3)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on February 19, 2014.
(4)		Filed as an Exhibit on Registration Statement on Form SB-2 with the SEC on May 15, 2007.
(5)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on July 18, 2013.
(6)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on April 11, 2014.
(7)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on February 6, 2013.
(8)		Filed as an Exhibit on Quarterly Report on Form 10-Q with the SEC on November 14, 2013.
(9)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on January 6, 2014.
(10)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on March 6, 2014.
(11)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on April 29, 2014
(12)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on May 6, 2014.
(13		Filed as an Exhibit on Current Report to Form 8-K with the SEC on January 17, 2014.
(14)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on June 28, 2013.
(15)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on August 21, 2013.
(16)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on July 12, 2013.
(17)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on June 5, 2014.
(18)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on June 9, 2014.
(19)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on June 24, 2014.
(20)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on July 9, 2014.
(21)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on July 10, 2014.
(22)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on July 18, 2014.
(23)		Filed as an Exhibit on Registration Statement on Form S-1/A with the SEC on July 2, 2014.
(24)		Filed as an Exhibit on Registration Statement on Form S-1/A with the SEC on July 28, 2014.
(25)		Filed as an Exhibit on Registration Statement on Form S-1/A with the SEC on September 8, 2014.
(26)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on October 21, 2014.
(27)		Filed as an Exhibit on Registration Statement on Form S-1/A with the SEC on October 23, 2014.
(28)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on December 29, 2014.
(29)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on January 14, 2015.
(30)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on January 22, 2015.
(31)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on January 22, 2015.
(32)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on March 4, 2015.
(33)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on March 17, 2015.
(34)		Filed as an Exhibit on Current Report to Form 8-K with the SEC on March 24, 2015.