11. RELATED PARTY TRANSACTIONS

12 Months Ended

Dec. 31, 2014

Related Party Transactions [Abstract]

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.

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	)

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.