23. GOING CONCERN

12 Months Ended

Dec. 31, 2014

Going Concern

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 ongoing regulatory reporting requirements, and incremental costs and inefficiencies in financial reporting. As a result of these and other factors, 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 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 contingent upon ongoing success in meeting periodic SEC filing requirements in a timely manner to ensure the availability of necessary public information about the firm’s 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.