DEBT FINANCING

9 Months Ended

Sep. 30, 2015

Debt Disclosure [Abstract]

DEBT FINANCING

(a) Debt Summary

The Company’s debt financing arrangements consist of the following as of September 30, 2015 and December 31, 2014:

	Original	Stated	As of September 30, 2015												Net Balance
	Date of	Maturity	Interest						Unamortized			Net			December 31,
Description	Financing	Date	Rate (1)			Principal (2)			Discount (3)			Balance			2014
Term Loan Agreements:
Original Credit Agreements	April 2015	April 2018		12.0	%	$	41,214	(4)	$	(3,572	)	$	37,642		$	-
Amended Credit Agreement	June 2015	April 2018		12.0	%		6,000	(4)		-			6,000			-
Forbearance Agreement	September 2015	March 2017		14.0	%		1,251	(4)		-			1,251			-
Convertible Debt	Various	Various		Various			24,734	(5)		(527	)		24,207			45,398
VIP Promissory Notes	April 2014	December 2017		10.0	%		8,000	(6)		-			8,000			11,000
ExWorks Revolving Loan	June 2015	June 2016		27.0	%		2,788	(7)		-			2,788			-
Unsecured Note	March 2015	March 2016		0.4	%		900	(8)		-			900			-
Vapestick Credit Facility	May 2013	August 2015		4.8	%		170	(9)		-			170			403
Demand Notes	Nov/Dec 2014	Nov/Dec 2014		12.0	%		-			-			-			1,270
Mortgage Payable	September 2014	December 2019		5.8	%		-			-			-			250
Total debt financing						$	85,057		$	(4,099	)		80,958			58,321
Less current maturities													(28,592	)		(58,321	)
Long-term maturities												$	52,366		$	-

_________________ 

⁽¹⁾ Interest Rate. The stated interest rate is the contractual rate of interest specified in the debt agreement. For variable rate debt and amended debt agreements, the rate in effect as of September 30, 2015 is shown. For debt paid off during the nine months ended September 30, 2015, the rate in effect on December 31, 2014 is shown. See also Note 8 for accounting for the fair value of compound embedded derivatives and detachable common stock purchase warrants that are bifurcated from the host debt agreement and accounted for at fair value.

⁽²⁾ Prepayment Penalties. In addition to the principal balance shown, certain debt agreements provide for prepayment penalties up to 25% if the debt is repaid prior to the maturity date.

⁽³⁾ Unamortized Discounts. Original issue discounts (“OID”) are amortized to interest expense using the effective interest method. The unamortized discount represents the portion of OID that will be charged to interest expense over the remaining term of the respective debt agreements. 

⁽⁴⁾ Term Loan Agreements. In April 2015, the Company entered into credit agreements with (i) Calm Waters Partnership (“Calm Waters”), an institutional investor and (ii) a group of 15 investors (the “Additional Lenders”), on substantially identical terms, pursuant to which Calm Waters made term loans to the Company of $35,000 and the Additional Lenders made term loans of $6,214 (collectively referred to as the “April Term Loans”). The April Term Loans mature in April 2018 and bear interest at the rate of 12.0% per annum. In June 2015, the Company and Calm Waters entered into an amendment that provided for an additional term loan (the “June Term Loan”) of $6,000. The June Term Loan matures in April 2018 and bears interest at 12.0% per annum. The proceeds of the April Term Loans and the June Term Loan were used to repay certain indebtedness, accrued interest, and prepayment penalties in the aggregate amount of $42,077 and the remainder was used for working capital and other general corporate purposes. Upon repayment of the Bridge Financing Notes discussed in Note 7(c), the holders agreed to cancel related warrants received in such financings for 15,104,150 shares of the Company’s common stock exercisable at $0.45 per share. See Note 8 for further information on the Company’s warrants and see Note 17 for an October 2015 amendment to the Calm Waters credit agreement.

On September 30, 2015, the Company and Calm Waters entered into a Forbearance Agreement pursuant to which the Company and Calm Waters agreed, among other things, to (i) provide for a forbearance period up to 18 months until March 31, 2017 (the “Forbearance Period”) with respect to the collection of $1,251 of accrued interest payable to Calm Waters through September 30, 2015, and (ii) the Company issued warrants to Calm Waters to purchase an aggregate of 5,995,453 shares of the Company’s common stock at an exercise price of approximately $0.21 per share. During the Forbearance Period, the $1,251 forbearance amount will accrue interest at 14.0% per annum.

For the period from October 2016 through March 2018, the Company is required to make monthly principal payments of $700 under the April Term Loans and monthly principal payments of $103 under the June Term Loan. Borrowings under the credit agreements are collateralized by a security interests in all of the present and future assets of the Company (except as otherwise provided herein). In addition, the Company pledged all of its equity interests in its subsidiaries as collateral for its obligations under these credit agreements. The credit agreements contain customary representations and warranties and customary affirmative and negative covenants, including, among others, covenants that limit or restrict the Company’s ability to incur indebtedness, grant liens, enter into sale and leaseback transactions, merge or consolidate, dispose of property or assets, make investments or loans, make acquisitions, enter into certain transactions with affiliates, pay dividends or make distributions, engage in any business other than its current business, undergo a change of control, or issue equity interests, in each case subject to customary exceptions. In addition, the credit agreements contain customary events of default that entitle the lenders to cause any or all of the Company’s indebtedness under the credit agreements to become immediately due and payable. The events of default include, among others, non-payment, inaccuracy of representations and warranties, commencement or filing of a petition for relief under any federal or state bankruptcy laws. Upon the occurrence of an event of default and following any applicable cure periods, a default interest rate of an additional 2% may be applied to the outstanding loan balances, and the Lenders may declare all outstanding obligations immediately due and payable.

As additional consideration to induce the lenders to enter into the credit agreements, the Company granted the lenders warrants to purchase an aggregate of 176,198,571 shares of the Company’s common stock. In connection with the June Term Loan, the Company granted additional warrants to purchase an aggregate of 30,000,000 shares of the Company’s common stock. All of the warrants are exercisable for a period of seven years from the original issue date, and have an exercise price of $0.45 per share. The Company entered into a registration rights agreement with the lenders, pursuant to which the Company agreed to register all of the shares of common stock issuable upon exercise of the warrants on a registration statement on Form S-1 to be filed with the SEC within 45 calendar days following request to do so by Calm Waters, and to cause the registration statement to be declared effective within 90 days following the initial filing date. If the registration statement is not filed or declared effective in a timely manner, the Company is required to pay partial liquidated damages up to 3% of the aggregate principal of each lender’s Term Loan. The Company incurred a loss on debt extinguishments of $63,793 associated with the repayment of indebtedness from the proceeds of the April and June Term Loan Agreements.

The obligations of the Company are guaranteed by FIN, GEC, VCIG LLC (“VCIG”), Victory Electronic Cigarettes, Inc. (“Victory”), Vapestick, VIP and E-Cigs UK Holding Company Limited (“UK Holding), each of which is a direct or indirect wholly owned subsidiary of the Company (together with the Company, the “Loan Parties”), pursuant to (i) a Guarantee and Collateral Agreement entered into on April 27, 2015, among the Loan Parties and the Lead Lender (the “Lead Lender Guarantee and Collateral Agreement”) and (ii) a Guarantee and Collateral Agreement entered into in April 2015, among the Loan Parties and the agent (the “Agent”) for the Additional Lenders (the “Additional Lenders Guarantee and Collateral Agreement” and together with the Lead Lender Guarantee and Collateral Agreement, the “Guarantee and Collateral Agreements”). The Term Loan Agreements are collateralized against substantially all of the Company’s assets. The Company has also entered into Intercreditor Agreements that govern the relative priorities (and certain other rights) of the Lead Lender, the Additional Lenders, the former shareholders of VIP, and the holders of the Company’s 15% Notes pursuant to the respective security agreements that each have entered into with the Loan Parties.

⁽⁵⁾ Convertible to Common Stock. The outstanding principal balance and accrued interest of the Convertible Debt is convertible to shares of the Company’s common stock. Additional details about outstanding convertible debt agreements are summarized in Note 7(c).

⁽⁶⁾ VIP Promissory Notes. In April 2014, the Company issued $11,000 of promissory notes (the “VIP Promissory Notes”) in connection with the April 2014 acquisition of VIP. The VIP Promissory Notes provided for interest at 10.0% and matured in December 2014. During 2014, additional consideration of $5,000 was also due under an earnout provision in the acquisition agreement. In April 2015, the VIP Promissory Notes were amended whereby the Company agreed to combine the $5,000 earnout into the VIP Promissory Notes. Under the amended terms, the Company agreed to make principal payments of (i) $8,000 in April 2015, (ii) $300 per month from October 2016 through November 2017, and (iii) accrued interest and any remaining principal balance is payable in December 2017.

⁽⁷⁾ ExWorks Revolving Loan. On June 30, 2015, the Company entered into a credit agreement with ExWorks Capital Fund I, L.P. (“ExWorks”). The credit agreement provides for a revolving line of credit (the “Revolving Loan Agreement”) with a total commitment up to $6,000. The borrowing base is equal to (i) up to 75% of eligible accounts receivable and inventory of certain of the Company’s U.S. based subsidiaries (up to a maximum of $4,000), plus (ii) up to 75% of the value of eligible inventory of certain of the Company’s U.K based subsidiaries (up to a maximum of $2,500), minus (iii) certain availability reserves as determined by ExWorks. The advance rate against eligible accounts is subject to reduction based on credits, returned goods and setoffs. Borrowings under the Revolving Loan Agreement bear interest at an effective annual rate of 27.0%. Either party may elect to terminate the Revolving Loan on June 30, 2016; however, if neither party elects to terminate, the agreement will be automatically extended for an additional 12 months.

On September 29, 2015, the Company entered into an amendment to the Revolving Loan Agreement, whereby ExWorks agreed that during the four-month period through January 31, 2016, it will permit borrowings up to $1,500 in excess of the borrowing base calculation set forth in the Loan Agreement. As of September 30, 2015, borrowings under the Revolving Loan Agreement amounted to $2,788 and the Company had unused borrowing availability of $2,076. As discussed in Note 17, the Company repaid all outstanding borrowings under the Revolving Loan Agreement in October 2015 although the credit agreement remains in effect.

⁽⁸⁾ Unsecured Note. In March 2015, the Company exchanged the remaining principal amount of $9,149 related to the Senior Secured 6% Notes with an accredited investor for (i) a cash payment of $13,000, (ii) an unsecured note in the principal amount of $1,800 (the “Unsecured Note”) and (iii) the issuance of warrants at an exercise price of $0.45 per share for 8,333,333 shares (the “Prepaid Warrants”) of Common Stock for which the holders prepaid the exercise fee in the aggregate amount of $3,750. As of September 30, 2015, all of the Prepaid Warrants have been exercised.

The Unsecured Note is due March 1, 2016 and bears interest at a rate of 0.40% per annum. The principal amount of the Unsecured Note is payable in twelve equal monthly installments of $150 on the first business day of each month from April 2015 through March 2016.

⁽⁹⁾ Vapestick Credit Facility. The Company has a credit facility (the “Vapestick Credit Facility”) with a bank in the United Kingdom. The Vapestick Credit Facility provides for up to $310 of borrowings collateralized by trade receivables that bear interest at 3.6% as of September 30, 2015. The Vapestick Credit Facility also provides for up to $310 of borrowings collateralized by inventories that bear interest at 4.8% as of September 30, 2015. As of September 30, 2015, total borrowings of $170 were outstanding at a weighted average interest rate of 4.8%. Under the terms of the Vapestick Credit Facility, the Company’s Vapestick subsidiary is subject to restrictive covenants including minimum tangible net worth and certain asset tests as defined in the credit agreement.

(b) Future Maturities Under Debt Financing Agreements

Based on debt agreements in effect as of September 30, 2015, the future principal payment requirements are shown below in the historical column. Additionally, pro forma disclosure is included below to give effect to the October 2015 financing discussed in Note 17 as if it occurred on September 30, 2015:

Year Ending September 30,	Historical		Pro Forma
2016	$	28,592	$	21,404
2017		14,487		18,195
2018		41,978		56,270
Total	$	85,057	$	95,869

(c) Terms of Convertible Debt Agreements

Presented below is a summary of the terms of outstanding convertible debt agreements as of September 30, 2015, with comparable net balances as of December 31, 2014:

	Original	Stated	As of September 30, 2015													Net Balance
	Date of	Maturity	Interest			Conversion					Unamortized			Net		December 31,
Description	Financing	Date	Rate (1)			Price (2)		Principal (3)			Discount (4)			Balance		2014
Senior Secured Notes:
Former 15% Notes	January 2014	July 2016		8.0	%	$	0.75	$	6,857	(5)	$	-		$	6,857	$	9,705
Former 15% Notes	February 2014	August 2016		8.0	%		0.75		12,100	(5)		-			12,100		12,819
Former 15% Notes	February 2014	August 2016		8.0	%		0.45		500	(5)		-			500		420
Total									19,457			-			19,457		22,944
6% Notes	Apr. to Oct. 2014	December 2016		6.0	%		0.86		-	(6)		-			-		10,907
5% OID Notes:
Original Issuance	December 2014	December 2015		12.0	%		0.45		626	(8)		(40	)		586		927
Original Issuance	January 2015	January 2016		12.0	%		0.21		877			(42	)		835		-
Original Issuance	January 2015	October 2015		10.0	%		0.60		132	(8)		(5	)		127		-
Original Issuance	February 2015	November 2015		10.0	%		0.60		197	(8)		(5	)		192		-
Bridge Financing Notes	Feb/Mar 2015	Apr/Jun 2015		12.0	%		0.75		-	(7)		-			-		-
Exchanged Notes:
2014 15% Notes	Feb/Mar 2015	December 2015		10.0	%		0.60		1,779	(8)		(314	)		1,465		-
Exchanged Notes	April 2015	January 2016		10.0	%		0.60		1,455	(8)		(111	)		1,344		-
Former Demand Note	February 2015	December 2015		12.0	%		0.21		211	(8)		(10	)		201		-
2014 FIN Exchanged Notes:
12% Exchanged Notes	July 2014	January 2016		12.0	%		0.75		-			-			-		7,345
Unsecured 4% Notes	May 2014	November 2015		4.0	%		0.75		-			-			-		2,237
4% Convertible Notes	May 2014	November 2015		4.0	%		0.75		-			-			-		1,038
															-
Total convertible debt								$	24,734		$	(527	)	$	24,207	$	45,398

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⁽¹⁾ Interest Rate. The stated interest rate is the contractual rate of interest specified in the debt agreement. For variable rate debt and amended debt agreements, the rate in effect as of September 30, 2015 is shown. For debt paid off during the nine months ended September 30, 2015, the rate in effect on December 31, 2014 is shown. See also Note 8 for accounting for the fair value of compound embedded derivatives and detachable common stock purchase warrants that are bifurcated from the host debt agreement and accounted for at fair value.

⁽²⁾ Convertible to Common Stock. The outstanding principal balance and accrued interest are convertible to shares of the Company’s common stock. The stated conversion price gives effect to amendments to the respective debt agreements and represents the conversion prices in effect on September 30, 2015. For debt repaid or extinguished during the nine months ended September 30, 2015, the conversion price in effect on December 31, 2014 is shown. 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.

⁽³⁾ Prepayment Penalties. In addition to the principal balance shown, certain debt agreements provide for prepayment penalties up to 25% if the debt is repaid prior to the maturity date.

⁽⁴⁾ Unamortized Discounts. Original issue discounts (“OID”) are amortized to interest expense using the effective interest method. The unamortized discount represents the portion of OID that will be charged to interest expense over the remaining term of the respective debt agreements. 

⁽⁵⁾ Amendment to 15% Notes. As of December 31, 2014, the aggregate principal balance (exclusive of unamortized discounts of $2,511) of these notes was $25,455 and the stated interest rate was 15.0%. During the first quarter of 2015, holders of $20,150 principal amount agreed to amend their notes to (i) extend the maturity date by 18 months from the original maturity dates in January and February 2015, (ii) reduce the interest rate from 15.0% to 8.0%, and (iii) reset the conversion price between $0.45 and $0.75 per share and eliminate all conversion price adjustments after the amendment. Additionally, between February and April 2015, holders of $1,858 principal amount converted their notes and accrued interest into 3,314,166 shares of the Company’s common stock, and holders of $3,375 principal amount agreed to exchange their notes for 10% exchange convertible notes. Additionally, holders of the 34,939,928 warrants issued in the first quarter of 2014 in connection with the Senior Secured Notes private placement agreed to amend their warrants to (i) remove the adjustment provisions stemming from any subsequent issuances, (ii) add a cashless exercise provision and (iii) set the exercise price at either $1.01 or $0.45. See Note 8 for further information on the Company’s warrants.

⁽⁶⁾ Amendment to 6% Notes. In March 2015, the Company exchanged the remaining principal amount of $9,149 related to the Senior Secured 6% Notes with an accredited investor for (i) a cash payment of $13,000, (ii) an unsecured note in the principal amount of $1,800 (the “Unsecured Note”) and (iii) the issuance of warrants at an exercise price of $0.45 per share for 8,333,333 shares (the “Prepaid Warrants”) of Common Stock for which the holders prepaid the exercise fee in the aggregate amount of $3,750. As of September 30, 2015, all of the Prepaid Warrants have been exercised.

⁽⁷⁾ Bridge Financing Notes. In February and March 2015, the Company completed private offerings for an aggregate of $16,842 principal amount of 5% Original Issue Discount Convertible Promissory Notes (the “Bridge Financing Notes”) and warrants to purchase shares of common stock with accredited investors for total net proceeds to the Company of approximately $16,000 after deducting placement agent fees and other expenses. The Bridge Financing Notes accrued interest at an annual rate of 12.0% and were due and repaid by June 2015 from proceeds from the Term Loans discussed in Note 7(a) above. The Bridge Financing Notes were convertible to shares of common stock at a conversion price of $0.75 per share. Warrants for an aggregate of 22,270,870 shares of common stock were granted in connection with these financings. The warrants are exercisable for $0.45 per share for a period of five years from the original issue date. 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.

⁽⁸⁾ Subsequent Event. As discussed in Note 17, in October 2015 the Company repaid outstanding principal under convertible debt agreements plus accrued interest and prepayment penalties in the aggregate amount of $5,272.

As of September 30, 2015, the Company was delinquent in making certain interest payments due under convertible debt instruments, meaning that the Company was in technical default. All required payments were made after September 30, 2015, which cured the technical default without any convertible note holder declaring an event of default.

(d) Interest Expense

Interest expense consists of the following for the three and nine months ended September 30, 2015 and 2014:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2015		2014			2015		2014
Interest at stated rate of debt agreement	$	2,616	$	711		$	6,501	$	3,727
Amortization of discount on debt issuances (1)		1,126		(176	)		23,754		5,336
Interest related to warrant issuance and other		-		94			26,705		94
Amortization of debt issuance costs		67		444			67		538
Fair value of penalty shares issued on FIN acquisition debt financing		-		5,248			-		8,473
Totals	$	3,809	$	6,321		$	57,027	$	18,168

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⁽¹⁾ Except for the excess embedded derivative inducements discussed below, at the date of a financing the fair value of Common Stock purchase warrants and compound embedded derivatives associated with debt conversion features are calculated and recorded as a debt discount. Such debt discounts are amortized to interest expense using the effective interest method over the remaining terms of the convertible notes. If the holder of a convertible note elects conversion prior to the maturity date, the unamortized discount on the conversion date is charged to interest expense.

(e) Debt Financing Inducement Expense

Debt financing inducement expense is recognized when the fair value of conversion features and warrants issued in connection with debt financings exceed the proceeds from the loans. Presented below are the components of debt financing inducement expense for the three and nine months ended September 30, 2015 and 2014:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2015			2014		2015			2014
Gross proceeds loaned to the Company	$	-		$	-	$	19,407		$	27,375
Less fair value of lenders' embedded conversion feature		-			-		(36,295	)		(25,603	)
Less fair value of warrants received by lenders		(1,331	)		-		(50,787	)		(30,988	)
Totals	$	(1,331	)	$	-	$	(67,765	)	$	(29,216	)

During the three months ended September 30, 2015, the Company entered into a forbearance agreement related to $1,251 of accrued interest that was payable on September 30, 2015. This accrued interest liability was extended through the issuance of a debt instrument that provides for interest at 14.0% per annum and matures in March 2018, and a warrant for the purchase of 5,995,453 shares of common stock exercisable at $0.21 per share. The debt instrument and the warrant were bifurcated by first determining the fair value of the warrant which was $1,331. Since funding was not available to satisfy this immediate need for cash, it was necessary to issue the warrant as an inducement to obtain the lender’s concession to provide a forbearance period of 18 months. Since cash was not exchanged in this debt financing, there were no proceeds applied in the calculation of debt financing inducement expense, which resulted in the immediate recognition of an expense for $1,331 for the fair value of the warrant.

At the date of issuance for inducements recognized during the three and nine months ended September 30, 2014, the Company was in the preliminary stages to obtain long-term financing but funding was required to address immediate needs for cash. These transactions were entered into with the intent of refinancing the convertible notes, which subsequently occurred in 2015.