LIQUIDITY AND GOING CONCERN

12 Months Ended

Dec. 31, 2015

Liquidity

LIQUIDITY AND GOING CONCERN

The Company used cash in its operating activities of $26,207 for the year ended December 31, 2015. As of December 31, 2015, the Company has a working capital deficit of $82,951 and an accumulated deficit of $454,352. The Company incurred net losses of $44,215 for the year ended December 31, 2015 and $388,844 for the year ended December 31, 2014. While these operating losses include significant noncash charges for items such as impairment of long-lived assets, advisory agreement warrants and stock-based compensation, the Company also incurred significant cash-based expenses related to four business combinations completed in 2014 and an aborted public offering of the Company’s common stock during the fourth quarter of 2014. The pace of the acquisitions in 2014 resulted in unanticipated difficulties in fully integrating the newly acquired business units, resulting in inefficiencies that contributed to the Company’s operating losses. On September 30, 2015, the Company entered into a Forbearance Agreement with a major term loan lender since the Company did not have adequate capital resources to satisfy the payment of $1,251 of accrued interest.

Over the past two fiscal years, the Company has relied on debt and equity financings to fund its acquisitions and negative operating cash flows. As of December 31, 2015, convertible debt in the aggregate principal balance of $19,808 is outstanding. Of this amount, $351 was repaid in January 2016, leaving a balance of $19,457 that matures during the third quarter of 2016. If the market price of the Company’s common stock does not increase above the conversion prices that range between $0.45 and $0.75 per share, the conversion options will not be exercised by the holders and the Company will be required to seek additional financing to retire the debt or renegotiate an extended due date, of which there can be no assurance that either tactic will be successful. Even if the market price of the Company’s common stock is higher than the conversion price, there is no assurance that holders will convert which would require the Company to pay cash. As a result of these and other factors, the Company’s capital resources may be insufficient to enable the execution of its global business plan in the near term. These and other conditions create ongoing substantial doubt about the Company’s ability to meet its financial obligations and to continue operating as a going concern in the normal course of business. 

During the year ended December 31, 2015 and subsequently, the Company completed the following actions to improve liquidity and operating results:

• Term Debt financing in the aggregate original principal amount of $47,214 was obtained in the second quarter of 2015. This financing enabled the repayment or restructuring of debt that had been in default as of December 31, 2014, and the renegotiation with lenders to eliminate some of the highly dilutive features contained in previous debt instruments and warrants.

• On October 30, 2015, the Company obtained Term Debt Financing for $18,000. The loan proceeds were used for (i) repayment of debt (including accrued interest and prepayment penalties) for $5,272, (ii) repayment of all amounts outstanding under the ExWorks Revolving Loan Agreement for $4,538, (iii) settlement of delinquent trade payables and costs of the financing for $4,074, and (iv) repayment of $500 on the VIP Promissory Notes. The remaining $3,616 was available for working capital and other general corporate purposes.

• As discussed in Note 17, the Company obtained Term Debt Financing for $9,043 on January 11, 2016. The loan proceeds were used for (i) payment of $5,300 to settle patent infringement litigation and other legal settlements, (ii) repayment of convertible debt and delinquent accrued interest for $2,086, (iii) settlement of delinquent trade payables and costs of the financings for $650, (iv) repayment of $257 of principal on the VIP Promissory Notes, and (v) the remaining $750 was available for working capital and other general corporate purposes.

• As discussed in Note 7(c), during the first and second quarters of 2015, 15% Notes for $19,457 in principal were restructured to reduce the interest rate from 15.0% to 8.0% and the maturity date was extended for 18 months until July and August of 2016. Additionally, 15% Notes for $1,858 of principal converted to shares of common stock and 15% Notes for $4,140 of principal agreed to exchange their notes for 10% exchange convertible notes.

• As of December 31, 2014, the Company owed an aggregate of $11,000 for the VIP Promissory Notes and $5,000 for a related earnout payment. The Term Debt financing enabled the repayment of $8,600 of the VIP Promissory Notes and extension of the maturity date for the $5,000 compensatory earnout until December 2017.

• In June 2015, the Company obtained an asset-based working capital loan that provides for future borrowings up to $6,000. As of December 31, 2015, no borrowings were outstanding under the Revolving Loan Agreement which bears interest at 27.0% per annum, and the Company had unused borrowing availability of approximately $5,600.

• During 2015, the Company completed favorable settlements with certain former executives, and certain current and former suppliers and service providers, which resulted in some payments being eliminated and others were deferred over an extended period.

• During 2015, the Company relocated its corporate headquarters to Denver, Colorado and key employees were hired to address needs in the accounting and information technology functions.

While significant uncertainty about the Company’s ability to continue as a going concern remains, management’s plans are now keenly focused on profitable growth and improving cash flows from operating activities through the following key initiatives designed to improve efficiency and lower costs:

• Establish VIP as the #1 premium global brand in the segment, measured by net revenue;

• Utilize the FIN and Vapestick brands as the traditional retail brands;

• Expand profitably into non-traditional channels and new markets through distribution partnerships;

• Strengthen the organizational talent base;

• Become a low-cost provider; and

• Improve working capital.

Management believes the actions outlined above represent significant progress to improve liquidity and position the Company for growth. In combination with the successful execution of management’s plans to further improve efficiency and lower costs, management believes adequate capital resources exist to carry out planned activities through the second quarter of 2016. If the market price of the Company’s common stock does not increase sufficiently to incentivize conversion of $19,457 of currently outstanding convertible debt that matures during the third quarter of 2016, the Company will be required to seek additional financing or renegotiate an extended due date, of which there can be no assurance that either tactic will be successful.

There can be no assurance that the Company will generate sufficient operating cash flows to continue operations in the normal course of business. These consolidated financial statements do not include any adjustments for the recoverability and valuation of assets or the amounts and classification of liabilities if the Company is unable to continue as a going concern.