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DEBT FINANCING
 3 Months Ended
Mar. 31, 2016
Debt Disclosure [Abstract]  
DEBT FINANCING

(a) Debt Summary

 

The Company’s debt financing arrangements consist of the following as of March 31, 2016 and December 31, 2015:

 

    Original   Stated   As of March 31, 2016     Net Balance  
    Date of   Maturity   Interest           Unamortized     Net     December 31,  
Description   Financing   Date   Rate (1)     Principal (2)     Discount (3)     Balance     2015  
                                       
Credit Agreements:                                                
April 2015 Term Loans   April 2015   April 2018     12.0 %   $ 41,214 (4)   $ (2,805 )   $ 38,409     $ 38,027  
June 2015 Term Loan   June 2015   April 2018     12.0 %     6,000 (4)     -       6,000       6,000  
October 2015 Term Loan   October 2015   April 2018     12.0 %     18,000 (4)     -       18,000       18,000  
January 2016 Term Loan   October 2015   April 2018     12.0 %     9,043 (4)     -       9,043       -  
Forbearance Agreement   September 2015   March 2017     14.0 %     1,251 (4)     -       1,251       1,251  
Convertible Debt   Various   Various     Various       19,457 (5)     -       19,457       19,785  
VIP Promissory Notes   April 2014   December 2017     5.4 %     7,130 (6)     -       7,130       7,400  
Unsecured Note   March 2015   March 2016     0.4 %     - (7)     -       -       450  
                                                 
Total debt financing                   $ 102,095     $ (2,805 )     99,290       90,913  
Less current maturities                                     (28,611 )     (22,942 )
                                                 
Long-term debt, less current maturities                                   $ 70,679     $ 67,971  

 

  (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 March 31, 2016 is shown. For debt paid off during the three months ended March 31, 2016, the rate in effect on December 31, 2015 is shown. See also Note 7 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 20% 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) Credit 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”). In June 2015, the Company and Calm Waters entered into an amendment that provided for an additional term loan (the “June Term Loan”) for $6,000. In October 2015, the Company and Calm Waters entered into an amendment that provided for an additional term loan (the “October Term Loan”) for $18,000. In January 2016, the Company and Calm Waters entered into an amendment that provided for an additional term loan of $9,043 (the “January Term Loan”). The April, June, October and January Term Loans mature in April 2018 and bear interest at the rate of 12.0% per annum.

 

The January Term 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 $270 of principal on the VIP Promissory Notes, and (v) the remaining $737 was available for working capital and other general corporate purposes.

 

For the period from October 2016 through March 2018, the Company is required to make monthly principal payments of $1,267 under the April, June, October and January Term Loans. Borrowings under the credit agreements are collateralized by 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, and 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.

 

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 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. During the Forbearance Period, the $1,251 forbearance amount accrues interest at 14.0% per annum.

 

As additional consideration to induce Calm Waters to enter into the January Term Loan, the Company issued warrants to purchase 45,214,775 shares of the Company’s common stock, which are exercisable for a period of seven years from the original issue date, and have an exercise price of $0.25 per share. In connection with the credit agreements, as amended, during 2015 the Company granted Calm Waters and the Additional Lenders warrants to purchase an aggregate of 252,194,035 shares of the Company’s common stock. See Note 7 for further information on the Company’s warrants and see Note 7 for a discussion of all warrants held by Calm Waters. 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 obligations of the Company under the credit agreements 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 100% 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, except as otherwise noted herein. 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.

 

As of April 1, 2016, the Company was delinquent in making an aggregate of $1,984 of interest payments due to Calm Waters under the term loans.

 

  (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 6(c).

 

  (6) VIP Promissory Notes. In April 2014, the Company issued $11,000 of promissory notes (the “VIP Promissory Notes”) in connection with the 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 (which provides for interest at 3.5% per annum) 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. In addition, the Company made a principal payment of $100 in January 2015, $500 in October 2015 and $270 in January 2016 as a concession to obtain the January Term Loan discussed above, resulting in an outstanding principal balance of $7,130 as of March 31, 2016.

 

  (7) 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 to purchase 8,333,333 shares of the Company’s common stock at an exercise price of $0.45 per share (the “Prepaid Warrants”) for which the holders prepaid the exercise fee in the aggregate amount of $3,750. During 2015 all of the Prepaid Warrants were exercised.

 

The Unsecured Note was 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. The Unsecured Note was paid off at maturity.

 

(b) Future Maturities Under Debt Financing Agreements

 

Based on debt agreements in effect as of March 31, 2016, the future principal payment requirements are shown below:

 

Year Ending March 31,      
       
2017   $ 30,110  
2018     20,535  
2019     51,450  
         
Total   $ 102,095  

 

(c) Terms of Convertible Debt Agreements 

 

Presented below is a summary of the terms of outstanding convertible debt agreements as of March 31, 2016, with comparable net balances as of December 31, 2015:

 

                        Principal Balance  
    Date of   Maturity   Interest     Conversion     March 31,     December 31,  
Description   Financing   Date   Rate (1)     Price (2)     2016 (3)     2015  
                                 
Senior Secured Notes:                                        
Former 15% Notes   January 2014   July 2016     8.0 %   $0.75     $ 6,857     $ 6,857  
Former 15% Notes   February 2014   August 2016     8.0 %   $0.75       12,100       12,100  
Former 15% Notes   February 2014   August 2016     8.0 %   $0.45       500       500  
Total                             19,457       19,457  
5% OID Notes   January 2015   January 2016     12.0 %   $0.21       - (4)     328  
                                         
Total convertible debt                           $ 19,457     $ 19,785  

  

  (1) Interest Rate. The stated interest rate is the contractual rate of interest specified in the debt agreement. For amended debt agreements, the rate in effect as of the earlier of payoff or March 31, 2016 is shown. See also Note 7 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 March 31, 2016. For debt repaid or extinguished during the three months ended March 31, 2016, the conversion price in effect on December 31, 2015 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 20% if the debt is repaid prior to the maturity date.

 

  (4) 5% OID Notes. As discussed in Note 6(a), in January 2016 the Company obtained an additional Term Loan for $9,043 from Calm Waters and used a portion of the proceeds to repay outstanding principal of $351 under this convertible debt agreement, which was also owed to Calm Waters.

 

As of April 1, 2016, the Company was delinquent in making an aggregate of $389 of interest payments due under the convertible debt agreements.

 

(d) Interest Expense 

 

Interest expense consists of the following for the three months ended March 31, 2016 and 2015:

 

    2016     2015  
             
Interest at stated rate of debt agreement   $ 2,703     $ 1,719  
Amortization of discount on debt issuances (1)     404       10,699  
Interest related to warrant issuance and other     -       26,744  
Amortization of debt issuance costs     141       -  
                 
Totals   $ 3,248     $ 39,162  

 

  (1) Except for the debt financing 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. If the holder of a convertible note elects to convert 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, original issue discount and warrants issued in connection with debt financings exceeds the proceeds from the loans. Presented below are the components of debt financing inducement expense for the three months ended March 31, 2016 and 2015:

 

    2016     2015  
             
Gross proceeds loaned to the Company   $ -     $ 19,159  
Less fair value of lenders' embedded conversion feature     -       (36,295 )
Less fair value of original issue discount     -       (684 )
Less fair value of warrants received by lenders     -       (48,614 )
                 
Totals   $ -     $ (66,434 )

 

During the first quarter of 2015, the Company had immediate requirements for funding for past due payments that were due to lender, suppliers and service providers. In order to satisfy the need for liquidity, the Company entered into arrangements that resulted the issuance of warrants and the modification of embedded conversion features. The aggregate impact of these transactions resulted in debt financing inducement expense of $66,434. All of these transactions were entered into with the intent of obtaining long-term financing which subsequently occurred in April 2015.