LIQUIDITY AND GOING CONCERN

3 Months Ended

Mar. 31, 2016

Liquidity

LIQUIDITY AND GOING CONCERN

The Company is continuing its efforts to recover from unanticipated difficulties in fully integrating four business combinations completed over a period of seven months in 2014, and an aborted public offering of the Company’s common stock during the fourth quarter of 2014. The Company incurred net losses of $20,431 and $66,966 for the three months ended March 31, 2016 and 2015, respectively. The Company used cash in its operating activities of $5,275 for the three months ended March 31, 2016. As of March 31, 2016, the Company has a working capital deficit of $97,933 and an accumulated deficit of $474,783.

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 March 31, 2016, convertible debt in the aggregate principal balance of $19,457 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. 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. As of April 1, 2016, the Company was delinquent in making an aggregate of $2,373 of interest payments on its outstanding debt. 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 2015, the Company faced obstacles that required major restructuring and financing activities and, in response to those challenges, the Company successfully completed the following actions to improve liquidity and operating results:

• Management negotiated and settled 15 outstanding legal disputes.

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

• Obtained credit terms from six major contract manufacturers.

• Negotiated outstanding liabilities from over 23 major customers and law firms, reducing liabilities from $6,400 to $3,800.

• Reduced public company costs from an annual run rate of $3,000 to $700 .

• Reduced landed cost of AVS refills by 22%.

• Launched vaping system in GEC division, and turnaround revenue reaching approximately $7,300 in 2015 after reaching approximately $2,500 in the first six months of 2015.

• Established a new returns policy eliminating liability associated with unlimited returns.

• Initiated international growth discussions in Europe and Africa.

• 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 proceeds from this financing were primarily used to repay outstanding debt and delinquent trade payables.

• On January 11, 2016, the Company obtained Term Debt Financing for $9,043. The proceeds from this financing 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 6(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 obtained in the second quarter of 2015 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.

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.

Despite the substantial actions taken to date, substantial doubt about the Company’s ability to continue as a going concern remains. In addition to seeking additional financing, management believes that a crucial near term step will involve negotiations with the Company’s lenders to restructure the terms under existing debt agreements. There can be no assurance that the Company will be able to restructure existing debt agreements or 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.