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BASIS OF PRESENTATION

6 Months Ended

Jun. 30, 2016

BASIS OF PRESENTATION

Basis of Presentation. The accompanying unaudited condensed consolidated financial statements are presented on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (“GAAP”) and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Accordingly, certain information and footnote disclosures required by GAAP for complete financial statements have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the consolidated financial statements have been included.

Our organization and operations, the accounting policies we follow and other information are contained in the footnotes to our consolidated financial statements filed as part of our Annual Report on Form 10-K for the year ended December 31, 2015. This quarterly report should be read in conjunction with such Form 10-K. Our financial condition as of June 30, 2016, and operating results for the three and six months ended June 30, 2016 are not necessarily indicative of the financial condition and results of operations that may be expected for any future interim period or for the year ending December 31, 2016. The condensed consolidated balance sheet as of December 31, 2015 included herein was derived from the audited financial statements as of that date, but does not include all disclosures, including notes required by GAAP.

Change in Estimate. The Company periodically reviews the depreciation and amortization periods for long-lived assets to ensure that the service lives coincide with the periods over which the assets are expected to provide service benefits. During the first quarter of 2016, management determined that the amortization periods for identifiable intangible assets associated with the FIN reporting unit should be reduced. Accordingly, the amortization period for customer relationships was reduced from 10 years to 4 years, and the amortization period for trade names was reduced from 13 years to 10 years. For the three and six months ended June 30, 2016, the aggregate effect of this change in estimate resulted in a decrease to net income of $348 and $696 (net income per basic and diluted share of $0.00 and $0.01 for each period), respectively.

Revision of 2015 Statement of Operations. As discussed in Note 1 to the consolidated financial statements, included in the Company’s 2015 Annual Report on Form 10-K, during the fourth quarter of 2015 management discovered two errors, one of which affects the previously issued financial statements for the three and six months ended June 30, 2015. This reporting error relates to the issuance of a credit to a large customer of the Company’s wholly-owned subsidiary, FIN Electronic Cigarette Corporation, Inc., in June 2014 and resulted from the Company’s agreement to provide retroactive price concessions. In the previously issued balance sheet as of December 31, 2014, the Company did not account for the unsettled portion of this price concession through the recognition of a liability of $2,269 as of that date. The impact of this error to the Company’s previously reported results of operations for the three and six months ended June 30, 2015 was an understatement of net sales by $353 and $892, respectively.

Management has evaluated the effect of this error on the Company’s results of operations and determined that the impact is quantitatively and qualitatively immaterial to the Company’s previously reported results of operations for the three and six months ended June 30, 2015 and, therefore, the Company determined that an amendment to the previously filed Quarterly Reports on Form 10-Q was not necessary. Accordingly, under SEC Staff Accounting Bulletin No. 108, the Company has revised the previously issued financial statements for the three and six months ended June 30, 2015 included herein to correct this error.

In addition, the Company has reclassified certain expenses in the statement of operations for the three and six months ended June 30, 2015 to conform to the 2016 presentation, and are explained in the footnotes to the table below.

The following tables set forth the previously reported results of operations for the three and six months ended June 30, 2015, along with the adjustments discussed above to reconcile previously reported amounts to the revised amounts presented in the accompanying consolidated financial statements:

	Three Months Ended June 30, 2015									Six Months Ended June 30, 2015
	As Previously Reported			Adjustments			As Revised			As Previously Reported			Adjustments		As Revised

Net sales ⁽¹⁾	$	12,013		$	353		$	12,366		$	23,104		$	892	$	23,996
Cost of goods sold		(5,778	)		-			(5,778	)		(11,051	)		-		(11,051	)
Gross profit		6,235			353			6,588			12,053			892		12,945

Operating expenses ⁽²⁾		(13,922	)		(5	)		(13,927	)		(36,617	)		-		(36,617	)
Loss from operations		(7,687	)		348			(7,339	)		(24,564	)		892		(23,672	)
Other income (expense)		50,666			5			50,671			289			-		289
Income before income taxes		42,979			353			43,332			(24,275	)		892		(23,383	)
Income tax expense		(195	)		3			(192	)		(444	)		-		(444	)

Net income (loss)	$	42,784		$	356		$	43,140		$	(24,719	)	$	892	$	(23,827	)

Net income (loss) per common share:
Basic	$	0.69		$	0.01		$	0.70		$	(0.61	)	$	0.02	$	(0.59	)
Diluted	$	0.24		$	0.00		$	0.24		$	(0.61	)	$	0.02	$	(0.59	)

⁽¹⁾

Revision of $353 and $892 for the three and six months ended June 30, 2015, respectively, to previously reported net sales related to correction of the accounting for a retroactive price concession, as discussed above.

⁽²⁾

During the three months ended June 30, 2015, the Company reclassified interest expense from professional fees and other to interest expense for the first half of 2015. Revision of $5 to reflect interest expense solely for the three months ended June 30, 2015.

Correction of Immaterial Errors – Identifiable Intangible Assets and Income Taxes

We identified errors while preparing the second quarter of 2016 unaudited condensed consolidated financial statements related to identifiable intangible assets and income taxes dating back to March 31, 2015 and December 31, 2014, respectively. Management evaluated the materiality of the errors described above from a qualitative and quantitative perspective. Based on such evaluation, we concluded that, while the errors were significant to the six months ended June 30, 2016, the corrections would not be material to any individual prior period, nor did they have an effect on the trend of financial results, taking into account the requirements of the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”). Accordingly, we are correcting the errors in the December 31, 2015 consolidated balance sheet, the unaudited condensed consolidated statement of operations and comprehensive income (loss) for the six months ended June 30, 2015, the unaudited condensed consolidated statement of changes in stockholders’ deficit for the six months ended June 30, 2016; there was no impact to the unaudited condensed consolidated statements of operations and comprehensive income (loss) for the three months ended June 30, 2015, and cash flows for the six months ended June 30, 2015.

The following table sets forth the previously reported balance sheet as of December 31, 2015, along with adjustments to reconcile previously reported amounts to the revised amounts presented in the accompanying consolidated financial statements:

		December 31, 2015
	Notes	As Previously Reported			Adjustments			As Revised

Accrued interest and other	1	$	11,674		$	1,402		$	13,076

Deferred income taxes	1		4,318			(451	)		3,867

Accumulated deficit	1,2		(454,352	)		559			(453,793	)

Accumulated other comprehensive loss	1,2		(4,478	)		(1,510	)		(5,988	)

The following table sets forth the previously reported statement of operations and comprehensive income (loss) for the six months ended June 30, 2015 along with adjustments to reconcile previously reported amounts to the revised amounts presented in the accompanying consolidated financial statements:

			Six Months Ended June 30, 2015
			As Previously
	Notes		Reported			Adjustments		As Revised

Net loss			$	(23,827	)	$	-	$	(23,827	)

Other comprehensive income (loss):
Foreign currency translation income (loss)		2		(4	)		773		769

Comprehensive income (loss)			$	(23,831	)	$	773	$	(23,058	)

(1)

Revision as of December 31, 2015 to increase current income taxes payable by $1,402, decrease deferred income taxes payable by $451, decrease accumulated deficit by $1,331 and increase accumulated other comprehensive loss by $2,282 resulting from corrections to the computation of UK income taxes.

(2)

Revision to increase customer relationships by $515 and trade names by $258 as of March 31, 2015 for foreign currency translation adjustments with a corresponding reduction to accumulated other comprehensive loss, and the subsequent impairment of those identifiable intangible assets during the fourth quarter ended December 31, 2015.

Reclassifications. Certain reclassifications have been made to prior period amounts and balances in order to conform to the current period presentation. These reclassifications had no impact on working capital, net loss, stockholders’ deficit or cash flows as previously reported.

Recent accounting pronouncements. The following recently issued accounting standards are not yet effective; the Company is assessing the impact these standards will have on its consolidated financial statements as well as the period in which adoption is expected to occur:

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”. This comprehensive guidance will replace all existing revenue recognition guidance and, as amended, is effective for annual reporting periods beginning after December 15, 2018, and interim periods therein.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities”. This ASU is intended to improve the recognition and measurement of financial instruments. Among other things, this ASU requires certain equity investments to be measured at fair value with changes in fair value recognized in net income. This guidance is effective for fiscal years beginning after December 15, 2017, and interim periods therein.

In February 2016, the FASB issued ASU 2016-02, “Leases”, which will supersede the existing guidance for lease accounting. This ASU will require lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. This guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, and early adoption is permitted. The Company is currently assessing the impact this guidance will have on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-06, “Contingent Put and Call Options in Debt Instruments”, which clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, and early adoption is permitted.

In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting”. The core change with this ASU is the simplification of several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification in the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years, and early adoption is permitted.

The following recently issued accounting standards were adopted effective January 1, 2016; the impact of adoption did not have a material impact on the Company’s consolidated financial statements:

In November 2014, the FASB issued ASU 2014-16, “Derivatives and Hedging: Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity”. This ASU does not change the current criteria in GAAP for determining when separation of certain embedded derivative features in a hybrid financial instrument is required, but clarifies how current GAAP should be interpreted in the evaluation of the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share, reducing existing diversity in practice.

In January 2015, the FASB issued ASU 2015-01, “Income Statement—Extraordinary and Unusual Items”, that will simplify income statement classification by removing the concept of extraordinary items from GAAP. The separate disclosure of extraordinary items after income from continuing operations in the income statement is no longer permitted.

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation: Amendments to the Consolidation Analysis”. The new standard is intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures.

During 2015, the FASB issued ASUs No. 2015-03 and No. 2015-15 titled “Interest-Imputation of Interest”, which generally requires the presentation of debt issuance costs as a direct deduction from the carrying amount of the related debt liabilities. However, for debt issuance costs related to line-of-credit arrangements, the Company may continue presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement. The Company elected to continue to present debt issuance costs related to its line of credit as an asset in its consolidated balance sheets.

In July 2015, the FASB issued ASU No. 2015-11, “Inventory: Simplifying the Measurement of Inventory”, which changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. ASU No. 2015-11 defines net realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.