The Accompanying Notes are an Integral Part
of These Unaudited Condensed Consolidated Financial Statements.
The Accompanying Notes are an Integral Part
of These Unaudited Condensed Consolidated Financial Statements.
The Accompanying Notes are an Integral Part
of These Unaudited Condensed Consolidated Financial Statements.
The Accompanying Notes are an Integral Part
of These Unaudited Condensed Consolidated Financial Statements.
The Accompanying Notes are an Integral Part
of These Unaudited Condensed Consolidated Financial Statements.
The Accompanying Notes are an Integral Part
of These Unaudited Condensed Consolidated Financial Statements.
Notes to Unaudited Condensed Consolidated
Financial Statements
(Dollars in Thousands, Except Per Share
Amounts)
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 Electronic Cigarettes International
Group, Ltd. (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 September 30, 2016, and operating results for the three and nine months ended September
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 nine months ended September 30, 2016, the aggregate effect of this
change in estimate resulted in an increase to net loss of $348 and $1,044 (net loss per basic and diluted share of $0.00 and $0.00
for the three months ended September 30, 2016 and $0.01 and $0.00 for the nine months ended September 30, 2016, 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 affected the previously issued financial statements
for the nine months ended September 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 nine months ended September
30, 2015 was an understatement of net sales by $892. There was no impact for the three months ended September 30, 2015.
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 nine months ended September 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 nine months ended
September 30, 2015 included herein to correct this error.
Electronic Cigarettes International Group,
Ltd.
Notes to Unaudited Condensed Consolidated
Financial Statements
(Dollars in Thousands, Except Per Share
Amounts)
The following tables set forth the previously
reported results of operations for the nine months ended September 30, 2015, along with the adjustments discussed above to reconcile
previously reported amounts to the revised amounts presented in the accompanying consolidated financial statements:
|
|
Nine Months Ended September 30, 2015
|
|
|
|
As
Previously
Reported
(2)
|
|
|
Adjustments
|
|
|
As Revised
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
(1)
|
|
$
|
33,356
|
|
|
$
|
892
|
|
|
$
|
34,248
|
|
Cost of goods sold
|
|
|
(15,082
|
)
|
|
|
|
|
|
|
(15,082
|
)
|
Gross profit
|
|
|
18,274
|
|
|
|
892
|
|
|
|
19,166
|
|
Operating expenses
|
|
|
(43,686
|
)
|
|
|
|
|
|
|
(43,686
|
)
|
Loss from operations
|
|
|
(25,412
|
)
|
|
|
892
|
|
|
|
(24,520
|
)
|
Other income (expense)
|
|
|
13,947
|
|
|
|
|
|
|
|
13,947
|
|
Loss from continuing operations before income taxes
|
|
|
(11,465
|
)
|
|
|
892
|
|
|
|
(10,573
|
)
|
Income tax expense
|
|
|
(748
|
)
|
|
|
|
|
|
|
(748
|
)
|
Loss from continuing operations
|
|
|
(12,213
|
)
|
|
|
892
|
|
|
|
(11,321
|
)
|
Loss from discontinued operations
|
|
|
(3,277
|
)
|
|
|
|
|
|
|
(3,277
|
)
|
Net loss
|
|
|
(15,490
|
)
|
|
|
892
|
|
|
|
(14,598
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share - basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.23
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.22
|
)
|
Loss from discontinued operations
|
|
|
(0.07
|
)
|
|
|
-
|
|
|
|
(0.07
|
)
|
Net loss
|
|
$
|
(0.30
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.29
|
)
|
(1)
|
Revision of $892 for the nine months ended September 30, 2015 to previously reported net sales related to correction of the accounting for a retroactive price concession, as discussed above.
|
(2)
|
The As Previously
Reported amounts for the nine months ended September 30, 2015 reflect the impact resulting from reporting discontinued
operations. See Note 3, Divestitures.
|
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 nine months ended September 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 nine months ended September 30, 2015, the unaudited condensed consolidated statement of changes in stockholders’
deficit for the nine months ended September 30, 2016; there was no impact to the unaudited condensed consolidated statements of
operations and comprehensive income (loss) for the three months ended September 30, 2015, and cash flows for the nine months ended
September 30, 2015.
Electronic Cigarettes International Group,
Ltd.
Notes to Unaudited Condensed Consolidated
Financial Statements
(Dollars in Thousands, Except Per Share
Amounts)
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current income taxes
|
|
1
|
|
$
|
1,392
|
|
|
$
|
1,402
|
|
|
$
|
2,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2015
|
|
|
|
Notes
|
|
As Previously
Reported
|
|
|
Adjustments
|
|
|
As Revised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
3
|
|
$
|
(15,490
|
)
|
|
$
|
892
|
|
|
$
|
(14,598
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation income (loss)
|
|
2
|
|
|
(2,287
|
)
|
|
|
773
|
|
|
|
(1,514
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
|
|
(17,777
|
)
|
|
|
1,665
|
|
|
|
(16,112
|
)
|
(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.
|
(3)
|
Revision to net loss discussed in
Revision of 2015 Statement of Operations
above.
|
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 August 2014, the FASB issued Update No. 2014-15—Presentation
of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue
as a Going Concern. This was issued to provide guidance about management’s responsibility to evaluate whether there is substantial
doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. The guidance is
effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December
15, 2016. Early application is permitted.
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.
Electronic Cigarettes International Group,
Ltd.
Notes to Unaudited Condensed Consolidated
Financial Statements
(Dollars in Thousands, Except Per Share
Amounts)
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.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification
of Certain Cash Receipts and Cash Payments” (ASU No. 2016-15). This guidance clarifies how certain cash receipts and payments
should be presented in the statement of cash flows and is effective for interim and annual reporting periods beginning after December
15, 2017, with early adoption 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.
2.
|
LIQUIDITY AND GOING CONCERN
|
The Company is continuing efforts to recover
from certain obstacles it has faced, including unanticipated difficulties in fully integrating four business combinations completed
over a period of seven months in 2014 and the inability to use proceeds from a proposed but aborted public offering of the Company’s
common stock during the fourth quarter of 2014. This required major restructuring and financing activities and, in response to
those challenges, the Company completed certain actions to improve liquidity and operating results as reflected in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2015.
Electronic Cigarettes International Group,
Ltd.
Notes to Unaudited Condensed Consolidated
Financial Statements
(Dollars in Thousands, Except Per Share
Amounts)
The following is summary financial information
as of September 30, 2016 and for the nine months then ended:
|
|
September 30,
2016
|
|
|
|
|
|
Working capital deficit (including warrant and derivative
liabilities of $26,416)
|
|
$
|
29,435
|
|
Accumulated deficit
|
|
$
|
460,905
|
|
Current maturities of debt financing (face amount):
|
|
|
|
|
VIP promissory notes
|
|
$
|
3,600
|
|
Accrued interest payable:
|
|
|
|
|
Term loans
|
|
$
|
621
|
|
Convertible debt
|
|
|
54
|
|
Forbearance agreement
|
|
|
149
|
|
VIP promissory notes
|
|
|
600
|
|
Total accrued interest payable (including $835
to be paid in cash)
|
|
$
|
1,424
|
|
|
|
|
|
|
|
|
Nine Months
Ended September 30,
2016
|
|
Loss from operations
|
|
$
|
13,755
|
|
Net cash used in operating activities
|
|
$
|
8,786
|
|
Over the past two fiscal years, the
Company has relied on debt and equity financings to fund its 2014 acquisitions while experiencing negative operating cash
flows. As of September 30, 2016, the Company had amortizing VIP promissory note payments of $300 per month commencing in
October 2016.
To address past liquidity requirements,
on July 8, 2016, the Company amended certain debt financing agreements that resulted in the following:
|
·
|
Deferral of the maturity date on $94,965 of debt financing to June 2020, including $74,257 of term loans, $19,457 of convertible debt and $1,251 under the forbearance agreement;
|
|
·
|
Reduction to the term loans, forbearance agreement and convertible debt interest rates from 12.0%, 14.0% and 8.0%, respectively, to 4.0%;
|
|
·
|
Elimination of amortizing payments on the term loans;
|
|
·
|
Use of shares of the Company’s common stock to pay interest on term loans due on a quarterly basis, and on convertible debt due on a monthly basis (holders of 84.7% of the amended term loans, the new term loan and the convertible debt elected to receive their interest in shares of the Company);
|
|
·
|
Entry into a fifth term loan for $4,000 on terms and conditions consistent with the four previous term loans, as amended;
|
|
·
|
Deferral of interest on the forbearance agreement; and
|
|
·
|
Payment of all outstanding accrued interest payable through the issuance of 30,676,704 shares of the Company’s common stock to Calm Waters Partnership (“Calm Waters”), with the remainder in cash.
|
As a result of these efforts, the Company
has improved its financial condition. However, capital resources may not be sufficient to enable the execution of its global business
plan in the near term. Despite the actions taken to date, these and other conditions create ongoing substantial doubt about the
Company’s ability to meet its financial obligations, to continue operations in the normal course of business, and to continue
as a going concern. 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.
Electronic Cigarettes International Group,
Ltd.
Notes to Unaudited Condensed Consolidated
Financial Statements
(Dollars in Thousands, Except Per Share
Amounts)
On October 5, 2016, the Company and
its wholly-owned subsidiary Hardwire Interactive Acquisition Company (“HIAC”), known internally as Global
E-Commerce (“GEC”), entered into an Asset Purchase Agreement with Hardwire Interactive, Inc. (“HII”)
for the sale of the majority of the assets of HIAC to HII for $800 cash. Beginning on September 30, 2016, the Company
reported the operating results of HIAC as discontinued operations in the condensed consolidated statement of operations for
all periods presented. In addition, the assets and liabilities associated with the discontinued operations are classified as
assets and liabilities held for sale in the condensed consolidated balance sheets for all periods presented.
The following table provides the components
of discontinued operations, net of tax:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,118
|
|
|
$
|
2,499
|
|
|
$
|
6,904
|
|
|
$
|
5,149
|
|
Cost of goods sold
|
|
|
654
|
|
|
|
519
|
|
|
|
2,245
|
|
|
|
2,066
|
|
Gross profit
|
|
|
1,464
|
|
|
|
1,980
|
|
|
|
4,659
|
|
|
|
3,083
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and benefits
|
|
|
151
|
|
|
|
47
|
|
|
|
450
|
|
|
|
171
|
|
Professional fees and administrative
|
|
|
338
|
|
|
|
486
|
|
|
|
1,181
|
|
|
|
744
|
|
Marketing and selling
|
|
|
1,174
|
|
|
|
1,435
|
|
|
|
3,884
|
|
|
|
2,685
|
|
Depreciation and amortization
|
|
|
281
|
|
|
|
920
|
|
|
|
2,122
|
|
|
|
2,760
|
|
Total operating expenses
|
|
|
1,944
|
|
|
|
2,888
|
|
|
|
7,637
|
|
|
|
6,360
|
|
Loss from operations
|
|
|
(480
|
)
|
|
|
(908
|
)
|
|
|
(2,978
|
)
|
|
|
(3,277
|
)
|
Loss on disposal
(1)
|
|
|
(13,295
|
)
|
|
|
-
|
|
|
|
(13,524
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(13,775
|
)
|
|
$
|
(908
|
)
|
|
$
|
(16,502
|
)
|
|
$
|
(3,277
|
)
|
|
(1)
|
Includes deferred tax benefit of $229 for the three months ended September 30, 2016. There were
no income taxes for the nine months ended September 30, 2016.
|
The following table provides the components
of assets and liabilities held for sale as of September 30, 2016 and December 31, 2015:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
-
|
|
|
$
|
(14
|
)
|
Accounts receivable
|
|
|
782
|
|
|
|
1,415
|
|
Inventories
|
|
|
-
|
|
|
|
788
|
|
Prepaid expenses and other
|
|
|
-
|
|
|
|
197
|
|
Total current assets held for sale
|
|
|
782
|
|
|
|
2,386
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
-
|
|
|
|
8,071
|
|
Identifiable intangible assets, net
|
|
|
-
|
|
|
|
7,164
|
|
Total long-term assets held for sale
|
|
|
-
|
|
|
|
15,235
|
|
|
|
|
|
|
|
|
|
|
Total assets held for sale
|
|
$
|
782
|
|
|
$
|
17,621
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
-
|
|
|
|
303
|
|
Accrued interest and other
|
|
|
-
|
|
|
|
94
|
|
Total current liabilities held for sale
|
|
$
|
-
|
|
|
$
|
397
|
|
(2)
As of September 30, 2016, total current assets held for sale represent the sales price of $800 less selling costs of $18.
Electronic Cigarettes International Group,
Ltd.
Notes to Unaudited Condensed Consolidated
Financial Statements
(Dollars in Thousands, Except Per Share
Amounts)
4.
|
GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
|
Goodwill
During the third quarter of 2016,
after evidencing declines in revenue, gross profit margins and cash flows relative to the corresponding period of 2015, and
despite a reduction in operating expenses, these triggering events, gave rise for the need to perform an interim test of
Vapestick’s goodwill for impairment. Based on an estimated enterprise value of $5,753 and a reporting unit carrying value of $10,027, the Company recorded impairment to
goodwill of $4,274 for the three and nine months ended September 30, 2016. The third quarter of 2016 impairment loss was an
estimate that, upon revision to forecasts to be generated during the fourth quarter of 2016, may require further adjustment
during that period.
Goodwill consists of the following by reporting
unit as of September 30, 2016 and December 31, 2015:
Reporting Unit
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
FIN
|
|
$
|
16,586
|
|
|
$
|
16,586
|
|
VIP
|
|
|
9,289
|
|
|
|
10,606
|
|
Vapestick
|
|
|
6,641
|
|
|
|
12,460
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,516
|
|
|
$
|
39,652
|
|
Goodwill decreased by $2,862 from December
31, 2015 and September 30, 2016 due to foreign exchange translation adjustments associated with the VIP and Vapestick acquisitions.
Identifiable Intangible Assets
Identifiable intangible assets consist
of the following as of September 30, 2016 and December 31, 2015:
|
|
2016
|
|
|
2015
|
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net Book
Value
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net Book
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
22,720
|
|
|
$
|
(10,145
|
)
|
|
|
12,575
|
|
|
$
|
24,548
|
|
|
$
|
(8,308
|
)
|
|
$
|
16,240
|
|
Trade names
|
|
|
12,428
|
|
|
|
(4,376
|
)
|
|
|
8,052
|
|
|
|
13,763
|
|
|
|
(3,901
|
)
|
|
|
9,862
|
|
Internet domains and websites
|
|
|
953
|
|
|
|
(233
|
)
|
|
|
720
|
|
|
|
1,091
|
|
|
|
(184
|
)
|
|
|
907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
36,101
|
|
|
$
|
(14,754
|
)
|
|
|
21,347
|
|
|
$
|
39,402
|
|
|
$
|
(12,393
|
)
|
|
$
|
27,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30
|
|
|
|
|
|
$
|
1,055
|
|
|
|
|
|
|
|
|
|
|
$
|
1,151
|
|
|
|
|
|
Nine months ended September 30
|
|
|
|
|
|
$
|
3,265
|
|
|
|
|
|
|
|
|
|
|
$
|
3,491
|
|
|
|
|
|
Electronic Cigarettes International Group,
Ltd.
Notes to Unaudited Condensed Consolidated
Financial Statements
(Dollars in Thousands, Except Per Share
Amounts)
5.
|
PROPERTY AND EQUIPMENT
|
Property and equipment consists of the
following as of September 30, 2016 and December 31, 2015:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Office furniture and equipment
|
|
$
|
2,691
|
|
|
$
|
2,376
|
|
Retail inventory displays
|
|
|
1,026
|
|
|
|
1,026
|
|
Leasehold improvements
|
|
|
162
|
|
|
|
183
|
|
Other
|
|
|
116
|
|
|
|
67
|
|
Total property and equipment
|
|
|
3,995
|
|
|
|
3,652
|
|
Less accumulated depreciation and amortization
|
|
|
(2,240
|
)
|
|
|
(1,553
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
1,755
|
|
|
$
|
2,099
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense:
|
|
|
|
|
|
|
|
|
Three months ended September 30
|
|
$
|
313
|
|
|
$
|
325
|
|
Nine months ended September 30
|
|
$
|
952
|
|
|
$
|
768
|
|
(a) Debt Summary
The Company’s debt financing arrangements
as of September 30, 2016 and December 31, 2015 consist of the following:
|
|
|
|
|
|
September 30, 2016
|
|
|
|
|
|
|
Original
Date
of Financing
|
|
Maturity
Date
|
|
Interest
Rate
|
|
|
Principal
|
|
|
Unamortized
Discount
|
|
|
Net Balance
|
|
|
December
31, 2015
Net Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 2015 Term
Loans
(1)
|
|
April 2015
|
|
June 2020
|
|
|
4.0
|
%
|
|
$
|
41,214
|
|
|
$
|
(3,019
|
)
|
|
$
|
38,195
|
|
|
$
|
38,027
|
|
June 2015 Term Loan
(1)
|
|
June 2015
|
|
June 2020
|
|
|
4.0
|
%
|
|
|
6,000
|
|
|
|
(439
|
)
|
|
|
5,561
|
|
|
|
6,000
|
|
October 2015 Term Loan
(1)
|
|
October 2015
|
|
June 2020
|
|
|
4.0
|
%
|
|
|
18,000
|
|
|
|
(1,318
|
)
|
|
|
16,682
|
|
|
|
18,000
|
|
January 2016 Term Loan
(1)
|
|
January 2016
|
|
June 2020
|
|
|
4.0
|
%
|
|
|
9,043
|
|
|
|
(662
|
)
|
|
|
8,381
|
|
|
|
-
|
|
July
2016 Term Loan
(1)
|
|
July 2016
|
|
June 2020
|
|
|
4.0
|
%
|
|
|
4,000
|
|
|
|
(293
|
)
|
|
|
3,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Term Loans
|
|
|
|
|
|
|
|
|
|
|
78,257
|
|
|
|
(5,731
|
)
|
|
|
72,526
|
|
|
|
62,027
|
|
Forbearance Agreement
(2)
|
|
September 2015
|
|
June 2020
|
|
|
4.0
|
%
|
|
|
1,251
|
|
|
|
-
|
|
|
|
1,251
|
|
|
|
1,251
|
|
Convertible Debt
(3)
|
|
January &
February 2014
|
|
June 2020
|
|
|
4.0
|
%
|
|
|
19,055
|
|
|
|
(1,395
|
)
|
|
|
17,660
|
|
|
|
19,785
|
|
VIP Promissory Notes
(4)
|
|
April 2014
|
|
December 2017
|
|
|
5.4
|
%
|
|
|
6,983
|
|
|
|
-
|
|
|
|
6,983
|
|
|
|
7,400
|
|
Unsecured
Note
(5)
|
|
March 2015
|
|
March 2016
|
|
|
0.4
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
105,546
|
|
|
$
|
(7,126
|
)
|
|
|
98,420
|
|
|
|
90,913
|
|
Less current maturities,
net of discount amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,700
|
)
|
|
|
(22,942
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
96,720
|
|
|
$
|
67,971
|
|
As of September 30, 2016, Calm Waters Partnership
(“Calm Waters”) is the holder of $81,543 of the Company’s debt, including $35,000 of the April 2015 Term Loans,
all of the June 2015, October 2015, January 2016 and July 2016 Term Loans, all of the Forbearance Agreement and $8,249 of the Convertible
Debt, representing 77% of the outstanding balance.
Electronic Cigarettes International Group,
Ltd.
Notes to Unaudited Condensed Consolidated
Financial Statements
(Dollars in Thousands, Except Per Share
Amounts)
(1)
Credit
Agreements.
In January 2016, the Company and Calm Waters entered into an amendment that provided for an additional term loan
of $9,043 with terms and conditions the same as those provided in the April 2015, June 2015 and October 2015 Term Loans (the “January
2016 Term Loan”).
The January 2016 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 of $351 and accrued interest of $1,735 due Calm Waters, (iii) settlement of 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.
On July 8, 2016, the Company entered
into an amendment to extend the maturity date of the Term Loans from April 2018 to June 2020, and to reduce the interest rate
from 12.0% to 4.0%. The amendment also provides for (i) the elimination of amortizing payments and (ii) the use of shares of
the Company’s common stock to pay interest on a quarterly basis at the one-time election of the lender. Holders of
84.7% of the amended term loans, the new term loan and the convertible debt elected to receive their interest in shares of
the Company. Shares issued to pay interest shall be included in the securities subject to the Registration Rights Agreement
entered into on April 27, 2015. Upon execution of the amendments, the Company issued 30,676,704 shares of common stock to
Calm Waters to pay accrued but unpaid interest owing on the Term Loans and Convertible Debt, with the remainder of accrued
but unpaid interest paid in cash. The Company also granted Calm Waters additional warrants to purchase 49,088,030 shares of
common stock at $0.145 per share, 28,000,000 of which were associated with the new fifth term loan, and 21,088,030 of which
were associated with the acquisition by Calm Waters of certain Term Loans and Convertible Debt from existing holders.
The Company also entered into a fifth term
loan for $4,000 on terms and conditions consistent with those provided by the first four amended term loans. Proceeds from the
fifth term loan are planned for working capital purposes. After consummation of the fifth term loan, the aggregate of new loans
and loans amended of $98,563 constitute 93% of the outstanding debt of $105,546.
(2)
Forbearance
Agreement.
On July 8, 2016, the Company entered into an amendment to extend the maturity date from March 2017 to June 2020,
and to reduce the interest rate from 14.0% to 4.0%. As of September 30, 2016, $149 of accrued interest was payable to Calm Waters.
(3)
Convertible Debt.
On July 8, 2016, the Company entered into
an amendment to extend the maturity dates from July and August 2016 to June 2020, and to reduce the interest rate from 8.0%
to 4.0%. In addition, the price to convert debt into shares of common stock of the Company was reduced to $0.145 from a
range of $0.45 to $0.75. The amendment to the
Convertible Debt also provides for the use of shares of the Company’s common stock to pay interest that is due on a
monthly basis at the one-time election of the lender. In addition, the Convertible Debt is no longer subordinate to the Term
Loans.
(4)
VIP
Promissory Notes.
The Company made a principal payment of $270 in January 2016 as a concession to obtain the January 2016 Term
Loan discussed above, and a principal payment of $147 in July 2016 resulting in an outstanding principal balance of $6,983 as of
September 30, 2016.
(5)
Unsecured
Note.
The Unsecured Note was due March 1, 2016 and was paid off at maturity.
(b) Future Maturities
under Debt Financing Agreements
Based on debt agreements in effect as of
September 30, 2016, the future principal payment requirements are shown below:
Year ending September 30,
|
|
|
|
|
|
|
|
|
|
2017
|
|
$
|
3,600
|
|
2018
|
|
|
3,383
|
|
2019
|
|
|
-
|
|
2020
|
|
|
98,563
|
|
|
|
|
|
|
Total
|
|
$
|
105,546
|
|
(c) Interest Expense
Interest expense consists of the following:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
(2)
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest at stated rate of debt agreement
|
|
$
|
1,299
|
|
|
$
|
2,616
|
|
|
$
|
6,786
|
|
|
$
|
6,501
|
|
Amortization of discount on debt issuance
(1)
|
|
|
435
|
|
|
|
1,126
|
|
|
|
1,222
|
|
|
|
23,754
|
|
Interest related to warrant issuance and other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26,705
|
|
Payment in-kind interest fair value adjustments
(3)
|
|
|
(302
|
)
|
|
|
-
|
|
|
|
(302
|
)
|
|
|
-
|
|
Amortization of debt issuance costs
|
|
|
-
|
|
|
|
67
|
|
|
|
283
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,432
|
|
|
$
|
3,809
|
|
|
$
|
7,989
|
|
|
$
|
57,027
|
|
Electronic Cigarettes International Group,
Ltd.
Notes to Unaudited Condensed Consolidated
Financial Statements
(Dollars in Thousands, Except Per Share
Amounts)
(1)
Except
for the debt financing inducements, 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.
(2)
See
Note 1, Basis of Presentation, Revision of 2015 Statement of Operations.
(3)
Interest on certain
Term Loans and Convertible Debt are paid with shares of the Company’s common stock on a quarterly and monthly basis,
respectively. In both instances, the number of shares are derived based on a 90-day variable weighted average price
(“VWAP”). The product of the number of shares times the difference between the VWAP and the share price at the
settlement date results in a periodic fair value adjustment to interest.
7.
|
WARRANTS AND EMBEDDED DERIVATIVES
|
The following table summarizes the Company’s
liability under warrant and compound embedded derivative agreements:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
Number of
Shares
(2)
|
|
|
Liability
(2)
|
|
|
Number of
Shares
|
|
|
Liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
398,237,188
|
|
|
$
|
21,705
|
|
|
|
305,068,558
|
|
|
$
|
54,412
|
|
Embedded derivatives in convertible debt
(1)
|
|
|
131,410,334
|
|
|
|
4,711
|
|
|
|
28,068,159
|
|
|
|
496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
529,647,522
|
|
|
|
26,416
|
|
|
|
333,136,717
|
|
|
|
54,908
|
|
Less current portion
|
|
|
|
|
|
|
(26,416
|
)
|
|
|
|
|
|
|
(54,908
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
|
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
$
|
-
|
|
(1)
The
convertible debt instruments contain features that permit the holders to elect conversion of the debt to shares of the Company’s
common stock. The Company bifurcates the conversion features from the related debt instruments and accounts for each component
at its estimated fair value with updated valuations performed at the end of each calendar quarter.
(2)
As
of September 30, 2016, there were 108,783,187 common shares issued and outstanding. The Company would need to issue an additional
586,198,860 common shares to accommodate in their entirety the exercise of warrants (398,237,188), conversion of debt (131,410,334),
exercise of stock options (54,574,337) and vesting of restricted stock (1,977,001). Existing shares and shares issued for all common
stock equivalents could aggregate total outstanding shares of 694,982,047; as the Company has 300,000,000 common shares authorized,
this could result in a deficiency of 394,982,047 shares.
In order to increase the number of shares
available to cover the authorized share deficiency, the Company would need either to (i) amend its articles of incorporation to
increase the amount of its authorized common shares or (ii) effect a reverse stock split which would decrease the current number
of shares issued and outstanding as well as the number of shares issuable upon exercise or conversion of its outstanding stock
options, warrants and convertible debt. Either of these corporate actions would require shareholder approval. If the Company is
not able to cure the authorized share deficiency by the point when holders of such options, warrants and convertible debt attempt
to exercise or convert such securities and the Company no longer has common shares available to fill such exercise or conversion,
the Company would be required to settle a portion of its warrant and derivative liabilities in cash which requires that these instruments
continue to be classified as liabilities rather than equity instruments.
Electronic Cigarettes International Group,
Ltd.
Notes to Unaudited Condensed Consolidated
Financial Statements
(Dollars in Thousands, Except Per Share
Amounts)
Fair Value of Warrant Liability
The following table summarizes the terms
and fair value of the Company’s liability related to warrants outstanding:
|
|
|
|
|
|
|
September 30, 2016
|
|
Year of
Issuance
|
|
Year of
Expiration
|
|
Exercise
Price
|
|
|
Number of
Shares
|
|
|
Fair Value of
Liability
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
2022
|
|
$
|
0.15
|
|
|
|
251,045,614
|
|
|
$
|
14,017
|
|
2016
|
|
2023
|
|
|
0.15
|
|
|
|
94,302,805
|
|
|
|
5,650
|
|
2015
|
|
2020
|
|
|
0.15
|
|
|
|
17,206,821
|
|
|
|
927
|
|
2014
|
|
2019
|
|
|
0.15
|
|
|
|
10,098,766
|
|
|
|
478
|
|
2014
|
|
2019
|
|
|
0.45
|
|
|
|
9,908,131
|
|
|
|
259
|
|
2014
|
|
2019
|
|
|
0.37
|
|
|
|
6,666,669
|
|
|
|
208
|
|
2014
|
|
2019
|
|
|
1.01
|
|
|
|
4,148,214
|
|
|
|
61
|
|
2013
|
|
2018
|
|
|
0.75
|
|
|
|
2,006,667
|
|
|
|
35
|
|
2015
|
|
2020
|
|
|
1.01
|
|
|
|
1,496,214
|
|
|
|
28
|
|
2013
|
|
2019
|
|
|
0.75
|
|
|
|
1,000,000
|
|
|
|
27
|
|
2014
|
|
2019
|
|
|
0.21
|
|
|
|
176,339
|
|
|
|
7
|
|
2016
|
|
2019
|
|
|
0.15
|
|
|
|
109,052
|
|
|
|
5
|
|
2014
|
|
2019
|
|
|
0.21
|
|
|
|
71,896
|
|
|
|
3
|
|
Total
|
|
|
|
$
|
0.17
|
(1)
|
|
|
398,237,188
|
|
|
$
|
21,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Year of
Issuance
|
|
Year of
Expiration
|
|
Exercise
Price
|
|
|
Number of
Shares
|
|
|
Fair Value of
Liability
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
2022
|
|
$
|
0.45
|
|
|
|
246,198,582
|
|
|
$
|
45,718
|
|
2015
|
|
2020
|
|
|
1.01
|
|
|
|
14,860,382
|
|
|
|
1,491
|
|
2014
|
|
2019
|
|
|
0.45
|
|
|
|
10,969,265
|
|
|
|
1,887
|
|
2014
|
|
2019
|
|
|
1.01
|
|
|
|
13,185,185
|
|
|
|
1,859
|
|
2015
|
|
2022
|
|
|
0.21
|
|
|
|
5,995,453
|
|
|
|
1,270
|
|
2014
|
|
2019
|
|
|
0.37
|
|
|
|
6,666,669
|
|
|
|
1,171
|
|
2015
|
|
2020
|
|
|
0.45
|
|
|
|
3,842,653
|
|
|
|
552
|
|
2013
|
|
2018
|
|
|
0.75
|
|
|
|
2,006,667
|
|
|
|
299
|
|
2013
|
|
2019
|
|
|
0.75
|
|
|
|
1,000,000
|
|
|
|
114
|
|
2014
|
|
2019
|
|
|
0.21
|
|
|
|
248,236
|
|
|
|
50
|
|
2015
|
|
2016
|
|
|
0.75
|
|
|
|
66,667
|
|
|
|
1
|
|
2014
|
|
2016
|
|
|
1.49
|
|
|
|
28,799
|
|
|
|
-
|
|
Total
|
|
|
|
$
|
0.50
|
(1)
|
|
|
305,068,558
|
|
|
$
|
54,412
|
|
(1)
|
Represents the weighted average exercise price.
|
(2)
|
Please refer to Note 14, Fair Value Measurements, for additional information about methodologies used to determine the fair value of warrants.
|
The Company has issued the following warrants
to Calm Waters, which constitute 86% of the total outstanding warrants as of September 30, 2016:
Year of Issuance
|
|
Year of Expiration
|
|
Exercise Price
|
|
|
Number of Shares
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2019
|
|
$
|
0.145
|
|
|
|
4,444,444
|
|
2015
|
|
2020
|
|
|
0.145
|
|
|
|
16,229,542
|
|
2015
|
|
2022
|
|
|
0.145
|
|
|
|
228,405,638
|
|
2016
|
|
2023
|
|
|
0.145
|
|
|
|
94,302,805
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
343,382,429
|
|
As a condition of the warrant agreements,
Calm Waters was not permitted to own more than 4.99% of the Company’s common stock (the “Beneficial Ownership Threshold”)
upon exercise of outstanding warrants. Upon 61 days’ notice, Calm Waters was permitted to increase or decrease the Beneficial
Ownership Threshold, but never increase the Beneficial Ownership Threshold in excess of 9.99%. On July 8, 2016, the Company amended certain
debt financing arrangements. In connection therewith, existing warrant agreements with Calm Waters were amended to eliminate the
Beneficial Ownership Threshold, and Calm Waters was granted additional warrants. As of September 30, 2016 and November
15, 2016, Calm Waters is the direct beneficial owner of 29.6% and 34.1% of the Company’s common stock, respectively.
Electronic Cigarettes International Group,
Ltd.
Notes to Unaudited Condensed Consolidated
Financial Statements
(Dollars in Thousands, Except Per Share
Amounts)
On July 8, 2016, in connection with amendments to its loans,
warrants previously issued to Calm Waters to acquire common stock were amended as follows:
|
|
|
|
Exercise Price
|
|
|
|
|
Year of Issuance
|
|
Year of
Expiration
|
|
Original
|
|
|
Amended
|
|
|
Number of
Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
2022
|
|
$
|
0.45
|
|
|
$
|
0.145
|
|
|
|
3,842,653
|
|
2015
|
|
2020
|
|
|
1.01
|
|
|
|
0.145
|
|
|
|
7,387,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,230,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
2022
|
|
|
0.45
|
|
|
|
0.145
|
|
|
|
222,410,185
|
|
2016
|
|
2023
|
|
|
0.25
|
|
|
|
0.145
|
|
|
|
45,214,775
|
|
2014
|
|
2019
|
|
|
1.01
|
|
|
|
0.145
|
|
|
|
9,443,678
|
|
2015
|
|
2020
|
|
|
0.21
|
|
|
|
0.145
|
|
|
|
5,995,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
283,064,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
294,294,399
|
|
Electronic Cigarettes International Group,
Ltd.
Notes to Unaudited Condensed Consolidated
Financial Statements
(Dollars in Thousands, Except Per Share
Amounts)
Warrants previously issued to Convertible Debt and Term Loan
holders, excluding those issued to Calm Waters and included above, were amended as follows:
|
|
|
|
Exercise Price
|
|
|
|
|
Year of Issuance
|
|
Year of
Expiration
|
|
Original
|
|
|
Amended
|
|
|
Number of
Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2019
|
|
$
|
1.01
|
|
|
$
|
0.145
|
|
|
|
4,543,212
|
|
2015
|
|
2020
|
|
|
1.01
|
|
|
|
0.145
|
|
|
|
977,278
|
|
2014
|
|
2019
|
|
|
0.45
|
|
|
|
0.145
|
|
|
|
1,111,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,631,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
2022
|
|
|
0.45
|
|
|
|
0.145
|
|
|
|
23,022,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,654,383
|
|
The following table summarizes changes in the Company’s
outstanding warrants and the related liability for the nine months ended September 30, 2016:
|
|
Number of Warrants
|
|
|
Warrant Liability
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
|
305,068,558
|
|
|
$
|
54,412
|
|
Issuance of warrants:
|
|
|
|
|
|
|
|
|
January 2016 Term Loan
(1)
|
|
|
45,214,775
|
|
|
|
8,571
|
|
July 2016 Term Loan
(1)
|
|
|
28,000,000
|
|
|
|
2,931
|
|
Restructuring
(1)
|
|
|
21,088,030
|
|
|
|
2,208
|
|
Anti-dilution adjustments
(2)
|
|
|
109,052
|
|
|
|
-
|
|
Modification of warrants:
|
|
|
|
|
|
|
|
|
Amendments
|
|
|
-
|
|
|
|
8,504
|
|
Surrenders
|
|
|
(1,148,418
|
)
|
|
|
-
|
|
Expirations
|
|
|
(94,809
|
)
|
|
|
-
|
|
Periodic fair value adjustments
|
|
|
-
|
|
|
|
(54,921
|
)
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
|
398,237,188
|
|
|
$
|
21,705
|
|
|
(1)
|
Issued to Calm Waters.
|
|
(2)
|
Some of the Company’s warrant agreements previously included anti-dilution adjustments whereby
the exercise price and number of shares would reset to a lower exercise price and an increased number of shares (a “Reset
Event”). Upon a Reset Event, the fair value of the warrant liability was adjusted and a loss was recognized. As of September
30, 2015, the warrant agreements were amended whereby substantially all such anti-dilution features were eliminated.
|
Fair Value of Embedded Derivatives
for Convertible Debt
As of September 30, 2016, the following
presents the conversion prices, number of shares issuable, and the fair value of the Company’s liability under compound embedded
derivative agreements:
|
|
Date of
Financing
|
|
Principal
Balance
|
|
|
Conversion
Price
|
|
|
Shares
Issuable
|
|
|
Derivative
Liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible debt
|
|
January & February 2014
|
|
$
|
19,055
|
|
|
$
|
0.145
|
|
|
|
131,410,334
|
|
|
$
|
4,711
|
|
Foreign Sales
The Company generated approximately $6,885
and $9,113 of foreign sales during the three months and $23,378 and $27,098 for the nine months ended September 30, 2016 and 2015,
respectively. The concentration of foreign sales during 2016 were impacted by the declining value of the Great Britain Pound, which
resulted in a decrease to net sales of $1,244 and $2,331 for the three and nine months ended September 30, 2016, respectively.
Electronic Cigarettes International Group,
Ltd.
Notes to Unaudited Condensed Consolidated
Financial Statements
(Dollars in Thousands, Except Per Share
Amounts)
Disclosures Related to Statements
of Operations
Presented below are certain expenses included
in the accompanying statements of operations:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and selling expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
$
|
50
|
|
|
$
|
326
|
|
|
$
|
152
|
|
|
$
|
2,190
|
|
Rent expense
|
|
|
995
|
|
|
|
921
|
|
|
|
3,088
|
|
|
|
2,332
|
|
Other
|
|
|
105
|
|
|
|
813
|
|
|
|
415
|
|
|
|
2,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,150
|
|
|
$
|
2,060
|
|
|
$
|
3,655
|
|
|
$
|
7,125
|
|
9.
|
RELATED PARTY TRANSACTIONS
|
Certain marketing and logistics
support services are provided by entities controlled by a key employee of the Company’s GEC division that was acquired
from Hardwire Interactive, Inc. These services were provided prior to the Company’s 2014 acquisition of GEC and have
continued under the Company’s ownership. These arrangements may be discontinued by either party at any time, and the
total services provided amounted to $282 and $402 for the three months and $859 and $1,218 for the nine months ended
September 30, 2016 and 2015, respectively. As of September 30, 2016 and December 31, 2015, accounts payable to this related
party amounted to $109 and $49, respectively. On October 5, 2016, the Company sold the GEC division back to the previous
owners and, therefore, the services were no longer provided thereafter.
In January 2015, warrant terms with two
warrant holders were amended whereby the number of warrants would be 1,000,000 each at an exercise price of $0.75 per share, and
certain adjustment provisions were removed. These transactions were entered into with affiliates of a former member of the Company’s
board of directors. Management determined that the affiliates surrendered rights that were significantly greater in value than
the consideration exchanged by $44,230 and, accordingly, this amount was treated as a capital contribution since it was entered
into with related parties. Additionally, in March 2015, a consultant surrendered a warrant to purchase 1,000,000 shares of common
stock at an exercise price of $0.75. The fair value of the warrant on the date of surrender resulted in a gain on extinguishment
of warrants of $2,233.
In January 2015, the Company’s Chief
Executive Officer purchased $195 principal amount of January 2014 15% Convertible Notes, which were purchased from another note
holder, as well as warrants to purchase 260,608 shares of the Company’s common stock at an exercise price of $1.01, which
were issued in conjunction with the note purchase. The 15% Convertible Notes and warrants were subject to the amendments as discussed
in Note 6, Debt Financing.
10.
|
STOCK-BASED COMPENSATION
|
Stock Options
In addition to options granted under shareholder-approved
stock option plans, the Company has granted options outside of these plans for a total of 54,169,161 shares as of September 30,
2016. Since these options were not issued pursuant to a shareholder approved stock option plan, they are non-qualified stock options
for income tax purposes. Total stock-based compensation related to stock options was approximately $183 and $(61) for the three
months, and $3,543 and $12,235 for the nine months ended September 30, 2016 and 2015, respectively.
Electronic Cigarettes International Group,
Ltd.
Notes to Unaudited Condensed Consolidated
Financial Statements
(Dollars in Thousands, Except Per Share
Amounts)
The following table summarizes share activity and the weighted
average exercise prices related to stock options outstanding for the nine months ended September 30, 2016 and 2015:
|
|
Nine Months Ended September 30, 2016
|
|
|
Nine Months Ended September 30, 2015
|
|
|
|
Shares
|
|
|
Weighted
Average Price
|
|
|
Shares
|
|
|
Weighted
Average Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, beginning of period
|
|
|
26,547,399
|
|
|
$
|
1.09
|
|
|
|
540,000
|
|
|
$
|
26.10
|
|
Granted
|
|
|
61,107,672
|
|
|
|
0.16
|
|
|
|
32,196,317
|
|
|
|
0.60
|
|
Forfeited
|
|
|
(33,080,734
|
)
|
|
|
0.54
|
|
|
|
(1,373,334
|
)
|
|
|
0.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of period
|
|
|
54,574,337
|
|
|
$
|
0.41
|
|
|
|
31,362,983
|
|
|
$
|
1.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of period
|
|
|
40,923,251
|
|
|
$
|
0.47
|
|
|
|
20,381,935
|
|
|
$
|
1.28
|
|
On June 30, 2016, the Company terminated
options to acquire 31,014,067 shares of common stock and contemporaneously issued options to acquire 50,117,673 shares of common
stock to certain key employees and directors.
The weighted average fair value for stock
options granted for the nine months ended September 30, 2016 and 2015 was $0.10 and $0.49 per share, respectively. In estimating the
fair value of options, the Company used the Black-Scholes option-pricing model based upon the closing price of the Company’s
stock on the date of grant and the following weighted average assumptions for the nine months ended September 30, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Expected lives (in years)
|
|
|
5.3
|
|
|
|
5.3
|
|
Risk-free interest rate
|
|
|
1.4
|
%
|
|
|
1.5
|
%
|
Expected volatility
|
|
|
85.0
|
%
|
|
|
139.0
|
%
|
Expected forfeiture rate
|
|
|
8.0
|
%
|
|
|
8.0
|
%
|
Expected dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
We estimate expected volatility based on
historical daily price changes of our common stock for a period equal to the current expected term of the options. The risk-free
interest rate is based on the United States treasury yields in effect at the time of grant corresponding with the expected term
of the options. The expected option term is the number of years we estimate that options will be outstanding prior to exercise
considering vesting schedules and our historical exercise patterns.
Stock-based compensation expense is recognized
over the vesting period of stock options and restricted stock awards. For a single award with a graded vesting schedule and only
service conditions, the Company recognizes compensation cost on a straight-line basis over the requisite service period for each
separately vesting portion of the award as if the award was in substance multiple awards. For stock options granted through September
30, 2016, unrecognized stock compensation expense amounted to $911 which will be charged to expense over the remaining vesting
periods of the options, which is a weighted average period of 1.58 years as of September 30, 2016. As of September 30, 2016, the
aggregate intrinsic value of all outstanding stock options amounted to $0 based on the closing stock price of $0.09 per share on
September 30, 2016. The following table summarizes information about stock options outstanding as of September 30, 2016:
Outstanding Options
|
|
|
Vested Options
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Low
|
|
|
High
|
|
|
Weighted
Average
|
|
|
Remaining
Contractual
Term
|
|
|
Number of
Shares
|
|
|
Weighted
Average Price
|
|
|
Number of
Shares
|
|
$
|
0.16
|
|
|
$
|
0.16
|
|
|
$
|
0.16
|
|
|
|
9.8
|
|
|
|
29,847,398
|
|
|
$
|
0.16
|
|
|
|
24,585,980
|
|
|
0.16
|
|
|
|
0.16
|
|
|
|
0.16
|
|
|
|
9.8
|
|
|
|
23,593,605
|
|
|
|
0.16
|
|
|
|
15,203,937
|
|
|
0.37
|
|
|
|
77.25
|
|
|
|
11.09
|
|
|
|
5.7
|
|
|
|
1,133,334
|
|
|
|
11.09
|
|
|
|
1,133,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.16
|
|
|
$
|
77.25
|
|
|
$
|
0.41
|
|
|
|
9.7
|
|
|
|
54,574,337
|
|
|
$
|
0.47
|
|
|
|
40,923,251
|
|
Electronic Cigarettes International Group,
Ltd.
Notes to Unaudited Condensed Consolidated
Financial Statements
(Dollars in Thousands, Except Per Share
Amounts)
Restricted Stock
The fair value of the restricted stock
grants is based upon the closing price of the Company’s stock on the date of grant. The following table summarizes share
activity, the weighted average fair value per share, and the change in unrecognized compensation related to restricted stock grants
outstanding:
|
|
Nine Months Ended September 30, 2016
|
|
|
Nine Months Ended September 30, 2015
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Fair Value
Per Share
|
|
|
Unrecognized
Compensation
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Fair Value
Per Share
|
|
|
Unrecognized
Compensation
|
|
Unvested shares, beginning of period
|
|
|
2,596,999
|
|
|
$
|
0.64
|
|
|
$
|
1,177
|
|
|
|
66,667
|
|
|
$
|
5.85
|
|
|
$
|
1,445
|
|
Shares granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,963,665
|
|
|
|
0.65
|
|
|
|
1,646
|
|
Compensation recognized
|
|
|
-
|
|
|
|
-
|
|
|
|
(276
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,560
|
)
|
Forfeited
|
|
|
(360,300
|
)
|
|
|
0.69
|
|
|
|
(247
|
)
|
|
|
(77,777
|
)
|
|
|
3.66
|
|
|
|
-
|
|
Shares vested
|
|
|
(259,698
|
)
|
|
|
0.64
|
|
|
|
-
|
|
|
|
(22,223
|
)
|
|
|
5.85
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested shares, end of period
|
|
|
1,977,001
|
|
|
$
|
0.63
|
|
|
$
|
654
|
|
|
|
2,930,332
|
|
|
$
|
0.65
|
|
|
$
|
1,531
|
|
Unrecognized compensation expense of $654
related to restricted stock will be recognized over the vesting period set forth in the restricted stock agreements, which extends
through June 2019. The aggregate intrinsic value of unvested restricted stock was $178 based on the closing price of $0.09
for the Company’s common stock on September 30, 2016.
The Company is subject to federal and state
income taxes in the United States. Additionally, as a result of business combinations completed in 2014, the Company has been subject
to foreign income taxes in the United Kingdom (“U.K.”) since the date of the acquisitions. The following is a summary
of U.S. and U.K income taxes:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Income tax benefit (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
11
|
|
|
$
|
(14
|
)
|
|
$
|
1
|
|
|
$
|
(23
|
)
|
U.K.
|
|
|
7
|
|
|
|
(290
|
)
|
|
|
135
|
|
|
|
(725
|
)
|
|
|
$
|
18
|
|
|
$
|
(304
|
)
|
|
$
|
136
|
|
|
$
|
(748
|
)
|
A valuation allowance has been provided
for all the U.S.-based net deferred tax assets, including the Federal tax net operating losses and foreign tax credits, since the
“more likely than not” realization criteria was not met as of September 30, 2016 and 2015. As of September 30, 2016,
gross unrecognized tax benefits are immaterial and there was no change in such benefits during the nine months ended September
30, 2016. The Company does not expect a significant increase or decrease to the uncertain tax positions within the next twelve
months.
12.
|
NET INCOME (LOSS) PER SHARE
|
Basic net income (loss) per share
is computed by dividing net income (loss) for the period by the weighted average number of common shares outstanding during
the period. Diluted net income (loss) per share is computed by dividing net income (loss) for the period by the
weighted average number of common shares outstanding during the period, plus the dilutive effect of outstanding warrants,
stock options, shares issuable under convertible debt and unvested restricted stock using the as-converted and treasury
stock methods. During most periods when there is a net loss, all potentially dilutive shares are anti-dilutive and are
excluded from the calculation of diluted net loss per share. When there is income from continuing operations, a loss from discontinued operations and a net loss, potentially
dilutive shares are included in the calculation of diluted net loss per share.
Electronic Cigarettes International Group,
Ltd.
Notes to Unaudited Condensed Consolidated
Financial Statements
(Dollars in Thousands, Except Per Share
Amounts)
The following table sets for the computation of basic and diluted
net income (loss) per share:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
(1)
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(1,363
|
)
|
|
$
|
10,137
|
|
|
$
|
9,390
|
|
|
$
|
(11,321
|
)
|
Interest expense on convertible debt
|
|
|
-
|
|
|
|
1,280
|
|
|
|
985
|
|
|
|
-
|
|
|
|
$
|
(1,363
|
)
|
|
$
|
11,417
|
|
|
$
|
10,375
|
|
|
$
|
(11,321
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(13,775
|
)
|
|
|
(908
|
)
|
|
|
(16,502
|
)
|
|
|
(3,277
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(15,138
|
)
|
|
$
|
9,229
|
|
|
$
|
(7,112
|
)
|
|
$
|
(14,598
|
)
|
Interest expense on convertible debt
|
|
|
-
|
|
|
|
1,280
|
|
|
|
985
|
|
|
|
-
|
|
|
|
$
|
(15,138
|
)
|
|
$
|
10,509
|
|
|
$
|
(6,127
|
)
|
|
$
|
(14,598
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.01
|
)
|
|
$
|
0.14
|
|
|
$
|
0.11
|
|
|
$
|
(0.22
|
)
|
Diluted
|
|
$
|
(0.01
|
)
|
|
$
|
0.10
|
|
|
$
|
0.04
|
|
|
$
|
(0.22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.13
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.07
|
)
|
Diluted
|
|
$
|
(0.13
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.14
|
)
|
|
$
|
0.13
|
|
|
$
|
(0.08
|
)
|
|
$
|
(0.29
|
)
|
Diluted
|
|
$
|
(0.14
|
)
|
|
$
|
0.09
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
105,874,000
|
|
|
|
71,511,000
|
|
|
|
85,555,000
|
|
|
|
51,171,000
|
|
Dilutive effect of warrants, stock options, convertible debt and unvested restricted stock
|
|
|
-
|
|
|
|
41,850,000
|
|
|
|
166,212,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
105,874,000
|
|
|
|
113,361,000
|
|
|
|
251,767,000
|
|
|
|
51,171,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive common stock equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
398,237,188
|
|
|
|
258,824,869
|
|
|
|
25,474,130
|
|
|
|
265,068,558
|
|
Stock options
|
|
|
54,574,337
|
|
|
|
-
|
|
|
|
1,133,332
|
|
|
|
38,894,655
|
|
Convertible debt
|
|
|
131,410,334
|
|
|
|
31,112,983
|
|
|
|
-
|
|
|
|
31,362,983
|
|
Unvested restricted stock
|
|
|
1,977,001
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,930,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
586,198,860
|
|
|
|
289,937,852
|
|
|
|
26,607,462
|
|
|
|
338,256,528
|
|
(1)
|
See Note 1, Basis of Presentation, Revision 2015 Statement of Operations.
|
13.
|
COMMITMENTS AND CONTINGENCIES
|
Operating Leases
As of September 30, 2016, future minimum lease payments are
as follows:
Year ending September 30,
|
|
|
|
|
|
|
|
|
|
2017
|
|
$
|
1,103
|
|
2018
|
|
|
615
|
|
2019
|
|
|
306
|
|
2020
|
|
|
111
|
|
|
|
|
|
|
Total
|
|
$
|
2,135
|
|
For leases that provide for an abated rent
period, the value of this inducement is being reflected as a reduction to rent expense over the term of the lease.
Royalties
On January 5, 2016, the Company reached
a settlement to resolve a lawsuit that was filed in June 2012. During the fourth quarter of 2015, the Company recognized a charge
for damages incurred under the settlement. Under the terms of the settlement, the Company was granted a non-exclusive license
under the patents asserted in the litigation and certain other e-vapor technology related patents in exchange for an ongoing royalty
based on net sales of certain products. Total royalties of $376 and $1,273 were incurred during the three and nine months ended
September 30, 2016 and are included in cost of goods sold in the accompanying statement of operations.
Electronic Cigarettes International Group,
Ltd.
Notes to Unaudited Condensed Consolidated
Financial Statements
(Dollars in Thousands, Except Per Share
Amounts)
Other Contingencies
From time to time we may be involved in
various claims and legal actions arising in the ordinary course of our business. When the Company becomes aware of potential litigation,
it evaluates the merits of the case in accordance with the applicable accounting literature. The Company evaluates its exposure
to the matter, possible legal or settlement strategies and the likelihood of an unfavorable outcome. If the Company determines
that an unfavorable outcome is probable and can be reasonably estimated, it establishes the necessary accruals. Certain insurance
policies held by the Company may reduce the cash outflows with respect to an adverse outcome on certain of these litigation matters.
The Company does not believe it is reasonably possible that any of these matters will have a material adverse effect on the Company’s
consolidated financial position, results of operations and cash flows.
14.
|
FAIR VALUE MEASUREMENTS
|
The carrying amounts of cash, accounts
receivable, and accounts payable approximate fair value as of September 30, 2016 and December 31, 2015, because of the relatively
short maturities of these instruments. The estimated fair values for financial instruments presented herein are not necessarily
indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair values. The carrying values of certain borrowings approximate
fair value because the underlying instruments are fixed-rate notes based on current market rates and current maturities.
Fair value is the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In
determining fair value, the Company uses various methods including market, income and cost approaches. Based on these approaches,
the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including
assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable,
market corroborated, or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use
of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the
valuation techniques the Company is required to provide the following information according to the fair value hierarchy. The fair
value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities
carried at fair value will be classified and disclosed in one of the following three categories:
Level 1
|
Quoted prices for identical assets and liabilities traded in active exchange markets, such as the New York Stock Exchange.
|
Level 2
|
Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data. Level 2 also includes derivative contracts whose value is determined using a pricing model with observable market inputs or can be derived principally from or corroborated by observable market data.
|
Level 3
|
Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for nonbinding single dealer quotes not corroborated by observable market data.
|
While the Company believes its valuation
methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine
the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
Electronic Cigarettes International Group,
Ltd.
Notes to Unaudited Condensed Consolidated
Financial Statements
(Dollars in Thousands, Except Per Share
Amounts)
The following is a description of the valuation methodologies
used for complex financial instruments measured at fair value:
Warrant Valuation Methodologies
The Black Scholes model was used to compute
the fair value of outstanding warrants. Key inputs into the valuation models include a risk-free interest rate and an expected
stock price volatility. Significant assumptions include the following:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
0.77% - 1.42
|
%
|
|
|
0.01% - 1.75
|
%
|
Historical volatility
|
|
|
84.7% - 112.3
|
%
|
|
|
90.4% - 129.7
|
%
|
Weighted average term
|
|
|
5.50
|
|
|
|
6.82
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The risk-free interest rate is based on
the yield of U.S. Treasury Bonds over the expected term. The expected share price volatility is based on historical common stock
prices for the Company and comparable publicly-traded companies over a period commensurate with the expected term of the warrant.
As these assumptions are revised in the future, significant adjustments to future valuation of warrants may result.
Recurring Fair Value Measurements
The Company does not have any recurring
measurements of the fair value of assets. Recurring measurements of the fair value of liabilities are summarized as follows:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
21,705
|
|
|
$
|
21,705
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
54,412
|
|
|
$
|
54,412
|
|
Derivative liability
|
|
|
-
|
|
|
|
-
|
|
|
|
4,711
|
|
|
|
4,711
|
|
|
|
-
|
|
|
|
-
|
|
|
|
496
|
|
|
|
496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
26,416
|
|
|
$
|
26,416
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
54,908
|
|
|
$
|
54,908
|
|
The Company did not make any transfers in or out of Level 3
for the nine months ended September 30, 2016. The following table presents a reconciliation of changes in liabilities measured
at fair value on a recurring basis for the nine months ended September 30, 2016:
|
|
Warrants
|
|
|
Derivatives
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of liability, beginning of period
|
|
$
|
54,412
|
|
|
$
|
496
|
|
|
$
|
54,908
|
|
Issuances of new instruments and other
|
|
|
13,710
|
|
|
|
(1
|
)
|
|
|
13,709
|
|
Total net losses (gains) included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value adjustments
(1)
|
|
|
(54,921
|
)
|
|
|
(9,012
|
)
|
|
|
(63,933
|
)
|
Extinguishments through modifications
|
|
|
8,504
|
|
|
|
13,314
|
|
|
|
21,818
|
|
Extinguishments through cancellations
|
|
|
-
|
|
|
|
(86
|
)
|
|
|
(86
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of liability, end of period
|
|
$
|
21,705
|
|
|
$
|
4,711
|
|
|
$
|
26,416
|
|
|
(1)
|
For the three and six months ended September 30, 2016, the loss on troubled debt restructuring
of $24,223 and $24,163, respectively, included extinguishments through modifications of $21,818, a loss of $2,024 from revision
to the amount of accrued interest through the July 8, 2016 date of restructuring and certain debt issuance costs, net of $381 and
$321, respectively.
|
Electronic Cigarettes International Group,
Ltd.
Notes to Unaudited Condensed Consolidated
Financial Statements
(Dollars in Thousands, Except Per Share
Amounts)
On October 5, 2016, the Company sold its GEC division. See Note
3, Divestiture.
On November 9, 2016, the Company
entered into a second amendment (the “O’Neill Amendment”) to its employment agreement with Mr. Daniel J.
O’Neill that was entered into on March 17, 2015, and amended on September 21, 2015 (the “O’Neill Employment
Agreement”). The O’Neill Amendment amends the O’Neill Employment Agreement by providing that if Mr.
O’Neill terminates his employment upon a Change of Control, as defined in the O’Neill Employment Agreement, then
the Company is required to pay him a lump sum consisting of his earned but unpaid base salary through the termination date, a
pro-rata annual bonus, the prior year’s annual bonus, to the extent earned but not paid, the amount of any unreimbursed
business expenses, any accrued vacation or other pay pursuant to the Company’s vacation policy, to the extent not
previously paid, and an amount equal to 36 months of base salary.