Notes to Unaudited Condensed Consolidated Interim Financial
Statements
(Amounts expressed in US Dollars)
1. NATURE OF OPERATIONS
Gilla
Inc. (“Gilla”, the “Company” or the
“Registrant”) was incorporated under the laws of the
state of Nevada on March 28, 1995 under the name of Truco,
Inc.
The
current business of the Company consists of the manufacturing,
marketing and distribution of generic and premium branded E-liquid
(“E-liquid”), which is the liquid used in vaporizers,
electronic cigarettes (“E-cigarettes”), and other
vaping hardware and accessories. E-liquid is heated by an atomizer
to deliver the sensation of smoking and sometimes even mimic
traditional smoking implements, such as cigarettes or cigars, in
their use and/or appearance, without burning tobacco. The Company
provides consumers with choice and quality across various
categories and price points to deliver the most efficient and
effective vaping solutions for nicotine and related products.
Gilla’s proprietary product portfolio includes the following
brands: Coil Glaze™, Siren, The Drip Factory, Craft
Vapes™, Craft Clouds, Surf Sauce, Vinto Vape, VaporLiq, Vape
Warriors, Vapor’s Dozen, Miss Pennysworth’s Elixirs,
Enriched Vapor and Crown E-liquid™.
2. GOING CONCERN
These
unaudited condensed consolidated interim financial statements have
been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the
normal course of business. As shown in these unaudited condensed
consolidated interim financial statements, at June 30, 2017, the
Company has an accumulated deficit of $16,782,133 and a working
capital deficiency of $4,478,693 as well as negative cash flows
from operating activities of $1,250,358 for the six month period
ended June 30, 2017. These conditions represent material
uncertainty that cast significant doubt about the Company's ability
to continue as a going concern. The ability of the Company to
continue as a going concern is dependent upon achieving a
profitable level of operations or on the ability of the Company to
obtain necessary financing to fund ongoing operations. Management
believes that the Company will not be able to continue as a going
concern for the next twelve months without additional financing or
increased revenues.
To meet
these objectives, the Company continues to seek other sources of
financing in order to support existing operations and expand the
range and scope of its business. However, there are no assurances
that any such financing can be obtained on acceptable terms and in
a timely manner, if at all. Failure to obtain the necessary working
capital would have a material adverse effect on the business
prospects and, depending upon the shortfall, the Company may have
to curtail or cease its operations.
These
unaudited condensed consolidated interim financial statements do
not include any adjustments to the recorded assets or liabilities
that might be necessary should the Company have to curtail
operations or be unable to continue in existence.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated interim financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States of America for
interim financial information and with the instructions to Form
10-Q. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in
the United States of America for complete consolidated financial
statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Interim results are not
necessarily indicative of the results that may be expected for a
full year. These condensed consolidated interim financial
statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2016, as filed with the U.S. Securities and Exchange
Commission.
The accounting policies of the Company are in accordance with
accounting principles generally accepted in the United States of
America. Outlined below are those policies considered particularly
significant:
(a)
Basis of
Consolidation
These
unaudited condensed consolidated interim financial statements
include the accounts of the Company and its wholly owned
subsidiaries; Gilla Operations, LLC; E Vapor Labs Inc. (“E
Vapor Labs”); E-Liq World, LLC; Charlie’s Club, Inc.;
Gilla Enterprises Inc. and its wholly owned subsidiaries Gilla
Europe Kft. and Gilla Operations Europe s.r.o.; Gilla Operations
Worldwide Limited (“Gilla Worldwide”); Gilla
Franchises, LLC and its wholly owned subsidiary Legion of Vape,
LLC; and Snoke Distribution Canada Ltd. and its wholly owned
subsidiary Snoke Distribution USA, LLC. All inter-company accounts
and transactions have been eliminated in preparing these unaudited
condensed consolidated interim financial statements.
In
accordance with the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification
(“ASC”) No. 720,
Other
Expenses
(“ASC 720”), the Company expenses the
production costs of advertising the first time the advertising
takes place. The Company expenses all advertising costs as
incurred. During the three and six month periods ended June 30,
2017, the Company expensed $39,313 and $91,847, respectively, (June
30, 2016: $113,442 and $158,552) as corporate promotions. These
amounts have been recorded as an administrative
expense.
(c)
Recently Adopted
Accounting Pronouncements
In
November 2015, the FASB issued Accounting Standards Update
(“ASU”) No. 2015-17,
Income Taxes (Topic 740): Balance Sheet
Classification of Deferred Taxes
(“ASU
2015-17”). ASU 2015-17 simplifies the presentation of
deferred income taxes by eliminating the separate classification of
deferred income tax liabilities and assets into current and
noncurrent amounts in the consolidated balance sheet statement of
financial position. The amendments in the update require that all
deferred tax liabilities and assets be classified as noncurrent in
the consolidated balance sheet. The amendments in this update are
effective for annual periods beginning after December 15, 2016, and
interim periods therein and may be applied either prospectively or
retrospectively to all periods presented.
Adoption of ASU 2015-17 did not have an impact on
the Company’s coondensed consolidated interim financial
statements.
On
March 30, 2016, the FASB issued ASU No. 2016-09,
Compensation – Stock Compensation
(Topic 718): Improvements to
Employee Share-Based Payment Accounting
(“ASU
2016-09”)
.
This
update requires that all excess tax benefits and tax deficiencies
arising from share-based payment awards should be recognized as
income tax expense or benefit on the income statement. The
amendment also states that excess tax benefits should be classified
along with other income tax cash flows as an operating activity. In
addition, an entity can make an entity-wide accounting policy
election to either estimate the number of awards expected to vest
or account for forfeitures as they occur. The provisions of this
update are effective for annual and interim periods beginning
after December 15, 2016.
Adoption
of ASU 2016-09 did not have an impact on the Company’s
condensed consolidated interim financial
statements.
In October 2016, the FASB issued ASU No.
2016-17,
Consolidation (Topic 810):
Interests Held through Related Parties That Are under Common
Control
(“ASU
2016-17”). The new guidance changed how a reporting entity
that is a single decision maker for a variable interest entity
(“VIE”) will consider its indirect interests in that
VIE when determining whether the reporting entity is the primary
beneficiary and should consolidate the VIE. Under previous
U.S. GAAP
, a single decision maker in
a VIE is required to consider an indirect interest held by a
related party under common control in its entirety. Under ASU
2016-17, the single decision maker will consider the indirect
interest on a proportionate basis. Adoption of ASU 2016-17 did not
have an impact on the Company’s condensed consolidated
interim financial statements.
(d)
Recent Accounting
Pronouncements
The
Company has reviewed all recently issued, but not yet effective,
accounting pronouncements and other than the below, does not expect
the future adoption of any such pronouncements to have a
significant impact on its results of operations, financial
condition or cash flow.
In May
2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic
606)
(“ASU 2014-09”), requiring an entity to
recognize revenue when it transfers promised goods or services to
customers in an amount that reflects the consideration to which the
entity expects to be entitled to in exchange for those goods or
services. ASU 2014-09 will supersede nearly all existing revenue
recognition guidance under U.S. GAAP when it becomes
effective. ASU 2014-09 as amended by ASU No. 2015-14, ASU No.
2016-08, ASU No. 2016-10, ASU No. 2016-12 and ASU No. 2016-20, is
effective for interim and annual periods beginning after
December 15, 2017 and is applied on either a modified
retrospective or full retrospective basis. The Company is
evaluating the guidance and has not yet determined the impact on
its consolidated financial statements.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases
(Topic 842)
(“ASU
2016-02”). ASU 2016-02 requires lessees to recognize all
leases with terms in excess of one year on their balance sheet as a
right-of-use asset and a lease liability at the commencement date.
The new standard also simplifies the accounting for sale and
leaseback transactions. The amendments in this update are effective
for annual periods beginning after December 15, 2018, and interim
periods therein and must be adopted using a modified retrospective
method for leases existing at, or entered into after, the beginning
of the earliest comparative period presented in the financial
statements. Early adoption is permitted. The Company is evaluating
the guidance and has not yet determined the impact on its
consolidated financial statements.
In
April 2016, the FASB issued ASU No. 2016-10,
Revenue from Contracts with Customers
(Topic 606):
Identifying Performance Obligations and
Licensing
(“ASU 2016-10”). ASU 2016-10 clarifies
the following two aspects of Topic 606: identifying performance
obligations and the licensing implementation guidance, while
retaining the related principles for those areas. The provisions of
this update are effective for annual and interim periods beginning
after December 15, 2017, with early application permitted. The
Company is evaluating the guidance and has not yet determined the
impact on its consolidated financial statements.
In May
2016, the FASB issued ASU No. 2016-12,
Revenue from Contracts with Customers (Topic
606)
:
Narrow-Scope
Improvements and Practical Expedients
(“ASU
2016-12”). The core principal of ASU 2016-12 is the
recognition of revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those
goods or services. The provisions of this update are
effective for annual and interim periods beginning
after December 15, 2017, with early application permitted. The
Company is evaluating the guidance and has not yet determined the
impact on its consolidated financial statements.
In June
2016, the FASB issued ASU No. 2016-13,
Financial Instruments – Credit Losses
(Topic 326): Measurement of Credit Losses on Financial
Instruments
(“ASU 2016-13”), which requires
financial assets measured at amortized cost be presented at the net
amount expected to be collected. The allowance for credit losses is
a valuation account that is deducted from the amortized cost basis.
The measurement of expected losses is based upon historical
experience, current conditions, and reasonable and supportable
forecasts that affect the collectability of the reported amount.
This guidance is effective for fiscal years beginning
after December 15, 2019, with early adoption permitted. The
Company is evaluating the guidance and has not yet determined the
impact on its consolidated financial statements.
In
August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments (a
consensus of the Emerging Issues Task Force)
(“ASU
2016-15”), which clarifies how certain cash receipts and cash
payments are presented and classified in the statement of cash
flows. Among other clarifications, the guidance requires that cash
proceeds received from the settlement of corporate-owned life
insurance (COLI) policies be classified as cash inflows from
investing activities and that cash payments for premiums on COLI
policies may be classified as cash outflows for investing
activities, operating activities or a combination of both. The
guidance is effective for fiscal years beginning
after December 15, 2017, with early adoption permitted.
Retrospective application is required. The Company is evaluating
the guidance and has not yet determined the impact on its
consolidated financial statements.
In
October 2016, the FASB issued ASU No. 2016-16,
Income Taxes (Topic 740): Intra-Entity
Transfers of Assets Other Than Inventory
("ASU 2016-16").
ASU 2016-16 prohibits the recognition of current and deferred
income taxes for an intra-entity transfer until the asset has been
sold to an outside party. The amendment in ASU 2016-16 is effective
for annual reporting periods beginning after December 15, 2017,
including interim reporting periods within those annual reporting
periods. The Company is evaluating the guidance and has not yet
determined the impact on its consolidated financial
statements.
In
January 2017, the FASB issued ASU No. 2017-04,
Intangibles-Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment
(“ASU
2017-04”). The new guidance eliminates the requirement to
calculate the implied fair value of goodwill (Step 2 of the current
two-step goodwill impairment test under ASC 350). Instead, entities
will record an impairment charge based on the excess of a reporting
unit’s carrying amount over its fair value (Step 1 of the
current two-step goodwill impairment test). ASU 2017-04 is
effective prospectively for reporting periods beginning after
December 15, 2019, with early adoption permitted for annual and
interim goodwill impairment testing dates after January 1, 2017.
The Company is evaluating the guidance and has not yet determined
the impact on its consolidated financial statements.
In May
2017, the FASB issued ASU No. 2017-09,
Compensation-Stock Compensation (Topic 718):
Scope of Modification Accounting
(“ASU
2017-09”). ASU 2017-09 clarifies which changes to the terms
or conditions of a share-based payment award require an entity to
apply modification accounting in Topic 718. The standard is
effective for interim and annual reporting periods beginning after
December 15, 2017, with early adoption permitted. The Company is
evaluating the guidance and has not yet determined the impact on
its consolidated financial statements.
4. AMOUNTS OWING ON ACQUISITIONS
(a) On
July 1, 2015, the Company acquired all of the issued and
outstanding shares of E Vapor Labs, a Florida based E-liquid
manufacturer. The Company acquired E Vapor Labs in order to
procure an E-liquid manufacturing platform allowing the Company to
secure large private label contracts as well as manufacture its own
brands going forward.
In
consideration for the acquisition, the Company paid to the vendors,
$225,000 in cash on closing and issued $900,000 in unsecured
promissory notes on closing (collectively, the “Unsecured
Promissory Notes”). The Unsecured Promissory Notes were
issued in three equal tranches of $300,000 due four (4), nine (9)
and eighteen (18) months respectfully from closing (individually,
“Promissory Notes A”, “Promissory Notes B”,
and “Promissory Notes C”, respectively). The Unsecured
Promissory Notes are all unsecured, non-interest bearing, and on
the maturity date, at the option of the vendors, up to one-third of
each tranche of the Unsecured Promissory Notes can be repaid in
Common Shares, calculated using the 5 day weighted average closing
market price prior to the maturity of the Unsecured Promissory
Notes. The Unsecured Promissory Notes, are all and each subject to
adjustments as outlined in the share purchase agreement (the
“SPA”), dated June 25, 2015.
At
December 31, 2015, the Company adjusted the Promissory Notes A for
$116,683 which is the known difference in the working capital
balance at closing of the acquisition from the amount specified in
the SPA. Furthermore, a 12% discount rate has been used to
calculate the present value of the Unsecured Promissory Notes based
on the Company’s estimate of cost of financing for comparable
notes with similar term and risk profiles. Over the term of the
respective Unsecured Promissory Notes, interest will be accrued at
12% per annum to accrete the Unsecured Promissory Notes to their
respective principal amounts. During the six month periods ended
June 30, 2017 and 2016, the Company recorded $nil and $16,078,
respectively, in interest expense related to the accretion of the
Unsecured Promissory Notes.
|
|
|
|
|
|
|
Present
value at December 31, 2015
|
$
203,573
|
$
291,620
|
$
267,857
|
$
763,050
|
|
Measurement period
adjustment
|
(19,505
)
|
-
|
-
|
(19,505
)
|
|
Interest expense
related to accretion
|
(751
)
|
8,380
|
32,143
|
39,772
|
|
Present
value at December 31, 2016
|
183,317
|
300,000
|
300,000
|
783,317
|
Present
value at June 30, 2017
|
$
183,317
|
$
300,000
|
$
300,000
|
$
783,317
|
(b) On December
2, 2015, the
Company acquired all of the assets of The Mad Alchemist, LLC
(“TMA”), an E-liquid manufacturer, including the
assets, rights and title to own and operate The Mad
Alchemist™ and Replicant E-liquid brands (the “The Mad
Alchemist Brands”).
In
consideration for the acquisition, the Company issued 819,672
Common Shares valued at $0.122 per share for a total value of
$100,000; agreed to pay a total of $400,000 in deferred payments
(the “Amounts Owing on Acquisition”), payable in ten
(10) equal payments of $20,000 in cash and $20,000 in Common Shares
every three (3) months following the closing date; and agreed to a
quarterly earn-out based on the gross profit stream derived from
product sales of The Mad Alchemist Brands. The earn-out commences
on the closing date and pays up to a maximum of 25% of the gross
profit stream. The number of Common Shares issuable will be
calculated and priced using the 5 day weighted average closing
market price prior to each issuance date. Furthermore, a 12%
discount rate has been used to calculate the present value of the
Amounts Owing on Acquisition. Over the term of the respective
deferred payments, interest will be accrued at 12% per annum to
accrete the payments to their respective principal amounts. During
the six month periods ended June 30, 2017 and 2016, the Company
recorded $nil and $9,582, respectively, in interest expense related
to the accretion of the Amounts Owing on Acquisition.
On
April 15, 2016, the Company entered into a settlement agreement
(the “TMA Settlement Agreement”) with
TMA
and the vendors of TMA (collectively,
the “TMA Vendors”). Subject to the terms and conditions
of the TMA Settlement Agreement, the parties settled: (i) any and
all compensation and expenses owing by the Company to the TMA
Vendors and (ii) the $400,000 of Amounts Owing on Acquisition
payable by the Company to TMA Vendors pursuant to the TMA Asset
Purchase Agreement in exchange for the Company paying to the TMA
Vendors a total settlement consideration of $133,163 payable as
$100,000 in cash and $33,163 in the Company’s assets as a
payment-in-kind. Of the $100,000 payable in cash under the TMA
Settlement Agreement, $45,000 was paid upon execution of the
settlement, $27,500 was payable thirty days following the signing
of the settlement and the remaining $27,500 was payable at the
later of (i) sixty days following the signing of the TMA Settlement
Agreement, or (ii) the completion of the historical audit of TMA.
As a result of the TMA Settlement Agreement, the Company has
recorded a gain on settlement in the amount of $274,051. As at June
30, 2017, $55,000 (December 31, 2016: $55,000) remains payable to
the TMA Vendors. In addition, the Company and the TMA Vendors
mutually terminated all employment agreements between the Company
and the TMA vendors, entered into on the date of closing of the
acquisition by the Company, and all amounts were fully settled
pursuant to the TMA Settlement Agreement. Due to the change in
circumstances, during the year ended December 31, 2016, the Company
tested goodwill and intangibles for impairment and as a result, the
Company has fully impaired goodwill and intangible assets related
to the acquired assets of TMA in the amount of $208,376 and
$122,983, respectively, which formerly represented the value of
brands, customer relationships, workforce and business acumen
acquired.
5. OTHER CURRENT ASSETS
Other
current assets consist of the following:
|
|
|
|
|
Vendor
deposits
|
$
21,421
|
$
13,256
|
|
Prepaid
expenses
|
235,385
|
301,348
|
|
Trade
currency
|
45,000
|
45,000
|
|
Other
receivables
|
152,383
|
103,104
|
|
|
$
454,189
|
$
462,708
|
Other
receivables include VAT receivable, HST receivable and holdback
amounts related to the Company’s merchant services
accounts.
6. INVENTORY
Inventory
consists of the following:
|
|
|
|
|
Vaping hardware and
accessories
|
$
29,284
|
$
105,496
|
|
E-liquid bottles -
finished goods
|
160,922
|
181,392
|
|
E-liquid
components
|
109,454
|
158,050
|
|
Bottles and
packaging
|
256,113
|
100,197
|
|
|
$
555,773
|
$
545,135
|
During
the three month periods ended June 30, 2017 and 2016, the Company
expensed $493,987 and $345,036 of inventory as cost of goods sold,
respectively. During the six month periods ended June 30, 2017 and
2016, the Company expensed $1,040,720 and $1,205,982 of inventory
as cost of goods sold, respectively. At June 30, 2017, the full
amount of the Company’s inventory serves as collateral for
the Company’s secured borrowings.
7. PROPERTY AND EQUIPMENT
Property
and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
Furniture and
equipment
|
$
65,610
|
$
28,732
|
$
36,878
|
$
45,917
|
|
Computer
hardware
|
20,899
|
8,565
|
12,334
|
15,985
|
|
Manufacturing
equipment
|
64,529
|
26,961
|
37,568
|
31,166
|
|
|
$
151,038
|
$
64,258
|
$
86,780
|
$
93,068
|
Depreciation
expense for the three month periods ended June 30, 2017 and 2016
amounted to $10,045 and $15,015, respectively. Depreciation expense
for the six month periods ended June 30, 2017 and 2016 amounted to
$19,701 and $28,510, respectively.
At June
30, 2017, the full amount of the Company’s property and
equipment serves as collateral for the Company’s secured
borrowings.
8. WEBSITE DEVELOPMENT
Website
development consists of the following:
|
|
|
|
|
|
|
|
|
|
|
VaporLiq
Website
|
$
10,000
|
$
3,917
|
$
6,083
|
7,083
|
|
|
|
|
|
|
Amortization
expense on website development for the three month periods ended
June 30, 2017 and 2016 amounted to $500 for each period.
Amortization expense on website development for the six month
periods ended June 30, 2017 and 2016 amounted to $1,000 for each
period. The estimated amortization expense for the next 3 years
ending December 31, 2017, 2018 and 2019 approximates $2,000 per
year. For the year ending December 31, 2020, estimated amortization
expense approximates $1,083.
9. INTANGIBLE ASSETS
Intangible
assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
Brands
|
$
50,000
|
$
18,000
|
$
32,000
|
$
37,000
|
|
Customer
relationships
|
173,000
|
67,000
|
106,000
|
123,300
|
|
|
$
223,000
|
$
85,000
|
$
138,000
|
$
160,300
|
|
|
|
|
|
|
Amortization
expense on intangible assets for the three month periods ended June
30, 2017 and 2016 amounted to $11,150 and $43,000, respectively.
Amortization expense on intangible assets for the six month periods
ended June 30, 2017 and 2016 amounted to $22,300 and $54,000,
respectively. The estimated amortization expense for the next 3
years ending December 31, 2017, 2018 and 2019 approximates $44,600
per year. For the year ending December 31, 2020, estimated
amortization expense approximates $26,500.
10. GOODWILL
|
|
|
|
|
Opening
balance
|
$
889,497
|
$
1,252,084
|
|
Measurement period
adjustment
|
-
|
(154,211
)
|
|
Impairment
|
-
|
(208,376
)
|
|
End
of period
|
$
889,497
|
$
889,497
|
|
|
|
|
During
the year ended December 31, 2016, the Company tested the goodwill
for impairment. As a result, the Company fully impaired the
goodwill related to the acquisition of the assets of TMA in the
amount of $208,376 which formerly represented the value of
workforce and business acumen acquired.
11. LOANS FROM SHAREHOLDERS
The
Company has outstanding current loans from shareholders as
follows:
|
|
|
|
|
Non-interest
bearing, unsecured, no specific terms of repayment
(i)
|
$
-
|
$
5,000
|
|
Bears interest of
1.5% per month on a cumulative basis, unsecured, no specific terms
of repayment
(ii)
|
12,680
|
23,223
|
|
Bears interest of
6% per annum on a cumulative basis, secured by the assets of the
Company, matures on March 2, 2018
(v)
|
516,302
|
474,065
|
|
Non-interest
bearing, secured by the assets of the Company, matures on March 12,
2017 and currently in default
(vi)
|
154,120
|
-
|
|
|
$
683,102
|
$
502,288
|
The
Company has outstanding long term loans from shareholders as
follows:
|
|
|
|
|
Bears interest of
10% per annum on a cumulative basis, secured by the assets of the
Company, matures on July 1, 2018
(iii)
|
$
385,300
|
$
372,400
|
|
Bears interest of
10% per annum on a cumulative basis, secured by the assets of the
Company, matures on July 1, 2018
(iv)
|
100,000
|
100,000
|
|
Bears interest of
6% per annum on a cumulative basis, secured by the assets of the
Company, matures on March 2, 2018
(v)
|
-
|
24,951
|
|
|
$
485,300
|
$
497,351
|
(i) During the six
month period ended June 30, 2017, the amount owing to the
shareholder increased from $5,000 to $22,692 and was then fully
settled through the issuance of 226,920 private placement units at
a price of $0.10 per unit. Each unit consisted of one Common Share
and a half Common Share purchase warrant exercisable over twelve
months at an exercise price of $0.20 per share.
(ii) During the
three and six month period ended June 30, 2017, the Company accrued
interest of $1,327 and $2,726, respectively, on this shareholder
loan (June 30, 2016: $1,452 and $2,797). Total accrued interest
owing on the shareholder loan at June 30, 2017 was $16,017
(December 31, 2016: $12,784) which is included in accrued
liabilities. During the six month period ended June 30, 2017,
$10,000 owing on this shareholder loan was settled with the
issuance of face value $10,000 of Convertible Debentures Series C-3
(note 15) and $3,512 was settled with cash.
(iii) On February
13, 2014, the Company entered into a secured promissory note (the
“Secured Note”) with a shareholder, whereby the Company
agreed to pay the party the aggregate unpaid principal amount of
CAD $500,000 (USD $385,300) (December 31, 2016: CAD $500,000; USD
$372,400) on or before August 13, 2014, bearing interest at a rate
of 10% per annum, such interest to accrue monthly and added to the
principal. The Secured Note is secured by a general security
agreement granting a general security interest over all the assets
of the Company. During the years ended December 31, 2014 and 2015,
the Company and the shareholder extended the maturity date of the
Secured Note to January 1, 2016 and July 1, 2017, respectively.
During the year ended December 31, 2016, the Company and the
shareholder extended the maturity date of the Secured Note to July
1, 2018. The amendment to the Secured Note was accounted for as a
modification of debt and no gain or loss was recognized on the
amendment.
During
the three and six month periods ended June 30, 2017, the Company
accrued interest of $12,114 and $24,028, respectively, (June 30,
2016: $10,999 and $21,385) on the Secured Note. Accrued interest
owing on the Secured Note at June 30, 2017 was $121,046 (December
31, 2016: $93,221) which is included in accrued
liabilities.
(iv) On July 15,
2014, the Company entered into a secured promissory note (the
“Secured Note No.2”) with a shareholder, whereby the
Company agreed to pay the party the aggregate unpaid principal
amount of $100,000 on or before July 18, 2014, bearing interest at
a rate of 10% per annum, such interest to accrue monthly and added
to the principal. The Secured Note No.2 is secured by the general
security agreement issued with the Secured Note. During the years
ended December 31, 2014 and 2015, the Company and the shareholder
extended the maturity date of the Secured Note No.2 to January 1,
2016 and July 1, 2017, respectively. During the year ended December
31, 2016, the Company and the shareholder extended the maturity
date of the Secured Note No.2 to July 1, 2018. The amendment to the
Secured Note No.2 was accounted for as a modification of debt and
no gain or loss was recognized on the amendment.
During
the three and six month periods ended June 30, 2017, the Company
accrued interest of $3,234 and $6,389, respectively, (June 30,
2016: $2,928 and $5,784) on the Secured Note No.2. Accrued interest
owing on the Secured Note No.2 at June 30, 2017 was $31,541
(December 31, 2016: $25,152) which is included in accrued
liabilities.
In
connection to the maturity date extension of Secured Note and
Secured Note No.2 (together, the “Secured Notes”), the
Company issued warrants for the purchase of 250,000 Common Shares
exercisable until July 1, 2018 at an exercise price of $0.20 per
share (note 17(b)).
(v) On March 2,
2016, the Company entered into a loan agreement (the “Loan
Agreement”) with a shareholder, whereby the shareholder would
make available to the Company the aggregate principal amount of CAD
$670,000 (USD $516,302) (the “Shareholder Loan”) for
capital expenditures, marketing expenditures and working capital.
Under the terms of the Loan Agreement, the Shareholder Loan was
made available to the Company in two equal tranches of CAD
$335,000, for a total loan amount of CAD $670,000 (USD $516,302),
with the first tranche (“Loan Tranche A”) received on
the closing date and the second tranche (“Loan Tranche
B”) received on April 14, 2016. At June 30, 2017, CAD $52,000
(USD $39,099) of the Loan Tranche B was being held in trust by the
shareholder to be released on the incurrence of specific expenses.
The Shareholder Loan bears interest at a rate of 6% per annum, on
the outstanding principal, and shall mature on March 2, 2018,
whereby any outstanding principal together with all accrued and
unpaid interest thereon shall be due and payable. The Company shall
also repay 5% of the initial principal amount of Loan Tranche A and
5% of Loan Tranche B, monthly in arrears, with the first principal
repayment beginning on June 30, 2016. The Company may elect to
repay the outstanding principal of the Shareholder Loan together
with all accrued and unpaid interest thereon prior to maturity
without premium or penalty. The Company also agreed to service the
Shareholder Loan during the term prior to making any payments to
the Company’s Chief Executive Officer, Chief Financial
Officer and Board of Directors. The Shareholder Loan is secured by
a general security agreement granting a general security interest
over all the assets of the Company. On March 2, 2016 and in
connection to the Loan Agreement, the Company issued warrants for
the purchase of 1,000,000 Common Shares exercisable until March 2,
2018 at an exercise price of $0.20 per share. The warrants shall
vest in two equal tranches, with 500,000 warrants to vest upon the
close of Loan Tranche A and the remaining 500,000 warrants to vest
upon the close of Loan Tranche B. On March 3, 2016 and April 14,
2016, the Company closed Loan Tranche A and Loan Tranche B,
respectively, at which dates the warrants became fully vested and
exercisable (note 17(g)).
During the three
and six month periods ended June 30, 2017, the Company accrued
interest of $8,048 and $16,042, respectively, (June 30, 2016:
$6,970 and $8,135) on the Shareholder Loan. Accrued interest owing
on the Shareholder Loan at June 30, 2017 was $40,665 (December 31,
2016: $23,433) which is included in accrued liabilities. At June
30, 2017, the Company owes the shareholder $403,018 in principal
payments.
(vi)
On
January 12, 2017, the Company entered into a bridge loan agreement
(the “Bridge Loan Agreement”) with a shareholder,
whereby the shareholder would make available to the Company the
aggregate principal amount of CAD $200,000 (USD $154,120) (the
“Bridge Loan”) in two equal tranches of CAD $100,000.
The Company received the first tranche on January 12, 2017
(“Bridge Loan Note A”) and the second tranche on
January 18, 2017 (“Bridge Loan Note B”). The Bridge
Loan is non-interest bearing and matures on March 12, 2017.
Pursuant to the terms of the Bridge Loan Agreement, the shareholder
received a 5% upfront fee upon the closing of Bridge Loan Note A
and a 5% upfront fee upon the closing of Bridge Loan Note B. The
Bridge Loan is secured by the general security agreement issued in
connection to the Secured Note. On January 12, 2017 and in
connection to the Bridge Loan Agreement, the Company issued
warrants for the purchase of 50,000 Common Shares exercisable until
January 11, 2018 at an exercise price of $0.20 per share, with
25,000 warrants to vest upon the closing of Bridge Loan Note A and
the remaining 25,000 warrants vest upon the closing of Bridge Loan
Note B. On January 12, 2017 and January 18, 2017, the Company
closed Bridge Loan Note A and Bridge Loan Note B, respectively, at
which dates the warrants became fully vested and exercisable (note
17(n)). The Bridge Loan matured on March 12, 2017 and is currently
in default.
12. CREDIT FACILITY
On
August 1, 2014, the Company entered into a revolving credit
facility (the “Credit Facility”) with an unrelated
party acting as an agent to a consortium of participants (the
“Lenders”), whereby the Lenders would make a revolving
credit facility in the aggregate principal amount of CAD $500,000
for the exclusive purpose of purchasing inventory for sale in the
Company’s ordinary course of business to approved customers.
The Credit Facility charged interest at a rate of 15% per annum on
all drawn advances and a standby fee of 3.5% per annum on the
undrawn portion of the Credit Facility. The Credit Facility matured
on August 1, 2015 whereby the outstanding advances together with
all accrued and unpaid interest thereon would be due and payable.
On August 1, 2014, and in connection to the Credit Facility, the
Company issued warrants for the purchase of 250,000 Common Shares
exercisable over two years at an exercise price of $0.30 per share.
The Company’s Chief Executive Officer and Chief Financial
Officer were both participants of the consortium of participants of
the Credit Facility, each having committed to provide ten percent
of the principal amount of the Credit Facility. The Credit Facility
was secured by all of the Company’s inventory and accounts
due relating to any inventory as granted in an intercreditor and
subordination agreement by and among the Company, the Secured Note
holder and the Lenders to establish the relative rights and
priorities of the secured parties against the Company and a
security agreement by and between the Company and the
Lenders.
During
the year ended December 31, 2014, the Company was advanced $387,110
(CAD $449,083) from the Credit Facility for the purchase of
inventory including $77,453 (CAD $89,852) of advances from the
Company’s Chief Executive Officer and Chief Financial Officer
as their participation in the Credit Facility.
On
April 24, 2015, the Company was advanced $89,590 (CAD $124,000)
from the Credit Facility including $17,918 (CAD $24,800) of
advances from the Company’s Chief Executive Officer and Chief
Financial Officer as their participation in the Credit
Facility.
On
September 1, 2015, the Company was advanced $122,825 (CAD $170,000)
from the Credit Facility including $24,565 (CAD $34,000) of
advances from the Company’s Chief Executive Officer and Chief
Financial Officer as their participation in the Credit
Facility.
During
the three and six month period ended June 30, 2017, the Company
paid $nil and $nil, respectively, (June 30, 2016: $2,189 and
$2,189) of interest and standby fees as a result of the Credit
Facility.
On
January 18, 2016, and in connection to the Term Loan (note 13), the
Company and the Lenders entered into a loan termination agreement
whereby the Company and the Lenders terminated and retired the
Credit Facility. As a result, the CAD $294,000 in amounts advanced
from the Credit Facility and the CAD $3,093 in accrued interest
owing on the Credit Facility were rolled into the Term
Loan.
13. TERM LOAN
On
January 18, 2016, the Company entered into a term loan (the
“Term Loan”) with the Lenders, whereby the Lenders
would loan the Company the aggregate principal amount of CAD
$1,000,000 for capital expenditures, marketing expenditures and
working capital. The agent who arranged the Term Loan was not a
related party of the Company. The Term Loan bears interest at a
rate of 16% per annum, on the outstanding principal, and shall
mature on July 3, 2017, whereby any outstanding principal together
with all accrued and unpaid interest thereon shall be due and
payable. The Term Loan is secured the intercreditor and
subordination agreement as well as the security agreement issued in
connection to the Credit Facility. The Term Loan is subject to a
monthly cash sweep, calculated as the total of (i) CAD $0.50 for
every E-liquid bottle, smaller than 15 ml, sold by the Company
within a monthly period; and (ii) CAD $1.00 for every E-liquid
bottle, greater than 15 ml, sold by the Company within a monthly
period (the “Cash Sweep”). The Cash Sweep will be
disbursed to the Lenders in the following priority: first, to pay
the monthly interest due on the Term Loan; and second, to repay any
remaining principal outstanding on the Term Loan. The Company may
elect to repay the outstanding principal of the Term Loan together
with all accrued and unpaid interest thereon prior to the maturity,
subject to an early repayment penalty of the maximum of (i) 3
months interest on the outstanding principal; or (ii) 50% of the
interest payable on the outstanding principal until maturity (the
“Early Repayment Penalty”). The Term Loan shall be
immediately due and payable at the option of the Lenders if there
is a change in key personnel meaning the Company’s current
Chief Executive Officer and Chief Financial Officer. On January 18,
2016 and in connection to the Term Loan, the Company issued
warrants for the purchase of 250,000 Common Shares (note 17(d))
exercisable until December 31, 2017 at an exercise price of $0.20
per share. In addition, the Company also extended the expiration
date of the 250,000 warrants (note 17(d)) issued on August 1, 2014
in connection with the Credit Facility until December 31, 2017,
with all other terms of the warrants remaining the
same.
The
Company’s Chief Executive Officer and Chief Financial Officer
are both participants of the consortium of Lenders of the Term
Loan, each having committed to provide ten percent of the principal
amount of the Term Loan. Neither the Chief Executive Officer nor
the Chief Financial Officer participated in the warrants issued or
warrants extended in connection with the Term Loan and both parties
have been appropriately abstained from voting on the Board of
Directors to approve the Term Loan, where applicable.
On July
15, 2016, the Company and the Lenders of the Term Loan entered into
a term loan amendment (the “Term Loan Amendment”) in
which the Lenders agreed to extend to the Company an additional CAD
$600,000 in principal to increase the Term Loan facility up to the
aggregate principal amount of CAD $1,600,000. The parties also
extended the maturity date of the Term Loan to July 2, 2018 with
all other terms of the Term Loan remaining the same. The
Company’s Chief Executive Officer and its Chief Financial
Officer are both participants in the consortium of Lenders having
each committed to provide a total of CAD $150,000 of the initial
principal of the Term Loan and the additional principal of the Term
Loan pursuant to the Term Loan Amendment.
On July
15, 2016 and in connection to the Term Loan Amendment, the Company
issued warrants for the purchase of 300,000 Common Shares (note
17(k)) exercisable until December 31, 2018 at an exercise price of
$0.20 per share. The Company also extended the expiration dates of:
i) the warrants for the purchase of 250,000 Common Shares (note
17(d)) issued on January 18, 2016 in connection to the Term Loan;
and ii) the warrants for the purchase of 250,000 Common Shares
(note 17(d)) issued on August 1, 2014 and extended on January 18,
2016 in connection to the Term Loan, both until December 31, 2018,
with all other terms of the warrants remaining the same. Neither
the Chief Executive Officer nor the Chief Financial Officer
participated in the warrants issued or warrants extended in
connection with the Term Loan Amendment.
During
the year ended December 31, 2016, the Company was advanced
$1,219,840 (CAD $1,600,000) from the Term Loan including the CAD
$294,000 and CAD $3,093 rolled in from the Credit Facility (note
12) as well as CAD $240,581 of advances from the Company’s
Chief Executive Officer and Chief Financial Officer.
On
February 27, 2017, the Company and the Lenders of the Term Loan
entered into a term loan amendment (the “Term Loan Amendment
No.2”) to amend certain terms and conditions of the Term
Loan. Pursuant to the Term Loan Amendment No.2, the parties agreed
to modify the Cash Sweep to be calculated as the total of CAD
$0.01667 per ml of E-liquid sold by the Company within a monthly
period, such modification to be retroactively applied as of January
1, 2017. The Lenders also agreed to cancel the Early Repayment
Penalty and waive any interest payment penalties due under the Term
Loan. On February 27, 2017 and in connection to the Term Loan
Amendment No.2, the Company agreed to issue 500,000 private
placement units at a price of $0.10 per unit as a settlement of
$50,000 in financing fees. Each unit consisted of one Common Share
and a half Common Share purchase warrant exercisable over twelve
months at an exercise price of $0.20 per share. On April 4, 2017,
the Company issued the 500,000 units. The Company’s Chief
Executive Officer and its Chief Financial Officer received a total
of 93,622 units which included 93,622 Common Shares and warrants
for the purchase of 46,811 Common Shares. The Term Loan Amendment
No.2 was accounted for as a modification of debt and no gain or
loss was recognized on the amendment.
During
the three and six month periods ended June 30, 2017, the Company
expensed $42,120 and $86,673, respectively, (June 30, 2016: $29,824
and $52,836) in interest as a result of the Term Loan. Pursuant to
the Cash Sweep, during the six month period ended June 30, 2017,
the Company paid $171,976 to the Lenders consisting of $101,511 in
interest and $70,465 in principal payments. At June 30, 2017, the
Company owes the Lenders $26,932, consisting of $14,225 in interest
and $12,707 in principal payments, which was paid to the Lenders on
July 15, 2017 as per the terms of the Cash Sweep.
The
amount owing on the Term Loan is as follows:
|
|
|
|
|
Opening
balance/amount advanced
|
$
1,144,337
|
$
1,219,840
|
|
Exchange loss
(gain) during the period/year
|
36,885
|
(28,159
)
|
|
Principal payments
made
|
(70,465
)
|
(76,815
)
|
|
Interest
accrued
|
86,673
|
140,540
|
|
Interest payments
made
|
(101,511
)
|
(111,069
)
|
|
Ending
balance
|
$
1,095,919
|
$
1,144,337
|
14. PROMISSORY NOTES
The
Company has outstanding current promissory notes as
follows:
|
|
|
|
|
Unsecured
Promissory Notes (note 4(a))
|
$
783,317
|
$
783,317
|
|
Unsecured,
bears interest at 18% per annum, matures June 19, 2019
(i)
|
30,000
|
-
|
|
Unsecured, bears
interest at 10%, matures December 15, 2017
(ii)
|
16,750
|
-
|
|
Unsecured, bears
interest at 10% per annum, matures September 28, 2017
(iii)
|
5,250
|
17,750
|
|
|
$
835,317
|
$
801,067
|
The
Company has outstanding long term promissory notes as
follows:
|
|
|
|
|
Unsecured,bears
interest at 18% per annum, matures June 19, 2019
(i)
|
$
30,000
|
-
|
(i)
On June 30, 2017,
the Company issued a promissory note in the amount of $60,000 to an
unrelated party. The principal together with interest at the rate
of 18% per annum is payable in monthly instalments of $3,400 with
the first payment due on July 19, 2017 and the final payment due on
June 19, 2019. In the event of default by way of any missed payment
under the promissory note and not cured for a period of 15 days, at
the option of the note holder, the entire principal amount
remaining will become due and payable without notice. At June 30,
3017, $30,000 of the principal on this promissory note has been
classified as a current liability and $30,000 has been classified
as a long term liability on the balance sheet.
(ii) On April 20,
2017, the Company issued a promissory note in the amount of $20,000
to an unrelated party. The principal together with interest at the
rate of 10% over the term of the promissory note is payable in
monthly instalments of $2,750 with the first payment due on May 15,
2017 and the final payment due on December 15, 2017. In the event
of default by way of any missed payment under the promissory note
and not cured for a period of 15 days, at the option of the note
holder, the entire principal amount remaining will become due and
payable without notice. During the three and six month periods
ended June 30, 2017, the Company paid $250 and $250, respectively,
(June 30, 2016: $nil and $nil) in interest on this promissory note.
At June 30, 2017, the Company was delinquent on its June 30, 2017
payment which has since been paid.
(iii)
On September 28,
2016, the Company issued a promissory note in the amount of $21,000
to an unrelated party. The principal together with interest at the
rate of 10% per annum is payable in monthly instalments of $2,000
with the first payment due on October 28, 2016 and the final
payment due on September 28, 2017. In the event of default by way
of any missed payment under the promissory note and not cured for a
period of 15 days, at the option of the note holder, the entire
principal amount remaining will become due and payable without
notice. During the three and six month periods ended June 30, 2017,
the Company paid $750 and $1,500, respectively, in interest (June
30, 2016: $nil and $nil) on this promissory note.
15. CONVERTIBLE DEBENTURES
Convertible Debentures Series A
On
September 3, 2013, December 23, 2013 and February 11, 2014, the
Company issued $425,000, $797,000 and $178,000, respectively, of
unsecured subordinated convertible debentures (“Convertible
Debentures Series A”). The Convertible Debentures Series A
matured on January 31, 2016 and charged interest at a rate of 12%
per annum, payable quarterly in arrears. The Convertible Debentures
Series A were convertible into Common Shares at a fixed conversion
rate of $0.07 per share at any time prior to the maturity date. Of
the $178,000 in face value of Convertible Debentures Series A
issued on February 11, 2014, $3,000 were issued in settlement of
loans from shareholders and $50,000 were issued in settlement of
loans from related parties.
Convertible Debentures Series B
On
December 31, 2015, the Company issued 650 unsecured subordinated
convertible debenture units (“Convertible Debentures Series
B”) for proceeds of $650,000. Each Convertible Debentures
Series B consisted of an unsecured subordinated convertible
debenture having a principal amount of $1,000 and warrants for the
purchase of 5,000 Common Shares at a price of $0.20 per share for a
period of twenty-four months from the date of issuance (note
17(c)). The Convertible Debentures Series B mature on January 31,
2018 and bear interest at a rate of 8% per annum, payable quarterly
in arrears. The face value of the Convertible Debentures Series B,
together with all accrued and unpaid interest thereon, are
convertible into Common Shares at a fixed conversion rate of $0.10
per share at any time prior to maturity. The Company also has the
option to force conversion of any outstanding Convertible
Debentures Series B at any time after six months from issuance and
prior to maturity. Of the $650,000 in face value of Convertible
Debentures Series B issued on December 31, 2015, $276,000 were
issued in settlement of loans from related parties, $10,000 were
issued in settlement of related party consulting fees $20,000 were
issued in settlement of consulting fees owing to an unrelated party
and $227,000 were issued in settlement of loans from
shareholders.
Convertible Debentures Series C
On May
20, 2016, the Company issued 375 unsecured subordinated convertible
debenture units (the “Convertible Debentures Series C”)
for proceeds of $375,000. Each Convertible Debentures Series C
consisted of an unsecured subordinated convertible debenture having
a principal amount of $1,000 and warrants for the purchase of
10,000 Common Shares at a price of $0.20 per share for a period of
twenty-four months from the date of issuance (note 17). The
Convertible Debentures Series C mature on January 31, 2018 and bear
interest at a rate of 8% per annum, accrued quarterly in arrears.
The face value of the Convertible Debentures Series C, together
with all accrued and unpaid interest thereon, are convertible into
Common Shares at a fixed conversion rate of $0.10 per share at any
time prior to maturity. The Company also has the option to force
conversion of any outstanding Convertible Debentures Series C at
any time after six months from issuance and prior to maturity. For
Canadian holders, the Company may only force conversion of any
outstanding Convertible Debentures Series C at such time that the
Company is a reporting issuer within the jurisdiction of Canada. Of
the $375,000 in face value of Convertible Debentures Series C
issued on May 20, 2016 (“Convertible Debentures Series
C-1”), $55,000 were issued in settlement of amounts owing to
related parties (note 20(c)) and $10,000 were issued in settlement
of amounts owing to an employee. The Company incurred costs of
$22,725 as a result of the issuance of Convertible Debentures
Series C-1 on May 20, 2016.
On
December 31, 2016, the Company issued an additional 275 units of
Convertible Debentures Series C (“Convertible Debentures
Series C-2”) for proceeds of $275,000 which were fully issued
in exchange for cash.
On
January 20, 2017, the Company issued an additional 75 units of
Convertible Debentures Series C (“Convertible Debentures
Series C-3”) in settlement of $65,000 owing to a related
party (note 20(c)) and $10,000 owing in shareholder loans (note
11(ii)).
The
Company evaluated the terms and conditions of the Convertible
Debentures Series A, Convertible Debentures Series B and each
tranche of Convertible Debentures Series C (together, the
“Convertible Debentures”) under the guidance of ASC No.
815,
Derivatives and
Hedging
(“ASC 815”). The conversion feature met
the definition of conventional convertible for purposes of applying
the conventional convertible exemption. The definition of
conventional contemplates a limitation on the number of shares
issuable under the arrangement. The instrument was convertible into
a fixed number of shares and there were no down round protection
features contained in the contracts.
Since a
portion of the Convertible Debentures were issued in exchange for
nonconvertible instruments at the original instrument’s
maturity date, the guidance of ASC 470-20-30-19 & 20 were
applied. The fair value of the newly issued Convertible Debentures
were equal to the redemption amounts owed at the maturity date of
the original instruments. Therefore, there was no gain or loss on
extinguishment of debt recorded. After the exchange occurred, the
Company was required to consider whether the new hybrid contracts
embodied a beneficial conversion feature
(“BCF”).
For the
face value $425,000 of Convertible Debentures Series A issued on
September 3, 2013, the calculation of the effective conversion
amount did not result in a BCF because the effective conversion
price was greater than the Company’s stock price on the date
of issuance, therefore no BCF was recorded. However, for the face
value $797,000 of Convertible Debentures Series A that were issued
on December 23, 2013 and the face value $178,000 of Convertible
Debentures Series A that were issued on February 11, 2014, the
calculation of the effective conversion amount resulted in a BCF
because the effective conversion price was less than the
Company’s stock price on the date of issuance and a BCF in
the amount of $797,000 and $178,000, respectively, were recorded in
additional paid-in capital.
For the
face value $650,000 of Convertible Debentures Series B issued on
December 31, 2015, the relative fair value of the warrants included
in the issuance totaling $287,757 was calculated using the
Black-Scholes option pricing model. The resulting fair value of
such Convertible Debentures Series B issuance was calculated to be
$362,243. The calculation of the effective conversion amount
resulted in a BCF because the effective conversion price was less
than the Company’s stock price on the date of issuance and a
BCF in the amount of $133,657 was recorded in additional paid-in
capital.
For the
face value $375,000 of Convertible Debentures Series C-1 issued on
May 20, 2016, the relative fair value of the warrants included in
the issuance totaling $234,737 (note 17(i)) was calculated using
the Black-Scholes option pricing model. The resulting fair value of
such Convertible Debentures Series C-1 was calculated to be
$140,263. The calculation of the effective conversion amount
resulted in a BCF because the effective conversion price was less
than the Company’s stock price on the date of issuance and a
BCF in the amount of $117,538, net of transaction costs, was
recorded in additional paid-in capital.
For the
face value $275,000 of Convertible Debentures Series C-2 issued on
December 31, 2016, the relative fair value of the warrants included
in the issuance totaling $143,871 (note 17(m)) was calculated using
the Black-Scholes option pricing model. The resulting fair value of
such Convertible Debentures Series C-2 was calculated to be
$131,129. The calculation of the effective conversion amount
resulted in a BCF because the effective conversion price was less
than the Company’s stock price on the date of issuance and a
BCF in the amount of $131,129, was recorded in additional paid-in
capital.
For the
face value $75,000 of Convertible Debentures Series C-3 issued on
January 20, 2017, the relative fair value of the warrants included
in the issuance totaling $43,737 (note 17(o)) was calculated using
the Black-Scholes option pricing model. The resulting fair value of
such Convertible Debentures Series C-3 was calculated to be
$31,263. The calculation of the effective conversion amount
resulted in a BCF because the effective conversion price was less
than the Company’s stock price on the date of issuance and a
BCF in the amount of $31,263, was recorded in additional paid-in
capital.
The BCF
and the fair value of the warrants, which represents debt discount,
is accreted over the life of the Convertible Debentures using the
effective interest rate. Amortization of debt discount was recorded
as follows:
|
|
For the Three
Months Ended
June
30,
2017
|
For the Three Months
Ended
June
30,
2016
|
For the Six Months
Ended
June
30,
2017
|
For the Six
Months Ended
June
30,
2016
|
|
Convertible
Debentures Series A
|
$
-
|
$
-
|
$
-
|
$
17,342
|
|
Convertible
Debentures Series B
|
40,104
|
8,334
|
83,841
|
13,130
|
|
Conversion of
Convertible Debentures Series B
|
342,399
|
-
|
342,399
|
-
|
|
Convertible
Debentures Series C-1
|
24,412
|
5,814
|
44,584
|
5,814
|
|
Conversion of
Convertible Debentures Series C-1
|
163,599
|
-
|
163,599
|
-
|
|
Convertible
Debentures Series C-2
|
15,077
|
-
|
20,286
|
-
|
|
Convertible
Debentures Series C-3
|
4,112
|
-
|
6,283
|
-
|
|
|
$
589,703
|
$
14,148
|
$
660,992
|
$
36,286
|
Convertible
Debentures as of June 30, 2017 and December 31, 2016, are as
follows:
|
Balance,
December 31, 2015
|
$
87,158
|
|
Face value
Convertible Debentures Series C-1
|
375,000
|
|
Face value
Convertible Debentures Series C-2
|
275,000
|
|
Relative fair value
of detachable warrants
|
(378,608
)
|
|
BCF
|
(248,667
)
|
|
Transaction
costs
|
(22,725
)
|
|
Amortization of
debt discount
|
94,546
|
|
Conversion
|
(23,000
)
|
|
Cash
settlements
|
(75,000
)
|
|
Balance,
December 31, 2016
|
$
83,704
|
|
Face Value
Convertible Debentures Series C-3
|
75,000
|
|
Relative fair value
of detachable warrants
|
(43,737
)
|
|
BCF
|
(31,263
)
|
|
Conversion of
Convertible Debentures Series B
|
(423,000
)
|
|
Conversion of
Convertible Debenture Series C-1
|
(190,000
)
|
|
Amortization of
debt discount
|
660,992
|
|
Balance,
June 30, 2017
|
$
131,696
|
|
|
|
Conversions and Repayments of Convertible Debentures Series
A
The
Company received forms of election whereby holders of the
Convertible Debentures Series A elected to convert the face value
of the debentures into Common Shares at $0.07 per share pursuant to
the terms of the Convertible Debentures Series A. As at June 30,
2017, the Company received the following forms of elections from
holders of the Convertible Debentures:
|
Date Form
of
Election
Received
|
Face Value of
Convertible Debentures Series A Converted
|
Number
of
Common Shares
Issued on Conversion
|
|
April 15,
2014
|
$
50,000
|
714,286
|
|
September 30,
2014
|
800,000
|
11,428,572
|
|
November 10,
2014
|
275,000
|
3,928,571
|
|
March 9,
2015
(1)
|
52,000
|
742,857
|
|
July 15,
2015
|
105,000
|
1,500,000
|
|
September 1,
2015
|
20,000
|
285,714
|
|
|
$
1,302,000
|
18,600,000
|
(1)
On March 9, 2015,
the Company settled interest payable on the Convertible Debentures
Series A in the amount of $1,096 with the issuance of Common Shares
at a price of $0.15 per share, of which, $358 of interest payable
on the Convertible Debentures Series A was settled with a Director
of the Company.
On
January 25, 2016, the Company received a form of election to
convert face value $23,000 of Convertible Debentures Series A, such
328,571 Common Shares remain unissued. On March 10, 2016, the
Company settled face value $25,000 of Convertible Debentures Series
A with a cash payment. On July 6, 2016, the Company settled face
value $50,000 of Convertible Debentures Series A and agreed to pay
to the holders such face value in monthly payments ending on
November 1, 2016. As at December 31, 2016, the $50,000 was fully
paid.
As at
June 30, 2017, all Convertible Debentures Series A had been fully
settled and only the 328,571 Common Shares remain
unissued.
Conversions and Repayments of Convertible Debentures Series B &
C
On
April 30, 2017 and pursuant to the terms of the Convertible
Debentures Series B, the Company sent notices of its election to
convert $423,000 in face value and $45,058 in accrued interest to
holders of Convertible Debentures Series B at $0.10 per share for a
total of 4,680,581 Common Shares of the Company. As a result of
these conversions, the Company recorded a debt discount in the
amount of $342,399. The above amount included the conversion of
$286,000 in face value and $30,465 in accrued interest held by
related parties of the Company (note 20(c)).
On
April 30, 2017 and pursuant to the terms of the Convertible
Debentures Series C, the Company sent notices of its election to
convert $190,000 in face value and $14,367 in accrued interest to
holders of Convertible Debentures Series C-1 at $0.10 per share for
a total of 2,043,670 Common Shares of the Company. As a result of
these conversions, the Company recorded a debt discount in the
amount of $163,599. The above amount included the conversion of
$5,000 in face value and $378 in accrued interest held by related
parties of the Company (note 20(c)).
As at
June 30, 2017, face value $227,000 of Convertible Debentures Series
B and face value $535,000 of Convertible Debentures Series C remain
owing to their respective debenture holders.
Interest on Convertible Debentures
During
the three and six month periods ended June 30, 2017, the Company
recorded interest expense in the amount of $19,229 and $46,023,
respectively, (June 30, 2016: $18,816 and $231,780) on the
Convertible Debentures. The interest owing on the convertible
debentures is included in accrued liabilities on the balance
sheet.
16. COMMON STOCK
During
the six months ended June 30, 2017, the Company:
|
|
●
|
Issued
18,483,818 Common Shares on a private placement basis, at a price
of $0.10 per private placement unit, for cash proceeds, net of
issuance costs, of $1,758,672;
|
|
|
●
|
Issued
1,998,950 Common Shares on a private placement basis, at a price of
$0.10 per private placement unit, for settlement of $199,895 in
amounts owing to related parties (note 20(c));
|
|
|
●
|
Issued
226,920 Common Shares on a private placement basis, at a price of
$0.10 per private placement unit, for settlement of $22,692 in
amounts owing to a shareholder (note 11(i));
|
|
|
●
|
Issued
320,022 Common Shares, at an average price of $0.156 per share, for
settlement of $50,000 in consulting fees owing to a shareholder,
previously granted and recognized as Common Shares to be issued as
at December 31, 2016;
|
|
|
●
|
Issued
143,715 Common Shares, at an average price of $0.129 per share, for
settlement of $18,550 in consulting fees owing to an unrelated
party, previously granted and recognized as Common Shares to be
issued as at December 31, 2016;
|
|
|
●
|
Issued
366,667 Common Shares, at a price of $0.15 per share, for
settlement of $55,000 in consulting fees owing to an unrelated
party, previously granted and recognized as Common Shares to be
issued as at December 31, 2016;
|
|
|
●
|
Issued
300,000 Common Shares, at a price of $0.10 per share, for
settlement of $30,000 in amounts owing to a director of the Company
(note 20(a)). The amount allocated to Shareholders’
Deficiency, based on their fair value, amounted to $33,000. The
balance of $3,000 has been recorded as a loss on settlement of
debt;
|
|
|
●
|
Issued
300,000 Common Shares, at a price of $0.167 per share, for
settlement of $50,000 in charitable contributions owing to an
unrelated party (note 22(d)). The amount allocated to
Shareholders’ Deficiency, based on their fair value, amounted
to $36,000. The balance of $14,000 has been recorded as a gain on
settlement of debt;
|
|
|
●
|
Issued
50,000 Common Shares, at a price of $0.12 per share, as $6,000 in
employment income to an unrelated party;
|
|
|
●
|
Issued
871,000 Common Shares, at a price of $0.10 per share, for
settlement of $87,100 in directors fees owing to former directors
of the Company (note 20(a)). The amount allocated to
Shareholders’ Deficiency, based on their fair value, amounted
to $121,940. The balance of $34,840 has been recorded as a loss on
settlement of debt;
|
|
|
●
|
Issued
500,000 Common Shares on a private placement basis, at a price of
$0.10 per private placement unit, as settlement of $50,000 in
financing fees in connection to the Term Loan Amendment No.2 (note
13). Of the 500,000 Common Shares issued, 93,622 Common Shares were
issued to related parties (note 20(c));
|
|
|
●
|
Issued
6,130,000 Common Shares, at a price of $0.10 per share, on
conversion of $613,000 of Convertible Debentures (note 15). The
above amount included the conversion of $291,000 of Convertible
Debentures held by related parties of the Company (note 20(c));
and
|
|
|
●
|
Issued
594,251 Common Shares, at price of $0.10 per share, for settlement
of $59,425 in interest owing on Convertible Debentures (note 15).
The above amount included the settlement of $30,843 of interest
owing on Convertible Debentures held by related parties of the
Company (note 20(c)).
|
During
the year ended December 31, 2016, the Company:
|
|
●
|
Issued
480,000 Common Shares, at a price of $0.10 per share, for
settlement of $48,000 in deferred fees owing to a related party
(note 20(c)). The amount allocated to Shareholders’
Deficiency, based on their fair value, amounted to $76,800. The
balance of $28,800 has been recorded as a loss on settlement of
debt;
|
|
|
●
|
Issued
562,715 Common Shares, at an average price of $0.141 per share, for
settlement of $79,154 in consulting fees owing to unrelated
parties. The amount allocated to Shareholders’ Deficiency,
based on their fair value, amounted to $78,780. The balance of $374
has been recorded as a gain on settlement of debt; and
|
|
|
●
|
Issued
150,000 Common Shares, at a price of $0.14 per share, as $21,000 in
related party employment income (note 20(c)).
|
17. WARRANTS
The
following schedule summarizes the outstanding warrants for the
purchase of Common Shares of the Company:
|
|
|
|
|
|
|
Weighted Average
Exercise Price
|
Weighted Average
Life Remaining (yrs)
|
|
Weighted Average
Exercise Price
|
Weighted Average
Life Remaining (yrs)
|
|
Beginning of
year
|
17,310,000
|
$
0.23
|
1.21
|
8,177,373
|
$
0.25
|
1.39
|
|
Issued
|
14,252,782
|
0.21
|
0.93
|
11,935,000
|
0.21
|
2.05
|
|
Cancelled
|
(1,750,000
)
|
0.25
|
1.03
|
(1,125,000
)
|
0.25
|
1.13
|
|
Expired
|
(2,750,000
)
|
0.35
|
-
|
(1,677,373
)
|
0.19
|
-
|
|
End of
year
|
27,062,782
|
$
0.21
|
0.92
|
17,310,000
|
$
0.23
|
1.21
|
|
|
|
|
|
|
|
|
The
Company has issued warrants for the purchase of Common Shares of
the Company as follows:
|
Issuance
Date
|
|
|
|
|
|
|
|
|
|
May 29,
2015
|
(a)
|
250,000
|
2.00
|
0.40
|
0.85
%
|
Nil
|
298
%
|
35,362
|
|
May 29,
2015
|
(a)
|
250,000
|
2.00
|
0.50
|
0.85
%
|
Nil
|
298
%
|
35,134
|
|
May 29,
2015
|
(a)
|
250,000
|
2.00
|
0.60
|
0.85
%
|
Nil
|
298
%
|
34,934
|
|
May 29,
2015
|
(a)
|
250,000
|
2.00
|
0.70
|
0.85
%
|
Nil
|
298
%
|
34,755
|
|
December 30,
2015
|
(b)
|
250,000
|
1.50
|
0.20
|
0.88
%
|
Nil
|
190
%
|
26,821
|
|
December 31,
2015
|
(c)
|
3,250,000
|
2.00
|
0.20
|
1.19
%
|
Nil
|
265
%
|
516,343
|
|
January 18,
2016
|
(d)
|
250,000
|
2.46
|
0.20
|
0.91
%
|
Nil
|
263
%
|
51,598
|
|
February 18,
2016
|
(e)
|
300,000
|
2.00
|
0.25
|
0.80
%
|
Nil
|
275
%
|
30,501
|
|
February 18,
2016
|
(f)
|
1,500,000
|
2.00
|
0.25
|
0.80
%
|
Nil
|
275
%
|
152,503
|
|
March 2,
2016
|
(g)
|
1,000,000
|
2.00
|
0.20
|
0.91
%
|
Nil
|
271
%
|
158,995
|
|
April 13,
2016
|
(h)
|
1,750,000
|
2.00
|
0.25
|
0.88
%
|
Nil
|
264
%
|
241,754
|
|
May 20,
2016
|
(i)
|
3,750,000
|
2.00
|
0.20
|
1.03
%
|
Nil
|
259
%
|
234,737
|
|
May 20,
2016
|
(j)
|
85,000
|
2.00
|
0.20
|
1.03
%
|
Nil
|
259
%
|
14,225
|
|
July 15,
2016
|
(k)
|
300,000
|
2.46
|
0.20
|
0.91
%
|
Nil
|
263
%
|
45,799
|
|
December 22,
2016
|
(l)
|
250,000
|
1.50
|
0.20
|
0.87
%
|
Nil
|
180
%
|
18,840
|
|
December 31,
2016
|
(m)
|
2,750,000
|
2.00
|
0.20
|
1.20
%
|
Nil
|
259
%
|
143,871
|
|
January 12,
2017
|
(n)
|
50,000
|
1.00
|
0.20
|
0.81
%
|
Nil
|
191
%
|
4,988
|
|
January 20,
2017
|
(o)
|
750,000
|
2.00
|
0.20
|
1.20
%
|
Nil
|
267
%
|
43,737
|
|
January 31,
2017
|
(p)
|
3,773,006
|
1.00
|
0.20
|
0.84
%
|
Nil
|
173
%
|
224,479
|
|
January 31,
2017
|
(q)
|
411,361
|
1.00
|
0.20
|
0.84
%
|
Nil
|
173
%
|
24,474
|
|
February 17,
2017
|
(r)
|
907,948
|
1.00
|
0.20
|
0.82
%
|
Nil
|
167
%
|
63,641
|
|
February 17,
2017
|
(s)
|
108,954
|
1.00
|
0.20
|
0.82
%
|
Nil
|
167
%
|
7,615
|
|
March 8,
2017
|
(t)
|
1,500,000
|
2.00
|
0.25
|
1.36
%
|
Nil
|
266
%
|
193,438
|
|
March 21,
2017
|
(u)
|
3,270,045
|
1.00
|
0.20
|
1.00
%
|
Nil
|
165
%
|
236,773
|
|
March 21,
2017
|
(v)
|
27,623
|
1.00
|
0.20
|
1.00
%
|
Nil
|
165
%
|
2,000
|
|
April 4,
2017
|
(w)
|
250,000
|
1.00
|
0.20
|
1.03
%
|
Nil
|
163
%
|
19,703
|
|
April 6,
2017
|
(x)
|
500,000
|
2.00
|
0.25
|
1.24
%
|
Nil
|
167
%
|
52,643
|
|
June 2,
2017
|
(y)
|
1,634,615
|
1.00
|
0.20
|
1,16
%
|
Nil
|
171
%
|
110,602
|
|
June 16,
2017
|
(z)
|
769,230
|
1.00
|
0.20
|
1.21
%
|
Nil
|
171
%
|
57,765
|
|
June 28,
2017
|
(aa)
|
300,000
|
1.00
|
0.20
|
1.21
%
|
Nil
|
159
%
|
23,020
|
|
|
30,687,782
|
|
|
|
|
|
2,841,050
|
(a)
Issued in connection to a commission agreement. The warrants vest
in four tranches of 250,000 warrants each. The first tranche has an
exercise price of $0.40 per share and vested upon execution of the
agreement. The second tranche has an exercise price of $0.50 per
share and will vest upon the sales agent delivering $500,001 in
sales revenue to Gilla Worldwide. The third tranche has an exercise
price of $0.60 per share and will vest upon the sales agent
delivering $1,000,001 in sales revenue to Gilla Worldwide. The
fourth tranche has an exercise price of $0.70 per share and will
vest upon the sales agent delivering $1,500,001 in sales revenue
Gilla Worldwide. During the year ended December 31, 2015, the
Company booked the fair value of the vested warrants in the amount
of $35,362 as a prepaid to be expensed over the two year life of
the commission agreement. During the six month periods ended June
30, 2017 and 2016, the Company expensed $7,367 and $8,840,
respectively, in stock based compensation which has been recorded
as an administrative expense. No portion of the value of the
unvested warrants has been expensed as the sales agent had not yet
delivered any sales revenue to Gilla Worldwide.
(b)
Issued in connection to the Secured Notes (note 11). During
the year ended December 31, 2015, the Company booked the fair value
of the warrants in the amount of $26,821 as a prepaid to be
expensed over the life of the Secured Notes. During the six month
periods ended June 30, 2017 and 2016, the Company expensed $8,843
and $8,892, respectively, of the prepaid as financing fees which
has been recorded as an interest expense.
(c)
Issued in connection to the issuance of Convertible Debentures
Series B (note 14). The relative fair value of the warrants in
the amount of $516,343, along with the BCF, represents debt
discount on the Convertible Debentures Series B and is accreted
over the life of the convertible debentures using the effective
interest rate. During the six month periods ended June 30, 2017 and
2016, the Company recorded interest expense in the amount of
$83,841 and $13,130, respectively, related to debt discount which
includes the accretion of the BCF of the Convertible Debentures
Series B.
(d)
Issued in connection to the Term Loan (note 13). On July 15, 2016
and in connection to the Term Loan Amendment, the Company extended
the expiration date of the warrants to December 31, 2018, with all
other terms of the warrants remaining the same. During the year
ended December 31, 2016, the Company booked the fair value of the
warrants and the extension in the amount of $51,598 as a prepaid to
be expensed over the life of the Term Loan. During the six months
ended June 30, 2017 and 2016, the Company expensed $9,465 and
$12,921, respectively, as financing fees which has been recorded as
interest expense. On July 15, 2016 and in connection to the Term
Loan Amendment, the Company also extended the expiration date of
the warrants for the purchase of 250,000 Common Shares that were
issued on August 1, 2014 in connection to the Credit Facility (note
12) and extended on January 18, 2016 in connection to the Term Loan
(note 13) until December 31, 2018, with all other terms of the
warrants remaining the same. During the year ended December 31,
2016, the Company booked the fair value of the extensions in the
amount of $42,325 as a prepaid to be expensed over the life of the
Term Loan. During the six month periods ended June 30, 2017 and
2016, the Company expensed $8,076 and $9,467, respectively, as
financing fees which has been recorded as interest
expense.
(e)
Issued in relation to a consulting agreement. The warrants shall
vest quarterly in eight equal tranches, with the first tranche
vesting immediately and the final tranche vesting on November 18,
2017. If the consulting agreement was terminated prior to the
expiration of the warrants, any unexercised fully vested warrants
would expire thirty calendar days following the effective
termination date and any unvested warrants would be automatically
canceled. On August 31, 2016, the Company terminated the consulting
agreement and 187,500 of the unvested warrants have been cancelled
and the remaining 112,500 vested warrants remain outstanding and
exercisable until February 17, 2018 as mutually agreed in the
termination. During the six month periods ended June 30, 2017 and
2016, the Company expensed $nil and $16,511, respectively, as stock
based compensation which has been recorded as an administrative
expense.
(f)
Issued in relation to a consulting agreement. The warrants shall
vest quarterly in eight equal tranches, with the first tranche
vesting immediately and the final tranche vesting on November 18,
2017. If the consulting agreement was terminated prior to the
expiration of the warrants, any unexercised fully vested warrants
would expire thirty calendar days following the effective
termination date and any unvested warrants shall be automatically
canceled. On October 25, 2016, the Company terminated the
consulting agreement and 937,500 unvested warrants have been
cancelled and the remaining 562,500 vested warrants remain
outstanding and exercisable until June 30, 2018 as mutually agreed
in the termination. During the six month periods ended June 30,
2017 and 2016, the Company expensed $nil and $82,556, respectively,
as stock based compensation which has been recorded as an
administrative expense.
(g)
Issued in connection to the Loan Agreement (note 11(v)). The
warrants shall vest in two equal tranches, with 500,000 warrants to
vest upon the close of Loan Tranche A and the remaining 500,000
warrants to vest upon the close of Loan Tranche B. On March 3, 2016
and April 14, 2016, the Company closed Loan Tranche A and Loan
Tranche B, respectively, at which dates the warrants became fully
vested and exercisable. During the year ended December 31, 2016,
the Company booked the fair value of the warrants in the amount of
$158,995 as a prepaid to be expensed over the life of the
Shareholder Loan. During the six month periods ended June 30, 2017
and 2016, the Company expensed $41,073 and $22,083, respectively,
of the prepaid as financing fees which has been recorded as
interest expense.
(h)
Issued in connection to a consulting agreement. Forty percent of
the warrants vested immediately with the remaining sixty percent
vesting in equal tranches of fifteen percent on September 30, 2016,
December 31 2016, June 30, 2017 and December 31, 2017. If the
consulting agreement is terminated prior to the expiration of the
warrants, any unexercised fully vested warrants shall expire ninety
calendar days following the effective termination date and any
unvested warrants shall be automatically canceled. During the six
month period ended June 30, 2017, the Company terminated the
consulting agreement for cause and all warrants issued in
connection to the consulting agreement were canceled. As a result
of the termination, the Company did not record any stock based
compensation during the six month period ended June 30, 2017.
During the six month period ended June 30, 2016, the Company
expensed $135,032 in stock based compensation in relation to these
warrants.
(i)
Issued in connection to the issuance of Convertible Debentures
Series C-1 (note 15). The relative fair value of the warrants in
the amount of $234,737, along with the BCF, represents debt
discount on the Convertible Debentures Series C-1 and is accreted
over the life of the convertible debentures using the effective
interest rate. During the six month periods ended June 30, 2017 and
2016, the Company recorded interest expense in the amount of
$39,385 and $5,814, respectively, related to debt discount which
includes the accretion of the BCF of the Convertible Debentures
Series C-1.
(j)
Issued as a commission payment related to the issuance of the
Convertible Debentures Series C-1. The fair value of the warrants
in the amount of $14,225 was recorded as a reduction to the
proceeds received from the Convertible Debentures Series C-1 (note
15).
(k)
Issued in connection to the Term Loan Amendment (note 13). During
the year ended December 31, 2016, the Company booked the fair value
of the warrants in the amount of $45,799 as a prepaid to be
expensed over the life of the Term Loan. During the six month
periods ended June 30, 2017 and 2016, the Company expensed $11,562
and $nil, respectively, of the prepaid as financing fees which has
been recorded as interest expense.
(l)
Issued in connection to the Secured Notes (note 11). During the
year ended December 31, 2016, the Company booked the fair value of
the warrants in the amount of $18,840 as prepaid to be expensed
over the life of the Secured Notes. During the six month periods
ended June 30, 2017 and 2016, the Company expensed $3,055 and $nil,
respectively, of the prepaid as financing fees which has been
recorded as interest expense.
(m)
Issued in connection to the issuance of Convertible Debentures
Series C-2 (note 15). The relative fair value of the warrants in
the amount of $143,871, along with the BCF, represents debt
discount on the Convertible Debentures Series C-2 and is accreted
over the life of the convertible debentures using the effective
interest rate. During the six month periods ended June 30, 2017 and
2016, the Company recorded interest expense in the amount of
$11,022 and $nil, respectively, related to debt discount which
includes the accretion of the BCF of the Convertible Debentures
Series C-2.
(n)
Issued in connection to the Bridge Loan Agreement (note 11(vi)).
During the six month periods ended June 30, 2017 and 2016, the
Company expensed the fair value of the warrants in the amount of
$4,988 and $nil, respectively, as financing fees which has been
recorded as interest expense.
(o)
Issued in connection to the issuance of Convertible Debentures
Series C-3 (note 15). The relative fair value of the warrants in
the amount of $43,737, along with the BCF, represents debt discount
on the Convertible Debentures Series C-3 and is accreted over the
life of the convertible debentures using the effective interest
rate. During the six month periods ended June 30, 2017 and 2016,
the Company recorded interest expense in the amount of $20,286 and
$nil, respectively, related to debt discount which includes the
accretion of the BCF of the Convertible Debentures Series
C-3.
(p)
Issued in connection to private placement units. No stock based
compensation expense was recorded since the warrants were issued as
part of a private placement of Common Shares. The fair value of the
warrants were calculated and recorded in additional paid in
capital.
(q)
Issued as a commission payment related to the issuance of private
placement units. The fair value of the warrants in the amount of
$24,474 was recorded as a reduction to the proceeds received from
the private placement issuance.
(r)
Issued in connection to private placement units. No stock based
compensation expense was recorded since the warrants were issued as
part of a private placement of Common Shares. The fair value of the
warrants were calculated and recorded in additional paid in
capital.
(s)
Issued as a commission payment related to the issuance of private
placement units. The fair value of the warrants in the amount of
$7,615 was recorded as a reduction to the proceeds received from
the private placement issuance.
(t)
Issued in connection to an employment agreement. The warrants will
vest in three equal tranches, with the first tranche vesting upon
the employee generating over $25,000 in sales of new business for
two consecutive months, the second tranche vesting upon the
employee generating cumulative sales of over $500,000 and the third
tranche vesting upon the employee generating cumulative sales of
over $1,000,000 of new business. At June 30, 2017, no stock based
compensation has been recorded as the employee has not yet begun to
generate new business sales.
(u)
Issued in connection to private placement units. No stock based
compensation expense was recorded since the warrants were issued as
part of a private placement of Common Shares. The fair value of the
warrants were calculated and recorded in additional paid in
capital.
(v)
Issued as a commission payment related to the issuance of the
private placement units. The fair value of the warrants in the
amount of $2,000 was recorded as a reduction to the proceeds
received from the private placement issuance.
(w)
Issued in connection to private placement units. No stock based
compensation expense was recorded since the warrants were issued as
part of a private placement of Common Shares. The fair value of the
warrants were calculated and recorded in additional paid in
capital.
(x)
Issued in connection to an employment agreement, the warrants shall
vest in two equal tranches, with the first tranche vesting upon the
commercial sale of a new product to be developed by the employee
and the second tranche vesting upon the commercial sale of a total
of two new products developed by the employee. The Company expects
both tranches to vest at August 15, 2017 and has recorded $35,094
in stock based compensation for the six month period ended June 30,
2017.
(y)
Issued in connection to private placement units. No stock based
compensation expense was recorded since the warrants were issued as
part of a private placement of Common Shares. The fair value of the
warrants were calculated and recorded in additional paid in
capital.
(z)
Issued in connection to private placement units. No stock based
compensation expense was recorded since the warrants were issued as
part of a private placement of Common Shares. The fair value of the
warrants were calculated and recorded in additional paid in
capital.
(aa)
Issued in connection to private placement units. No stock based
compensation expense was recorded since the warrants were issued as
part of a private placement of Common Shares. The fair value of the
warrants were calculated and recorded in additional paid in
capital.
18. STOCK BASED COMPENSATION
The
Company recorded stock based compensation as follows:
|
|
Three Months
Ended
June
30,
2017
|
Three Months
Ended
June
30,
2016
|
Six Months
Ended
June
30,
2017
|
Six Months
Ended
June
30,
2016
|
|
Warrants
Issued as Stock Based Compensation
|
|
|
|
|
|
Warrants issued in
connection to the Bridge Loan Agreement
|
$
-
|
$
-
|
$
4,988
|
$
-
|
|
Warrants issued as
commission related to private placements units
|
-
|
-
|
34,089
|
-
|
|
Warrants issued in
relation to consulting agreements
|
35,094
|
172,431
|
35,094
|
222,939
|
|
Total
Warrants Issued as Stock Based Compensation
|
35,094
|
172,431
|
74,171
|
222,939
|
|
|
|
|
|
|
|
Issuance of stock
options (note 21)
|
1,213,605
|
-
|
1,213,605
|
-
|
|
Common shares
issued for consulting fees
|
6,000
|
100,154
|
6,000
|
100,154
|
|
Common shares to be
issued for consulting fees
|
-
|
32,710
|
-
|
32,710
|
|
Total
Stock Based Compensation
|
$
1,254,699
|
$
305,295
|
$
1,293,776
|
$
355,803
|
19. SHARES TO BE ISSUED
As at
June 30, 2017, the Company has $83,000 in Common Shares to be
issued, consisting of the following:
●
328,571 Common
Shares, valued at $0.07 per share, to be issued due to the
conversion of $23,000 of Convertible Debentures Series A (note 15);
and
●
600,000 Common
Shares on a private placement basis, at a price of $0.10 per
private placement unit, for cash proceeds of $60,000.
As at
December 31, 2016, the Company had $146,550 in Common Shares to be
issued, consisting of the following:
●
328,571 Common
Shares, valued at $0.07 per share, to be issued due to the
conversion of $23,000 of Convertible Debentures Series A (note
15);
●
320,022 Common
Shares, valued at an average price of $0.156 per share, to be
issued due to the settlement of $50,000 in consulting fees owing to
a shareholder. Such Common Shares were issued on April 5,
2017;
●
143,715 Common
Shares, valued at an average price of $0.129 per share, to be
issued due to the settlement of $18,550 in consulting fees owing to
an unrelated party. Such Common Shares were issued on April 5,
2017; and
●
366,667 Common
Shares, valued at $0.15 per share, to be issued due to the
settlement of $55,000 in consulting fees owing to an unrelated
party. Such Common Shares were issued on April 5,
2017.
20. RELATED PARTY TRANSACTIONS
Transactions
with related parties are incurred in the normal course of business
and are as follows:
|
(a)
|
The
Company’s current and former officers and shareholders have
advanced funds on an unsecured, non-interest bearing basis to the
Company, unless stated otherwise below, for travel related and
working capital purposes. The Company has not entered into any
agreement on the repayment terms for these
advances.
|
Advances
from related parties were as follows:
|
|
|
|
|
Advances by and
amounts payable to Officers of the Company, two of which are also
Directors
|
$
159,236
|
$
95,759
|
|
Advances by and
consulting fees payable to a corporation owned by two Officers of
the Company, one of which is also a Director
|
139,167
|
313,745
|
|
Consulting fees
owing to persons related to Officers who are also Directors of the
Company
|
53,878
|
77,463
|
|
Advances by
Officers of the Company, one of which is also a Director, bears
interest at 1.5% per month
|
552,634
|
901,784
|
|
Amounts payable to
a corporation related by virtue of a common Officer and Director of
the Company
|
-
|
76,407
|
|
Consulting fees and
directors fees payable to Directors of the Company
|
25,680
|
13,725
|
|
|
$
930,595
|
$
1,478,883
|
At June
30, 2017, the Company had deferred amounts of $1,060,687 (December
31, 2016: $1,085,906) owing to related parties. The deferred
amounts consist of $573,280 (December 31, 2016: $572,506) owing to
Officers of the Company, two of which are also Directors, for
consulting fees payable, amounts of $61,000 owing to Directors of
the Company for directors fees payable and amounts of $385,300 (CAD
$500,000) (December 31, 2016: $372,400; CAD $500,000) owing to a
corporation owned by two Officers of the Company, one of which is
also a Director, for management service fees payable and $41,107 of
amounts accrued towards the incentive bonus to be paid at maturity.
The amounts are non-interest bearing and payable on April 1, 2018,
in exchange for agreeing to defer the fees, the Directors and
Officers will receive an incentive bonus equal to 10% of the amount
deferred and payable on April 1, 2018. The bonus will be expensed
over the term of the deferrals. During the six month periods ended
June 30, 2017 and 2016, the Company expensed $47,307 and $nil,
respectively, in interest expense related to the incentive
bonus.
During
the six month period ended June 30, 2017, the Company settled
$87,100 of fees payable, deferred and otherwise, to two former
Directors of the Company with the issuance of 871,000 Common Shares
at a price of $0.10 per share. The amount allocated to
Shareholders’ Deficiency, based on their fair value, amounted
to $121,940. The balance of $34,840 has been recorded as a loss on
settlement of debt (note 16).
During
the six month period ended June 30, 2017, the Company settled
$30,000 of amounts payable to a Director of the Company with the
issuance of 300,000 Common Shares. The amount allocated to
Shareholders’ Deficiency, based on their fair value, amounted
to $33,000. The balance of $3,000 has been recorded as a loss on
settlement of debt (note 16).
During
the year ended December 31, 2016, the Company settled $48,000 of
the deferred amounts owing to an Officer and Director of the
Company with 480,000 Common Shares.
|
(b)
|
Interest
accrued to related parties were as follows:
|
|
|
|
|
|
|
|
|
|
Interest accrued on
advances by Officers of the Company, one of which is also a
Director
|
$
325,783
|
$
234,121
|
|
Advances by and
consulting fees payable to a corporation owned by two Officers of
the Company, one of which is also a Director
|
44,277
|
29,669
|
|
|
$
370,060
|
$
263,790
|
(c)
Transactions with
related parties were as follows:
During
the six month period ended June 30, 2017, the Company expensed $nil
(June 30, 2016: $48,080) in rent expense payable to a corporation
related by virtue of a common Officer and a common Director of the
Company.
During
the six month period ended June 30, 2017, the Company expensed
$20,689 (June 30, 2016: $11,024) in costs related to vehicles for
the benefit of three Officers, two of which are also Directors of
the Company, and for the benefit of a person related to an Officer
and Director of the Company. The Company also expensed $48,532
(June 30, 2016: $136,773) in travel and entertainment expenses
incurred by Officers and Directors of the Company.
On June
30, 2017, the Company issued 3,042,931 Common Shares, at a price of
$0.10 per share, to an Officer who is also a Director of the
Company, on the conversion of $275,000 in face value of the
Convertible Debentures Series B and the settlement of $29,293 in
interest accrued on the Convertible Debentures Series B (note
15).
On June
30, 2017, the Company issued 121,717 Common Shares, at a price of
$0.10 per share, to a person related to an Officer who is also a
Director of the Company, on the conversion of $11,000 in face value
of the Convertible Debentures Series B and the settlement of $1,171
in interest accrued on the Convertible Debentures Series B (note
15).
On June
30, 2017, the Company issued 53,781 Common Shares, at a price of
$0.10 per share, to a Director of the Company, on the conversion of
$5,000 in face value of the Convertible Debentures Series C-1 and
the settlement of $378 in interest accrued on Convertible
Debentures Series C-1 (note 15).
On
March 21, 2017, the Company issued 1,998,950 Common Shares as part
of private placement units, at a price of $0.10 per private
placement unit, for settlement of $199,895 in amounts owing to
related parties.
On
January 20, 2017, the Company issued 65 units of Convertible
Debentures Series C-3 in settlement of $65,000 owing to a related
party (note 15).
During
the year ended December 31, 2016, amounts owing to a former related
party in the amount of $9,263 were forgiven, as a result, the
Company recorded a gain on settlement in the amount of
$9,263.
On June
17, 2016, the Company issued 150,000 Common Shares, at a price of
$0.14 per share, to a person related to an Officer and Director of
the Company, on the signing of a new employment
agreement.
On May
20, 2016, the Company issued face value $55,000 of Convertible
Debentures Series C-1 to related parties consisting of $10,000 to a
person related to an Officer and Director for settlement of fees
payable, $10,000 to a Director of the Company for settlement of
directors fees payable and $35,000 to a corporation owned by two
Officers of the Company, one of which is also a Director, for
settlement of loans payable (note 15).
On May
20, 2016, the Company issued face value $15,000 of Convertible
Debentures Series C-1 to two Directors of the Company for cash
(note 15).
On
February 2, 2016, the Company settled $48,000 in consulting fees
payable to a related party and agreed to issue 480,000 Common
Shares at a price of $0.10 per share. Such Common Shares were
issued on May 19, 2016.
On May
20, 2016, the Company issued face value $55,000 of Convertible
Debentures Series C-1 to related parties consisting of $10,000 to a
person related to an Officer and Director for settlement of fees
payable, $10,000 to a Director of the Company for settlement of
directors fees payable and $35,000 to a corporation owned by two
Officers of the Company, one of which is also a Director, for
settlement of loans payable (note 15).
On May
20, 2016, the Company issued face value $15,000 of Convertible
Debentures Series C-1 to two Directors of the Company for cash
(note 15).During the year ended December 31, 2016, amounts owing to
a former related party in the amount of $9,263 were forgiven, as a
result, the Company recorded a gain on settlement in the amount of
$9,263.
On June
30, 2017, the Company issued 3,042,931 Common Shares, at a price of
$0.10 per share, to an Officer who is also a Director of the
Company, on the conversion of $275,000 in face value of the
Convertible Debentures Series B and the settlement of $29,293 in
interest accrued on the Convertible Debentures Series B (note
15).
On June
30, 2017, the Company issued 121,717 Common Shares, at a price of
$0.10 per share, to a person related to an Officer who is also a
Director of the Company, on the conversion of $11,000 in face value
of the Convertible Debentures Series B and the settlement of $1,171
in interest accrued on the Convertible Debentures Series B (note
15).
On June
30, 2017, the Company issued 53,781 Common Shares, at a price of
$0.10 per share, to a Director of the Company, on the conversion of
$5,000 in face value of the Convertible Debentures Series C-1 and
the settlement of $378 in interest accrued on Convertible
Debentures Series C-1 (note 15).
The
Company expensed consulting fees payable to related parties as
follows:
|
|
|
|
|
Officers
|
$
170,595
|
$
81,840
|
|
Persons related to
a Director
|
73,109
|
26,389
|
|
|
$
243,704
|
$
108,229
|
The
Company’s Chief Executive Officer and Chief Financial Officer
are both participants of the consortium of Lenders of the Credit
Facility and the Term Loan, each committed to provide a total of
CAD $150,000 of the Term Loan (notes 12 and 13).
On
February 27, 2017 and in connection to the Term Loan Amendment
No.2, the Company agreed to issue 500,000 private placement units,
at a price of $0.10 per unit, for settlement of $50,000 in
financing fees. The Company’s Chief Executive Officer and its
Chief Financial Officer received a total of 93,622 units which
included 93,622 Common Shares and warrants for the purchase of
46,811 Common Shares.
21. STOCK OPTION PLAN
On June
16, 2017, the Company adopted a stock option plan (the
“Option Plan”), under which the Board of Directors may
from time to time, in its discretion, grant to directors, officers,
employees and consultants of the Company non-transferable options
to purchase Common Shares.
Pursuant
to the Option Plan, the Company may issue options for such period
and exercise price as may be determined by the Board of Directors,
and in any case not exceeding ten years from the date of grant and
equal to not more than 10% of the then issued and outstanding
Common Shares. The minimum exercise price of an option granted
under the Option Plan must not be less than 100% of the market
value of the Common Shares on the date such option is granted, and
if the option is issued to a 10% shareholder of the Company, the
exercise price will not be less than 110% of the market value of
the Common Shares on the date such option is granted.
Outstanding
options at June 30, 2017 are as follows:
|
|
|
|
Expiry
Date
|
|
Executive
Officers
|
4,500,000
|
$
0.20
|
June 15,
2020
|
|
Directors
|
1,250,000
|
$
0.20
|
June 15,
2020
|
|
Employees
|
3,000,000
|
$
0.20
|
June 15,
2020
|
|
|
8,750,000
|
|
|
|
Grant
Date
|
|
|
|
|
|
|
June 16,
2017
|
June 15,
2020
|
8,750,000
|
8,750,000
|
$
0.20
|
$
1,213,605
|
The
options fully vested on issuance and the fair value of $1,213,605
was determined using the Black Scholes option-pricing model with
the following weighted average assumptions:
|
Stock
price
|
|
$0.14
|
|
Risk-free
interest rate
|
|
1.49%
|
|
Expected
life
|
|
3
years
|
|
Estimated
volatility in the market price of the Common Shares
|
|
306%
|
During
the six month periods ended June 30, 2017 and 2016, the Company
expensed $1,213,605 and $nil, respectively, as a stock option
expense.
22. COMMITMENTS AND CONTINGENCIES
a)
Premises Lease – Florida, USA
Effective
January 1, 2015, a subsidiary of the Company entered into an
operating lease agreement for a rental premises in Daytona Beach,
Florida, USA. The terms of this agreement are to be for a period of
36 months and ending on December 31, 2017 with payments made
monthly. Minimum annual lease payments are as follows:
b)
Premises Leases – Budapest, Hungary
Effective
January 2, 2017, a subsidiary of the Company entered into a lease
agreement for a rental premises in Budapest, Hungary. The terms of
the agreement are to be for a period of one year ending on December
31, 2017 with payments made monthly. Minimum annual lease payments
are denominated in Euros and are as follows:
c)
Litigation
The
Company is subject to certain legal proceedings and claims, which
arise in the ordinary course of its business. Although occasional
adverse decisions or settlements may occur, the Company believes
that the final disposition of such matters should not have a
material adverse effect on its financial position, results of
operations or liquidity.
On
January 5, 2016, Yaron Elkayam, Pinchas Mamane and Levent Dimen
filed a three count complaint against the Company in the Circuit
Court of Hillsborough County, Florida alleging (i) breach of
contract, (ii) breach of implied covenant of good faith and fair
dealing, and (iii) fraud in the inducement seeking damages in the
amount of approximately $900,000 of Unsecured Promissory Notes
issued on July 1, 2015 as a result of the acquisition of E Vapor
Labs. In July of 2016, the Company filed its Answer, Affirmative
Defences and Counterclaim.
d)
Charitable Sales Promotion
On
January 21, 2016, the Company entered into an agreement with
Wounded Warriors Family Support Inc. in which the Company agreed to
make a donation of $1.00 for each sale of its “Vape
Warriors” E-liquid product during the period from January 1,
2016 to December 31, 2016, with a minimum donation of $50,000.
During the year ended December 31, 2016, the Company accrued the
full $50,000 in charitable contributions regarding this agreement.
During the six months ended June 30, 2017, the Company settled the
full amount owing in exchange for 300,000 Common
Shares.
e)
Royalty Agreement
On June
14, 2016, the Company entered into a royalty agreement related to
an E-liquid recipe purchased from an unrelated party in which the
Company agreed to pay to the recipe developer, a royalty of $0.25
per 60 ml of E-liquid sold that contains the recipe, up to a
maximum of $100,000. Although the Company has the ability to sell
the E-liquid globally, the royalty is paid only on the E-liquid
sold within the United States. The Company is no longer selling the
original recipe and as of June 30, 2017, has stopped accruing
royalty payments on this agreement. During the three and six month
periods ended June 30, 2017, the Company paid $nil and $649,
respectively, (June 30, 2016: $nil and $nil) in relation to the
royalty agreement.
23. FINANCIAL INSTRUMENT
(i)
Credit Risk
Credit
risk is the risk of financial loss to the Company if a customer or
counterparty to a financial instrument fails to meet its
contractual obligations. The Company’s credit risk is
primarily attributable to fluctuations in the realizable values of
its cash and trade receivables. Cash accounts are maintained with
major international financial institutions of reputable credit and
therefore bear minimal credit risk. In the normal course of
business, the Company is exposed to credit risk from its customers
and the related trade receivables are subject to normal commercial
credit risks. A substantial portion of the Company’s trade
receivables are concentrated with a limited number of large
customers all of which the Company believes are subject to normal
industry credit risks. At June 30, 2017, the Company recorded an
allowance of $161,340 (December 31, 2016: $nil) in regards to
customers with past due amounts. As at June 30, 2017, 23% (December
31, 2016: 15%) of the Company’s trade receivables are due
from one customer and 59% of the trade receivables are due from
four customers. During the six month period ended June 30, 2017,
30% (June 30, 2016: 31%) of the Company’s sales were to one
customer.
(ii)
Liquidity Risk
Liquidity
risk is the risk that the Company will not be able to meet its
financial obligations as they fall due. The Company’s
approach to managing liquidity risk is to ensure, as far as
possible, that it will have sufficient liquidity to meet its
liabilities when due, under both normal and stressed conditions,
without incurring unacceptable losses or risking damage to the
Company’s reputation. The Company manages liquidity risk by
closely monitoring changing conditions in its investees,
participating in the day to day management and by forecasting cash
flows from operations and anticipated investing and financing
activities. At June 30, 2017, the Company had liabilities due to
unrelated parties through its financial obligations over the next
five years in the aggregate principal amount of $5,316,945. Of such
amount, the Company has obligations to repay $4,699,949 over the
next twelve months with the remaining $616,996 becoming due within
the following four years.
(iii) Foreign
Currency Risk
Currency
risk is the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in foreign
exchange rates.
The risks and
fluctuations are related to cash, accounts payable and trade
receivables that are denominated in CAD, HUF and
EUR.
Analysis by currency in CAD, HUF and EUR equivalents is as
follows:
|
June 30, 2017
|
|
|
|
|
CAD
|
$
197,015
|
$
29,431
|
$
43,268
|
|
HUF
|
$
230,041
|
$
52,219
|
$
14,119
|
|
EUR
|
$
55,636
|
$
59,824
|
$
94,563
|
The
effect of a 10% strengthening of the United States Dollar against
the Canadian Dollar, the Hungarian Forint and the Euro at the
reporting date on the CAD, HUF and EUR-denominated trade
receivables and payables carried at that date would, had all other
variables held constant, have resulted in an increase in profit for
the year and increase of net assets of $12,432, $16,370 and $9,875,
respectively. A 10% weakening in the exchange rate would, on the
same basis, have decreased profit and decreased net assets by
$12,432, $16,370 and $9,875, respectively.
The
Company purchases inventory in a foreign currency, at June 30,
2017, the Company included $105,346 (December 31, 2016: $238,888)
in inventory purchased in a foreign currency on its consolidated
balance sheet. The Company does not use derivative financial
instruments to reduce its exposure to this risk.
(iv)
Interest Rate Risk
Interest
rate risk is the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in market
interest rates. The Company is exposed to interest rate risk on its
fixed interest rate financial instruments. These fixed-rate
instruments subject the Company to a fair value risk. The interest
rates on all of the Company’s existing interest bearing debt
are fixed. Sensitivity to a plus or minus 25 basis points change in
rates would not significantly affect the fair value of this
debt.
24
.
SEGMENTED
INFORMATION
The
Company currently operates in only one business segment, namely,
manufacturing, marketing and distributing of E-liquid, vaporizers,
E-cigarettes, and vaping accessories in North America and
Europe. Total long lived assets by geographic location are as
follows:
|
|
|
|
|
Canada
|
$
670
|
$
826
|
|
United
States
|
1,099,410
|
1,125,704
|
|
Europe
|
20,280
|
23,418
|
|
|
$
1,120,360
|
$
1,149,948
|
Total
sales by geographic location are as follows:
|
|
|
|
|
Canada
|
$
55,163
|
$
-
|
|
United
States
|
470,360
|
1,838,191
|
|
Europe
|
1,984,042
|
430,337
|
|
|
$
2,509,565
|
$
2,268,528
|
25. SUBSEQUENT EVENTS
On July
1, 2017 and in connection to a consulting agreement, the Company
issued warrants for the purchase of 75,000 Common Shares
exercisable over eighteen (18) months at an exercise price of $0.20
per share.
On July
31, 2017, the Company acquired all of the issued and outstanding
shares of Vape Brands International Inc. (“VBI”), a
Canada-based E-liquid manufacturer and distributor, through its
wholly owned subsidiary Gilla Enterprises Inc., pursuant to the
terms of a share purchase agreement, dated July 31, 2017. Pursuant
to the share purchase agreement, the Company paid to the vendors of
VBI the following consideration: (i) 2,500,000 Common Shares of the
Company valued at $0.14 per share for a total value of $350,000;
(ii) warrants for the purchase of 2,000,000 Common Shares of the
Company exercisable over twenty-four (24) months at an exercise
price of $0.20 per share from the closing date, such warrants
vesting in five (5) equal tranches every four (4) months following
the closing date; (iii) a total of CAD $550,000 in non-interest
bearing, unsecured vendor-take-back loans due over twenty-four (24)
months, with principal repayments beginning five (5) months from
the closing date until maturity of up to CAD $25,000 per month; and
(iv) an earn-out capped at (a) the total cumulative amount of CAD
$2,000,000; or (b) five (5) years from the closing date (the
“Earn-Out”). The Earn-Out shall be calculated as: (x)
15% of the gross profit generated in Canada by VBI’s co-pack
and distribution business; (y) 10% of the revenue generated in
Canada by Gilla’s existing E-liquid brands; and (z) 15% of
the revenue generated globally on VBI’s existing E-liquid
brands. Furthermore, the Earn-Out shall be calculated and paid to
the vendors of VBI quarterly in arrears and only as 50% of the
aforementioned amounts on incremental revenue between CAD $300,000
and CAD $600,000 per quarter and 100% of the aforementioned amounts
on incremental revenue above CAD $600,000 per quarter with the
Earn-Out payable to the vendors in the fifth year repeated and paid
to the vendors in four (4) quarterly payments after the end of the
Earn-Out period, subject to the cumulative limit of the Earn-Out.
No Earn-Out shall be payable to the vendors of VBI if total revenue
for the Earn-Out calculation period is less than CAD $300,000 per
quarter. On July 31, 2017, the Company also entered into an
employment agreement with one of the vendors at a base salary of
CAD $155,000 per annum and issued warrants for the purchase of
1,000,000 Common Shares of the Company exercisable over twenty-four
(24) months at an exercise price of $0.20 per share, such warrants
vesting in four (4) equal tranches every six (6) months from the
issuance date.
On
August 4, 2017, the Company issued and sold on a private placement
basis, 500,000 Common Shares of the Company at a price of $0.10 per
share for cash proceeds of $50,000.
ITEM 2.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the
financial statements and the related notes thereto included
elsewhere in this Quarterly Report on Form 10-Q (this
“Report”). This Report contains certain forward-looking
statements and the Company's future operating results could differ
materially from those discussed herein. Our disclosure and analysis
included in this Report concerning our operations, cash flows and
financial position include forward-looking statements. Statements
that are predictive in nature, that depend upon or refer to future
events or conditions, or that include words such as
“expect”, “anticipate”,
“intend”, “plan”, “believe”,
“estimate”, “may”, “project”,
“will likely result”, and similar expressions are
intended to identify forward-looking statements. Such
forward-looking statements include (i) the ability to raise
additional capital; and (ii) expectations regarding anticipated
growth. Such forward-looking statements are subject to certain
risks, uncertainties and assumptions, and are more fully described
under “Part I, Item 1A - Risk Factors” of our Annual
Report on Form 10-K for the year ended December 31, 2016. New risks
and uncertainties arise from time to time, and it is impossible for
us to predict these events or how they may affect us. In any event,
these and other important factors, including those set forth in
Item 1A ñ “Risk Factors” of our Annual Report on
Form 10-K for the year ended December 31, 2016 may cause actual
results to differ materially from those indicated by our
forward-looking statements. We assume no obligation to update or
revise any forward-looking statements we make in this Report,
except as required by applicable securities laws.
Except as otherwise stated or required by the context, references
in this document to “Gilla” the
“Registrant”, the “Company,”
“we,” and “our” refer to Gilla
Inc.
Overview
Gilla
Inc. (the “Company”, the “Registrant” or
“Gilla”) was incorporated under the laws of the State
of Nevada on March 28, 1995 under the name of Truco, Inc. The
Company later changed its name to Web Tech, Inc., and then to
Cynergy, Inc., Mercantile Factoring Credit Online Corp.,
Incitations, Inc., Osprey Gold Corp. and to its present name. The
Company adopted the present name, Gilla Inc., on February 27, 2007.
The Company’s registered address is 475 Fentress Blvd., Unit
L, Daytona Beach, Florida 32114.
The
current business of the Company consists of the manufacturing,
marketing and distribution of generic and premium branded E-liquid
(“E-liquid”), which is the liquid used in vaporizers,
electronic cigarettes (“E-cigarettes”), and other
vaping hardware and accessories. E-liquid is heated by an atomizer
to deliver the sensation of smoking and sometimes even mimic
traditional smoking implements, such as cigarettes or cigars, in
their use and/or appearance, without burning tobacco. The Company
provides consumers with choice and quality across various
categories and price points to deliver the most efficient and
effective vaping solutions for nicotine and related products.
Gilla’s proprietary product portfolio includes the following
brands: Coil Glaze™, Siren, The Drip Factory, Craft
Vapes™, Craft Clouds, Surf Sauce, Vinto Vape, VaporLiq, Vape
Warriors, Vapor’s Dozen, Miss Pennysworth’s Elixirs,
Enriched Vapor and Crown E-liquid™.
Recent Developments
On May
10, 2016, the U.S. Federal Food & Drug Administration
(“FDA”) finalized a new rule, captioned, the
“Deeming Tobacco Products To Be Subject to the Federal Food,
Drug, and Cosmetic Act”, which extends the FDA’s
authority to include the regulation of electronic nicotine delivery
systems (such as e-cigarettes and vape pens), all cigars, hookah
(waterpipe) tobacco, pipe tobacco and nicotine gels, among others.
Going forward, the FDA will be able to review new nicotine products
not yet on the market; regulate claims by nicotine product
manufacturers and distributers; require evaluation and reporting of
the ingredients of nicotine products and how they are made; and
require disclosures regarding risks of nicotine products. The final
rule went into effect on August 8, 2016. The Company is assessing
the impact of the new FDA rule. Prospective investors are directed
to the “Risk Factors” contained in the Company’s
Annual Report filed with the U.S. Securities and Exchange
Commission (the “SEC”) for the fiscal year ended
December 31, 2016.
On
April 4, 2017, the Company issued, on a private placement basis,
500,000 private placement units of the Company (the
“Units”) at a price of $0.10 per Unit as a settlement
of $50,000 in financing fees in connection to a term loan
amendment. Each Unit consisted of one Common Share and one half
Common Share purchase warrant, each full warrant entitling the
holder to purchase one Common Share at an exercise price of $0.20
per Common Share for a period of twelve months following the
closing. The warrants for the purchase of 250,000 Common Shares
were issued on April 4, 2017 and the 500,000 Common Shares were
issued on June 22, 2017.
On
April 5, 2017, the Company issued 320,022 Common Shares at an
average price of $0.156 per Common Share as a settlement of $50,000
in consulting fees owing to an unrelated party.
On
April 5, 2017, the Company issued 143,715 Common Shares at an
average price of $0.129 per Common Share as a settlement of $18,550
in consulting fees owing to an unrelated party.
On
April 5, 2017, the Company issued 366,667 Common Shares at a price
of $0.15 per Common Share as a settlement of $55,000 in consulting
fees owing to an unrelated party.
On
April 5, 2017, the Company issued 300,000 Common Shares at a price
of $0.10 per Common Share as a settlement of $30,000 in amounts
owing to a director of the Company.
On
April 6, 2017 and in connection to an employment agreement, the
Company issued warrants for the purchase of 500,000 Common Shares
exercisable over twenty-four months at an exercise price of $0.25
per Common Share. The warrants will vest in two equal tranches,
with the first tranche vesting upon the commercial sale of a new
product to be developed by the employee and the second tranche
vesting upon the commercial sale of a total of two new products
developed by the employee.
On
April 28, 2017, the Company issued 300,000 Common Shares at a price
of $0.167 per Common Share as a settlement of $50,000 in charitable
contributions owing to an unrelated party.
On
April 28, 2017 and in connection to an employment agreement, the
Company issued 50,000 Common Shares at a price of $0.12 per Common
Share as $6,000 in employment income to an unrelated
party.
On
April 30, 2017, the Company sent notices of forced conversion to
holders of its unsecured subordinated convertible debenture units
issued on December 31, 2015 (the “Convertible Debenture
Series B”) electing to force conversion of a total of
$423,000 in face value and $45,058 in accrued interest owing on the
Convertible Debentures Series B. On June 30, 2017 and in connection
to the aforementioned notices, the Company issued a total of
4,680,581 Common Shares at a price of $0.10 per Common
Share.
On
April 30, 2017, the Company sent notices of forced conversion to
holders of its unsecured subordinated convertible debenture units
issued on May 20, 2016 (the “Convertible Debentures Series
C-1”) electing to force conversion of a total of $190,000 in
face value and $14,367 in accrued interest owing on the Convertible
Debentures Series C-1. On June 30, 2017 and in connection to the
aforementioned notices, the Company issued a total of 2,043,670
Common Shares at a price of $0.10 per Common Share.
On May
2, 2017, Henry J. Kloepper and Stanley D. Robinson resigned as
directors of the Company, effective immediately. On May 2, 2017 and
in connection to such resignations, the Company settled a total of
$87,100 in directors fees payable to Mr. Kloepper and Mr. Robinson
and issued a total of 871,000 Common Shares at a price of $0.10 per
Common Share. Such Common Shares were issued on May 23,
2017.
On June
2, 2017, the Company issued and sold, on a private placement basis,
3,269,230 Units at a price of $0.10 per Unit for total gross
proceeds of $326,923. The warrants for the purchase of 1,634,615
Common Shares were issued on June 2, 2017 and the 3,269,230 Common
Shares were issued on June 22, 2017.
On June
16, 2017, the Company issued and sold, on a private placement
basis, 1,538,460 Units at a price of $0.10 per Unit for total gross
proceeds of $153,846. The warrants for the purchase of 769,230
Common Shares were issued on June 16, 2017 and the 1,538,460 Common
Shares were issued on June 22, 2017.
On June
16, 2017, the Company adopted a stock option plan (the
“Option Plan”), under which the Board of Directors may
from time to time, in its discretion, grant to directors, officers,
employees and consultants of the Company non-transferable options
to purchase Common Shares. Pursuant to the Option Plan, the Company
may issue options for such period and exercise price as may be
determined by the Board of Directors, and in any case not exceeding
ten years from the date of grant and equal to not more than 10% of
the then issued and outstanding Common Shares. The minimum exercise
price of an option granted under the Option Plan must not be less
than 100% of the market value of the Common Shares on the date such
option is granted, and if the option is issued to a 10% shareholder
of the Company, the exercise price will not be less than 110% of
the market value of the Common Shares on the date such option is
granted.
On June
16, 2017, the Company’s Board of Directors granted and
issued, under the Option Plan, options for the purchase of
8,750,000 Common Shares exercisable over thirty-six months at an
exercise price of $0.20 per Common Share.
On June
28, 2017, the Company issued and sold, on a private placement
basis, 600,000 Units at a price of $0.10 per Unit for total gross
proceeds of $60,000. The warrants for the purchase of 300,000
Common Shares were issued on June 28, 2017 and the 600,000 Common
Shares remain unissued.
Subsequent Events
On July
1, 2017 and in connection to a consulting agreement, the Company
issued warrants for the purchase of 75,000 Common Shares
exercisable over eighteen months at an exercise price of $0.20 per
Common Share.
On July
31, 2017, the Company acquired all of the issued and outstanding
shares of Vape Brands International Inc. (“VBI”), a
Canada-based E-liquid manufacturer and distributor, through its
wholly owned subsidiary Gilla Enterprises Inc., pursuant to the
terms of a share purchase agreement, dated July 31, 2017. Pursuant
to the share purchase agreement, the Company paid to the vendors of
VBI the following consideration: (i) 2,500,000 Common Shares of the
Company valued at $0.14 per Common Share for a total value of
$350,000; (ii) warrants for the purchase of 2,000,000 Common Shares
of the Company exercisable over twenty-four months at an exercise
price of $0.20 per Common Share from the closing date, such
warrants vesting in five equal tranches every four months following
the closing date; (iii) a total of $550,000 Canadian Dollars
(“CAD”) in non-interest bearing, unsecured
vendor-take-back loans due over twenty-four months, with principal
repayments beginning five months from the closing date until
maturity of up to CAD $25,000 per month; and (iv) an earn-out
capped at (a) the total cumulative amount of CAD $2,000,000; or (b)
five years from the closing date (the “Earn-Out”). The
Earn-Out shall be calculated as: (x) 15% of the gross profit
generated in Canada by VBI’s co-pack and distribution
business; (y) 10% of the revenue generated in Canada by
Gilla’s existing E-liquid brands; and (z) 15% of the revenue
generated globally on VBI’s existing E-liquid brands.
Furthermore, the Earn-Out shall be calculated and paid to the
vendors of VBI quarterly in arrears and only as 50% of the
aforementioned amounts on incremental revenue between CAD $300,000
and CAD $600,000 per quarter and 100% of the aforementioned amounts
on incremental revenue above CAD $600,000 per quarter with the
Earn-Out payable to the vendors in the fifth year repeated and paid
to the vendors in four quarterly payments after the end of the
Earn-Out period, subject to the cumulative limit of the Earn-Out.
No Earn-Out shall be payable to the vendors of VBI if total revenue
for the Earn-Out calculation period is less than CAD $300,000 per
quarter. On July 31, 2017, the Company also entered into an
employment agreement with one of the vendors at a base salary of
CAD $155,000 per annum and issued warrants for the purchase of
1,000,000 Common Shares of the Company exercisable over twenty-four
months at an exercise price of $0.20 per Common Share, such
warrants vesting in four equal tranches every six months from the
issuance date.
On
August 4, 2017, the Company issued and sold, on a private placement
basis, 500,000 Common Shares of the Company at a price of $0.10 per
share for total gross proceeds of $50,000.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30,
2017 AND 2016
Revenue
For the
three month period ended June 30, 2017, the Company generated
$1,266,026 in sales from E-liquids, vaporizers, E-cigarettes and
accessories as compared to $
911,595
in sales for the three month period
ended June 30, 2016. Of the $1,266,026 in revenue generated for the
three month period ended June 30, 2017, $935,061 (74% of total
sales) was generated in Europe, $295,265 (23% of total sales) was
generated in the United States and $35,700 (3% of total sales) was
generated in Canada. Of the $911,595 in revenue generated for the
three month period ended June 30, 2016, $521,527 (41% of total
sales) was generated in the United States and $390,068 (31% of
total sales) was generated in Europe. The increase in international
sales is the result of the Company’s focus on building its
global business as well as growing demand for its E-liquid products
contained within the Company’s E-liquid brand
portfolio.
For the
six month period ended June 30, 2017, the Company generated
$2,509,565 in sales from E-liquids, vaporizers, E-cigarettes and
accessories as compared to $2,268,528 in sales for the six month
period ended June 30, 2016. Of the $2,509,565 in revenue generated
for the six month period ended June 30, 2017, $1,984,042 (79% of
total sales) was generated in Europe, $470,360 (19% of total sales)
was generated in the United States and $55,163 (2% of total sales)
was generated in Canada. Of the $2,268,528 in revenue generated for
the six month period ended June 30, 2016, $1,838,191 (73% of total
sales) was generated in the United States and $430,337 (17% of
total sales) was generated in Europe. The increase in international
sales is the result of the Company’s focus on building its
global business as well as growing demand for its E-liquid products
contained within the Company’s E-liquid brand
portfolio.
The
Company’s cost of goods sold for the three month period ended
June 30, 2017 was $493,987 which represents E-liquid, bottles,
hardware and related packaging as compared to
$345,036
for the three month period ended
June 30, 2016. Gross profit for the three month period ended June
30, 2017 was $772,039 with margins of 61% as compared to $566,559
with margins of 62% for the comparative period in
2016.
The
Company’s cost of goods sold for the six month period ended
June 30, 2017 was $1,040,720 which represents E-liquid, bottles,
hardware and related packaging as compared to
$1,205,982
for the six month period ended
June 30, 2016. Gross profit for the six month period ended June 30,
2017 was $1,468,845 with margins of 59% as compared to $1,062,546
with margins of 47% for the comparative period in
2016.
Operating Expenses
For the
three month period ended June 30, 2017, the Company incurred an
administrative expense of $1,146,710, consulting fees due to
related parties of $124,245, depreciation expense of $10,045,
amortization expense of $11,650, stock option expense of $1,213,605
and a loss on settlement of $23,840. For the three month period
ended June 30, 2016, the Company incurred an administrative expense
of $1,751,612, consulting fees due to related parties of $111,415,
depreciation expense of $15,015, amortization expense of $43,500,
recovery of bad debt of $1,198, impairment of goodwill of $208,376
and a gain on settlement of $245,625. Total operating expenses for
the three month period ended June 30, 2017 were $2,530,095 as
compared to $1,883,095 for the three month period ended June 30,
2016.
Administrative
costs were primarily comprised of rent, legal and audit fees,
marketing fees, travel expenses, consulting fees and employee
wages. The decrease in administrative expenses of $604,902 between
the three month period ended June 30, 2017 as compared to the three
month period ended June 30, 2016 is attributable to cost cutting
measures by management. The increase in consulting fees due to
related parties of $12,830 between the three month period ended
June 30, 2017 as compared to the three month period ended June 30,
2016 is attributable to the effects of foreign exchange
translation. The stock option expense incurred in the three month
period ended June 30, 2017 of $1,213,605 is attributable to the
adoption of a stock option plan and issuance thereunder to the
Company’s directors, officers and employees. The loss on
settlement of $23,840 for the three month period ended June 30,
2017 is attributable to losses associated with the settlement of
debt. The gain on settlement of $245,625 for the three month period
ended June 30, 2016 is attributable to the settlement of
consideration and compensation payable to a vendor of an
acquisition. As a result of the settlement, the Company also tested
and impaired $208,376 in goodwill related to the value of workforce
and business acumen required from such acquisition.
For the
six month period ended June 30, 2017, the Company incurred an
administrative expense of $2,144,060, consulting fees due to
related parties of $243,704, depreciation expense of $19,701,
amortization expense of $23,300, bad debt expense of $161,340,
stock option expense of $1,213,605 and a loss on settlement of
$23,840. For the six month period ended June 30, 2016, the Company
incurred an administrative expense of $2,798,638, consulting fees
due to related parties of $219,644, depreciation expense of
$28,510, amortization expense of $55,000, recovery of bad debt of
$1,198, impairment of goodwill of $208,376 and a gain on settlement
of $245,625. Total operating expenses for the six month period
ended June 30, 2017 were $3,829,550 as compared to $3,063,345 for
the six month period ended June 30, 2016.
Administrative
costs were primarily comprised of rent, legal and audit fees,
marketing fees, travel expenses, consulting fees and employee
wages. The decrease in administrative expenses of $654,578 between
the six month period ended June 30, 2017 as compared to the six
month period ended June 30, 2016 is attributable to cost cutting
measures by management. The increase in consulting fees due to
related parties of $24,060 between the six month period ended June
30, 2017 as compared to the six month period ended June 30, 2016 is
attributable to the effects of foreign exchange translation and the
hiring of a new related party in the second half of fiscal 2016.
The bad debt expense of $161,340 for the six month period ended
June 30, 2017 is attributable to an allowance booked for doubtful
accounts. The stock option expense incurred in the six month period
ended June 30, 2017 of $1,213,605 is attributable to the adoption
of a stock option plan and issuance thereunder to the
Company’s directors, officers and employees. The loss on
settlement of $23,840 for the six month period ended June 30, 2017
is attributable to losses associated with the settlement of debt.
The gain on settlement of $245,625 for the six month period ended
June 30, 2016 is attributable to the settlement of consideration
and compensation payable to a vendor of an acquisition. As a result
of the settlement, the Company also tested and impaired $208,376 in
goodwill related to the value of workforce and business acumen
required from such acquisition.
Loss from Operations
For the
three month period ended June 30, 2017, the Company incurred a loss
from operations of $1,758,056 as compared to a loss from operations
of $1,316,536 for the three month period ended June 30, 2016 due to
the reasons discussed above.
For the
six month period ended June 30, 2017, the Company incurred a loss
from operations of $2,360,705 as compared to a loss from operations
of $2,000,799 for the six month period ended June 30, 2016 due to
the reasons discussed above.
Other Expenses
For the
three month period ended June 30, 2017, the Company incurred a
foreign exchange loss of $64,839, amortization of debt discount
expense of $589,703 and interest expense of $220,371. For the three
month period ended June 30, 2016, the Company incurred a foreign
exchange loss of $11,609, amortization of debt discount expense of
$14,148 and interest expense of $149,932. For the three month
period ended June 30, 2017, the Company incurred total other
expenses of $874,913 as compared to $175,689 for the three month
period ended June 30, 2016. The increase in amortization of debt
discount expense of $575,555 between the three month period ended
June 30, 2017 as compared to the three month period ended June 30,
2016 is attributable to an increase in accretion of the beneficial
conversion feature and fair value of the warrants associated with
the Company’s convertible debentures resulting from the
cumulative effects of the issuance of new convertible debentures in
fiscal 2016 and 2017 and the conversion of convertible debentures
in 2017. The increase in interest expense of $70,439 between the
three month period ended June 30, 2017 as compared to the three
month period ended June 30, 2016 is attributable to increased
interest expenses associated with the Company’s debt
instruments.
For the
six month period ended June 30, 2017, the Company incurred a
foreign exchange loss of $59,894, amortization of debt discount
expense of $660,992 and interest expense of $449,648. For the six
month period ended June 30, 2016, the Company incurred a foreign
exchange loss of $89,092, amortization of debt discount expense of
$36,286 and interest expense of $271,916. For the six month period
ended June 30, 2017, the Company incurred total other expenses of
$1,170,534 as compared to $397,294 for the six month period ended
June 30, 2016. The increase in amortization of debt discount
expense of $624,706 between the six month period ended June 30,
2017 as compared to the six month period ended June 30, 2016 is
attributable to an increase in accretion of the beneficial
conversion feature and fair value of the warrants associated with
the Company’s convertible debentures resulting from the
cumulative effects of the issuance of new convertible debentures in
fiscal 2016 and 2017 and the conversion of convertible debentures
in 2017. The increase in interest expense of $177,732 between the
six month period ended June 30, 2017 as compared to the six month
period ended June 30, 2016 is attributable to increased interest
expenses associated with the Company’s debt
instruments.
Net Loss and Comprehensive Loss
Net
loss amounted to $2,632,969 for the three month period ended June
30, 2017 as compared to a net loss of $1,492,225 for the three
month period ended June 30, 2016 due to the reasons discussed
above.
Net
loss amounted to $3,531,239 for the six month period ended June 30,
2017 as compared to a net loss of $2,398,093 for the six month
period ended June 30, 2016 due to the reasons discussed
above.
Comprehensive
loss amounted to $2,732,954 for the three month period ended June
30, 2017 as compared to a comprehensive loss of $1,491,513 for the
three month period ended June 30, 2016. The change in comprehensive
loss as compared to net loss was due to foreign currency
translation adjustments resulting from the Company’s
translation of financial statements from Canadian Dollars, Euros
and Hungarian Forints to U.S. Dollars.
Comprehensive
loss amounted to $3,698,506 for the six month period ended June 30,
2017 as compared to a comprehensive loss of $2,521,679 for the six
month period ended June 30, 2016. The change in comprehensive loss
as compared to net loss was due to foreign currency translation
adjustments resulting from the Company’s translation of
financial statements from Canadian Dollars, Euros and Hungarian
Forints to U.S. Dollars.
Liquidity and Capital Resources
As at
June 30, 2017, the Company had total assets of $2,612,271 (as
compared to total assets of $2,422,954 at December 31, 2016)
consisting of cash and cash equivalents of $314,028, trade
receivables of $167,921, inventory of $555,773, other current
assets of $454,189, property and equipment of $86,780, website
development of $6,083, intangibles of $138,000 and goodwill of
$889,497. The increase in assets as at June 30, 2017 as compared to
December 31, 2016 are primarily the result of the increase in cash
as a result of private placements completed during the six months
ended June 30, 2017 and an increase of trade
receivables.
As at
June 30, 2017, the Company had total liabilities of $7,678,287 (as
compared to total liabilities of $8,113,864 at December 31, 2016)
consisting of accounts payable of $1,592,726, accrued liabilities
of $368,563, accrued interest due to related parties of $370,060,
customer deposits of $39,322, loans from shareholders of $683,102,
amounts due to related parties of $930,595, promissory notes of
$835,317, amounts owing on acquisition of $55,000, term loan of
$1,095,919, long term promissory notes of $30,000, long term loans
from shareholders of $485,300, long term amounts due to related
parties of $1,060,687 and long term convertible debentures of
$131,696.
At June
30, 2017, the Company had negative working capital of $4,478,693
and an accumulated deficit of $16,782,133.
As at
December 31, 2016, the Company had total assets of $2,422,954
consisting of cash and cash equivalents of $184,754, trade
receivables of $80,409, inventory of $545,135, other current assets
of $462,708, property and equipment of $93,068, website development
of $7,083, intangibles of $160,300 and goodwill of
$889,497.
As at
December 31, 2016, the Company had total liabilities of $8,113,864
consisting of accounts payable of $1,740,071, accrued liabilities
of $404,633, accrued interest due to related parties of $263,790,
customer deposits of $56,834, loans from shareholders of $502,288,
amounts due to related parties of $1,478,883, promissory notes of
$801,067, amounts owing on acquisition of $55,000, term loan of
$1,144,337, long term loans from shareholders of $497,351, long
term amounts due to related parties of $1,085,906 and long term
convertible debentures of $83,704.
At
December 31, 2016, the Company had negative working capital of
$5,173,897 and an accumulated deficit of $13,250,894.
Net cash used in operating activities
For the
six month period ended June 30, 2017, the Company used net cash of
$1,250,358 (as compared to $1,319,077 during the six month period
ended June 30, 2016) in operating activities to fund
administrative, marketing and sales. The decrease is attributable
to the results of operations and changes in the operating assets
and liabilities as discussed above.
Net cash used in investing activities
For the
six month period ended June 30, 2017, the Company used net cash of
$11,673 (as compared to $60,290 during the six month period ended
June 30, 2016) in investing activities relating to the addition of
capital assets.
Net cash flow from financing activities
For the
six month period ended June 30, 2017, net cash provided by
financing activities was $1,487,349 (see “Term Loan”,
“Bridge Loan”, “Promissory Notes” and
“Common Shares”) as compared to net cash provided by
financing activities of $1,377,123 for the six month period ended
June 30, 2016.
Term Loan
On
January 18, 2016, the Company entered into a term loan (the
“Term Loan”) with the Lenders, whereby the Lenders
would loan the Company the aggregate principal amount of CAD
$1,000,000 for capital expenditures, marketing expenditures and
working capital. The agent who arranged the Term Loan was not a
related party of the Company. The Term Loan bears interest at a
rate of 16% per annum, on the outstanding principal, and shall
mature on July 3, 2017, whereby any outstanding principal together
with all accrued and unpaid interest thereon shall be due and
payable. The Term Loan is secured the intercreditor and
subordination agreement as well as the security agreement issued in
connection to the Credit Facility. The Term Loan is subject to a
monthly cash sweep, calculated as the total of (i) CAD $0.50 for
every E-liquid bottle, smaller than 15 ml, sold by the Company
within a monthly period; and (ii) CAD $1.00 for every E-liquid
bottle, greater than 15 ml, sold by the Company within a monthly
period (the “Cash Sweep”). The Cash Sweep will be
disbursed to the Lenders in the following priority: first, to pay
the monthly interest due on the Term Loan; and second, to repay any
remaining principal outstanding on the Term Loan. The Company may
elect to repay the outstanding principal of the Term Loan together
with all accrued and unpaid interest thereon prior to the maturity,
subject to an early repayment penalty of the maximum of (i) 3
months interest on the outstanding principal; or (ii) 50% of the
interest payable on the outstanding principal until maturity (the
“Early Repayment Penalty”). The Term Loan shall be
immediately due and payable at the option of the Lenders if there
is a change in key personnel meaning the Company’s current
Chief Executive Officer and Chief Financial Officer. On January 18,
2016 and in connection to the Term Loan, the Company issued
warrants for the purchase of 250,000 Common Shares exercisable
until December 31, 2017 at an exercise price of $0.20 per share. In
addition, the Company also extended the expiration date of the
250,000 warrants issued on August 1, 2014 in connection with the
Credit Facility until December 31, 2017, with all other terms of
the warrants remaining the same.
The
Company’s Chief Executive Officer and Chief Financial Officer
are both participants of the consortium of Lenders of the Term
Loan, each having committed to provide ten percent of the principal
amount of the Term Loan. Neither the Chief Executive Officer nor
the Chief Financial Officer participated in the warrants issued or
warrants extended in connection with the Term Loan and both parties
have been appropriately abstained from voting on the Board of
Directors to approve the Term Loan, where applicable.
On July
15, 2016, the Company and the Lenders of the Term Loan entered into
a term loan amendment (the “Term Loan Amendment”) in
which the Lenders agreed to extend to the Company an additional CAD
$600,000 in principal to increase the Term Loan facility up to the
aggregate principal amount of CAD $1,600,000. The parties also
extended the maturity date of the Term Loan to July 2, 2018 with
all other terms of the Term Loan remaining the same. The
Company’s Chief Executive Officer and its Chief Financial
Officer are both participants in the consortium of Lenders having
each committed to provide a total of CAD $150,000 of the initial
principal of the Term Loan and the additional principal of the Term
Loan pursuant to the Term Loan Amendment.
On July
15, 2016 and in connection to the Term Loan Amendment, the Company
issued warrants for the purchase of 300,000 Common Shares
exercisable until December 31, 2018 at an exercise price of $0.20
per share. The Company also extended the expiration dates of: i)
the warrants for the purchase of 250,000 Common Shares issued on
January 18, 2016 in connection to the Term Loan; and ii) the
warrants for the purchase of 250,000 Common Shares issued on August
1, 2014 and extended on January 18, 2016 in connection to the Term
Loan, both until December 31, 2018, with all other terms of the
warrants remaining the same. Neither the Chief Executive Officer
nor the Chief Financial Officer participated in the warrants issued
or warrants extended in connection with the Term Loan
Amendment.
During
the year ended December 31, 2016, the Company was advanced
$1,219,840 (CAD $1,600,000) from the Term Loan including the CAD
$294,000 and CAD $3,093 rolled in from the Credit Facility as well
as CAD $240,581 of advances from the Company’s Chief
Executive Officer and Chief Financial Officer.
On
February 27, 2017, the Company and the Lenders of the Term Loan
entered into a term loan amendment (the “Term Loan Amendment
No.2”) to amend certain terms and conditions of the Term
Loan. Pursuant to the Term Loan Amendment No.2, the parties agreed
to modify the Cash Sweep to be calculated as the total of CAD
$0.01667 per ml of E-liquid sold by the Company within a monthly
period, such modification to be retroactively applied as of January
1, 2017. The Lenders also agreed to cancel the Early Repayment
Penalty and waive any interest payment penalties due under the Term
Loan. On February 27, 2017 and in connection to the Term Loan
Amendment No.2, the Company agreed to issue 500,000 private
placement units at a price of $0.10 per unit as a settlement of
$50,000 in financing fees. Each unit consisted of one Common Share
and a half Common Share purchase warrant exercisable over twelve
months at an exercise price of $0.20 per share. On April 4, 2017,
the Company issued the 500,000 units. The Company’s Chief
Executive Officer and its Chief Financial Officer received a total
of 93,622 units which included 93,622 Common Shares and warrants
for the purchase of 46,811 Common Shares. The Term Loan Amendment
No.2 was accounted for as a modification of debt and no gain or
loss was recognized on the amendment.
During
the three and six month periods ended June 30, 2017, the Company
expensed $42,120 and $86,673, respectively, (June 30, 2016: $29,824
and $52,836) in interest as a result of the Term Loan. Pursuant to
the Cash Sweep, during the six month period ended June 30, 2017,
the Company paid $171,976 to the Lenders consisting of $101,511 in
interest and $70,465 in principal payments. At June 30, 2017, the
Company owes the Lenders $26,932, consisting of $14,225 in interest
and $12,707 in principal payments, which was paid to the Lenders on
July 15, 2017 as per the terms of the Cash Sweep.
The
amount owing on the Term Loan is as follows:
|
|
|
|
|
Opening
balance/amount advanced
|
$
1,144,337
|
$
1,219,840
|
|
Exchange loss
(gain) during the period/year
|
36,885
|
(28,159
)
|
|
Principal payments
made
|
(70,465
)
|
(76,815
)
|
|
Interest
accrued
|
86,673
|
140,540
|
|
Interest payments
made
|
(101,511
)
|
(111,069
)
|
|
Ending
balance
|
$
1,095,919
|
$
1,144,337
|
Bridge Loan
On
January 12, 2017, the Company entered into a bridge loan agreement
(the “Bridge Loan Agreement”) with a shareholder,
whereby the shareholder would make available to the Company the
aggregate principal amount of CAD $200,000 (USD $154,120) (the
“Bridge Loan”) in two equal tranches of CAD $100,000.
The Company received the first tranche on January 12, 2017
(“Bridge Loan Note A”) and the second tranche on
January 18, 2017 (“Bridge Loan Note B”). The Bridge
Loan is non-interest bearing and matures on March 12, 2017.
Pursuant to the terms of the Bridge Loan Agreement, the shareholder
received a 5% upfront fee upon the closing of Bridge Loan Note A
and a 5% upfront fee upon the closing of Bridge Loan Note B. The
Bridge Loan is secured by the general security agreement issued in
connection to the Secured Note. On January 12, 2017 and in
connection to the Bridge Loan Agreement, the Company issued
warrants for the purchase of 50,000 Common Shares exercisable until
January 11, 2018 at an exercise price of $0.20 per share, with
25,000 warrants to vest upon the closing of Bridge Loan Note A and
the remaining 25,000 warrants vest upon the closing of Bridge Loan
Note B. On January 12, 2017 and January 18, 2017, the Company
closed Bridge Loan Note A and Bridge Loan Note B, respectively, at
which dates the warrants became fully vested and exercisable. The
Bridge Loan matured on March 12, 2017 and is currently in
default.
Promissory Notes
On June
30, 2017, the Company issued a promissory note in the amount of
$60,000 to an unrelated party. The principal together with interest
at the rate of 18% per annum is payable in monthly instalments of
$3,400 with the first payment due on July 19, 2017 and the final
payment due on June 19, 2019. In the event of default by way of any
missed payment under the promissory note and not cured for a period
of 15 days, at the option of the note holder, the entire principal
amount remaining will become due and payable without notice. At
June 30, 3017, $30,000 of the principal on this promissory note has
been classified as a current liability and $30,000 has been
classified as a long term liability on the balance
sheet.
On
April 20, 2017, the Company issued a promissory note in the amount
of $20,000 to an unrelated party. The principal together with
interest at the rate of 10% over the term of the promissory noteis
payable in monthly instalments of $2,750 with the first payment due
on May 15, 2017 and the final payment due on December 15, 2017. In
the event of default by way of any missed payment under the
promissory note and not cured for a period of 15 days, at the
option of the note holder, the entire principal amount remaining
will become due and payable without notice. During the three and
six month periods ended June 30, 2017, the Company paid $250 and
$250, respectively, (June 30, 2016: $nil and $nil) in interest on
this promissory note. At June 30, 2017, the Company was delinquent
on its June 30, 2017 payment which has since been
paid.
Common Shares
During
the six months ended June 30, 2017, the Company:
|
|
●
|
Issued
18,483,818 Common Shares on a private placement basis, at a price
of $0.10 per private placement unit, for cash proceeds, net of
issuance costs, of $1,758,672;
|
|
|
●
|
Issued
1,998,950 Common Shares on a private placement basis, at a price of
$0.10 per private placement unit, for settlement of $199,895 in
amounts owing to related parties;
|
|
|
●
|
Issued
226,920 Common Shares on a private placement basis, at a price of
$0.10 per private placement unit, for settlement of $22,692 in
amounts owing to a shareholder;
|
|
|
●
|
Issued
320,022 Common Shares, at an average price of $0.156 per share, for
settlement of $50,000 in consulting fees owing to a shareholder,
previously granted and recognized as Common Shares to be issued as
at December 31, 2016;
|
|
|
●
|
Issued
143,715 Common Shares, at an average price of $0.129 per share, for
settlement of $18,550 in consulting fees owing to an unrelated
party, previously granted and recognized as Common Shares to be
issued as at December 31, 2016;
|
|
|
●
|
Issued
366,667 Common Shares, at a price of $0.15 per share, for
settlement of $55,000 in consulting fees owing to an unrelated
party, previously granted and recognized as Common Shares to be
issued as at December 31, 2016;
|
|
|
●
|
Issued
300,000 Common Shares, valued at $0.10 per share, for settlement of
$30,000 in amounts owing to a director of the Company. The amount
allocated to Shareholders’ Deficiency, based on their fair
value, amounted to $33,000. The balance of $3,000 has been recorded
as a loss on settlement of debt;
|
|
|
●
|
Issued
300,000 Common Shares, at a price of $0.167 per share, for
settlement of $50,000 in charitable contributions owing to an
unrelated party. The amount allocated to Shareholders’
Deficiency, based on their fair value, amounted to $36,000. The
balance of $14,000 has been recorded as a gain on settlement of
debt;
|
|
|
●
|
Issued
50,000 Common Shares, at a price of $0.12 per share, as $6,000 in
employment income to an unrelated party;
|
|
|
●
|
Issued
871,000 Common Shares, at a price of $0.10 per share, for
settlement of $87,100 in directors fees owing to former directors
of the Company. The amount allocated to Shareholders’
Deficiency, based on their fair value, amounted to $121,940. The
balance of $34,840 has been recorded as a loss on settlement of
debt;
|
|
|
●
|
Issued
500,000 Common Shares on a private placement basis, at a price of
$0.10 per private placement unit, as settlement of $50,000 in
financing fees in connection to the Term Loan Amendment No.2. Of
the 500,000 Common Shares issued, 93,622 Common Shares were issued
to related parties;
|
|
|
●
|
Issued
6,130,000 Common Shares, at a price of $0.10 per share, on
conversion of $613,000 of convertible debentures. The above amount
included the conversion of $291,000 of convertible debentures held
by related parties of the Company; and
|
|
|
●
|
Issued
594,251 Common Shares, at price of $0.10 per share, for settlement
of $59,425 in interest owing on convertible debentures. The above
amount included the settlement of $30,843 of interest owing on
convertible debentures held by related parties of the
Company.
|
Satisfaction of Our Cash Obligations for the Next 12
Months
These
unaudited condensed consolidated interim financial statements have
been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the
normal course of business. As shown in these unaudited condensed
consolidated interim financial statements, at June 30, 2017, the
Company has an accumulated deficit of $16,782,133 and a working
capital deficiency of $4,478,693 as well as negative cash flows
from operating activities of $1,250,358 for the six month period
ended June 30, 2017. These conditions represent material
uncertainty that cast significant doubt about the Company's ability
to continue as a going concern. The ability of the Company to
continue as a going concern is dependent upon achieving a
profitable level of operations or on the ability of the Company to
obtain necessary financing to fund ongoing operations. Management
believes that the Company will not be able to continue as a going
concern for the next twelve months without additional financing or
increased revenues.
To meet
these objectives, the Company continues to seek other sources of
financing in order to support existing operations and expand the
range and scope of its business. However, there are no assurances
that any such financing can be obtained on acceptable terms and in
a timely manner, if at all. Failure to obtain the necessary working
capital would have a material adverse effect on the business
prospects and, depending upon the shortfall, the Company may have
to curtail or cease its operations.
These
unaudited condensed consolidated interim financial statements do
not include any adjustments to the recorded assets or liabilities
that might be necessary should the Company have to curtail
operations or be unable to continue in existence.
Off-Balance Sheet Arrangements
The
Company has no off-balance sheet arrangements.
Recently Adopted Accounting Pronouncements
In
November 2015, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) No. 2015-17,
Income Taxes (Topic 740): Balance Sheet
Classification of Deferred Taxes
(“ASU
2015-17”). ASU 2015-17 simplifies the presentation of
deferred income taxes by eliminating the separate classification of
deferred income tax liabilities and assets into current and
noncurrent amounts in the consolidated balance sheet statement of
financial position. The amendments in the update require that all
deferred tax liabilities and assets be classified as noncurrent in
the consolidated balance sheet. The amendments in this update are
effective for annual periods beginning after December 15, 2016, and
interim periods therein and may be applied either prospectively or
retrospectively to all periods presented. Adoption of ASU 2015-17
did not have an impact on the Company’s condensed
consolidated interim financial statements.
On
March 30, 2016, the FASB issued ASU No. 2016-09,
Compensation – Stock Compensation (Topic
718): Improvements to Employee Share-Based Payment
Accounting
(“ASU 2016-09”). This update requires
that all excess tax benefits and tax deficiencies arising from
share-based payment awards should be recognized as income tax
expense or benefit on the income statement. The amendment also
states that excess tax benefits should be classified along with
other income tax cash flows as an operating activity. In addition,
an entity can make an entity-wide accounting policyelection to
either estimate the number of awards expected to vest or account
for forfeitures as they occur. The provisions of this update are
effective for annual and interim periods beginning after December
15, 2016. Adoption of ASU 2016-09 did not have an impact on the
Company’s condensed consolidated interim financial
statements.
In
October 2016, the FASB issued ASU No. 2016-17,
Consolidation (Topic 810): Interests Held
through Related Parties That Are under Common Control
(“ASU 2016-17”). The new guidance changed how a
reporting entity that is a single decision maker for a variable
interest entity (“VIE”) will consider its indirect
interests in that VIE when determining whether the reporting entity
is the primary beneficiary and should consolidate the VIE. Under
previous U.S. GAAP, a single decision maker in a VIE is required to
consider an indirect interest held by a related party under common
control in its entirety. Under ASU 2016-17, the single decision
maker will consider the indirect interest on a proportionate basis.
Adoption of ASU 2016-17 did not have an impact on the
Company’s condensed consolidated interim financial
statements.
Recent Accounting Pronouncements
The Company has reviewed all
recently issued, but not yet effective, accounting pronouncements
and other than the below, does not expect the future adoption of
any such pronouncements to have a significant impact on its results
of operations, financial condition or cash flow.
In May
2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic
606)
(“ASU 2014-09”), requiring an entity to
recognize revenue when it transfers promised goods or services to
customers in an amount that reflects the consideration to which the
entity expects to be entitled to in exchange for those goods or
services. ASU 2014-09 will supersede nearly all existing revenue
recognition guidance under U.S. GAAP when it becomes
effective. ASU 2014-09 as amended by ASU No. 2015-14, ASU No.
2016-08, ASU No. 2016-10, ASU No. 2016-12 and ASU No. 2016-20, is
effective for interim and annual periods beginning after
December 15, 2017 and is applied on either a modified
retrospective or full retrospective basis. The Company is
evaluating the guidance and has not yet determined the impact on
its consolidated financial statements.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases
(Topic 842)
(“ASU
2016-02”). ASU 2016-02 requires lessees to recognize all
leases with terms in excess of one year on their balance sheet as a
right-of-use asset and a lease liability at the commencement date.
The new standard also simplifies the accounting for sale and
leaseback transactions. The amendments in this update are effective
for annual periods beginning after December 15, 2018, and interim
periods therein and must be adopted using a modified retrospective
method for leases existing at, or entered into after, the beginning
of the earliest comparative period presented in the financial
statements. Early adoption is permitted. The Company is evaluating
the guidance and has not yet determined the impact on its
consolidated financial statements.
In
April 2016, the FASB issued ASU No. 2016-10,
Revenue from Contracts with Customers
(Topic 606):
Identifying Performance Obligations and
Licensing
(“ASU 2016-10”). ASU 2016-10 clarifies
the following two aspects of Topic 606: identifying performance
obligations and the licensing implementation guidance, while
retaining the related principles for those areas. The provisions of
this update are effective for annual and interim periods beginning
after December 15, 2017, with early application permitted. The
Company is evaluating the guidance and has not yet determined the
impact on its consolidated financial statements.
In May
2016, the FASB issued ASU No. 2016-12,
Revenue from Contracts with Customers (Topic
606)
:
Narrow-Scope
Improvements and Practical Expedients
(“ASU
2016-12”). The core principal of ASU 2016-12 is the
recognition of revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those
goods or services. The provisions of this update are
effective for annual and interim periods beginning
after December 15, 2017, with early application permitted. The
Company is evaluating the guidance and has not yet determined the
impact on its consolidated financial statements.
In June
2016, the FASB issued ASU No. 2016-13,
Financial Instruments ñ Credit Losses
(Topic 326): Measurement of Credit Losses on Financial
Instruments
(“ASU 2016-13”), which requires
financial assets measured at amortized cost be presented at the net
amount expected to be collected. The allowance for credit losses is
a valuation account that is deducted from the amortized cost basis.
The measurement of expected losses is based upon historical
experience, current conditions, and reasonable and supportable
forecasts that affect the collectability of the reported amount.
This guidance is effective for fiscal years beginning
after December 15, 2019, with early adoption permitted. The
Company is evaluating the guidance and has not yet determined the
impact on its consolidated financial statements.
In
August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments (a
consensus of the Emerging Issues Task Force)
(“ASU
2016-15”), which clarifies how certain cash receipts and cash
payments are presented and classified in the statement of cash
flows. Among other clarifications, the guidance requires that cash
proceeds received from the settlement of corporate-owned life
insurance (COLI) policies be classified as cash inflows from
investing activities and that cash payments for premiums on COLI
policies may be classified as cash outflows for investing
activities, operating activities or a combination of both. The
guidance is effective for fiscal years beginning
after December 15, 2017, with early adoption permitted.
Retrospective application is required. The Company is evaluating
the guidance and has not yet determined the impact on its
consolidated financial statements.
In
October 2016, the FASB issued ASU No. 2016-16,
Income Taxes (Topic 740): Intra-Entity
Transfers of Assets Other Than Inventory
("ASU 2016-16").
ASU 2016-16 prohibits the recognition of current and deferred
income taxes for an intra-entity transfer until the asset has been
sold to an outside party. The amendment in ASU 2016-16 is effective
for annual reporting periods beginning after December 15, 2017,
including interim reporting periods within those annual reporting
periods. The Company is evaluating the guidance and has not yet
determined the impact on its consolidated financial
statements.
In
January 2017, the FASB issued ASU No. 2017-04,
Intangibles-Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment
(“ASU
2017-04”). The new guidance eliminates the requirement to
calculate the implied fair value of goodwill (Step 2 of the current
two-step goodwill impairment test under ASC 350). Instead, entities
will record an impairment charge based on the excess of a reporting
unit’s carrying amount over its fair value (Step 1 of the
current two-step goodwill impairment test). ASU 2017-04 is
effective prospectively for reporting periods beginning after
December 15, 2019, with early adoption permitted for annual and
interim goodwill impairment testing dates after January 1, 2017.
The Company is evaluating the guidance and has not yet determined
the impact on its consolidated financial statements.
In May
2017, the FASB issued ASU No. 2017-09,
Compensation-Stock Compensation (Topic 718):
Scope of Modification Accounting
(“ASU
2017-09”). ASU 2017-09 clarifies which changes to the terms
or conditions of a share-based payment award require an entity to
apply modification accounting in Topic 718. The standard is
effective for interim and annual reporting periods beginning after
December 15, 2017, with early adoption permitted. The Company is
evaluating the guidance and has not yet determined the impact on
its consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
The
accompanying unaudited condensed consolidated interim financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States of America for
interim financial information and with the instructions to Form
10-Q. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in
the United States of America for complete consolidated financial
statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Interim results are not
necessarily indicative of the results that may be expected for a
full year. These condensed consolidated interim financial
statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2016, as filed with the U.S. Securities and Exchange
Commission.
The
accounting policies of the Company are in accordance with
accounting principles generally accepted in the United States of
America. Outlined below are those policies considered particularly
significant:
Basis of Consolidation
These
unaudited condensed consolidated interim financial statements
include the accounts of the Company and its wholly owned
subsidiaries; Gilla Operations, LLC; E Vapor Labs Inc.; E-Liq
World, LLC; Charlie’s Club, Inc.; Gilla Enterprises Inc. and
its wholly owned subsidiaries Gilla Europe Kft. and Gilla
Operations Europe s.r.o.; Gilla Operations Worldwide Limited; Gilla
Franchises, LLC and its wholly owned subsidiary Legion of Vape,
LLC; and Snoke Distribution Canada Ltd. and its wholly owned
subsidiary Snoke Distribution USA, LLC. All inter-company accounts
and transactions have been eliminated in preparing these unaudited
condensed consolidated interim financial statements.
Advertising Costs
In
accordance with the FASB ASC No. 720,
Other Expenses
(“ASC 720”),
the Company expenses the production costs of advertising the first
time the advertising takes place. The Company expenses all
advertising costs as incurred. During the three and six month
periods ended June 30, 2017, the Company expensed $39,313 and
$91,847, respectively, (June 30, 2016: $113,442 and $158,552) as
corporate promotions. These amounts have been recorded as an
administrative expense.
ITEM 3.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This
item is not applicable to smaller reporting companies.
ITEM 4.
DISCLOSURE
CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
The
Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in its
filings with the SEC is recorded, processed, summarized and
reported within the time period specified in the SEC’s rules
and forms, and that such information is accumulated and
communicated to management, including the Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure based on the definition of
“disclosure controls and procedures” as defined in Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”).
As of
the end of the period covered by this Report, and under the
supervision and with the participation of management, including the
Company’s Chief Executive Officer (Principal Executive
Officer) and Chief Financial Officer (Principal Financial Officer),
the Company has evaluated the effectiveness of the design and
operation of the Company’s disclosure controls and
procedures. Based on this evaluation, the Company believes that
disclosure controls and procedures were not effective as of June
30, 2017, due to the Company’s limited resources and
staff.
Limitations
on Effectiveness of Controls and Procedures
The
Company’s management, including its Chief Executive Officer
and Chief Financial Officer, does not expect that disclosure
controls and procedures or its internal controls will prevent all
errors and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met.
Furthermore, the design of a control system must reflect the fact
that there are resource constraints and the benefits of controls
must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of
fraud, if any, within the Company have been detected. These
inherent limitations include, but are not limited to, the realities
that judgments in decision-making can be faulty and that breakdowns
can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also
is based in part upon certain assumptions about the likelihood of
future events and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions. Over time, controls may become inadequate because of
changes in conditions, or the degree of compliance with the
policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due
to error or fraud may occur and not be detected.
Changes
in Internal Controls
During
the quarter ended June 30, 2017, there have been no changes in the
Company’s internal control over financial reporting that have
materially affected or are reasonably likely to materially affect
its internal controls over financial reporting.
PART II - OTHER INFORMATION
ITEM
1.
LEGAL
PROCEEDINGS
On
January 5, 2016, Yaron Elkayam, Pinchas Mamane and Levent Dikmen
filed a three count complaint against the Company in the Circuit
Court of Hillsborough County, Florida alleging (i) breach of
contract, (ii) breach of implied covenant of good faith and fair
dealing, and (iii) fraud in the inducement seeking damages in the
amount of approximately $900,000 of promissory notes issued on July
1, 2015 as a result of the acquisition of E Vapor Labs Inc. In July
of 2016, the Company filed its Answer, Affirmative Defences and
Counterclaim. There can be no assurance that the outcome of this
complaint would not have a material adverse effect on the business,
results of operations and financial condition. The legal proceeding
has been brought in Circuit Court of the Thirteenth Judicial
Circuit in and for Hillsborough County, State of Florida, Civil
Division under the following caption: Yaron Elkayam, Pinchas
Mamane, Levent Dikmen, Plaintiffs, v. Gilla, Inc., Case No.
16-CA-0047, Division H, filed January 5, 2016.
There
have been no material changes in the Company’s risk factors
from those disclosed in Part I, Item 1A of our Annual Report on
Form 10-K for the fiscal year ended December 31, 2016.
ITEM
2.
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During
the period covered by this Report, we did not have any sales of
securities in transactions that were not registered under the
Securities Act that have not been previously reported in a Form
8-K, Form 10-Q or Form 10-K, except for the following:
On
April 4, 2017, the Company issued, on a private placement basis,
500,000 Units at a price of $0.10 per Unit as a settlement of
$50,000 in financing fees in connection to a term loan amendment.
The warrants for the purchase of 250,000 Common Shares were issued
on April 4, 2017 and the 500,000 Common Shares were issued on June
22, 2017. The Company offered and issued the Units, Common Shares
and warrants pursuant to exemptions from the registration
requirements of the Securities Act available under Section 4(a)(2)
and Rule 506 of Regulation D and Rule 903 of Regulation S
promulgated thereunder.
On
April 5, 2017, the Company issued 320,022 Common Shares at an
average price of $0.156 per Common Share as a settlement of $50,000
in consulting fees owing to an unrelated party, pursuant to
exemptions from the registration requirements of the Securities Act
available under Rule 903 of Regulations S promulgated
thereunder.
On
April 5, 2017, the Company issued 143,715 Common Shares at an
average price of $0.129 per Common Share as a settlement of $18,550
in consulting fees owing to an unrelated party, pursuant to
exemptions from the registration requirements of the Securities Act
available under Rule 903 of Regulations S promulgated
thereunder.
On
April 5, 2017, the Company issued 366,667 Common Shares at a price
of $0.15 per Common Share as a settlement of $55,000 in consulting
fees owing to an unrelated party, pursuant to exemptions from the
registration requirements of the Securities Act available under
Section 4(a)(2) and Rule 506 of Regulation D.
On
April 5, 2017, the Company issued 300,000 Common Shares at a price
of $0.10 per Common Share as a settlement of $30,000 in amounts
owing to a director of the Company, pursuant to exemptions from the
registration requirements of the Securities Act available under
Section 4(a)(2) and Rule 506 of Regulation D.
On
April 28, 2017, the Company issued 300,000 Common Shares at a price
of $0.167 per Common Share as a settlement of $50,000 in charitable
contributions owing to an unrelated party, pursuant to exemptions
from the registration requirements of the Securities Act available
under Section 4(a)(2) and Rule 506 of Regulation D.
On
April 28, 2017 and in connection to an employment agreement, the
Company issued 50,000 Common Shares at a price of $0.12 per Common
Share as $6,000 in employment income to an unrelated party,
pursuant to exemptions from the registration requirements of the
Securities Act available under Section 4(a)(2) of Regulation
D.
On May
23, 2017, the Company issued 871,000 Common Shares at a price of
$0.10 per Common Share as a settlement of $87,100 in directors fees
payable to former directors of the Company, pursuant to exemptions
from the registration requirements of the Securities Act available
under Rule 903 of Regulations S promulgated
thereunder.
On June
30, 2017 and in connection to the conversion of Convertible
Debenture Series B, the Company issued a total of 4,680,581 Common
Shares at a price of $0.10 per Common Share, pursuant to exemptions
from the registration requirements of the Securities Act available
under Section 4(a)(2) and Rule 506 of Regulation D and Rule 903 of
Regulation S promulgated thereunder.
On June
30, 2017 and in connection to the conversion of Convertible
Debenture Series C-1, the Company issued a total of 2,043,670
Common Shares at a price of $0.10 per Common Share, pursuant to
exemptions from the registration requirements of the Securities Act
available under Section 4(a)(2) and Rule 506 of Regulation D and
Rule 903 of Regulation S promulgated thereunder.
On June
2, 2017, the Company issued and sold, on a private placement basis,
3,269,230 Units at a price of $0.10 per Unit for total gross
proceeds of $326,923. The warrants for the purchase of 1,634,615
Common Shares were issued on June 2, 2017 and the 3,269,230 Common
Shares were issued on June 22, 2017. The Company offered and issued
the Units, Common Shares and warrants pursuant to exemptions from
the registration requirements of the Securities Act available under
Section 4(a)(2) and Rule 506 of Regulation D and Rule 903 of
Regulation S promulgated thereunder.
On June
16, 2017, the Company issued and sold, on a private placement
basis, 1,538,460 Units at a price of $0.10 per Unit for total gross
proceeds of $153,846. The warrants for the purchase of 769,230
Common Shares were issued on June 16, 2017 and the 1,538,460 Common
Shares were issued on June 22, 2017. The Company offered and issued
the Units, Common Shares and warrants pursuant to exemptions from
the registration requirements of the Securities Act available under
Section 4(a)(2) and Rule 506 of Regulation D and Rule 903 of
Regulation S promulgated thereunder.
ITEM
3.
DEFAULTS
UPON SENIOR SECURITIES
None.
ITEM
4.
MINE
SAFETY DISCLOSURES
Not
applicable.
ITEM
5.
OTHER
INFORMATION
None.
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Incorporated by Reference
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Exhibit
Number
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Exhibit Description
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Filed
Herewith
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Form
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Exhibit
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Filing Date
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Option Plan, dated as of June 16, 2017.
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X
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Certification
of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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X
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Certification
of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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X
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Certification
of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
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X
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Certifications
of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
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X
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101.INS
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XBRL
Instance Document
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X
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101.SCH
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XBRL
Taxonomy Extension Schema
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X
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101.CAL
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XBRL
Taxonomy Extension Calculation Linkbase
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X
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101.DEF
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XBRL
Taxonomy Definition Linkbase
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X
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101.LAB
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XBRL
Taxonomy Extension label Linkbase
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101.PRE
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XBRL
Taxonomy Extension Presentation Linkbase
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X
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* This
certification is deemed not filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”), or otherwise subject to the liability of that section,
nor shall it be deemed incorporated by reference into any filing
under the Securities Act or the Exchange Act.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
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GILLA INC.
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(Registrant)
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August
14, 2017
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By:
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/s/
Graham Simmonds
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Name:
Graham Simmonds
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Title:
Chief Executive Officer and Principal Executive
Officer
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By:
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/s/
Ashish Kapoor
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Name:
Ashish Kapoor
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Title:
Chief Financial Officer and
Principal
Accounting Officer
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