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EX-31.1 - CERTIFICATION - GILLA INC.glla_ex311.htm
EX-32.1 - CERTIFICATION - GILLA INC.glla_ex321.htm
EX-32.2 - CERTIFICATION - GILLA INC.glla_ex322.htm
EX-31.2 - CERTIFICATION - GILLA INC.glla_ex312.htm
EX-10.21 - FORM OF PROMISSORY NOTES FROM THE COMPANY TO THE VENDORS OF E VAPOR LABS INC. - GILLA INC.glla_ex1021.htm
EX-10.20 - SECURED PROMISSORY NOTE FROM THE COMPANY TO GRAVITAS FINANCIAL INC., - GILLA INC.glla_ex1020.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2015
 
OR
 
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______________ to _______________
 
 
Commission File Number: 000-28107
 
GILLA INC.
(Exact Name of Registrant as Specified in its Charter)
 
Nevada
 
88-0335710
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification Number)
     
475 Fentress Blvd., Unit L,
Daytona Beach, Florida
 
32114
(Address of Principal Executive Offices)
 
(Zip Code)

(416) 843-2881
Registrant’s telephone number, including area code

Not Applicable
(Former name, Former Address and Former Fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes   o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes   o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o (Do not check if a smaller reporting company)
Smaller reporting company
þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes  þ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
98,641,251 Common Shares, $0.0002 Par Value, were issued and outstanding as of November 20, 2015.

 
 

 
 
 GILLA, INC.
INDEX TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

 
     
Page
 
PART I - Financial Information
     
         
Item 1.
Interim Financial Statements (unaudited)
     
         
 
Consolidated Interim Balance Sheets as of September 30, 2015 (Unaudited) and December 31, 2014 (Audited)
   
3
 
           
 
Unaudited Consolidated Interim Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2015 and September 30, 2014
   
4
 
           
 
Unaudited Consolidated Interim Statement of Changes in Shareholders’ Deficiency for the Nine Months Ended September 30, 2015
   
5
 
           
 
Unaudited Consolidated Interim Statements of Cash Flows for the Nine Months Ended September 30, 2015
   
6
 
           
 
Notes to Unaudited Condensed Consolidated Interim Financial Statements
   
7
 
           
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operation
   
25
 
           
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
    33  
           
Item 4.
Disclosure Control and Procedures
    33  
           
PART II - Other Information
       
           
Item 1.
Legal Proceedings
    34  
           
Item 1A.
Risk Factors
    34  
           
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
    34  
           
Item 3.
Defaults Upon Senior Securities
    35  
           
Item 4.
Mine Safety Disclosures
    35  
           
Item 5.
Other Information
    35  
           
Item 6.
Exhibits
    35  
           
SIGNATURES
    36  


 
2

 
 
PART I - Financial Information

Item 1. Interim Financial Statements (unaudited)
Gilla Inc.
Consolidated Interim Balance Sheets
(Amounts expressed in US Dollars)

   
September 30,
2015
   
December 31,
2014
 
   
(unaudited)
   
(audited)
 
ASSETS
 
Current assets
           
Cash and cash equivalents
  $ 58,935     $ 496,724  
Accounts receivable
    155,175       37,421  
Inventory (note 6)
    147,051       78,901  
Prepaid expenses and vendor deposits
    114,976       378,252  
Total current assets
    476,137       991,298  
Long term assets
               
Property and equipment (note 7)
    112,216       1,864  
Website development (note 8)
    88,325       93,323  
Goodwill (note 4)
    879,443       -  
Total long term assets
    1,079,984       95,187  
                 
Total assets
  $ 1,556,121     $ 1,086,485  
LIABILITIES
 
   
Current liabilities
               
Accounts payable
  $ 617,664     $ 309,139  
Accrued liabilities
    97,984       69,017  
Accrued interest - related parties (note 17)
    102,101       39,279  
Customer deposit
    20,000       -  
Loans from shareholders (note 9)
    727,803       34,739  
Due to related parties (note 17)
    986,433       1,144,789  
Promissory notes (note 4)
    492,893       -  
Credit facility (note 10)
    220,294       387,110  
Total current liabilities
    3,265,172       1,984,073  
                 
Long term liabilities
               
Loan from shareholders (note 9)
    -       531,000  
Due to related parties (note 17)
    677,422       100,000  
Promissory notes (note 4)
    260,375       -  
Convertible debentures (note 12)
    44,995       24,828  
Total long term liabilities
    982,792       655,828  
                 
Total liabilities
    4,247,964       2,639,901  
                 
Going concern (note 2)
               
Related party transactions (note 17)
               
Commitments and contingencies (note 18)
               
Subsequent events (note 21)
               
STOCKHOLDERS’ DEFICIENCY
 
                 
Common stock (note 13)
  $ 19,342     $ 18,542  
Additional paid-in capital
    4,450,042       3,998,482  
Shares to be issued (note 15)
    25,000       -  
Accumulated deficit
    (7,485,936 )     (5,702,351 )
Accumulated other comprehensive income
    299,709       131,911  
Total shareholders’ deficiency
    (2,691,843 )     (1,553,416 )
                 
Total liabilities and stockholders’ deficiency
  $ 1,556,121     $ 1,086,485  
 
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements
 
 
3

 

Gilla Inc.
Unaudited Consolidated Interim Statements of Operations and Comprehensive Loss
(Amounts expressed in US Dollars)

   
For the Three Months Ended
September 30, 2015
   
For the Three Months Ended
September 30, 2014
   
For the Nine Months Ended
September 30, 2015
   
For the Nine Months Ended
September 30, 2014
 
                         
Sales revenue
  $ 816,610     $ 519,579     $ 824,251     $ 544,287  
Cost of goods sold
    560,329       426,922       562,854       464,673  
Gross profit (loss)
    256,281       92,657       261,397       79,614  
                                 
Consulting revenue
    -       6,311       -       26,737  
                                 
Operating expenses
                               
Administrative
    508,785       447,102       1,114,346       1,197,487  
Consulting fees - related parties (note 17)
    150,045       158,598       472,493       472,579  
Depreciation and amortization
    12,651       493       23,509       2,294  
Loss on sale of fixed asset
    -       661       -       661  
Bad debt expense (note 4)
    -       19,523       -       19,523  
Impairment of inventory
    75,964       42,638       75,964       42,638  
Total operating expenses
    747,445       669,015       1,686,312       1,735,182  
                                 
Loss from operations
    (491,164 )     (570,047 )     (1,424,915 )     (1,628,831 )
                                 
Other income (expenses):
                               
Foreign exchange
    20,895       (21,799 )     108,727       (33,964 )
Gain (loss) on loan receivable written off (note 5)
    -       (86,615 )     -       (66,748 )
Loss on settlement of account receivable
    -       -       (23,312 )     -  
Gain (loss) on settlement of debt
    -       -       16,344       (27,560 )
Impairment of goodwill (note 4)
    -       (167,538 )     -       (167,538 )
Amortization of debt discount
    (109,558 )     (634,212 )     (197,167 )     (704,780 )
Interest expense, net
    (114,981 )     (71,249 )     (263,262 )     (185,175 )
                                 
Total other expenses
    (203,644 )     (981,413 )     (358,670 )     (1,185,765 )
                                 
Net loss before income taxes
    (697,808 )     (1,551,460 )     (1,783,585 )     (2,814,596 )
Income taxes
    -       -       -       -  
Net loss
  $ (697,808 )   $ (1,551,460 )   $ (1,783,585 )   $ (2,814,596 )
                                 
Loss per weighted average number of shares outstanding (basic and diluted)
  $ (0.007 )   $ (0.022 )   $ (0.019 )   $ (0.040 )
                                 
Weighted average number of shares outstanding (basic and diluted)
    95,552,198       71,022,411       93,933,387       69,548,145  
                                 
                                 
Comprehensive loss:
                               
Net loss
  $ (697,808 )   $ (1,551,460 )   $ (1,783,585 )   $ (2,814,596 )
                                 
Foreign exchange translation adjustment
    87,911       (84,055 )     167,798       (83,689 )
                                 
Comprehensive loss
  $ (609,897 )   $ (1,467,405 )   $ (1,615,787 )   $ (2,730,907 )

The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements 
 
 
4

 

Gilla Inc.
Unaudited Consolidated Interim Statement of Changes in Stockholders’ Deficiency
(Amounts expressed in US Dollars)

   
Common Stock
   
Additional
Paid-In
   
Shares To Be
   
Accumulated
   
Accumulated
Other Comprehensive
   
Total Stockholders’
 
   
Shares
   
Amount
   
Capital
   
Issued
   
Deficit
   
Income
   
Deficiency
 
Balance, December 31, 2014
    92,698,018     $ 18,542     $ 3,998,482     $ -     $ (5,702,351 )   $ 131,911     $ (1,553,416 )
                                                         
Common shares issued for settlement of interest payable on convertible debentures at $0.15 per share
    4,918       1       737       -       -       -       738  
                                                         
Common shares issued for settlement of interest payable on convertible debentures to a director of the Company at $0.15 per share
    2,385       -       358       -       -       -       358  
                                                         
Common shares issued for conversion of convertible debentures at $0.07 per share
    2,299,999       460       160,540       -       -       -       161,000  
                                                         
Common shares issued for conversion of convertible debentures to a director of the Company at $0.07 per share
    228,572       45       15,955       -       -       -       16,000  
                                                         
Common shares issued for settlement of consulting fees at $0.11
    300,000       60       32,940       -       -       -       33,000  
                                                         
Common shares issued for settlement of marketing costs at $0.15
    408,597       82       61,208       -       -       -       61,290  
                                                         
Gain on common shares issued for settlement of marketing costs
    -       -       (16,344 )     -       -       -       (16,344 )
                                                         
Common shares and warrants issued for acquisition of subsidiary
    500,000       100       49,900       -       -       -       50,000  
                                                         
Common shares issued for settlement of consulting fees at $0.19
    60,000       12       11,388       -       -       -       11,400  
                                                         
Common shares issued for settlement of interest payable on convertible debentures at $0.10 per share
    201,945       40       20,155       -       -       -       20,195  
                                                         
Shares to be issued for settlement of consulting fees
    -       -       -       25,000       -       -       25,000  
                                                         
Stock based compensation
    -       -       114,723       -       -       -       114,723  
                                                         
Foreign currency translation gain
    -       -       -       -       -       167,798       167,798  
                                                         
Net loss
    -       -       -       -       (1,783,585 )     -       (1,783,685 )
                                                         
Balance, September 30, 2015
    96,704,434     $ 19,342     $ 4,450,042     $ 25,000     $ (7,485,936 )   $ 299,709     $ (2,691,843 )
 
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements
 
 
5

 
Gilla Inc.
Unaudited Consolidated Interim Statements of Cash Flows
(Amounts Expressed in US Dollars)
   
For the Nine
Months Ended
September 30, 2015
   
For the Nine
Months Ended
September 30, 2014
 
CASH FLOWS FROM OPERATING ACTIVITIES :
           
Net loss
  $ (1,783,585 )   $ (2,814,596 )
Items not requiring an outlay of cash
               
Depreciation
    8,511       2,294  
Amortization
    14,998       -  
(Gain) on loan receivable written-off
    -       66,748  
Stock based compensation
    114,723       46,997  
Loss on sale of fixed asset
    -       661  
Bad debt expense
    -       19,523  
Amortization of debt discount
    197,167       704,780  
(Gain) loss on settlement of debt
    (16,344 )     27,560  
Interest on promissory notes
    21,042          
Impairment of inventory
    75,964       42,638  
Impairment of goodwill
    -       167,538  
Loss on settlement of account receivable
    23,312       -  
Common shares to be issued for services
    25,000       -  
Common shares issued for services
    44,400       120,000  
Changes in operating assets and liabilities
               
Accounts receivable
    (97,488 )     (437,366 )
Funds held in trust
    -       20,000  
Prepaid expenses and vendor deposits
    267,316       (52,550 )
Inventory
    (19,578 )     (35,183 )
Accounts payable
    224,085       230,422  
Accrued liabilities
    28,966       22,587  
Customer deposits
    20,000       -  
Related party payables
    255,044       533,859  
Accrued interest-related party
    62,822       (56,844 )
  Net cash used in operating activities
    (533,645 )     (1,390,932 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Trademarks
    -       (8,212 )
Disposal (addition) of capital assets
    -       2,304  
Acquisition of subsidiary
    (225,000 )     -  
Website development
    -       (57,200 )
  Net cash used in investing activities
    (225,000 )     (63,108 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net cash acquired from acquisitions of subsidiaries
    26,016       8,812  
Net proceeds from credit facility
    (166,815 )     400,986  
Loans to subsidiary prior to acquisition
    (25,000 )     (109,978 )
Shareholder loan received (paid)
    221,470       605,576  
Net proceeds from (repayments to) related parties
    188,574       (153,167 )
Repayment of related party note payable
    -       (225,000 )
Proceeds from sale of convertible debentures
    -       80,000  
Proceeds from common share subscriptions
    -       410,200  
  Net cash provided by financing activities
    244,245       1,017,429  
Effect of exchange rate changes on cash
    76,611       87,891  
                 
Net increase in cash
    (437,789 )     (348,720 )
                 
Cash at beginning of period
    496,724       355,860  
                 
Cash at end of period
  $ 58,935     $ 7,140  
                 
Supplemental Schedule of Cash Flow Information:
               
Cash paid for interest
  $ 22,061     $ 148,739  
Cash paid for income taxes
  $ -     $ -  
                 
Non cash financing activities:
               
Common Stock issued in settlement of shareholder loans
  $ -     $ 1,638  
Common stock issued for payment of consulting fees payable
  $ 44,400     $ 178,912  
Common stock issued for settlement of interest payable
  $ 21,292     $ -  
Common stock issued for settlement of accounts payable
  $ 44,946     $ -  
Debentures issued for settlement of related party and shareholder loans
  $ -     $ 53,000  
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements
 
6

 

  Gilla Inc.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
September 30, 2015
 (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 shareholders approved a name change on March 22, 1996, March 18, 1997, September 13, 1999, October 3, 2000, April 23, 2003 and February 27, 2007 to Web Tech, Inc., Cynergy, Inc., Mercantile Factoring Credit Online Corp., Incitations, Inc., Osprey Gold Corp. and to its present name, respectively.

On November 21, 2012, the Company closed the acquisition of Snoke Distribution Canada Ltd. (“Snoke Distribution”) through the issuance of 29,766,667 Common Shares of the Registrant.

On February 28, 2014, the Company closed the acquisition of all of the issued and outstanding shares of Drinan Marketing Limited (“DML”), a private limited company engaged in the sales and distribution of electronic cigarettes in Ireland.  The Company issued to the sellers 500,000 Common Shares valued at $0.11 per share and warrants for the purchase of 1,000,000 Common Shares of the Company. On October 6, 2014, the Company appointed liquidators for the purpose of winding up DML by way of a voluntary liquidation by reason of its liabilities.

On July 1, 2015, the Company closed the acquisition of all the issued and outstanding shares of E Vapor Labs Inc (formerly, E Liquid Wholesale, Inc.) (“E Vapor Labs”), a Florida based E-liquid manufacturer. Pursuant to the share purchase agreement, dated June 25, 2015, the Company paid a total purchase price of $1,125,000 payable as (i) $225,000 in cash on closing and (ii) $900,000 in unsecured promissory notes issued on closing, such promissory notes issued in three equal tranches of $300,000 due four, nine and eighteen months respectfully from the closing date.

On July 14, 2015, the Company closed the acquisition of all the issued and outstanding shares of E-Liq World, LLC (“VaporLiq”), an E-liquid subscription based online retailer. Pursuant to the share purchase agreement, dated July 14, 2015, the Company issued 500,000 Common Shares and warrants for the purchase of 500,000 Common Shares of the Company exercisable over eighteen months with an exercise price of $0.20 per Common Share.

On November 2, 2015, the Company closed the acquisition of all of the assets of 901 Vaping Company LLC (“901 Vaping”), an E-liquid manufacturer, including all of the rights and title to own and operate the Craft Vapes, Craft Clouds and Miss Pennysworth’s Elixirs E-liquid brands (the “Brands”). Pursuant to the asset purchase agreement, dated October 21, 2015, the Company (i) issued to the vendor 1,000,000 Common Shares of the Company valued at $0.15 per share for a total value of $150,000; (ii) paid cash consideration equal to 901 Vaping’s inventory and equipment of approximately $23,000; and (iii) agreed to a quarterly-earn out based on the gross profit stream derived from product sales of the Brands commencing on the closing date up to a maximum of 25% of the gross profit stream.

The current business of the Company consists of the manufacturing, marketing and distribution of E-liquid, which is the liquid used in vaporizers, E-cigarettes, and other vaping hardware and accessories. E-liquid is heated by the atomizer to deliver the sensation and taste of smoking. Gilla has a two-pronged business model: Custom E-liquid Manufacturing, including private label solutions, E-liquid flavoring and fulfilment services; and Marketing & Online Services, including branding, marketing, sales support, and e-commerce solutions. Gilla’s channels to market include private label for convenience stores, vape shops and online retail. The Company also owns and operates the VaporLiq and Charlie’s Club monthly subscription-based delivery services for vaping products. Vaporizers and E-cigarettes are replacements for traditional cigarettes allowing smokers to reproduce the smoking experience. Vaporizers and E-cigarettes do not burn tobacco and are not smoking cessation devices.

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 September 30, 2015, the Company has an accumulated deficit of $7,485,936 a working capital deficiency of $2,789,035 and negative cash flows from operating activities of $533,645 for the nine month period ended September 30, 2015. The ability of the Company to continue as a going concern is in doubt and 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.
 
 
7

 
 
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, 2014, 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 (“Gilla Operations”); E Vapor Labs Inc; E Liq World, LLC; Charlie’s Club, Inc. (“Charlie’s Club”); Gilla Enterprises Inc.; Gilla Operations Worldwide Limited; Gilla Franchises, LLC and its wholly-owned subsidiary Gilla Biscayne, 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.
 
(b) Foreign Currency Translation

The Company’s Canadian subsidiaries maintain their books and records in Canadian dollars (CAD) which is also their functional currency. The Company’s Irish subsidiary maintains its books in Euros (EUR) which is also its functional currency. The Company and its U.S. subsidiaries maintain their books and records in United States dollars (USD) which is both the Company’s functional currency and reporting currency. The accounts of the Company are translated into United States dollars in accordance with provisions of ASC 830, Foreign Currency Matters. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated using the exchange rate prevailing at the balance sheet date. Non-monetary assets and liabilities are translated using the historical rate on the date of the transaction. Revenue and expenses are translated at average rates in effect during the reporting periods. All exchange gains or losses arising from translation of these foreign currency transactions are included in net income (loss) for the period. In translating the financial statements of the Company's Canadian and Irish subsidiaries from their functional currencies into the Company's reporting currency of United States dollars, balance sheet accounts are translated using the closing exchange rate in effect at the balance sheet date and income and expense accounts are translated using an average exchange rate prevailing during the reporting period. Adjustments resulting from the translation, if any, are included in cumulative other comprehensive income (loss) in shareholders' equity. The Company has not, to the date of these unaudited condensed consolidated interim financial statements, entered into derivative instruments to offset the impact of foreign currency fluctuations.
 
 
 
8

 
 
(c) Earnings (Loss) Per Share
 
Basic earnings (loss) per share are computed by dividing net income (loss) by the weighted average number of Common Shares outstanding for the period, computed under the provisions of Accounting Standards Codification subtopic 260-10, Earnings per Share (“ASC 260-10”). Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of Common Shares outstanding plus common stock equivalents (if dilutive) related to convertible preferred stock, stock options and warrants for each period. There were no common stock equivalent shares outstanding at September 30, 2015 and 2014 that have been included in the diluted loss per share calculation as the effects would have been anti-dilutive.
 
(d) Financial Instruments

Financial assets and financial liabilities are recognized in the balance sheet when the Company has become party to the contractual provisions of the instruments.
 
The Company’s financial instruments consist of cash, accounts receivable, accounts payable, accrued interest, due to related parties, accrued liabilities, customer deposit, promissory notes, convertible debentures, loans from shareholders and credit facility. The fair values of these financial instruments approximate their carrying value, due to their short term nature. Fair value of a financial instrument is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company’s financial instruments recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by FASB ASC No. 820, Fair Value Measurement and Disclosure (“ASC 820”), with the related amount of subjectivity associated with the inputs to value these assets and liabilities at fair value for each level, are as follows:
 
 
Level 1
 -
Unadjusted quoted prices in active markets for identical assets or liabilities;
 
Level 2
 -
Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities; and
 
Level 3
 -
Inputs that are not based on observable market data.
 
Cash is reflected on the consolidated balance sheets at fair value and classified as Level 1 hierarchy because measurements are determined using quoted prices in active markets for identical assets.

Fair value measurements of accounts receivable, accounts payable, accrued interest, due to related parties, accrued liabilities, customer deposit, promissory notes, convertible debentures, loans from shareholders, and credit facility are classified under Level 3 hierarchy because inputs are generally unobservable and reflect management’s estimates of assumptions that market participants would use in pricing the financial instruments.

(e) Advertising Costs

In accordance with FASB ASC 720, the Company expenses the production costs of advertising the first time the advertising takes place.  During the year ended December 31, 2014, $136,200 in production costs were incurred, $90,800 of which have been allocated to prepaid expenses and vendor deposits on the consolidated balance sheet, $45,400 in production costs were expensed during the year ended December 31, 2014 representing the release of the first phase of the Company’s online advertising campaign.  The Company expenses all other advertising costs as incurred. During the nine month period ended September 30, 2015, the Company expensed $159,236 (September 30, 2014: $252,359) as corporate promotions.
 
(f) Revenue Recognition

The Company records revenue when the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price to the customer is fixed and determinable, and collectability is reasonably assured. For the Company’s membership program the Company records revenue on collection of the monthly fee and after delivery of the products has occurred. Delivery is not considered to have occurred until the customer assumes the risks and rewards of ownership. Customers take delivery at the time of shipment for terms designated free on board shipping point. For sales designated free on board destination, customers take delivery when the product is delivered to the customer's delivery site. Provisions for sales incentives, product returns, and discounts to customers are recorded as an offset to revenue in the same period the related revenue is recorded.  The Company does not currently record a provision for product returns as to date sales in the membership program have been minimal and any returns related to sales through the Company’s wholesale distribution channels become the responsibility of the manufacturer. Therefore, any related provision for product returns was not deemed material for the periods ended September 30, 2015 and 2014.
 
 
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(g) Comprehensive Income or Loss
 
The Company reports comprehensive income or loss in its unaudited condensed consolidated interim financial statements. In addition to items included in net income or loss, comprehensive income or loss includes items charged or credited directly to stockholders’ equity, such as foreign currency translation adjustments and unrealized gains or losses on available for sale marketable securities.
 
(h) Use of Estimates

The preparation of consolidated interim financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated interim financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from these estimates, and such differences could be material.  The key sources of estimation uncertainty at the balance sheet date, which have a significant risk of causing a material adjustment to the carrying amounts of assets within the next financial year, include reserves and write downs of receivables and inventory, useful lives of property and equipment, impairment of goodwill, accruals, impairment of property and equipment, valuing stock based compensation, valuing equity securities, valuation of convertible debenture conversion options and deferred taxes and related valuation allowances.  Certain of our estimates could be affected by external conditions, including those unique to our industry and general economic conditions.  It is possible that these external factors could have an effect on our estimates that could cause actual results to differ from our estimates.  The Company re-evaluates all of its accounting estimates at least quarterly based on the conditions and records adjustments when necessary.

(i) 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 August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 requires an entity to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the financial statements are available to be issued when applicable) and to provide related footnote disclosures in certain circumstances. ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter with early adoption permitted. We do not expect the adoption of ASU 2014-15 to have a material impact on our consolidated financial statements.


4. BUSINESS COMBINATIONS

(a) On July 1, 2015, the Company closed the acquisition of all the issued and outstanding shares of E Vapor Labs, a Florida based E-liquid manufacturer.  The Company purchased 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. The following summarizes the fair value of the assets acquired, liabilities assumed and the consideration transferred at the acquisition date:
 
 
10

 
 
Assets acquired:
     
Cash
 
$
20,635
 
Receivables
   
46,492
 
Deposits
   
5,874
 
Inventory
   
122,401
 
Fixed assets
   
118,866
 
Goodwill
   
846,974
 
Total assets acquired
 
$
1,161,242
 
         
 Liabilities assumed:
       
Accounts payable
 
$
179,016
 
Loan payable
   
25,000
 
Total liabilities assumed
 
204,016
 
         
Consideration:
       
Cash
 
$
225,000
 
Promissory Notes A, unsecured and non-interest bearing, due November 1, 2015
   
203,570
 
Promissory Notes B, unsecured and non-interest bearing, due April 1, 2016
   
275,555
 
Promissory Notes C, unsecured and non-interest bearing, due January 1, 2017
   
253,101
 
Total consideration
 
$
957,226
 

In consideration for the acquisition, the Company paid to the vendors, $225,000 in cash on closing and $900,000 in unsecured promissory notes issued on the closing (collectively, the “Promissory Notes”). The Promissory Notes were issued in three equal tranches of $300,000 due 4, 9 and 18 months respectfully from the closing (individually, “Promissory Notes A”, “Promissory Notes B”, and “Promissory Notes C” respectively). The Promissory Notes are all unsecured, non-interest bearing, and on the maturity date, at the option of the vendors, up to 1/3 of each tranche of the Promissory Notes can be repaid in Common Stock of the Company, calculated using the 5 day weighted average closing market price of the Company prior to the maturity of the Promissory Notes. The Promissory Notes, are all and each subject to adjustments as outlined in the share purchase agreement (the “SPA”), dated June 25, 2015.
 
The goodwill is attributable to the assembled workforce and geographic presence of the acquired business as well as significant cost and revenue synergies expected to arise after the acquisition.

As at September 30, 2015, the Company has adjusted the Promissory Notes A for the known difference in the working capital balance at closing of the acquisition from the amount specified in the SPA.  Further, a 12% discount rate has been used to calculate the present value of the Promissory Notes.  Over the term of the respective Promissory Notes, interest will be accrued at 12% per annum to accrete the Promissory Notes to their respective principal amounts.

The Promissory Notes A were due on November 1, 2015. The Company provided notice to the Promissory Note holders on October 30, 2015 indicating its intention to repay such Promissory Notes, however, such inability to accurately determine the required adjustments pursuant to the SPA has forced the Company to defer repayment of such Promissory Notes until such time where the principal amount of the Promissory Notes can be accurately determined.

(b) On July 14, 2015, the Company closed the acquisition of all the issued and outstanding shares of VaporLiq, a private E-liquid subscription based online retailer. The Company purchased VaporLiq mainly to access industry relationships and knowhow of various E-liquid brands that VaporLiq transacts with. The following summarizes the fair value of the assets acquired, liabilities assumed and the consideration transferred at the acquisition date:

Assets acquired:
     
Cash
 
$
5,381
 
Website
   
10,000
 
Inventory
   
2,150
 
Goodwill
   
32,469
 
Total assets acquired
 
$
50,000
 
         
Total liabilities assumed
 
$
-
 
         
Consideration:
       
500,000 Common Shares & 500,000 warrants
 
$
50,000
 
Total consideration
 
$
50,000
 
 
 
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In consideration for the acquisition, the Company issued 500,000 Common Shares at $0.10 per share and 500,000 warrants, each to acquire one Common Share of the Company. These warrants are exercisable over 18 months with an exercise price of $0.20 per Common Share.
 
The goodwill is attributable to business acumen and access to key E-liquid brands that the Company may leverage for further acquisitions.
(c) On February 28, 2014, the Company closed the acquisition of all the issued and outstanding shares of DML, a private limited company organized under the laws of Ireland. DML is engaged in the sales and distribution of E-cigarettes in Ireland.  The following summarizes the fair value of the assets acquired, liabilities assumed and the consideration transferred at the acquisition date:

Assets acquired:
     
Cash
 
$
8,828
 
Receivables
   
112,460
 
Inventory
   
60,777
 
Loan receivable
   
84,936
 
Fixed, assets
   
3,826
 
Goodwill
   
167,538
 
Total assets acquired
 
$
438,365
 
         
Liabilities assumed:
       
Accounts payable
 
$
253,247
 
Loans payable
   
130,118
 
Total liabilities assumed
 
$
383,365
 
         
Consideration:
       
500,000 Common Shares
 
$
55,000
 
Total consideration
 
$
55,000
 

In consideration for the acquisition, the Company issued 500,000 Common Shares at $0.11 per share and 1,000,000 warrants, each to acquire one Common Share of the Company. These warrants will vest upon DML achieving cumulative E-cigarette sales revenues of over $1,500,000 beginning on the closing date. These warrants are to be exercisable over 3 years with an exercise price of $0.25 per Common Share.

On October 6, 2014, the Company’s wholly owned subsidiary DML held a meeting of DML’s creditors, whereby DML, with the approval of the Company as its sole shareholder, agreed that DML, by reason of its liabilities, be wound up by way of a voluntary liquidation (see note 15).


5. LOAN RECEIVABLE

On March 13, 2013, the Company entered into a factoring agreement with DML, who at the time was a third party, in which the Company advanced $19,867 in cash to DML to purchase a receivable owing to DML from a customer (the “Receivable”) at face value. The Receivable purchased was required to be paid by the applicable customer on or before the date that is 30 days after the date of issuance of the Receivable. In addition to payment of the account, the Company was to receive an additional fee of 2% of the face amount of the Receivable.  Default interest of 1/10th of 1% per day shall be calculated on the outstanding amount accruing from the due date until the amount is paid in full.  The Receivable is secured by a general security agreement covering all assets of DML and a first security interest in respect of all receivables purchased by the Company under the factoring agreement.

Default interest in the amount of $1,538 was accrued on the Receivable. During the year ended December 31, 2013, the Company determined the Receivable to be uncollectable and as a result recorded a loss of $21,405.

On February 28, 2014, the Company acquired DML. As a result, the Company reversed the write-off of the Receivable and recorded a gain of $19,867.

As a result of DML’s expected voluntary liquidation by reason of its liabilities, the Company wrote off the entire loan receivable from the previous shareholder of DML and recorded a loss on loan receivable of $85,717.
 
 
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6. INVENTORY

Inventory consists of the following:
 
   
September 30,
2015
   
December 31,
2014
 
E-cigarettes, E-liquids and accessories
 
$
119,645
   
$
78,901
 
Packaging
   
24,406
     
-
 
   
$
147,051
   
$
78,901
 
 
During the nine month period ended September 30, 2015, the Company wrote off $75,965 in obsolete inventory recorded in Charlie’s Club and Gilla Operations. As a result, the Company recorded an impairment of inventory of $75,965 for the period.

During the year ended December 31, 2014, the Company wrote off the full value of DML’s inventory in the amount of $60,301 as a result of DML’s liquidation and impaired the inventory located in Florida in the amount of $41,157 due to inventory obsolescence. During the year ended December 31, 2014, the Company recorded an impairment of inventory of $101,458.
 
7. PROPERTY AND EQUIPMENT
 
   
September 30,
2015
   
December 31, 2014
 
   
Cost
   
Accumulated Depreciation
   
Net
   
Net
 
Furniture and equipment
  $ 3,898     $ 2,418     $ 1,480     $ 595  
Computer hardware
    7,497       3,375       4,122       1,269  
Manufacturing equipment
    113,334       6,720       106,614          
    $ 124,729     $ 12,513     $ 112,216     $ 1,864  
 
Depreciation expense for the nine month periods ended September 30, 2015 and 2014 amounted to $8,511 and $2,294 respectively.
 
8. WEBSITE DEVELOPMENT

 
September 30,
2015
 
December 31, 2014
 
 
Cost
 
Accumulated Amortization
 
Net
 
Net
 
Charlie’s Club Website
  $ 99,989     $ 21,664     $ 78,325     $ 93,323  
E Liquid website
    10,000       -       10,000       -  
    $ 109,989     $ 21,664     $ 88,325     $ 93,323  

Amortization expense for the nine month periods ended September 30, 2015 and 2014 amounted to $14,998 and Nil respectively.

The estimated amortization expense for the next 4 years ending December 31, 2015, 2016, 2017 and 2018 approximates $19,998 per year, for the year ending December 31, 2019 it approximates $13,331.
 
 
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9. LOANS FROM SHAREHOLDERS
 
The Company has outstanding loans from shareholders as follows:
 
   
September 30,
2015
   
December 31,
2014
 
Non-interest bearing, unsecured, no specific terms of repayment
  $ 5,000     $ 5,000  
Bears interest of 10% per annum on a cumulative basis, secured by the assets of the Company, matures on January 1, 2016
    374,650       431,000  
Bears interest of 10% per annum on a cumulative basis, secured by the assets of the Company, matures on January 1, 2016
    100,000       100,000  
Bears interest of 10% per annum on a cumulative basis, secured by the assets of the Company, matures on January 1, 2016
    224,790       -  
Bears interest of 1.5% per month on a cumulative basis, unsecured, no specific terms of repayment
    23,363       29,739  
    $ 727,803     $ 565,739  

During the year ended December 31, 2014, the Company repaid $17,370 of loans from shareholders consisting of $13,569 in principal and $3,801 in interest.  The amount was repaid with $13,935 of cash and amounts of $3,435 were settled with the issuance of $3,000 of Convertible Debentures (note 12), resulting in a $435 gain on settlement of debt.

The Company accrued interest of Nil during the nine month period ended September 30, 2015 (September 30, 2014: $172) on this loan.

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 $374,650) on or before August 13, 2014, bearing interest at a rate of 10% per annum, such interest will accrue monthly and be added to the principal. The Secured Note is secured by a general security agreement over the assets of the Company.  During the year ended December 31, 2014, the Company and the shareholder extended the maturity date of the Secured Note to January 1, 2016.

The Company accrued interest of $38,956 during the nine month period ended September 30, 2015 (September 30, 2014: $31,330) on the Secured Note which is included in accrued liabilities. During the year ended December 31, 2014, the Company settled $30,690 in interest on the Secured Note with the issuance of Common Shares.

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 will accrue monthly and be added to the principal. The Secured Note No.2 is secured by the general security agreement issued with the Secured Note. During the year ended December 31, 2014, the Company and the shareholder extended the maturity date of the Secured Note No.2 to January 1, 2016.

The Company accrued interest of $7,953 during the nine month period ended September 30, 2015 (September 30, 2014: $2,111) on the Secured Note No.2 which is included in accrued liabilities. During the year ended December 31, 2014, the Company settled $2,111 in interest on the Secured Note No.2 with the issuance of Common Shares.

On June 29, 2015, the Company entered into a secured promissory note (the “Secured Note No.3”) with a shareholder, whereby the Company agreed to pay the party the aggregate unpaid principal amount of CAD $300,000 (USD $224,790) on or before January 1, 2016, bearing interest at a rate of 10% per annum, such interest will accrue monthly and be added to the principal. The Secured Note No.3 is secured by the general security agreement issued with the Secured Note.

The Company accrued interest of $5,667 during the nine month period ended September 30, 2015 (September 30, 2014: Nil) on the Secured Note No.3 which is included in accrued liabilities.

On August 15, 2014, the Company settled CAD $1,500 (USD $1,378) of non-interest bearing shareholder loans with the issuance of 10,919 Common Shares of the Company resulting in a loss of $260.

10. 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 “Lender”), whereby the Lender 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 shall bear 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 shall mature on August 1, 2015 whereby the outstanding advances together with all accrued and unpaid interest theron shall be due and payable. On August 1, 2014, and in connection to the Credit Facility, the Company issued 250,000 warrants to purchase Common Shares of the Company exercisable over two years with an exercise price of $0.30 per Common Share. The Company’s Chief Executive Officer and Chief Financial Officer are 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.
 
 
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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 February 11, 2015, the Company fully repaid the amounts advanced from the Credit Facility.

On April 24, 2015, the Company was advanced $99,274 (CAD $124,000) from the Credit Facility including $19,855 (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 $127,381 (CAD $170,000) from the Credit Facility including $25,476 (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 nine month period ended September 30, 2015, the Company accrued $21,084 of interest as a result of the Credit Facility, of which $17,952 has been paid and $3,132 of interest remains owing and is included in accounts payable.

11. NOTE PAYABLE - RELATED PARTY
 
On November 15, 2012, the Company entered into a convertible revolving credit note (the “Credit Note”), with a related party, for $225,000 due on or before February 15, 2014, bearing interest at a rate of 6% per annum payable at the maturity date. The Credit Note could be repaid, in whole or in part, without penalty with five days prior written notice. At any time subsequent to 30 days after the maturity date, the outstanding principal amount and any accrued and unpaid interest could be converted into common stock at a conversion price of the lower of $0.01 per share or the average of the bid prices for the common stock of the Company for the 15 trading days prior to the notice of conversion.
 
On February 14, 2014, the Company repaid all amounts due under the Credit Note.

During the nine month periods ended September 30, 2015 and 2014, the Company accrued Nil and $1,638 of interest on the Credit Note, respectively.
 
12. CONVERTIBLE DEBENTURES
 
On September 3, 2013, December 23, 2013 and February 11, 2014, the Company issued $425,000, $797,000 and $178,000 of unsecured subordinated convertible debentures (the “Convertible Debentures”), respectively. The Convertible Debentures mature on January 31, 2016 and bear interest at a rate of 12% per annum, which is payable quarterly in arrears. The Convertible Debentures are convertible into Common Shares of the Company at a fixed conversion rate of $0.07 per share at any time prior to the maturity date. Of the $178,000 Convertible Debentures issued on February 11, 2014, $3,000 were issued in settlement of loans from shareholders (note 9) and $50,000 was issued in settlement of loans from related parties (note 17).

As at December 31, 2013, the Company received $45,000 in advance for Convertible Debentures not yet issued.  Of this amount $25,000 was received by the Company in cash and $20,000 was collected by the Company’s lawyer and held in trust. The Company received the funds held in trust on February 21, 2014. These Debentures were issued February 11, 2014.

The Company evaluated the terms and conditions of the Convertible Debentures under the guidance of ASC 815, Derivatives and Hedging. 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 as an exchange of nonconvertible instruments at the nonconvertible instruments maturity date, the guidance of ASC 470-20-30-19 & 20 was applied. The fair value of the newly issued Convertible Debentures was 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”).
 
 
15

 
 
For the face value $425,000 Convertible Debentures that were 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 Convertible Debentures that were issued on December 23, 2013 and the face value $178,000 Convertible Debentures that were issued on February 11, 2014, the calculation of the effective conversion amount did result 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 amounts of $797,000 and $178,000, respectively, were recorded in additional paid-in capital. The BCF which represents debt discount is accreted over the life of the loan using the effective interest rate. For the nine month period ended September 30, 2015, the Company recorded interest expense in the amount of $197.167 (June 30, 2014: $704,780) related to debt discount which includes $124,807 related to the conversion of convertible debentures in the aggregate amount of $177,000.

On April 15, 2014, the Company received forms of election whereby holders of the Convertible Debentures elected to convert a total of $50,000 into Common Shares of the Company at $0.07 per share pursuant to the Convertible Debenture offering. On May 30, 2014, the Company issued 714,286 Common Shares on the conversion of the Convertible Debentures.

On September 30, 2014, the Company received forms of election whereby holders of the Convertible Debenture elected to convert a total of $800,000 into Common Shares of the Company at $0.07 per share pursuant to the Convertible Debenture offering. On November 4, 2014, the Company issued 11,428,572 Common Shares on the conversion of the Convertible Debentures.

On November 10, 2014, the Company received forms of election whereby holders of the Convertible Debenture elected to convert a total of $275,000, into Common Shares of the Company at $0.07 per share pursuant to the Convertible Debenture offering. On November 20, 2014, the Company issued 3,928,571 Common Shares on the conversion of the Convertible Debentures.

On March 9, 2015, the Company received forms of election whereby holders of the Convertible Debenture elected to convert a total of $52,000, into Common Shares of the Company at $0.07 per share pursuant to the Convertible Debenture offering.  On April 13, 2015, the 742,857 Common Shares related to the conversion were issued.

On July 15, 2015, the Company received forms of election whereby holders of the Convertible Debenture elected to convert a total of $105,000, into Common Shares of the Company at $0.07 per share pursuant to the Convertible Debenture offering.  On August 17, 2015, the 1,500,000 Common Shares related to the conversion were issued.

On September 1, 2015, the Company received forms of election whereby holders of the Convertible Debenture elected to convert a total of $20,000, into Common Shares of the Company at $0.07 per share pursuant to the Convertible Debenture offering.  On September 1, 2015, the 285,714 Common Shares related to the conversion were issued.

During the nine month period ended September 30, 2015, the Company recorded interest expense in the amount of $18,881 (September 30, 2014: $120,039) on the Convertible Debentures.

On July 13, 2015, the Company settled interest payable on the Convertible Debentures in the amount of $20,195 with the issuance of Common Shares and warrants having a combined value of $45,378. As a result, the Company recorded a loss on debt settlement of $25,283 for the nine month period ended September 30, 2015.
 
13. COMMON STOCK

Authorized: 300,000,000 Common Shares of $0.0002 par value (the “Common Shares”)

Issued and Outstanding:

   
September 30,
2015
   
December 31,
2014
 
96,704,434 Common Shares (2014:92,698,018)
  $ 19,342     $ 18,542  
 
 
16

 
 
During the nine month period ended September 30, 2015, the Company:

 
Issued 201,945 Common Shares at $0.10 per share for settlement of $20,195 in interest payable on a Convertible Debenture to an unrelated party;
 
Issued 60,000 Common Shares at $0.19 per share for settlement of $11,400 in consulting fees to an unrelated party;
 
Issued 500,000 Common Shares valued at $8,025 for the acquisition of a subsidiary;
 
Issued 4,918 Common Shares at $0.15 per share for settlement of  $738 in interest payable on Convertible Debentures to unrelated parties;
 
Issued 2,385 Common Shares at $0.15 per share for settlement of $358 in interest payable to a Director of the Company;
 
Issued 2,299,999 Common Shares at $0.07 per share as a result of the conversion of $161,000 of Convertible Debentures;
 
Issued 228,572 Common Shares at $0.07 per share to a Director of the Company as a result of the conversion of $16,000 of Convertible Debentures
 
Issued 300,000 Common Shares at $0.11 per share as compensation for $33,000 in consulting fees to an unrelated party; and
 
Issued 408,597 Common Shares valued at a fair value of $0.11 per share for settlement of $61,290 in marketing costs owing to an unrelated party. The amount allocated to Shareholders’ Deficiency, based on the fair value, amounted to $44,946. The balance of $16,344 has been recorded as a gain on settlement of debt.
 
During the year ended December 31, 2014, the Company:
 
 
Issued 200,000 Common Shares for settlement of $10,000 in consulting fees owing to an unrelated party;
 
Issued 500,000 Common Shares valued at $0.035 per share for cash proceeds of $17,500;
 
Issued 280,433 Common Shares valued at $0.1426 per share for settlement of $40,000 in consulting fees owing to an unrelated party;
 
Issued 270,597 Common Shares valued at $0.1293 per share for settlement of $35,000 in consulting fees owing to an unrelated party;
 
Issued 835,000 Common Shares valued at $0.10 per share for settlement of $83,500 owing as a result of the production costs of advertising;
 
Issued 10,000 Common Shares valued at $0.10 per share for settlement of $1,000 owing to a related party as a result of the production costs of advertising;
 
Issued 92,500 Common Shares valued at $0.19 per share for settlement of $17,500 in consulting fees owing to an unrelated party;
 
Issued 500,000 Common Shares valued at $0.11 per share for the acquisition of Drinan Marketing Ltd.;
 
Issued 55,000 Common Shares valued at $0.25 per share for settlement of $13,750 in consulting fees owing to an unrelated party;
 
Issued 2,734,667 Common Shares valued at $0.15 per share for cash proceeds of $410,200;
 
Issued 300,000 Common Shares valued at $0.18 per share as a prepayment of $54,000 in consulting fees to an unrelated party;
 
Issued 10,919 Common Shares valued at $0.15 per share for settlement of $1,638 of shareholder loans;
 
Issued 182,749 Common Shares valued at $0.15 per share for settlement at $27,412 in consulting fees owing to an unrelated party;
 
Issued 63,559 Common Shares at $0.236 per share as compensation for $15,000 in consulting fees to an unrelated party;
 
Issued 100,000 Common Shares at $0.16 per share as compensation for $16,000 in consulting fees to an unrelated party;
 
Issued 10,357,143 Common Shares at $0.07 per share as a result of the conversion of $725,000 of Convertible Debentures;
 
Issued 5,714,286 Common Shares at $0.07 per share to related parties as a result of the conversion of $400,000 of Convertible Debentures;
 
Issued 638,978 Common Shares at $0.15 per share for settlement of  $102,291 in interest payable to unrelated parties;
 
Issued 277,370 Common Shares at $0.15 per share for settlement of $35,162 in interest payable to related parties;
 
Issued 717,840 Common Shares at $0.15 per share for settlement of $107,676 in consulting fees payable to related parties;
 
Issued 800,000 Common Shares at a fair value of $0.15 per share as compensation for consulting fees to an unrelated party in the amount of $120,000;
 
Issued 500,000 Common Shares at $0.15 per share for settlement of $75,000 in consulting fees to a related party; and
 
Issued 490,000 Common Shares at $0.15 per share for cash proceeds of $73,500.
 
 
17

 
 
14. WARRANTS
 
The following schedule summarizes the outstanding warrants:
 
 
September 30, 
2015
 
December 31,
2014
 
Warrants Outstanding
 
Weighted Average Exercise Price
 
Warrants Outstanding
 
Weighted Average Exercise Price
Beginning of period
1,510,640
 
$
0.25
 
-
  $
-
Issued
2,451,945
   
0.34
 
1,510,640
   
0.25
Expired
(10,640)
   
0.15
 
-
   
-
End of period
3,951,945
 
$
0.31
 
1,510,640
 
$
0.25

(a) On February 28, 2014, as part of the acquisition of DML, the Company issued warrants to acquire 1,000,000 Common Shares of the Company.  The warrants will vest upon DML achieving cumulative E-cigarette sales revenues of over $1,500,000 beginning on the closing date. The warrants are to be exercisable over 3 years with an exercise price of $0.25 per Common Share. No value has been assigned as the Company has since placed DML into voluntary liquidation, and as a result, there is 0% probability of achieving the vesting provision.

(b) On July 25, 2014, and in connection to the private placement, the Company issued 10,640 warrants to purchase Common Shares of the Company exercisable over one year with an exercise price of $0.15 per Common Share.

The fair value of these issued warrants of $2,615 was determined using the Black Scholes option-pricing model with the following weighted average assumptions:

Risk-free interest rate
 
0.32
%
Expected life
 
1 year
 
Estimated volatility in the market price of the Common Shares
 
247
%
Dividend yield
 
Nil
 

The Company fully expensed the value of the warrants in stock based compensation which has been recorded as an administrative expense.

(c) On August 1, 2014, and in connection to the Credit Facility, the Company issued 250,000 warrants to purchase Common Shares of the Company exercisable over two years with an exercise price of $0.30 per Common Share.

The fair value of these issued warrants of $59,240 was determined using the Black Scholes option-pricing model with the following weighted average assumptions:

Risk-free interest rate
 
0.69
%
Expected life
 
2 years
 
Estimated volatility in the market price of the Common Shares
 
357
%
Dividend yield
 
Nil
 
 
The Company booked the value of the warrants as prepaid to be expensed over the life of the Credit Facility.  During the nine month period ended September 30, 2015, the Company expensed $34,557 in stock based compensation which has been recorded as an administrative expense.

(d) On November 10, 2014, and in connection to the Secured Note and Secured Note No.2 (together, the “Secured Notes”), the Company issued 250,000 warrants to purchase Common Shares of the Company exercisable over 14 months with an exercise price of $0.20 per Common Share.
 
 
18

 
 
The fair value of these issued warrants of $41,991 was determined using the Black Scholes option-pricing model with the following weighted average assumptions:

Risk-free interest rate
 
0.34
%
Expected life
 
1.14 years
 
Estimated volatility in the market price of the Common Shares
 
237
%
Dividend yield
 
Nil
 
 
The Company booked the value of the warrants as prepaid to be expensed over the life of the Secured Notes.  During the nine month period ended September 30, 2015, the Company expensed $27,491 in stock based compensation which has been recorded as an administrative expense.

(e) On January 30, 2015, and in connection to a supply and distribution agreement, the Company issued 250,000 warrants to purchase Common Shares of the Company exercisable over two years with an exercise price of $0.30 per Common Share.

The fair value of these issued warrants of $38,719 was determined using the Black Scholes option-pricing model with the following weighted average assumptions:

Risk-free interest rate
 
0.71
%
Expected life
 
2 years
 
Estimated volatility in the market price of the Common Shares
 
320
%
Dividend yield
 
Nil
 
 
The Company fully expensed the value of the warrants in stock based compensation which has been recorded as an administrative expense.

(f) On May 29, 2015, and in connection to a commission agreement, the Company issued 1,000,000 warrants to purchase Common Shares of the Company exercisable over two years. The warrants vest in 4 tranches of 250,000 warrants each. Tranche 1 has an exercise price of $0.40 and vested upon execution of the agreement. Tranche 2 has an exercise price of $0.50 and will vest upon the sales agent delivering $500,001 in sales revenue to Gilla Operations Worldwide Ltd (“GOWL”). Tranche 3 has an exercise price of $0.60 and will vest upon the sales agent delivering $1,000,001 in sales revenue to GOWL. Tranche 4 has an exercise price of $0.70 and will vest upon the sales agent delivering $1,500,001 in sales revenue GOWL.

The fair value of these issued warrants of $140,185 was determined using the Black Scholes option-pricing model with the following weighted average assumptions:

Risk-free interest rate
 
0.85
%
Expected life
 
2 years
 
Estimated volatility in the market price of the Common Shares
 
298
%
Dividend yield
 
Nil
 
 
The Company booked the value of the vested warrants in the amount of $35,362 as prepaid to be expensed over the life of the commission agreement.  During the nine month period ended September 30, 2015, the Company expensed $5,894 in stock based compensation which has been recorded as an administrative expense. No portion of the value of the unvested warrants has been expensed during the period ended September 30, 2015 as the sales agent had not yet delivered any sales revenue to GOWL.

(g) On June 29, 2015, and in connection to the Secured Note No.3, the Company issued 500,000 warrants to purchase Common Shares of the Company exercisable over one year with an exercise price of $0.15 per Common Share.

The fair value of these issued warrants of $40,643 was determined using the Black Scholes option-pricing model with the following weighted average assumptions:

Risk-free interest rate
 
0.51
%
Expected life
 
1 year
 
Estimated volatility in the market price of the Common Shares
 
166
%
Dividend yield
 
Nil
 
 
 
19

 
 
The Company booked the value of the warrants as prepaid to be expensed over the life of the Secured Note No. 3. During the nine month period ended September 30, 2015, the Company expensed $20,321 in stock based compensation which has been recorded as an administrative expense.

(h) On July 14, 2015, as part of the acquisition of VaporLiq, the Company issued 500,000 warrants to purchase Common shares of the Company exercisable over eighteen (18) months with an exercise price of $0.20 per Common Share.

The fair value of these issued warrants of $41,975 was determined using the Black Scholes option-pricing model with the following weighted average assumptions:

Risk-free interest rate
 
0.51
%
Expected life
 
1.5 years
 
Estimated volatility in the market price of the Common Shares
 
219
%
Dividend yield
 
Nil
 
 
(i) On July 15, 2015, and in connection with a private placement, the Company issued 201,945 warrants to purchase Common Shares of the Company exercisable over twelve (12) months with an exercise price of $0.20 per Common Share.

The fair value of these issued warrants of $11,047 was determined using the Black Scholes option-pricing model with the following weighted average assumptions:

Risk-free interest rate
 
0.52
%
Expected life
 
1 year
 
Estimated volatility in the market price of the Common Shares
 
174
%
Dividend yield
 
Nil
 

No stock based compensation expense was recorded since the warrants were issued as part of a private placement of common stock.

15. SHARES TO BE ISSUED

On September 30, 2015, the Company had $25,000 in unissued share liability, consisting of the following:

●  
The Company settled $25,000 in consulting fees owing to unrelated parties with the issuance of 211,389 Common Shares at $0.12 per share. Such Common Shares were issued on November 2, 2015.
 
16.  DECONSOLIDATION OF SUBSIDIARY

On October 6, 2014, the Company’s wholly owned subsidiary DML held a meeting of DML’s creditors, whereby DML, with the approval of the Company as its sole shareholder, agreed that by reason of its liabilities, DML be wound up by way of a voluntary liquidation.  Mr. Aengus Burns of the accounting firm of Grant Thornton and Mr. Patric Black of the accounting firm of CB Accounting Services were appointed as joint liquidators for the purposes of the winding up of DML. In accordance with Accounting Standards Codification (“ASC”) 810, when a subsidiary becomes subject to the control of a government, court, administrator, or regulator, deconsolidation of that subsidiary is required. The Company has therefore deconsolidated DML from its balance sheet as of October 6, 2014. The operations of DML for the period from the acquisition date of February 28, 2014 to the deconsolidation date of October 6, 2014 are included in the operations of the Company. The Company believes it has no responsibility for the liabilities of DML.

As a result of the loss of control and resulting deconsolidation the Company recorded a gain on deconsolidation in the amount of $126,867.  The Company also wrote off its investment in Drinan in the amount of $55,000, the intercompany receivable owing from DML in the amount of $233,659 and also the Company released $34,036 in currency translation adjustments retained in other comprehensive income into income.

 
20

 

17. RELATED PARTY TRANSACTIONS

Transactions with related parties are incurred in the normal course of business and are measured at the exchange amount, which is the amount of consideration established and agreed to between the related parties.
 
(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:
 
   
September 30,
2015
   
December 31,
2014
 
Advances by and amounts payable to Officers of the Company, two of which are also Directors
  $ 173,029     $ 133,820  
Advances by and consulting fees payable to a corporation owned by two Officers of the Company, one of which is also a Director
    127,878       523,824  
Consulting fees owing to persons related to an Officer who is also a  Director of the Company
    47,427       49,255  
Advances by Officers of the Company, one of which is also a Director, bears interest at 1.5% per month
    542,657       401,264  
Amounts payable to a corporation related by virtue of a common Officer of the Company
    -       30,294  
Amounts payable to a corporation related by virtue of common Officers and a common Director of the Company
    35,943       -  
Consulting fees and director fees payable to Directors of the Company
    59,500       6,332  
    $ 986,433     $ 1,144,789  

During the year ended December 31, 2014, the Company settled $50,000 of amounts owing to an Officer of the Company with the issuance of a $50,000 Convertible Debenture (note 12).

During the year ended December 31, 2014, the Company settled $220,075 of the loans owing to an Officer and Director of the Company with cash.

During the year ended December 31, 2014, the Company settled $40,379 of amounts owing to persons related to a Director of the Company with the issuance of 269,190 Common Shares at $0.15 (note 13).

During the year ended December 31, 2014, the Company settled $142,298 of amounts owing to Directors of the Company with the issuance of 948,650 Common Shares at $0.15 (note 13).

During the year ended December 31, 2014, the Company owed an amount of $100,000 to an Officer and Director of the Company.  The amount is non-interest bearing and payable on January 1, 2016.

During the nine month period ended September 30, 2015, the Company deferred amounts of $302,772 owing to Officers of the Company, two of which are also Directors and amounts of $374,650 owing to a corporation owned by two Officers of the Company, one of which is also a Director. The amounts are non-interest bearing and payable on January 1, 2017.
 
(b)
Interest accrued to related parties were as follows:
 
   
September 30, 2015
   
December 31, 2014
 
             
Interest accrued on advances by Officers of the Company, one of which is also a Director
 
$
102,101
   
$
39,279
 
   
$
102,101
   
$
39,279
 
 
(c)
 Transactions with related parties were as follows:

During the nine month period ended September 30, 2015, the Company expensed $32,317 (September 30, 2014: Nil) in rent expense payable to a corporation related by virtue of a common Officer and a common Director of the Company.  During the nine month period ended September 30, 2015, the Company expensed Nil (September 30, 2014: $11,541) in rent expense payable to a corporation related by virtue of a common Officer of the Company. 
 
 
21

 
 
During the nine month period ended September 30, 2015, the Company expensed $22,631 in costs related to a vehicle for the benefit of two Officers who are also Directors of the Company. The Company also expensed $78, 434 (September 30, 2014: $202,418) in travel and entertainment expenses incurred by Officers and Directors of the Company.

During the year ended December 31, 2014, the Company received $21,000 in cash proceeds from a Director of the Company as part of a private placement at $0.15. As a result the Company issued 140,000 shares.

During the nine month period ended September 30, 2015, the Company settled $358 of interest payable on Convertible Debentures with a Director of the Company at $0.15 per share, the Common Shares were issued on April 13, 2015.

During the nine month period ended September 30, 2015, the Company issued 228,572 Common Shares at $0.07 per share to a Director of the Company as a result of the conversion of $16,000 of Convertible Debentures, the shares were issued on April 13, 2015.

The Company expensed consulting fees payable to related parties as follows:

   
September 30.
2015
   
September 30,
2014
 
Directors
 
$
74,250
   
$
92,950
 
Officers
   
191,498
     
-
 
Corporation related by virtue of common Officers and a common Director
   
63,540
     
-
 
Corporation owned by two Officers, one of which is also a Director
   
94,138
     
326,162
 
Persons related to a Director
   
47,067
     
53,467
 
   
$
472,493
   
$
472,579
 

The Company’s Chief Executive Officer and Chief Financial Officer are 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 (see note 10).
 
18. COMMITMENTS AND CONTINGENCIES

a) Operating Lease

The future minimum payment under an operating lease for the use of a vehicle amounts to approximately $799 per month. The lease expires on April 30, 2016. Minimum annual lease payments are as follows:
 
2015
 
$
2,397
 
2016
   
3,196
 
   
$
5,593
 
 
b) Premises Lease

Effective January 1, 2014, 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, 2018 with payments made monthly. Minimum annual lease payments are as follows:

2015
 
$
14,297
 
2016
   
57,118
 
2017
   
57,118
 
2018
   
57,118
 
   
$
185,860
 
 
 
22

 
 
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. There was no outstanding litigation as of September 30, 2015.

d) Commission Agreement

The Company entered into a commission agreement with a sales agent effective May 29, 2015. The Company agreed to pay to the sales agent, 20% of the gross margin on all qualifying sales brokered to GOWL by the sales agent. The agreement has a term of two years at which time it can be either extended or terminated at the option of GOWL.

19. 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 accounts receivable. Cash accounts are maintained with major international financial institutions of reputable credit and therefore bear minimal credit risk.  The Company minimizes its exposure to credit risk related to its receivables by requiring all orders to be prepaid before delivery of the product.

(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.

(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 Company purchases inventory in a foreign currency, at September 30, 2015, the Company included no inventory purchased in a foreign currency on its 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.
 
20. SEGMENTED INFORMATION

The Company currently operates in only one business segment, namely, designing, marketing and distributing E-cigarettes, vaporizers, E-liquids and accessories in North America and Ireland.  Total assets by geographic location are as follows:

   
September 30,
2015
   
December 31,
2014
     
Canada
  $ 21,250     $ 5,524  
United States
    1,533,250       645,383  
Ireland
    1,621       435,578  
    $ 1,556,121     $ 1,086,485  
 
 
23

 
 
Total sales by geographic location are as follows:

   
September 30,
2015
   
September 30,
2014
 
Canada
  $ -     $ -  
United States
    824,251       8,921  
Ireland
    -       562,103  
    $ 824,251     $ 571,024  

21. SUBSEQUENT EVENTS

On November 2, 2015, the Company closed the acquisition of all of the assets of 901 Vaping Company LLC (“901 Vaping”), an E-liquid manufacturer, including all of the rights and title to own and operate the Craft Vapes, Craft Clouds and Miss Pennysworth’s Elixirs E-liquid brands (the “Brands”). Pursuant to the asset purchase agreement, dated October 21, 2015, the Company (i) issued to the vendor 1,000,000 Common Shares of the Company valued at $0.15 per share for a total value of $150,000; (ii) paid cash consideration equal to 901 Vaping’s inventory and equipment of approximately $23,000; and (iii) agreed to a quarterly-earn out based on the gross profit stream derived from product sales of the Brands commencing on the closing date up to a maximum of 25% of the gross profit stream. The Company did not assume any liabilities of 901 Vaping. On closing, the Company also entered into employment agreements with two of the principals of 901 Vaping with salaries of $100,000 and $50,000 respectively.

On November 2, 2015, the Company issued 211,389 Common Shares at $0.12 per Common Share, as compensation for $25,000 in consulting fees to unrelated parties.

On November 6, 2015, the Company issued and sold, on a private placement basis, 725,428 Common Shares and warrants for the purchase of 725,428 Common Shares of the Company exercisable over twelve (12) months with an exercise price of $0.20 per Common Share, for aggregate gross proceeds of $72,543. Such Common Shares were issued on November 10, 2015.

 
24

 
 
ITEM 2.                 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF 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, 2014. 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 – “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2014 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 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. Gilla’s 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 E-liquid, which is the liquid used in vaporizers, E-cigarettes, and other vaping hardware and accessories. E-liquid is heated by the atomizer to deliver the sensation and taste of smoking. Gilla has a two-pronged business model: Custom E-liquid Manufacturing, including private label solutions, E-liquid flavoring and fulfilment services; and Marketing & Online Services, including branding, marketing, sales support, and e-commerce solutions. Gilla’s channels to market include private label for convenience stores, vape shops and online retail. The Company also owns and operates the VaporLiq and Charlie’s Club monthly subscription-based delivery services for vaping products. Vaporizers and E-cigarettes are replacements for traditional cigarettes allowing smokers to reproduce the smoking experience. Vaporizers and E-cigarettes do not burn tobacco and are not smoking cessation devices.

Recent Developments
 
On July 1, 2015, the Company closed the acquisition of all the issued and outstanding shares of E Vapor Labs Inc (formerly, E Liquid Wholesale, Inc.) (“E Vapor Labs”), a Florida based E-liquid manufacturer. Pursuant to the share purchase agreement, dated June 25, 2015, the total purchase price was $1,125,000  payable to the vendors of E Vapor Labs as (i) $225,000 in cash on closing and (ii) $900,000 in promissory notes (together, the “Promissory Notes”) issued on the closing. The Promissory Notes were issued in three equal tranches of $300,000 due four (4), nine (9) and eighteen (18) months respectfully from the closing (individually, “Promissory Notes A”, “Promissory Notes B”, and “Promissory Notes C” respectively). The Promissory Notes are all unsecured, non-interest bearing, and on the maturity date, at the option of the vendors, up to one third (1/3) of each tranche of the Promissory Notes can be repaid in common stock of the Company, calculated using the five (5) day weighted average closing market price of the Company prior to the maturity of the Promissory Notes. The Promissory Notes, are all and each subject to adjustments as outlined in the share purchase agreement (the “SPA”), dated June 25, 2015.

On July 14, 2015, the Company closed the acquisition of all the issued and outstanding shares of E-Liq World, LLC (“VaporLiq”), an E-liquid subscription based online retailer. Pursuant to the share purchase agreement, dated July 14, 2015, the Company issued 500,000 Common Shares and warrants for the purchase of 500,000 Common Shares of the Company exercisable over eighteen (18) months with an exercise price of $0.20 per Common Share.
 
 
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On July 15, 2015, the Company received a form of election whereby a holder of its 12% unsecured subordinated convertible debentures (the “Convertible Debentures”) elected to convert a total of $105,000 of the Convertible Debentures into Common Shares of the Company pursuant to the terms of the Convertible Debentures. On August 17, 2015, the Company issued 1,500,000 Common Shares at a price of $0.07 per Common Share, as a result of these elections received on July 15, 2015.

On July 15, 2015, the Company settled $20,195 in interest payable to a holder of the Convertible Debentures and issued 201,945 Common Shares and warrants for the purchase of 201,945 Common Shares of the Company exercisable over twelve (12) months with an exercise price of $0.20 per Common Share. Such Common Shares were issued on August 17, 2015.

On July 31, 2015, the Company issued 60,000 Common Shares at a price of $0.19 per Common Share, as compensation for $11,400 in consulting fees to an unrelated party.

On September 1, 2015, the Company received a form of election whereby a holder of its Convertible Debentures elected to convert a total of $20,000 of the Convertible Debentures into Common Shares of the Company pursuant to the terms of the Convertible Debentures. On September 1, 2015, the Company issued 285,714 Common Shares at a price of $0.07 per Common Share, as a result of these elections received on September 1, 2015.

Subsequent Events

The Promissory Notes A were due on November 1, 2015. The Company provided notice to the Promissory Note holders on October 30, 2015 indicating its intention to repay such Promissory Notes, however, such inability to accurately determine the required adjustments pursuant to the SPA has forced the Company to defer repayment of such Promissory Notes until such time where the principal amount of the Promissory Notes can be accurately determined.

On November 2, 2015, the Company closed the acquisition of all of the assets of 901 Vaping Company LLC (“901 Vaping”), an E-liquid manufacturer, including all of the rights and title to own and operate the Craft Vapes, Craft Clouds and Miss Pennysworth’s Elixirs E-liquid brands (the “Brands”). Pursuant to the purchase agreement, dated October 21, 2015, the Company (i) issued to the vendor 1,000,000 Common Shares of the Company valued at $0.15 per share for a total value of $150,000; (ii) paid cash consideration equal to 901 Vaping’s inventory and equipment of approximately $23,000; and (iii) agreed to a quarterly-earn out based on the gross profit stream derived from product sales of the Brands commencing on the closing date up to a maximum of 25% of the gross profit stream. The Company did not assume any liabilities of 901 Vaping. On closing, the Company also entered into employment agreements with two of the principals of 901 Vaping with salaries of $100,000 and $50,000 respectively.

On November 2, 2015, the Company issued 211,389 Common Shares at $0.12 per Common Share, as compensation for $25,000 in consulting fees to unrelated parties.

On November 6, 2015, the Company issued and sold, on a private placement basis, 725,428 Common Shares and warrants for the purchase of 725,428 Common Shares of the Company exercisable over twelve (12) months with an exercise price of $0.20 per Common Share, for aggregate gross proceeds of $72,543. Such Common Shares were issued on November 10, 2015.

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND SEPTEMBER 30, 2014

Revenue

For the three month period ended September 30, 2015, the Company generated $816,610 in sales of e-liquids, vaporizers, e-cigarettes and accessories (collectively, “E-liquids”) as compared to $519,579 in sales for the three month period ended September 30, 2014.

For the nine month period ended September 30, 2015, the Company generated $ 824,251 in sales of E-liquids as compared to $544,287 in sales for the nine month period ended September 30, 2014.

The Company’s cost of goods sold for the three month period ended September 30, 2015 was $560,329 which represents E-liquids, bottles, hardware and the related packaging as compared to $426,922 for the three month period ended September 30, 2014. Gross profit for the three month period ended September 30, 2015 was $256,281 as compared to $92,657 for the comparative period in 2014.

The Company’s cost of goods sold for the nine month period ended September 30, 2015 was $562,854 which represents E-liquids, bottles, hardware and the related packaging as compared to $464,673 for the nine month period ended September 30, 2014. Gross profit for the nine month period ended September 30, 2015 was $261,397 as compared to $79,614 for the comparative period in 2014.

For the three month period ended September 30, 2015, the Company generated $ Nil in consulting services provided to clients in the tobacco industry compared to $6,311 for the three month period ended September 30, 2014.
 
 
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For the nine month period ended September 30, 2015, the Company generated $ Nil in consulting services provided to clients in the tobacco industry compared to $26,737 for the nine month period ended September 30, 2014.

For the nine month period ended September 30, 2015, total sales of $824,251 were generated in the United States. For the nine month period ended September 30, 2014, total sales of $8,611 were generated in the United States and $36,523 were generated in Ireland.

Operating Expenses

For the three month period ended September 30, 2015, the Company incurred administrative expenses of $508,785, consulting fees to related parties of $150,045, depreciation and amortization expense of $12,651 and impairment of inventory expense of $75,964. Administrative costs were primarily comprised of rent, legal and audit fees, marketing fees, travel expenses and employee wages. Total operating expenses for the three month period ended September 30, 2015 were $747,445. For the three month period ended September 30, 2014, the Company incurred administrative expenses of $447,102, consulting fees to related parties of $158,598, depreciation and amortization expense of $493, loss on sale of fixed asset of $661, bad debt expense of 19,523 and impairment of inventory expense of $42,638. Total operating expenses for the three month period ended September 30, 2014 were $669,015. The increase in administrative expenses of $61,683 is attributable to increased operations as a result of the acquired businesses during the period. The decrease in consulting fees due to related parties of $8,553 is attributable to the effects of foreign exchange translation. The impairment of inventory recorded for the three month periods ended September 30, 2015 and 2014 was due to inventory obsolescence.

For the nine month period ended September 30, 2015, the Company incurred administrative expenses of $1,114,346, consulting fees to related parties of $472,493, depreciation and amortization expense of $23,509 and impairment of inventory expense of $75,964. Administrative costs were primarily comprised of rent, legal and audit fees, marketing fees, travel expenses and employee wages. Total operating expenses for the nine month period ended September 30, 2015 were $1,686,312. For the nine month period ended September 30, 2014, the Company incurred administrative expenses of $1,197,487, consulting fees to related parties of $472,579, depreciation and amortization expense of $2,294, loss on sale of fixed asset of $661, bad debt expense of 19,523 and impairment of inventory expense of $42,638. Total operating expenses for the nine month period ended September 30, 2014 were $1,735,182.

Loss from Operations

For the three month period ended September 30, 2015, the Company incurred a loss from operations of $491,164 as compared to a loss from operations of $570,047 for the three month period ended September 30, 2014 due to the reasons discussed above.

For the nine month period ended September 30, 2015, the Company incurred a loss from operations of $1,424,915 as compared to a loss from operations of $1,628,831 for the nine month period ended September 30, 2014 due to the reasons discussed above.

Other Expenses

For the three month period ended September 30, 2015, the Company incurred a foreign exchange gain of $20,895, amortization of debt discount of $109,558, and interest expense of $114,981. For the three month period ended September 30, 2014, the Company incurred a foreign exchange loss of $21,799, amortization of debt discount of $634,212, impairment of goodwill of $167,538, loss on loan receivable of $86,615 and interest expense of $71,249. For the three month period ended September 30, 2015, the Company incurred total other expenses of $203,644 as compared to $981,413 for the three month period ended September 30, 2014.

For the nine month period ended September 30, 2015, the Company incurred a foreign exchange gain of $108,727, amortization of debt discount of $197,167, loss on settlement of account receivable of $23,312, gain on settlement of debt of $16,344 and interest expense of $263,262. For the nine month period ended September 30, 2014, the Company incurred a foreign exchange loss of $33,964, amortization of debt discount of $704,780, impairment of goodwill of $167,538, loss on loan receivable of $66,748, loss on settlement of debt $27,560 and interest expense of $185,175. For the nine month period ended September 30, 2015, the Company incurred total other expenses of $358,670 as compared to $1,185,765 for the nine month period ended September 30, 2014.

Net Loss and Comprehensive Loss

Net loss amounted to $697,808 for the three month period ended September 30, 2015 compared to a loss of $1,551,460 for the three month period ended September 30, 2014.
 
 
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Net loss amounted to $1,783,585 for the nine month period ended September 30, 2015 compared to a loss of $2,814,596 for the nine month period ended September 30, 2014.

Comprehensive loss amounted to $609.897 for the three month period ended September 30, 2015 compared to a comprehensive loss of $1,467,405 for the three month period ended September 30, 2014. The change in comprehensive loss compared to net loss was due to foreign currency translation adjustments resulting from the Company’s translation of financial statements from Canadian dollars and Euros to U.S. dollars.

Comprehensive loss amounted to $1,615,787 for the nine month period ended September 30, 2015 compared to a comprehensive loss of $2,730,907 for the nine month period ended September 30, 2014. The change in comprehensive loss compared to net loss was due to foreign currency translation adjustments resulting from the Company’s translation of financial statements from Canadian dollars and Euros to U.S. dollars.

Inflation

Through the period covered by this Report, inflation has not had a significant impact on the Company’s net sales and revenues and on income from continuing operations.

Liquidity and Capital Resources

As at September 30, 2015, the Company had total assets of $1,556,121 (compared to total assets of $1,086,485 at December 31, 2014) consisting of cash and cash equivalents of $58,935, accounts receivable of $155,175, inventory of $147,051, prepaid expenses and vendor deposits of $114,976, property and equipment of $112,216, website development of $88,325 and goodwill of 879,443. The increase in assets at September 30, 2015 from December 31, 2014, is primarily the result of the acquisitions of E Vapor Labs and VaporLiq.

As at September 30, 2015, the Company had total liabilities of $4,247,964 (compared to total liabilities of $2,639,901 at December 31, 2014) consisting of accounts payable of $617,664, accrued liabilities of $97,984, accrued interest due to related parties of $102,101, customer deposit of 20,000, loans from shareholders of $727,803, due to related parties of $986,433, Promissory Notes of $492,893, advances on Credit Facility of $220,294, long term due to related parties of $677,422, long term Promissory Notes of 260,375 and Convertible Debentures of $44,995.

At September 30, 2015, the Company had negative working capital of $2,789,035 and an accumulated deficit of $7,485,936.

As at December 31, 2014, the Company had total assets of $1,086,485 consisting of cash of $496,724, accounts receivable of $37,421, inventory of $78,901, prepaid expenses and vendor deposits of $378,252, property and equipment of $1,864 and website development of $93,323.

As at December 31, 2014, the Company had total liabilities of $2,639,901 consisting of accounts payable of $309,139, accrued liabilities of $69,017, accrued interest due to related parties of $39,279, loans from shareholders of $34,739, amounts due to related parties of $1,144,789, advances on Credit Facility of $387,110, long term loans from shareholders of $531,000, long term amounts due to a related party of $100,000 and Convertible Debentures of $24,828.

At December 31, 2014, the Company had negative working capital of $992,775 and an accumulated deficit of $5,702,351.

Net cash used in operating activities

For the nine month period ended September 30, 2015, the Company used cash of $533,645 (compared to $1,390,932 of cash used in operating activities during the nine month period ended September 30, 2014) 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 nine month period ended September 30, 2015, net cash used in investing activities was $225,000 attributable to the acquisition of a subsidiary (see “Acquisition of E Vapor Labs”). For the nine month period ended September 30, 2014, net cash used in investing activates was $63,108 attributable to trademarks, disposal of capital assets and website development.

Net cash flow from financing activities

For the nine month period ended September 30, 2015, net cash provided by financing activities was $244,245 (see “Credit Facility” and “Secured Notes”) compared to net cash provided by financing activities of $1,017,429 for the nine month period ended September 30, 2014.

 
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Acquisition of E Vapor Labs

On July 1, 2015, the Company closed the acquisition of all the issued and outstanding shares of E Vapor Labs, a Florida based E-liquid manufacturer.  The Company purchased 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. The following summarizes the fair value of the assets acquired, liabilities assumed and the consideration transferred at the acquisition date:

Assets acquired:
     
Cash
 
$
20,635
 
Receivables
   
46,492
 
Deposits
   
5,874
 
Inventory
   
122,401
 
Fixed assets
   
118,866
 
Goodwill
   
846,974
 
Total assets acquired
 
$
1,161,242
 
         
 Liabilities assumed:
       
Accounts payable
 
$
179,016
 
Loan payable
   
25,000
 
Total liabilities assumed
 
204,016
 
         
Consideration:
       
Cash
 
$
225,000
 
Promissory Notes A, unsecured and non-interest bearing, due November 1, 2015
   
203,570
 
Promissory Notes B, unsecured and non-interest bearing, due April 1, 2016
   
275,555
 
Promissory Notes C, unsecured and non-interest bearing, due January 1, 2017
   
253,101
 
Total consideration
 
$
957,226
 

In consideration for the acquisition, the Company paid to the vendors, $225,000 in cash on closing and $900,000 in unsecured promissory notes issued on the closing (collectively, the “Promissory Notes”). The Promissory Notes were issued in three equal tranches of $300,000 due 4, 9 and 18 months respectfully from the closing (individually, “Promissory Notes A”, “Promissory Notes B”, and “Promissory Notes C” respectively). The Promissory Notes are all unsecured, non-interest bearing, and on the maturity date, at the option of the vendors, up to 1/3 of each tranche of the Promissory Notes can be repaid in Common Stock of the Company, calculated using the 5 day weighted average closing market price of the Company prior to the maturity of the Promissory Notes. The Promissory Notes, are all and each subject to adjustments as outlined in the share purchase agreement (the “SPA”), dated June 25, 2015.

The goodwill is attributable to the assembled workforce and geographic presence of the acquired business as well as significant cost and revenue synergies expected to arise after the acquisition.

As at September 30, 2015, the Company has adjusted the Promissory Notes A for the known difference in the working capital balance at closing of the acquisition from the amount specified in the SPA.  Further, a 12% discount rate has been used to calculate the present value of the Promissory Notes.  Over the term of the respective Promissory Notes, interest will be accrued at 12% per annum to accrete the Promissory Notes to their respective principal amounts.

The Promissory Notes A were due on November 1, 2015. The Company provided notice to the Promissory Note holders on October 30, 2015 indicating its intention to repay such Promissory Notes, however, such inability to accurately determine the required adjustments pursuant to the SPA has forced the Company to defer repayment of such Promissory Notes until such time where the principal amount of the Promissory Notes can be accurately determined.

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 “Lender”), whereby the Lender 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 shall bear 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 shall mature on August 1, 2015 whereby the outstanding advances together with all accrued and unpaid interest theron shall be due and payable. On August 1, 2014, and in connection to the Credit Facility, the Company issued 250,000 warrants to purchase Common Shares of the Company exercisable over two years with an exercise price of $0.30 per Common Share. The Company’s Chief Executive Officer and Chief Financial Officer are 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.
 
 
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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 February 11, 2015, the Company fully repaid the amounts advanced from the Credit Facility.

On April 24, 2015, the Company was advanced $99,274 (CAD $124,000) from the Credit Facility including $19,855 (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 $127,381 (CAD $170,000) from the Credit Facility including $25,476 (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 nine month period ended September 30, 2015, the Company accrued $21,084 of interest as a result of the Credit Facility, of which $17,952 has been paid and $3,132 of interest remains owing and is included in accounts payable.

Secured Notes

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 $374,650) on or before August 13, 2014, bearing interest at a rate of 10% per annum, such interest will accrue monthly and be added to the principal. The Secured Note is secured by a general security agreement over the assets of the Company.  During the year ended December 31, 2014, the Company and the shareholder extended the maturity date of the Secured Note to January 1, 2016.

The Company accrued interest of $38,956 during the nine month period ended September 30, 2015 (September 30, 2014: $31,330) on the Secured Note which is included in accrued liabilities. During the year ended December 31, 2014, the Company settled $30,690 in interest on the Secured Note with the issuance of Common Shares.

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 will accrue monthly and be added to the principal. The Secured Note No.2 is secured by the general security agreement issued with the Secured Note. During the year ended December 31, 2014, the Company and the shareholder extended the maturity date of the Secured Note No.2 to January 1, 2016.

The Company accrued interest of $7,953 during the nine month period ended September 30, 2015 (September 30, 2014: $2,111) on the Secured Note No.2 which is included in accrued liabilities. During the year ended December 31, 2014, the Company settled $2,111 in interest on the Secured Note No.2 with the issuance of Common Shares.

On June 29, 2015, the Company entered into a secured promissory note (the “Secured Note No.3”) with a shareholder, whereby the Company agreed to pay the party the aggregate unpaid principal amount of CAD $300,000 (USD $224,790) on or before January 1, 2016, bearing interest at a rate of 10% per annum, such interest will accrue monthly and be added to the principal. The Secured Note No.3 is secured by the general security agreement issued with the Secured Note.

The Company accrued interest of $5,667 during the nine month period ended September 30, 2015 (September 30, 2014: Nil) on the Secured Note No.3 which is included in accrued liabilities.

On August 15, 2014, the Company settled CAD $1,500 (USD $1,378) of non-interest bearing shareholder loans with the issuance of 10,919 Common Shares of the Company resulting in a loss of $260.

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 September 30, 2015, the Company has an accumulated deficit of $7,485,936 a working capital deficiency of $2,789,035 and negative cash flows from operating activities of $533,645 for the nine month period ended September 30, 2015. The ability of the Company to continue as a going concern is in doubt and 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.
 
 
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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.
 
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 August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 requires an entity to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the financial statements are available to be issued when applicable) and to provide related footnote disclosures in certain circumstances. ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter with early adoption permitted. We do not expect the adoption of ASU 2014-15 to have a material impact on our 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, 2014, 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 (“Gilla Operations”); E Vapor Labs Inc; E Liq World, LLC; Charlie’s Club, Inc. (“Charlie’s Club”); Gilla Enterprises Inc.; Gilla Operations Worldwide Limited; Gilla Franchises, LLC and its wholly-owned subsidiary Gilla Biscayne, 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.

Foreign Currency Translation

The Company’s Canadian subsidiaries maintain their books and records in Canadian dollars (CAD) which is also their functional currency. The Company’s Irish subsidiary maintains its books in Euros (EUR) which is also its functional currency. The Company and its U.S. subsidiaries maintain their books and records in United States dollars (USD) which is both the Company’s functional currency and reporting currency. The accounts of the Company are translated into United States dollars in accordance with provisions of ASC 830, Foreign Currency Matters. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated using the exchange rate prevailing at the balance sheet date. Non-monetary assets and liabilities are translated using the historical rate on the date of the transaction. Revenue and expenses are translated at average rates in effect during the reporting periods. All exchange gains or losses arising from translation of these foreign currency transactions are included in net income (loss) for the period. In translating the financial statements of the Company's Canadian and Irish subsidiaries from their functional currencies into the Company's reporting currency of United States dollars, balance sheet accounts are translated using the closing exchange rate in effect at the balance sheet date and income and expense accounts are translated using an average exchange rate prevailing during the reporting period. Adjustments resulting from the translation, if any, are included in cumulative other comprehensive income (loss) in shareholders' equity. The Company has not, to the date of these unaudited condensed consolidated interim financial statements, entered into derivative instruments to offset the impact of foreign currency fluctuations.
 
 
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Earnings (Loss) Per Share

Basic earnings (loss) per share are computed by dividing net income (loss) by the weighted average number of Common Shares outstanding for the period, computed under the provisions of Accounting Standards Codification subtopic 260-10, Earnings per Share (“ASC 260-10”). Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of Common Shares outstanding plus common stock equivalents (if dilutive) related to convertible preferred stock, stock options and warrants for each period. There were no common stock equivalent shares outstanding at September 30, 2015 and 2014 that have been included in the diluted loss per share calculation as the effects would have been anti-dilutive.

Financial Instruments

Financial assets and financial liabilities are recognized in the balance sheet when the Company has become party to the contractual provisions of the instruments.

The Company’s financial instruments consist of cash, accounts receivable, accounts payable, accrued interest, due to related parties, accrued liabilities, customer deposit, promissory notes, convertible debentures, loans from shareholders and credit facility. The fair values of these financial instruments approximate their carrying value, due to their short term nature. Fair value of a financial instrument is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company’s financial instruments recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by FASB ASC No. 820, Fair Value Measurement and Disclosure (“ASC 820”), with the related amount of subjectivity associated with the inputs to value these assets and liabilities at fair value for each level, are as follows:

●  Level 1
 -
Unadjusted quoted prices in active markets for identical assets or liabilities;
●  Level 2
 -
Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities; and
●  Level 3
 -
Inputs that are not based on observable market data.

Cash is reflected on the consolidated balance sheets at fair value and classified as Level 1 hierarchy because measurements are determined using quoted prices in active markets for identical assets.

Fair value measurements of accounts receivable, accounts payable, accrued interest, due to related parties, accrued liabilities, customer deposit, promissory notes, convertible debentures, loans from shareholders, and credit facility are classified under Level 3 hierarchy because inputs are generally unobservable and reflect management’s estimates of assumptions that market participants would use in pricing the financial instruments.

Advertising Costs

In accordance with FASB ASC 720, the Company expenses the production costs of advertising the first time the advertising takes place.  During the year ended December 31, 2014, $136,200 in production costs were incurred, $90,800 of which have been allocated to prepaid expenses and vendor deposits on the consolidated balance sheet, $45,400 in production costs were expensed during the year ended December 31, 2014 representing the release of the first phase of the Company’s online advertising campaign.  The Company expenses all other advertising costs as incurred. During the nine month period ended September 30, 2015, the Company expensed $159,236 (September 30, 2014: $252,359) as corporate promotions.
 
 
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Revenue Recognition

The Company records revenue when the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price to the customer is fixed and determinable, and collectability is reasonably assured. For the Company’s membership program the Company records revenue on collection of the monthly fee and after delivery of the products has occurred. Delivery is not considered to have occurred until the customer assumes the risks and rewards of ownership. Customers take delivery at the time of shipment for terms designated free on board shipping point. For sales designated free on board destination, customers take delivery when the product is delivered to the customer's delivery site. Provisions for sales incentives, product returns, and discounts to customers are recorded as an offset to revenue in the same period the related revenue is recorded.  The Company does not currently record a provision for product returns as to date sales in the membership program have been minimal and any returns related to sales through the Company’s wholesale distribution channels become the responsibility of the manufacturer. Therefore, any related provision for product returns was not deemed material for the periods ended September 30, 2015 and 2014.

Comprehensive Income or Loss

The Company reports comprehensive income or loss in its unaudited condensed consolidated interim financial statements. In addition to items included in net income or loss, comprehensive income or loss includes items charged or credited directly to stockholders’ equity, such as foreign currency translation adjustments and unrealized gains or losses on available for sale marketable securities.

Use of Estimates

The preparation of consolidated interim financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated interim financial statements and the reported amounts of revenue and expenses during the period. Actual results could differ from these estimates, and such differences could be material.  The key sources of estimation uncertainty at the balance sheet date, which have a significant risk of causing a material adjustment to the carrying amounts of assets within the next financial year, include reserves and write downs of receivables and inventory, useful lives of property and equipment, impairment of goodwill, accruals, impairment of property and equipment, valuing stock based compensation, valuing equity securities, valuation of convertible debenture conversion options and deferred taxes and related valuation allowances.  Certain of our estimates could be affected by external conditions, including those unique to our industry and general economic conditions.  It is possible that these external factors could have an effect on our estimates that could cause actual results to differ from our estimates.  The Company re-evaluates all of its accounting estimates at least quarterly based on the conditions and records adjustments when necessary.

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

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our filings with the Securities and Exchange Commission (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 our 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 our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on this evaluation, we believe that disclosure controls and procedures were not effective as of September 30, 2015, due to our limited resources and staff.
 
Limitations on Effectiveness of Controls and Procedures

Our management, including our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), does not expect that our disclosure controls and procedures or our 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. Further, 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.
 
 
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Changes in Internal Controls

During the quarter ended September 30, 2015, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.
 
PART II - OTHER INFORMATION
 
ITEM 1.                 LEGAL PROCEEDINGS
 
The Company is not currently a party in any material legal proceeding or governmental regulatory proceeding nor are we currently aware of any pending or potential material legal proceeding or governmental regulatory proceeding proposed to be initiated against us.
 
ITEM 1A.              RISK FACTORS
 
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, 2014.
 
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 of 1933, as amended, (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 July 14, 2015, the Company closed the acquisition of all the issued and outstanding shares of VaporLiq and issued 500,000 Common Shares at a price of $0.10 per Common Share to the vendors of VaporLiq pursuant to the share purchase agreement, dated July 14, 2015. The Company issued such Common Shares to accredited investors in reliance upon the exemptions from registration requirements of the Securities Act provided by Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.

On July 15, 2015, the Company received a form of election whereby a holder of its Convertible Debentures elected to convert a total of $105,000 of the Convertible Debentures into Common Shares of the Company pursuant to the terms of the Convertible Debentures. On August 17, 2015, the Company issued 1,500,000 Common Shares at a price of $0.07 per Common Share, as a result of these elections received on July 15, 2015 to convert $105,000 of the Convertible Debentures. The Company issued such Common Shares to non-U.S. persons pursuant to the exemption from registration requirements of the Securities Act provided by Regulation S of the Securities Act.

On July 15, 2015, the Company settled $20,195 in interest payable to a holder of the Convertible Debentures and issued 201,945 Common Shares and warrants for the purchase of 201,945 Common Shares of the Company exercisable over twelve (12) months with an exercise price of $0.20 per Common Share. Such Common Shares were issued on August 17, 2015. The Company issued such Common Shares to non-U.S. persons pursuant to the exemption from registration requirements of the Securities Act provided by Regulation S of the Securities Act.

On July 31, 2015, the Company issued 60,000 Common Shares at a price of $0.19 per Common Share, as compensation for $11,400 in consulting fees to an unrelated party. The Company issued such Common Shares in reliance upon the exemption from the registration requirements of the Securities Act provided by Section 4(2) of the Securities Act and Regulation D promulgated thereunder.

On September 1, 2015, the Company received a form of election whereby a holder of its Convertible Debentures elected to convert a total of $20,000 of the Convertible Debentures into Common Shares of the Company pursuant to the terms of the Convertible Debentures. On September 1, 2015, the Company issued 285,714 Common Shares at a price of $0.07 per Common Share, as a result of these elections received on September 1, 2015 to convert $20,000 of the Convertible Debentures. The Company issued such Common Shares to accredited investors in reliance upon the exemptions from registration requirements of the Securities Act provided by Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder.
 
 
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Subsequent Events

On November 2, 2015, the Company closed the acquisition of all of the assets of 901 Vaping and issued 1,000,000 Common Shares at a price of $0.15 per Common Share to vendor pursuant to the asset purchase agreement dated October 21, 2015.

On November 2, 2015, the Company issued 211,389 Common Shares at $0.12 per Common Share, as compensation for $25,000 in consulting fees to unrelated parties.

On November 6, 2015, the Company issued and sold, on a private placement basis, 725,428 Common Shares and warrants for the purchase of 725,428 Common Shares of the Company exercisable over twelve (12) months with an exercise price of $0.20 per Common Share, for aggregate gross proceeds of $72,543. Such Common Shares were issued on November 10, 2015.

The Company issued all the foregoing Common Shares in reliance upon the exemption from the registration requirements of the Securities Act provided by Section 4(2) of the Securities Act or Regulation D promulgated thereunder.

ITEM 3.                 DEFAULTS UPON SENIOR SECURITIES
 
None.
 
ITEM 4.                 MINE SAFETY DISCLOSURES
 
Not applicable.
 
ITEM 5.                 OTHER INFORMATION
 
None.
  
ITEM 6.                 EXHIBITS
 
           
Incorporated by Reference
Exhibit
Number
  
Exhibit Description
  
Filed
Herewith
  
Form
 
Exhibit
 
Filing Date
               
10.20
 
Secured Promissory Note from the Company to Gravitas Financial Inc., dated as of June 29, 2015.
 
X
           
                     
10.21
 
Form of Promissory Notes from the Company to the vendors of E Vapor Labs Inc.
 
X
           
                     
31.1
 
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
X
           
                     
31.2
 
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
X