GILLA INC. - FORM 10-K - April 8, 2016

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EX-31.1 - CERTIFICATION - GILLA INC.	glla_ex311.htm
EX-32.2 - CERTIFICATION - GILLA INC.	glla_ex322.htm
EX-31.2 - CERTIFICATION - GILLA INC.	glla_ex312.htm
EX-21.1 - SUBSIDIARIES - GILLA INC.	glla_ex211.htm
EX-32.1 - CERTIFICATION - GILLA INC.	glla_ex321.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2015

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)

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

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.0002 Par Value Per Share

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

Check whether the issuer (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, and (2) has been subject to such filing requirements for the past 90 days. Yes o No þ

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	þ

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

The aggregate market value of the voting common stock held by non-affiliates of the Registrant on June 30, 2015, was approximately $13,662,657 based on the average bid and asked prices on such date of $0.18. The registrant does not have any non-voting equities.

The Registrant had 99,560,923 shares of common stock (“Common Shares” or “Common Stock”), $0.0002 par value per share, outstanding on April 7, 2016.

TABLE OF CONTENTS

FORM 10-K

FOR FISCAL YEAR ENDED DECEMBER 31, 2015

		Page
Part I

ITEM 1.	Business	4

ITEM 1A.	Risk Factors	20

ITEM 1B.	Unresolved Staff Comments	30

ITEM 2.	Properties	30

ITEM 3.	Legal Proceedings	30

ITEM 4.	Mine Safety Disclosures	30

Part II

ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	31

ITEM 6	Selected Financial Data	32

ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	33

ITEM 7A	Quantitative and Qualitative Disclosures About Market Risk	52

ITEM 8.	Financial Statements and Supplementary Data	F-1

ITEM 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	53

ITEM 9A.	Controls and Procedures	53

ITEM 9B.	Other Information	54

Part III

ITEM 10.	Directors, Executive Officers and Corporate Governance	55

ITEM 11.	Executive Compensation	59

ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	61

ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	62

ITEM 14.	Principal Accounting Fees and Services	67

ITEM 15.	Exhibits, Financial Statement Schedules	68

Signatures

Cautionary Language Regarding Forward-Looking Statements

This Annual Report on Form 10-K (this “Report” or “Annual Report”) contains forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on management's expectations as of the filing date of this Report with the Securities and Exchange Commission ("SEC"). 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, but are not limited to statements concerning the Company's operations, performance, financial condition, business strategies, and other information and that involve substantial risks and uncertainties. Such forward-looking statements are subject to certain risks, uncertainties and assumptions, including prevailing market conditions and are more fully described under “Part I, Item 1A - Risk Factors” of this Report. 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 of this Report under the caption “Risk Factors,” 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.

PART I

ITEM 1. BUSINESS

Gilla Inc. (the “Company”, the “Registrant” or “Gilla”) was incorporated under the laws of the state of Nevada on March 28, 1995 under the name of Truco, Inc. The Company later changed its name to Web Tech, Inc., and then to Cynergy, Inc., Mercantile Factoring Credit Online Corp., Incitations, Inc., Osprey Gold Corp. and to its present name. The Company adopted the present name, Gilla Inc., on February 27, 2007. Gilla’s address is 475 Fentress Blvd., Unit L, Daytona Beach, Florida 32114.

BUSINESS OF ISSUER

Gilla aims to be a global leader in the manufacturing and distribution of E-liquid for the vapor industry (“E-liquid”). The Company provides consumers with choice and quality across categories and price points.

Gilla has built a strong platform for growth through investing in brands and distribution to consumers. Over the past year, the Company has developed and acquired manufacturing operations, premium E-liquid brands and a global distribution platform. The Company has also made changes to its operating model to improve agility and responsiveness to consumer demand.

The Company is building depth in its E-liquid portfolio to meet consumer tastes, while maintaining a high degree of standards across all of its operations.

Gilla Manufactures		Gilla Markets		Gilla Innovates		Gilla Sells
Gilla owns proprietary manufacturing operations and a distribution platform to ensure the efficient, sustainable production and supply of E-liquid. The Company strives to meet and exceed customer expectations.		The Company invests in global marketing initiatives to inform and persuade consumers, to build its brands and to identify new acquisitions. Gilla helps consumers make educated choices about E-liquid and related vaping products.		Innovation is key to the Company’s continued growth. Gilla is committed to developing new and attractive flavor profiles, new packaging and product offerings to capitalize on emerging trends in the marketplace.		Everyone at the Company sells or understands how they can sell or build valuable relationships with customers and consumers. Gilla is passionate about delivering unparalleled customer service to extend the Company’s sales reach.

The Company’s Products

The Company’s current products include generic and premium branded E-liquid (the “Products”), the liquid used in vaporizers, E-cigarettes, and other vaping hardware and accessories. A vaporizer, or E-cigarette, is an electronic inhaler meant to simulate and substitute traditional cigarettes. Generally, a heating element, such as an atomizer, vaporizes the E-liquid solution to deliver the sensation of smoking, without burning tobacco. E-liquid is available with or without nicotine.

E-liquid is a solution of propylene glycol (an organic compound that facilitates the vapor effect that can be found in many pharmaceutical and cosmetic products such as moisturizers) (“PG”), vegetable glycerin (“VG”), flavoring and a variable percentage of pharmaceutical grade nicotine. The Company offers over 500 base flavors of generic E-liquid which are available in nicotine strengths ranging from 0mg to 24mg with varying proportions of PG and VG. An E-liquid with a higher VG content will deliver a thicker cloud of vapor when vaporized. The Company’s premium E-liquid brands have been meticulously developed and manufactured to satisfy enhanced flavor palates and are only available in limited flavors and nicotine strengths.

The Company does not manufacture vaporizers, E-cigarettes, other vaping hardware or accessories. All hardware sold by the Company is manufactured and supplied to the Company by third parties.

Premium Brand Portfolio

The Company’s diversified portfolio approach to manufacturing and distributing E-liquid provides customers the flexibility to select from the Company’s catalog of premium brands to directly cater to unique consumer opportunities that exist in the niche marketplaces in which it operates. This allows the Company to allocate resources for its highest growth opportunities on a global scale. Gilla’s portfolio of brands offers a range of price points and flavor profiles enabling the Company to capitalize on preference shifts across the price and palate spectrum. The breadth and depth that the Company aims to develop within its portfolio will provide resilience and enable the Company to continue to grow over time.

Gilla’s premium E-liquid portfolio includes Craft Vapes, Craft Clouds, Vape Warriors, Miss Pennysworth’s Elixirs, The Mad Alchemist, Replicant and Coil Glaze. The Company expects to continually launch new E-liquid brands both organically and through acquisition as the Company identifies new market trends and consumer tastes.

Research and Development

Innovation forms an important part of Gilla’s growth strategy, playing a key role in positioning its brands for continued growth at the forefront of the vapor industry. The Company’s in-house mixologists and vaping experts are continually developing new E-liquid flavors to cater to emerging vaping trends and changing consumer demands. The Company’s marketing and design specialists develop and launch new attractive brands and product offerings from the Company’s proprietary catalog of recipes. Innovative new packaging and marketing components are also critical to Gilla’s ongoing customer and consumer relations.

Manufacturing, Distribution, Principal Markets & Marketing Methods

Manufacturing and Distribution Platform

The Company owns and operates its own manufacturing and distribution platform, which operate from leased premises in Daytona Beach, Florida and Budapest, Hungary.

Gilla sells its Products through a number of market channels including vape shops, retail and wholesale distributors, convenience stores, and e-commerce websites. A shift from cig-a-like E-cigarettes to vaporizers in the market has led to vape shops and other retailers allocating more shelf space to E-liquid brands. This market shift was driven by the E-cigarette’s power and flavor limitations as well as the better performance, affordability and overall user experience of the vaporizer. As a result, it is expected that the U.S. E-liquid industry will grow to $2.8B by 2015.

One of the Company’s key strengths is its geographic reach. The Company currently services North America and over 25 European counties in over 30 languages. The Company is focused on developing its sales and global distribution network by introducing new product offerings, sales incentives and promotional programs and best-in-class customer service.

Retail and Vape Shops

Gilla has developed a deep understanding of the vapor industry from both the wholesale buyer and consumer perspective. The Company uses this knowledge to create products, services and programs that will assist the Company in cultivating partnerships with our customers. There are over 19,000 vape shops globally with approximately half in the U.S. alone. Vape shops educate consumers through their knowledgeable vaping experts who assist customers in choosing from an assortment of E-liquid flavors and products. In addition, many of these vape shops offer house branded generic E-liquids that are filled onsite or sourced through third parties.

The Company focuses on selling generic and premium E-liquid Products to vape shops through targeted sales programs, promotions, in-store point of sale marketing and other sales giveaways to the vape shops since Gilla believes such incentives will assist in obtaining and increasing shelf space at such retail locations. The Company also believes that educating vape shop personnel also is a key determinant in increasing sales.

Gilla seeks to leverage its low cost manufacturing and distribution platform to offer vape shops and other retail and wholesale buying groups low-cost, high-quality generic E-liquid Product in return for guaranteed commitments to carry a number of our premium E-liquid brands. Such incentives could build valuable relationships and customer loyalty with vape shops while quickly increasing shelf space and sales of the Company’s high margin premium E-liquid Products.

E-commerce

The Company also distributes its Products through its websites and other online sales platforms. The Company believes that its online strategy will continue to evolve while expanding on various forms of social media as a key element in its marketing strategy and in further establishing and growing the Company’s E-liquid product portfolio.

Gilla’s Business Model

Gilla aims to be a global leader in the manufacturing and distribution of E-liquid for the vapor industry. The Company has grown through investments in manufacturing, E-liquid brands, distribution and acquisitions to both broaden Gilla’s portfolio depth and geographical footprint. The Company’s business model targets the high growth E-liquid industry to generate high margin returns on premium E-liquid brands to drive returns for its shareholders, while creating value for its customers and consumers.

The Company has developed a strong platform for growth based on the following key elements:

●	Diversified E-liquid Portfolio – Gilla has developed and acquired premium E-liquid brands across categories and price points.

●	Global Geographic Reach – Gilla’s distribution infrastructure services North America and over 25 European counties in over 30 languages.

●	Efficient Supply and Procurement - Gilla’s manufacturing facilities ensure efficient, sustainable production and supply of E-liquids to the highest quality standards.

●	Leading Capabilities – Gilla is focused on execution and has retained knowledgeable and industry leading executives across all functions of its business including operations, sales and finance and is committed to delivering industry leading customer service.

Performance Drivers

The Company has developed six performance drivers that we believe are key to driving growth.

1.	Strengthen and accelerate growth of our generic brands

Strengthening recurring sales of the Company’s generic brands can support a vast amount of the Company’s operating and overhead costs. Gilla can leverage paid infrastructure to target growth opportunities.

2.	Win premium E-liquid in every market

The Company’s premium E-liquid brands can generate margins in excess of 75%. Gilla’s diversified portfolio approach provides the flexibility to cater toward unique customer opportunities that exist in each distinct market in which the Company operates to become the market leader in the premium E-liquid segment.

3.	Innovate to meet new customer needs

The Company’s ability to innovate and launch new brands is a competitive advantage. Gilla’s in-house research and development team has the ability to quickly respond to changing market needs and introduce new and attractive flavor profiles and packaging.

4.	Maintain and improve customer service

The Company has developed infrastructure and capabilities to deliver unparalleled customer service. Providing best-in-class customer service can extend Gilla’s sales reach building valuable relationships and brand loyalty.

5.	Drive out costs to invest in growth

Improving productivity and efficiency within the Company will improve its financial results and allow the Company to reinvest in the business to drive growth.

6.	Attract and retain talent

The Company’s success will depend on the ability to attract and retain qualified and competent employees at all levels of the business. Ensuring that Gilla has the best talent is one of the Company’s biggest challenges and one of its greatest opportunities.

Employees

As at the date of this Report, the Company has fifteen key individuals engaged as consultants and thirty-five full-time employees. Collectively, these consultants and employees oversee day-to-day operations of the Company supporting management, administrative, bookkeeping, accounting, manufacturing, logistics, sales, marketing, and digital media functions of the Company. As required, the Company also engages consultants to provide services to the Company, including legal and corporate services. The Company has no unionized employees.

Being in the growth-stage, the Company intends to increase (or decrease) its number of employees as appropriate as appropriate to achieve the Company’s objectives. The Company intends to focus on identifying, attracting and retaining talented, highly motivated, customer-focused, team-orientated employees to support its growth.

Competition

The market for the Company’s Products is very competitive and subject to rapid change and regulatory requirements. The E-liquid niche of the vapor industry is extremely competitive with low barriers to entry. There can be no assurance that the Company will be in a stronger position to respond quickly to potential acquisitions and other market opportunities, new or emerging technologies and changes in customer requirements. Market disruption will be caused when new products or brands are able to differentiate from the market. Failure to maintain and enhance the Company’s competitive position could materially adversely affect the business and its prospects.

The Company faces intense competition from direct and indirect competitors, including “big tobacco,” “big pharma,” and other known and established or yet to be formed E-liquid or vaping companies, each of whom pose a competitive threat to the Company and its future business prospects. The Company expects competition to intensify in the future. Certain of these businesses are either currently competing with the Company or are focusing significant resources on providing products that will compete with the Company’s E-liquid product offerings in the future.

The Company’s principal competitors can be classified into three main categories: i) tobacco companies, ii) other E-liquid and vaping companies, and iii) pharmaceutical companies. The Company competes primarily on the basis of product quality, brand recognition, brand loyalty, service, marketing, advertising and price. The Company is subject to highly competitive conditions in all aspects of the business, and barriers to entry into the E-liquid manufacturing and distribution business are low. The competitive environment and the Company’s competitive position can be significantly influenced by weak economic conditions, erosion of consumer confidence, competitors’ introduction of low-priced products or innovative products, cigarette excise taxes, higher absolute prices and larger gaps between price categories, and product regulation that diminishes the ability to differentiate tobacco products.

Traditional tobacco companies, including Reynolds American Inc., Altria Group Inc., Phillip Morris International Inc., British American Tobacco PLC and Imperial Tobacco Group PLC are expanding into various E-cigarette and vaping markets throughout the world. Each of these companies have rolled out their own E-cigarette offerings in markets where the Company currently sells its Products. Because of their well-established sales and distribution channels, marketing expertise and significant resources, “big tobacco” may be better positioned than small competitors to capture a larger share of the vaping market. The Company also faces competition from smaller tobacco companies that are much larger, better funded, and more established than the Company.

The Company faces direct competition from independent pure play E-cigarette and vaping companies, including Vapor Corp., Electronic Cigarettes International Group Ltd., Vapor Hub International Inc. and other private companies that currently market competing products. The Company also faces indirect competitors such as the traditional tobacco companies offering cigarettes, Nicotine Replacement Therapies (NRT) and smokeless tobacco products. It is likely that these companies will enter the market as the E-liquid and vapor industry grows. There can be no assurance that the Company will be able to compete successfully against any of these traditional tobacco players and smaller competitors, some of whom have greater resources, capital, industry experience, market penetration or developed distribution networks.

Intellectual Property

The Company seeks to protect its intellectual property using a combination of trademarks, trade secrets, copyrights and contractual provisions. Trademarks are expected to form an integral part of the Company’s brand marketing.

The Company has and generally plans to continue to enter into non-disclosure, confidentially and intellectual property assignment agreements with all new employees as a condition of employment. In addition, the Company will also generally enter into confidentiality and non-disclosure agreements with consultants, manufacturers’ representatives, distributors, suppliers and others to attempt to limit access to, use and disclosure of our proprietary information.

Trademarks

The Company owns trademarks on certain of its brands including Craft Vapes, The Mad Alchemist and YECIG or has applications currently being examined. The Company plans to continue to expand its portfolio of brand names and its proprietary trademarks worldwide as the business grows.

Patents

The Company does not own any domestic or foreign patents relating to E-liquid products or vaporizers.

Government Regulations

Government authorities in the United States, the European Union, Canada and in other countries extensively regulate, among other things, the research, development, testing, approval, manufacturing, labeling, post-approval monitoring and reporting, packaging, promotion, storage, advertising, distribution, marketing and export and import of electronic products for the vaporization and administration of inhaled doses of nicotine including E-cigarettes, cigars, cigarillos and pipes, as well as cartridges of nicotine solutions and related products. The Company must comply with these regulations, as applicable, in the jurisdictions where it offers and sells its Products. The process of obtaining regulatory approvals and the subsequent compliance with applicable federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources. The following is a summary of certain regulatory matters generally affecting the E-cigarette, E-liquid and other vaping product marketplace in the United States, the European Union and Canada, which does not purport to be a comprehensive overview of all applicable laws and regulations that may impact the Company’s business.

United States

The United States Food and Drug Administration (the “FDA”) is permitted to regulate E-cigarettes as “tobacco products” under the Family Smoking Prevention and Tobacco Control Act of 2009 (the “Tobacco Control Act”), based on the December 2010 U.S. Court of Appeals for the D.C. Circuit’s decision in Sottera, Inc. v. Food & Drug Administration, 627 F.3d 891 (D.C. Cir. 2010). Furthermore, the FDA is not permitted to regulate E-cigarettes as “drugs” or “devices” or a “combination product” under the Federal Food, Drug and Cosmetic Act unless marketed for therapeutic purposes.

Since the Company does not market E-cigarettes, E-liquid or other vaping products for therapeutic purposes, the Company’s Products that contain nicotine are subject to being classified as “tobacco products” under the Tobacco Control Act. Although the FDA is prohibited from issuing regulations banning all cigarettes or all smokeless tobacco products, or requiring the reduction of nicotine yields of a tobacco product to zero, the Tobacco Control Act grants the FDA broad authority to impose restrictions over the design, manufacture, distribution, sale, marketing and packaging of tobacco. Furthermore, The FDA is required to issue future regulations regarding the promotion and marketing of tobacco products sold or distributed over the internet, by mail order or through other non-face-to-face transactions in order to prevent the sale of tobacco products to minors.

The Tobacco Control Act also requires an establishment of a Tobacco Products Scientific Advisory Committee to provide advice, information and recommendations with respect to the safety, dependence or health issues related to tobacco products.

The Tobacco Control Act could result in a decrease in tobacco product sales in the United States, including the sales of the Company’s Products.

The FDA has previously indicated that it intends to regulate E-cigarettes under the Tobacco Control Act through the issuance of deeming regulations that would include E-cigarettes, E-liquid and other vaping products under the definition of a “tobacco product” under the Tobacco Control Act subject to the FDA’s jurisdiction. On April 25, 2014, the FDA announced a proposed rule (the “Proposed Rule”) seeking to establish, for the first time, federal regulatory authority over, among other tobacco products, E-cigarettes, E-liquid and other vaping products (collectively, “Deemed Tobacco Products”).

If approved by the FDA in its current form, the final Proposed Rule would mandate with respect to Deemed Tobacco Products such as E-cigarettes, E-liquid and other vaping products:

●	a prohibition on sales to those younger than 18 years of age and requirements for verification by means of photographic identification;

●	health warnings on product packages and in advertisements; and

●	a ban on vending machine sales unless the vending machines are located in a facility where the retailer ensures that individuals under 18 years of age are prohibited from entering at any time.

Also under the Proposed Rule, manufacturers of newly Deemed Tobacco Products would be subject to, among other requirements, the following:

●	registration with, and reporting of product and ingredient listings to, the FDA;

●	no marketing of new tobacco products prior to FDA review;

●	no direct and implied claims of reduced risk such as “light”, “low” and “mild” descriptions unless FDA confirms (a) that scientific evidence supports the claim and (b) that marketing the product will benefit public health;

●	payment of user fees; and

●	no distribution of free samples.

In addition, the Proposed Rule would require any “new tobacco product,” defined as any Deemed Tobacco Product that was not commercially marketed as of the “grandfathering” date of February 15, 2007, to obtain premarket approval before it could be marketed in the U.S. The premarket approval could take any of the following three pathways: (1) submission of a premarket tobacco product application (“PMTA”) and receipt of a marketing authorization order; (2) submission of a substantial equivalence (“SE”) report and receipt of an SE order; or (3) submission of a request for an exemption from SE requirements and receipt of an SE exemption determination. FDA has proposed a compliance policy that would delay enforcement of PMTA and SE requirements for two years after the effective date of the final Proposed Rule. The Company cannot predict if its Products, all of which would be considered “non-grandfathered,” will receive the required premarket approval from FDA. Failure to obtain premarket approval could prevent the Company from marketing and selling non-grandfathered Products in the U.S. and, thus, may have a material effect the business, financial condition and results of operations.

The Proposed Rule contemplates enforcement actions being brought against products determined to be adulterated and misbranded. The Proposed Rule’s comment period ended on August 8, 2014. It is not known when the Proposed Rule could become final. The Proposed Rule contains various compliance dates based on the publication date of the final Rule in the Federal Register. In June 2015, the FDA issued an advance notice of proposed rulemaking to seek public comment related to warnings and child-resistant packaging for liquid nicotine and nicotine-containing E-liquid. However, the FDA did not at such time indicate the timing or scope of future regulations. As a result, the Company cannot anticipate the impact of such rules and regulations will have on the industry or the Company’s business, financial condition or results of operations.

The application of the Tobacco Control Act to E-cigarettes, E-liquid and other vaping products could impose, among other things, restrictions on the content of nicotine in E-cigarettes, E-liquid or other vaping products, the advertising, marketing and sale of E-cigarettes, E-liquid or other vaping products, the use of certain flavorings and the introduction of new products. The Company cannot predict the scope of such regulations or the impact they may have on the Company specifically or the vapor industry generally, though if enacted, they could have a material adverse effect on the business, results of operations and financial condition.

State and local governments currently legislate and regulate tobacco products, including what is considered a tobacco product, how tobacco taxes are calculated and collected, to whom tobacco products can be sold and by whom, in addition to where tobacco products, specifically cigarettes may be smoked and where they may not. Certain municipalities have enacted local ordinances which preclude the use of E-cigarettes, E-liquid or other vaping products where traditional tobacco burning cigarettes cannot be used and certain states have proposed legislation that would categorize E-cigarettes, E-liquid and other vaping products as tobacco products, equivalent to their tobacco burning counterparts. If these bills become laws, E-cigarettes, E-liquid and other vaping products may lose their appeal as an alternative to traditional cigarettes; which may have the effect of reducing the demand for the Company’s Products and as a result have a material adverse effect on our business, results of operations and financial condition.

The Company may be required to discontinue, prohibit or suspend sales of its Products to states that require us to obtain a retail tobacco license. If the Company is unable to obtain certain licenses, approvals or permits and if the Company is not able to obtain the necessary licenses, approvals or permits for financial reasons or otherwise and/or any such license, approval or permit is determined to be overly burdensome to the Company then the Company may be required to cease sales and distribution of its Products to those states, which would have a material adverse effect on the Company’s business, results of operations and financial condition.

As a result of FDA import alert 66-41 (which allows the detention of unapproved drugs promoted in the U.S.), U.S. Customs has from time to time temporarily and in some instances indefinitely detained certain products. If the FDA modifies the import alert from its current form which allows U.S. Customs discretion to release the products, to a mandatory and definitive hold the Company may no longer be able to ensure a supply of raw materials or saleable product, which will have material adverse effect on the Company’s business, results of operations and financial condition.

At present, neither the Prevent All Cigarette Trafficking Act (which prohibits the use of the U.S. Postal Service to mail most tobacco products and which amends the Jenkins Act, which would require individuals and businesses that make interstate sales of cigarettes or smokeless tobacco to comply with state tax laws) nor the Federal Cigarette Labeling and Advertising Act (which governs how cigarettes can be advertised and marketed) apply to E-cigarettes, E-liquid or other vaping products. The application of either or both of these federal laws to the Company’s Products would have a material adverse effect on the Company’s business, results of operations and financial condition.

The tobacco industry expects significant regulatory developments to take place over the next few years, driven principally by the World Health Organization’s Framework Convention on Tobacco Control (“FCTC”). The FCTC is the first international public health treaty on tobacco, and its objective is to establish a global agenda for tobacco regulation with the purpose of reducing initiation of tobacco use and encouraging cessation. Regulatory initiatives that have been proposed, introduced or enacted include:

●	the levying of substantial and increasing tax and duty charges;

●	restrictions or bans on advertising, marketing and sponsorship;

●	the display of larger health warnings, graphic health warnings and other labeling requirements;

●	restrictions on packaging design, including the use of colors and generic packaging;

●	restrictions or bans on the display of tobacco product packaging at the point of sale, and restrictions or bans on cigarette vending machines;

●	requirements regarding testing, disclosure and performance standards for tar, nicotine, carbon monoxide and other smoke constituents levels;

●	requirements regarding testing, disclosure and use of tobacco product ingredients;

●	increased restrictions on smoking in public and work places and, in some instances, in private places and outdoors;

●	elimination of duty free allowances for travelers; and

●	encouraging litigation against tobacco companies.

If E-cigarettes, E-liquid or other vaping products are subject to one or more significant regulatory initiates enacted under the FCTC, the Company’s business, results of operations and financial condition could be materially and adversely affected.

European Union

On April 3, 2014, the European Union adopted the Tobacco Product Directive which will regulate E-cigarettes, E-liquid and other vaping products containing nicotine. In particular, the Tobacco Product Directive introduces a number of new regulatory requirements for E-cigarettes, E-liquid and other vaping products. For example, it (1) restricts the amount of nicotine that E-cigarettes and E-liquid can contain (2) requires E-cigarettes, E-liquid and refill containers to be sold in child and tamper-proof packaging and nicotine liquids to contain only “ingredients of high purity”; (3) provides that E-cigarettes, E-liquid and other vaping products must deliver nicotine doses at “consistent levels under normal conditions of use” and come with health warnings, instructions for their use, information on “addictiveness and toxicity”, an ingredients list, and information on nicotine content; (4) significantly restricts the advertising and promotion of E-cigarettes, E-liquid and other vaping products; and (5) requires E-cigarettes, E-liquid and other vaping products manufacturers and importers to notify EU Member States before placing new products on the market and to report annually to Member States (including on their sales volumes, types of users and their “preferences”).

The new Tobacco Product Directive came into force in May 2014 and gives Member States a two-year transition period to bring national legislation into line with the Tobacco Product Directive. Its effect will depend on how Member States transpose the Directive into their national laws. Member States may decide, for example, to introduce further rules affecting E-cigarettes, E-liquid and other vaping products (for example, age restrictions) provided that these are compatible with the principles of free movement of goods in the TFEU. For example, the Children and Families Act 2014 includes provisions that allow the Secretary of State to make regulations that prohibit the sale of E-cigarettes, E-liquid and other vaping products to people under the age of 18. The Tobacco Product Directive also includes provisions that allow Member States to ban specific E-cigarettes, E-liquid and other vaping products or types of E-cigarettes, E-liquid and other vaping products in certain circumstances if there are grounds to believe that they could present a serious risk to human health. If at least 3 Member States impose a ban and this is found to be duly justified, the European Commission could implement an EU wide ban. Similarly, the Tobacco Product Directive provides that Member States may prohibit a certain category of tobacco or related products on grounds relating to a specific situation in that Member State for public health purposes. Such measures must be notified to the European Commission to determine whether they are justified.

There is also existing legislation at the EU level and in Member States regulating medicinal products and medical devices. E-cigarettes, E-liquid and other vaping products are regarded by the competent authorities in some Member States as medicinal products and/or medical devices, and therefore require a marketing authorization (for medicinal products) prior to being placed on the market (as well as complying with all other requirements relating to medical products and devices). In the United Kingdom, for example, the MHRA has announced that E-cigarettes, E-liquid and other vaping products will be regulated as medicines in the future. Following the adoption of the Tobacco Products Directive, the MHRA will regulate as medicines a range of nicotine containing products including E-cigarettes, E-liquid and other vaping products that make medicinal claims or are above the limit set out in the Directive. This means that such E-cigarettes, E-liquid and other vaping products will only be able to be sold in the United Kingdom if a marketing authorization is first obtained from the MHRA.

There are also other national laws in Member States regulating E-cigarettes, E-liquid and other vaping products. It is not clear what impact the new Tobacco Product Directive will have on these laws.

Canada

Health Canada has advised that electronic smoking products (i.e., electronic products for the vaporization and administration of inhaled doses of nicotine including electronic cigarettes, cigars, cigarillos and pipes, as well as cartridges of nicotine solutions and related products) fall within the scope of the Food and Drugs Act. All of these products require market authorization prior to being imported, advertised or sold in Canada. Market authorization is granted by Health Canada following successful review of scientific evidence demonstrating safety, quality and efficacy with respect to the intended purpose of the health product. To date, no electronic smoking product has been authorized for sale by Health Canada.

In the absence of evidence establishing otherwise, an electronic smoking product delivering nicotine is regulated as a New Drug under Division 8, Part C of the Food and Drug Regulations. In addition, the delivery system within an electronic smoking kit that contains nicotine must meet the requirements of the Medical Devices Regulations. Appropriate establishment licences issued by Health Canada are also needed prior to importing, and manufacturing electronic cigarettes. Products that are found to pose a risk to health and/or are in violation of the Food and Drugs Act and related Regulations may be subject to compliance and enforcement actions in accordance with the Health Products and Food Branch Inspectorate's Compliance and Enforcement Policy (POL-0001). According to Health Canada regulations, it is not permissible to import, advertise or sell electronic smoking products without the appropriate authorizations, and persons that violate these regulations are subject to repercussions from Health Canada, including but not limited to, seizure of the products.

Since no scientific evidence demonstrating safety, quality and efficacy with respect to the intended purpose of E-cigarettes, E-liquid or other vaping products has been submitted to Health Canada to date, there is the possibility that in the future Health Canada may modify or retract the current prohibitions currently in place. However, there can be no assurance that the Company will be in total compliance, remain competitive, or financially able to meet future requirements and regulations imposed by Health Canada.

To date, Health Canada has not imposed any restrictions on E-cigarettes, E-liquid and other vaping products that do not contain nicotine. E-cigarettes, E-liquid and other vaping products that do not make any health claim and do not contain nicotine may be legally be sold in Canada. Thus, vendors can openly sell nicotine-free E-cigarettes, E-liquid and other vaping products. However, there are vape shops operating throughout Canada selling E-cigarettes, E-liquid and other vaping products containing nicotine without any implications from Health Canada. E-cigarettes, E-liquid and other vaping products are subject to standard product regulations in Canada, including the Canada Consumer Product Safety Act and the Consumer Packaging and Labelling Act.

At present, neither the Tobacco Act (which regulates the manufacture, sale, labelling and promotion of tobacco products) nor the Tobacco Products Labelling Regulations (Cigarettes and Little Cigars) (which governs how cigarettes can be advertised and marketed) apply to E-cigarettes, E-liquid and other vaping products. The application of these federal laws to E-cigarettes, E-liquid and other vaping products would have a material adverse effect on the Company’s business, results of operations and financial condition.

BACKGROUND AND HISTORY OF THE ISSUER

On November 15, 2012, the Company entered into a convertible revolving credit note (the “Credit Note”) with a related party, whereby the Company agreed to pay the party the aggregate unpaid principal amount of $225,000 on or before February 15, 2014, bearing interest at a rate of 6% per annum. On February 14, 2014, the Company repaid all amounts due under the Credit Note.

On November 21, 2012, the Company completed a business combination transaction (the “Merger”), pursuant to which it acquired all of the issued and outstanding common shares of Snoke Distribution Canada Ltd. (“Snoke Distribution”) in exchange for issuing 29,766,667 of its Common Shares to the former shareholders of Snoke Distribution. Upon the completion of the Merger, Snoke Distribution became a wholly-owned subsidiary of the Company, its senior management became the entire senior management of the Company and the Company began to focus exclusively on its current business.

On April 13, 2013, Mr. Henry J. Kloepper was appointed as Lead Independent Director and Chairman of the Audit Committee. Mr. Kloepper also serves as Chairman of the Compensation and Governance Committees.

Gilla Operations, LLC (“Gilla Operations”) was incorporated on May 2, 2013 under the laws of the State of Florida. Gilla Operations is a wholly-owned subsidiary of the Company and, since its incorporation, has been the primary operating subsidiary of the Company in the United States.

On August 21, 2013, the Company announced that its board of directors (the “Board of Directors”) had approved a non-brokered private placement offering (the “Convertible Debenture Offering”) of unsecured subordinated convertible debentures (“Convertible Debentures”) for aggregate gross proceeds of up to $2,000,000. The Convertible Debentures mature on January 31, 2016, bear interest at a rate of 12% per annum, payable quarterly in arrears, and are convertible at the option of the holder into Common Shares at a conversion price of $0.10 per Common Share at any time prior to the maturity date. The conversion price was subsequently amended to be $0.07 per Common Share. The proceeds of the Convertible Debenture Offering were used to repay debt and for the purchase of inventory and technology, product development, marketing, and working capital and general administrative purposes.

On September 3, 2013, the Company issued $425,000 of Convertible Debentures pursuant to the terms of the Convertible Debenture Offering for aggregate gross proceeds of $425,000. The Convertible Debentures were initially issued at a conversion price of $0.10 per Common Share and, on October 28, 2013, were reissued at a conversion price of $0.07 per Common Share. All the other terms and conditions of the re-issued Convertible Debentures remained the same.

Charlie’s Club, Inc. (“Charlie’s Club”) was incorporated on November 15, 2013 under the laws of the State of Florida. Charlie’s Club is a wholly-owned subsidiary of the Company.

Gilla Enterprises Inc. (“Gilla Enterprises”) was incorporated on December 20, 2013 under the laws of the Province of Ontario. Gilla Enterprises is a wholly-owned subsidiary of the Company and, since its incorporation, has been the primary operating subsidiary of the Company in Canada.

On December 23, 2013, the Company issued an additional $797,000 of Convertible Debentures pursuant to the terms of the Convertible Debenture Offering.

On January 8, 2014, the Company issued 200,000 Common Shares at a price of $0.05 per Common Share, as a settlement of $10,000 in consulting fees owed to an unrelated party.

On January 8, 2014, the Company issued and sold, on a private placement basis, 500,000 Common Shares at a price of $0.035 per Common Share, for aggregate gross proceeds of $17,500.

On February 11, 2014, the Company issued an additional $178,000 of Convertible Debentures pursuant to the terms of the Convertible Debenture Offering.

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 on or before August 13, 2014, bearing interest at a rate of 10% per annum. The Secured Note is secured by a general security agreement over the assets of the Company. On December 30, 2015, the Secured Note maturity date was extended until July 1, 2017.

On February 14, 2014, the Company repaid all amounts due under the Credit Note, as described in the second paragraph of this section, above.

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 E-cigarettes in Ireland. The Company issued to the sellers 500,000 Common Shares valued at a price of $0.11 per Common Share and warrants for the purchase of 1,000,000 Common Shares of the Company. The warrants were to vest upon DML achieving cumulative E-cigarette sales revenues of over $1,500,000 beginning on the closing date and exercisable over three years with an exercise price of $0.25 per Common Share. No value has been assigned to the warrants as there is 0% probability of achieving the vesting provision. The Company issued the 500,000 Common Shares to the sellers on June 2, 2014. On October 6, 2014, the Company appointed liquidators for the purpose of winding up DML by way of a voluntary liquidation.

On March 28, 2014, the Company issued 280,433 Common Shares at a price of $0.1426 per Common Share, as a settlement of $40,000 in consulting fees owed to an unrelated party.

On March 28, 2014, the Company issued 270,597 Common Shares at a price of $0.1293 per Common Share, as a settlement of $35,000 in consulting fees owed to an unrelated party.

On April 15, 2014, the Company received forms of election whereby holders of the Convertible Debentures elected to convert a total of $50,000 of the Convertible Debentures into Common Shares of the Company pursuant to the terms of the Convertible Debentures. On May 30, 2014, the Company issued 714,286 Common Shares at a price of $0.07 per Common Share, as a result of these elections received on April 15, 2014 to convert $50,000 of the Convertible Debentures.

On May 30, 2014, the Company issued 835,000 Common Shares at a price of $0.10 per Common Share, as a settlement of $83,500 in advertising production costs owed to unrelated parties.

On May 30, 2014, the Company issued 10,000 Common Shares at a price of $0.10 per Common Share, as a settlement of $1,000 in advertising production costs owed to a related party.

On May 30, 2014, the Company issued 92,500 Common Shares at a price of $0.19 per Common Share, as a settlement of $17,500 in consulting fees owed to an unrelated party.

On June 2, 2014, the Company issued 55,000 Common Shares at a price of $0.25 per Common Share, as a settlement of $13,750 in consulting fees owed to an unrelated party.

On July 25, 2014, the Company issued and sold, on a private placement basis, 1,401,333 Common Shares at a price of $0.15 per Common Share, for aggregate gross proceeds of $210,200. On July 25, 2014 and in connection to the private placement, the Company issued warrants for the purchase of 10,640 Common Shares of the Company exercisable over one year with an exercise price of $0.15 per Common Share.

On July 29, 2014, the Company issued 300,000 Common Shares at a price of $0.18 per Common Share, as a prepayment of $54,000 in consulting fees, to an unrelated party.

On August 1, 2014, the Company entered into a revolving credit facility (the “Credit Facility”) with a consortium of participants that includes two of the Company’s senior executive officers (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 agent who arranged the Credit Facility was not a related party of the Company. The Credit Facility bears 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 thereon shall be due and payable. On August 1, 2014 and in connection to the Credit Facility, the Company issued warrants for the purchase of 250,000 Common Shares of the Company exercisable over two years with an exercise price of $0.30 per Common Share. On January 18, 2016, the Company extended the expiration date of the warrants to December 31, 2017, with all other terms of the warrants remaining the same. The Company’s Chief Executive Officer and Chief Financial Officer are both participants of the consortium of participants of the Credit Facility, each having committed to provide ten percent of the principal amount of the Credit Facility. The Credit Facility is secured by all of the Company’s inventory and accounts due relating to any inventory as granted in an intercreditor and subordination agreement by and among the Company, the Secured Note holder and the Lender to establish the relative rights and priorities of the secured parties against the Company and a security agreement by and between the Company and the Lender. Neither the Chief Executive Officer nor the Chief Financial Officer will participate in the warrants issued in connection with the Credit Facility and both parties have been appropriately abstained from voting on the Board of Directors to approve the Credit Facility, where applicable. On January 18, 2016 and in connection to the Term Loan, the Company and the Lender entered into a loan termination agreement (the “Loan Termination Agreement”) whereby the Company and the Lender terminated and retired the Credit Facility.

On August 15, 2014, the Company issued 10,919 Common Shares at a price of $0.15 per Common Share, as a settlement of $1,638 of shareholder loans.

Gilla Operations Worldwide Limited (“Gilla Worldwide”) was incorporated on August 25, 2014 under the laws of Ireland. Gilla Worldwide is a wholly-owned subsidiary of the Company.

Gilla Franchises, LLC (“Gilla Franchises”) was incorporated on September 8, 2014 under the laws of the State of Florida. Gilla Franchises is a wholly-owned subsidiary of the Company.

Legion of Vape, LLC (“Legion of Vape”), formerly Gilla Biscayne, LLC, was incorporated on September 8, 2014 under the laws of the State of Florida. Legion of Vape is a wholly-owned subsidiary of Gilla Franchises.

On September 17, 2014, the Company issued 182,749 Common Shares at a price of $0.15 per Common Share, as a settlement of $27,412 in consulting fees owed to an unrelated party.

On September 29, 2014, the Company issued and sold, on a private placement basis, 1,333,334 Common Shares at a price of $0.15 per Common Share, for aggregate gross proceeds of $200,000.

On September 30, 2014, the Company issued 63,559 Common Shares at a price of $0.236 per Common Share, as compensation for $15,000 in consulting fees to an unrelated party.

On September 30, 2014, the Company received forms of election whereby holders of the Convertible Debentures elected to convert a total of $800,000 of the Convertible Debentures into Common Shares of the Company pursuant to the terms of the Convertible Debentures. On November 4, 2014, the Company issued 11,428,572 Common Shares at a price of $0.07 per Common Share, as a result of these elections received on September 30, 2014 to convert $800,000 of the Convertible Debentures.

On September 30, 2014, the Company settled $78,559 in interest payable on the Convertible Debentures and issued 523,726 Common Shares at a price of $0.15 per Common Share on November 4, 2014.

On September 30, 2014, the Company settled $107,676 in consulting fees payable to related parties and issued 717,840 Common Shares at a price of $0.15 per Common Share on November 4, 2014.

On October 7, 2014, Dr. Blaise A. Aguirre and Mr. Christopher Rich were appointed as members of the Board of Directors of the Company.

On October 9, 2014, the Company issued 100,000 Common Shares at a price of $0.16 per Common Share, as a settlement of $16,000 in consulting fees owed to an unrelated party.

On November 10, 2014, the Company entered into an amendment with a shareholder (the “Secured Note Amendment”), whereby both parties agreed to extend the maturity date of both the Secured Note, dated February 13, 2014, and the Secured Note No.2, dated July 15, 2014, to January 1, 2016, with all other terms of the respective notes remaining the same. On November 10, 2014 and in connection to the Secured Note Amendment, the Company issued warrants for the purchase of 250,000 Common Shares of the Company at an exercise price of $0.20 per Common Share, such warrants expiring on January 1, 2016.

On November 10, 2014, the Company received a form of election whereby a holder of a Convertible Debenture elected to convert a total of $275,000 of the Convertible Debentures into Common Shares of the Company pursuant to the terms of the Convertible Debentures. On November 20, 2014, the Company issued 3,928,571 Common Shares at a price of $0.07 per Common Share, as a result of this election received on November 10, 2014 to convert $275,000 of the Convertible Debentures.

On November 10, 2014, the Company settled $26,093 in interest payable on the Convertible Debentures and issued 173,953 Common Shares at a price of $0.15 per Common Share on November 20, 2014.

On November 10, 2014, the Company settled $32,081 in interest payable to a shareholder on the Secured Note and Secured Note No.2 and issued 218,669 Common Shares at a price of $0.15 per Common Share on November 20, 2014.

On November 14, 2014, Dr. Blaise A. Aguirre was appointed as a member of the Audit Committee.

On December 17, 2014, the Company issued 800,000 Common Shares at a price of $0.15 per Common Share, as compensation of $120,000 in consulting fees to an unrelated party.

On December 31, 2014, the Company issued 500,000 Common Shares at a price of $0.15 per Common Share, as a settlement of $75,000 in consulting fees owed to a related party.

On December 31, 2014, the Company issued and sold, on a private placement basis, 490,000 Common Shares at a price of $0.15 per Common Share, for aggregate gross proceeds of $73,500.

On January 30, 2015, the Company entered into a supply and distribution agreement with an e-cigarette company distributing primarily to the United Kingdom, whereby the Company is to supply white label products for the clients existing brand. In connection with this agreement, the Company issued warrants for the purchase of 250,000 Common Shares of the Company exercisable over two years with an exercise price of $0.30 per Common Share.

On March 9, 2015, the Company received forms of election whereby holders of the Convertible Debentures elected to convert a total of $52,000 of the Convertible Debentures into Common Shares of the Company pursuant to the terms of the Convertible Debentures. On April 13, 2015, the Company issued 742,857 Common Shares at a price of $0.07 per Common Share, as a result of these elections received on March 9, 2015 to convert $52,000 of the Convertible Debentures.

On March 9, 2015, the Company settled $1,096 in interest payable to holders of the Convertible Debentures and issued 7,303 Common Shares at a price of $0.15 per Common Share on April, 13, 2015.

On May 5, 2015, Ashish Kapoor was appointed as Interim Corporate Secretary of the Company following the resignation of Carrie J. Weiler from her position as the Corporate Secretary of the Company.

On May 12, 2015, the Company issued 300,000 Common Shares at a price of $0.11 per Common Share, as compensation for $33,000 in consulting fees to an unrelated party.

On May 14, 2015, the Board of Directors appointed J. Graham Simmonds to serve as Chairman of the Board of the Company following the resignation of Ernest Eves as a director and as the Chairman of the Board.

On May 29, 2015, the Company entered into a commission agreement with a sales agent, whereby the agent is to assist the Company generate sales though Gilla Worldwide. In connection with this agreement, the Company issued warrants for the purchase of 1,000,000 Common Shares of the Company exercisable over two years. The warrants vest in four tranches of 250,000 purchase warrants each. The first tranche has an exercise price of $0.40 per Common Share and vested upon execution of the agreement. The second tranche has an exercise price of $0.50 per Common Share and will vest upon the agent delivering $500,001 in sales revenue to Gilla Worldwide. The third tranche has an exercise price of $0.60 per Common Share and will vest upon the agent delivering $1,000,001 in sales revenue to Gilla Worldwide. The fourth tranche has an exercise price of $0.70 per Common Share and will vest upon the agent delivering $1,500,001 in sales revenue to Gilla Worldwide.

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 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. In connection to the Secured Note No.3, the Company issued warrants for the purchase of 500,000 Common Shares of the Company exercisable over one year with an exercise price of $0.15 per Common Share. On December 31, 2015, the Company fully settled the Secured Note No.3 through the issuance of $227,000 in Convertible Debenture Units.

On June 30, 2015, the Company issued 408,597 Common Shares at a price of $0.15 per Common Share, as a settlement of $61,290 in marketing costs owed to an unrelated party. These Common Shares had a fair value of $0.11 per Common Share.

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 (the “SPA”), 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 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 SPA.

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 valued at $0.17 per Common Share 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 July 15, 2015, the Company received a form of election whereby a holder of a Convertible Debenture 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 this election received on July 15, 2015 to convert $105,000 of the Convertible Debentures.

On July 2015, the Company settled $20,194 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 months with an exercise price of $0.20 per Common Share, at a price of $0.10 per unit. Such Common Shares were issued on August 17, 2015 at a fair value of $0.11 per Common Share.

On July 31, 2015, the Company issued 60,000 Common Shares at a price of $0.19 per Common Share, as a settlement of $11,400 in consulting fees owed to unrelated parties

On September 1, 2015, the Company received a form of election whereby a holder of a Convertible Debenture 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 this election received on September 1, 2015 to convert $20,000 of the Convertible Debentures.

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 “CV 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 Common Share for a total value of $150,000; (ii) paid cash consideration equal to 901 Vaping’s inventory and equipment of $23,207; and (iii) agreed to a quarterly-earn out based on the gross profit stream derived from product sales of the CV 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 November 6, 2015, the Company issued and sold, on a private placement basis, a unit consisting of 725,428 Common Shares and warrants for the purchase of 725,428 Common Shares of the Company exercisable over twelve months with an exercise price of $0.20 per Common Share, at a price of $0.10 per unit, for aggregate proceeds of $72,543, of which $22,543 was received in cash and $50,000 as a settlement of related party loans. Such Common Shares were issued on November 10, 2015.

Gilla Europe Kft. (“Gilla Europe”) was incorporated on November 23, 2015 under the laws of Hungary. Gilla Europe is a wholly-owned subsidiary of Gilla Enterprises and, since its incorporation, has been the primary operating subsidiary of the Company in Europe.

On December 2, 2015, the Company closed the acquisition of all of the assets of The Mad Alchemist, LLC (“TMA”), an E-liquid manufacturer, including the assets, rights and title to own and operate The Mad Alchemist and Replicant E-liquid brands (the “TMA Brands”), pursuant to an asset purchase agreement dated November 30, 2015. The total purchase price for the assets was $500,000 including the issuance of (i) 819,672 Common Shares valued at $0.122 per Common Share for a total value of $100,000; (ii) $400,000 in cash payable in ten (10) equal payments of $20,000 in cash and $20,000 in Common Shares every three (3) months following the closing date; and (iii) agreed to a quarterly-earn out based on the gross profit stream derived from product sales of the TMA 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 TMA.

On December 30, 2015, the Company entered into an amendment with a shareholder (the “Secured Note Amendment No.2”), whereby both parties agreed to extend the maturity date of both the Secured Note, dated February 13, 2014, and the Secured Note No.2, dated July 15, 2014, to July 1, 2017, with all other terms of the respective notes remaining the same. The Secured Note Amendment No.2 also granted the shareholder an early right to repay both the Secured Note and the Secured Note No.2 if the Company were to complete a raise through a senior debt facility greater than or equal to two million dollars ($2,000,000) prior to the repayment dates of each of the respective notes. On December 30, 2015 and in connection to the Secured Note Amendment No.2, the Company issued warrants for the purchase of 250,000 Common Shares at an exercise price of $0.20 per Common Share, such warrants expiring on July 1, 2017.

On December 31, 2015, the Company closed the first issuances of unsecured subordinated convertible debenture units (the “Convertible Debenture Units”), each Convertible Debenture Unit consisting of an unsecured subordinated convertible debenture having a principal amount of $1,000 (the “Convertible Debentures No.2”) and warrants exercisable for the purchase of 5,000 Common Shares of the Company. On December 31, 2015, the Company issued $650,000 of Convertible Debenture Units which included warrants for the purchase of 3,250,000 Common Shares of the Company. The Convertible Debentures No.2 mature on January 31, 2018, bear interest at a rate of 8% per annum, payable quarterly in arrears, and are convertible at the option of the holder into Common Shares at a conversion price of $0.10 per Common Share at any time prior to the maturity date. The Company will have the option to force conversion of the Convertible Debentures No.2 at anytime after six months following the issuance date and prior to the maturity date. Each full warrant issued in the Convertible Debenture Unit entitles the holder to purchase one Common Share of the Company exercisable over twenty-four months with an exercise price of $0.20 per Common Share. The proceeds of the Convertible Debenture Units were used for capital expenditures, marketing expenditures and working capital.

On December 31, 2015, the Company agreed to issue 151,745 Common Shares at a price of $0.132 per Common Share, as a settlement of $20,000 in consulting fees owed to unrelated parties. These Common Shares remain unissued and are included as shares to be issued as at December 31, 2015.

Subsequent Events

On January 18, 2016, the Company entered into a term loan (the “Term Loan”) with a consortium of participants that includes two of the Company’s senior executive officers (the “Lender”), whereby the Lender would loan the Company the aggregate principal amount of CAD $1,000,000 for capital expenditures, marketing expenditures and working capital. The agent who arranged the Term Loan was not a related party of the Company. The Term Loan bears interest at a rate of 16% per annum, on the outstanding principal, and shall mature on July 3, 2017, whereby any outstanding principal together with all accrued and unpaid interest thereon shall be due and payable. The Term Loan is subject to a monthly cash sweep, calculated as the total of (i) CAD $0.50 for every E-liquid bottle, smaller than 15ml, sold by the Company within a monthly period; and (ii) CAD $1.00 for every E-liquid bottle, greater than 15ml, sold by the Company within a monthly period (the “Cash Sweep”). The Cash Sweep will be disbursed to the Lender in the following priority: first, to pay the monthly interest due on the Term Loan; and second, to repay any remaining principal outstanding on the Term Loan. The Company may elect to repay the outstanding principal of the Term Loan together with all accrued and unpaid interest thereon prior to the maturity, subject to an early repayment penalty of the maximum of (i) 3 months interest on the outstanding principal; or (ii) 50% of the interest payable on the outstanding principal until maturity. The Term Loan shall be immediately due and payable at the option of the Lender if there is a change in key personnel meaning the Company’s current Chief Executive Officer and Chief Financial Officer. On January 18, 2016 and in connection to the Term Loan, the Company issued warrants for the purchase of 250,000 Common Shares of the Company exercisable until December 31, 2017 with an exercise price of $0.20 per Common Share. In addition, the Company also extended the expiration date of the 250,000 warrants issued on August 1, 2014 in connection with the Credit Facility until December 31, 2017, with all other terms of the warrants remaining the same. The Company’s Chief Executive Officer and Chief Financial Officer are both participants of the consortium of participants of the Term Loan, each having committed to provide ten percent of the principal amount of the Term Loan. Neither the Chief Executive Officer nor the Chief Financial Officer will participate in the warrants issued or warrants extended in connection with the Term Loan and both parties have been appropriately abstained from voting on the Board of Directors to approve the Term Loan, where applicable.

On January 18, 2016, the Company and the Lender entered into a Loan Termination Agreement and the Credit Facility was terminated and retired as described above in this section.

On January 25, 2016, the Company received a form of election whereby a holder of a Convertible Debenture elected to convert a total of $23,000 of the Convertible Debentures into Common Shares of the Company pursuant to the terms of the Convertible Debentures. These Common Shares remain unissued.

On February 2, 2016, the Company settled $48,000 in consulting fees payable to a related party and agreed to issue 480,000 Common Shares at a price of $0.10 per Common Share. These Common Shares remain unissued.

On February 18, 2016, the Company entered into a consulting agreement and issued warrants for the purchase of 300,000 Common Shares of the Company exercisable until February 17, 2018 with an exercise price of $0.25 per Common Share. The warrants shall vest quarterly in eight equal tranches, with the first tranche vesting immediately and the final tranche vesting on November 18, 2017. If the consulting agreement is terminated prior to the expiration of the warrants, any unexercised fully vested warrants shall expire thirty calendar days following the effective termination date and any unvested warrants shall be automatically canceled.

On February 22, 2016, Curtis R. (“Austin”) Hopper was appointed as Chief Marketing Officer of the Company. The services of Mr. Hopper, as the Company’s Chief Marketing Officer, are provided to the Company in accordance with the terms of a consulting agreement, effective February 18, 2016, whereby the Company agreed to pay Mr. Hopper $12,500 per month and issued warrants for the purchase of 1,500,000 Common Shares of the Company exercisable until February 17, 2018 with an exercise price of $0.25 per Common Share. The warrants shall vest quarterly in eight equal tranches, with the first tranche vesting immediately and the final tranche vesting on November 18, 2017. If the consulting agreement is terminated prior to the expiration of the warrants, any unexercised fully vested warrants shall expire thirty calendar days following the effective termination date and any unvested warrants shall be automatically canceled.

On March 2, 2016, the Company entered into a loan agreement with a shareholder (the “Loan Agreement”), whereby the shareholder would make available to the Company the aggregate principal amount of CAD $670,000 (the “Loan”) for capital expenditures, marketing expenditures and working capital. Under the terms of the Loan Agreement, the Loan would be made available to the Company in two equal tranches of CAD $335,000 with the first tranche (“Loan Tranche A”) available on the closing date and the second tranche (“Loan Tranche B”) available to the Company at the option of the shareholder on or before May 2, 2016. The Loan bears interest at a rate of 6% per annum, on the outstanding principal, and shall mature on March 2, 2018, whereby any outstanding principal together with all accrued and unpaid interest thereon shall be due and payable. The Company shall also repay 5% of the initial principal amount of Loan Tranche A and 5% of Loan Tranche B, if made available to the Company, monthly in arrears, with the first principal repayment beginning on June 30, 2016. The Company may elect to repay the outstanding principal of the Loan together with all accrued and unpaid interest thereon prior to maturity without premium or penalty. The Company also agreed to service the Loan during the term prior to making any payments to the Company’s Chief Executive Officer, Chief Financial Officer and Board of Directors. The Loan is secured by a general security agreement over the assets of the Company. On March 2, 2016 and in connection to the Loan Agreement, the Company issued warrants for the purchase of 1,000,000 Common Shares of the Company exercisable until March 2, 2018 with an exercise price of $0.20 per Common Share, with 500,000 of such purchase warrants vesting upon the close of Loan Tranche A and the remaining 500,000 purchase warrants vesting upon the close of Loan Tranche B, if made available to the Company prior to May 2, 2016. On March 3, 2016, The Company closed Loan Tranche A and 500,000 of the purchase warrants became fully vested and exercisable.

ITEM 1A. RISK FACTORS

In addition to other information in this Report, the following risk factors should be carefully considered in evaluating our business because such factors may have a significant impact on our business, operating results, liquidity and financial condition. The materialization of any of the risks set forth below would mean that the Company’s actual results could differ materially from those projected in any forward-looking statements. These risks described below, as well as additional risks and uncertainties not presently known to us, or that we currently consider to be immaterial, may impact our business, operating results, liquidity and financial condition. If any of such risks occur, our business, operating results, liquidity and financial condition could be materially affected in an adverse manner. Under such circumstances, the trading price of our securities could decline, and you may lose all or part of your investment.

Risks Related to the Company’s Business

With losses over the years and negative working capital at December 31, 2015 and 2014, the Company has assessed that there is uncertainty regarding the Company’s ability to continue as a going concern. If the Company is not able to continue operations, investors could lose their entire investment in the Company.

The Company has a history of operating losses, and may continue to incur operating losses for the foreseeable future. This raises substantial doubts about the Company’s ability to continue as a going concern. The Company’s auditors issued an opinion in their audit report dated April 5, 2016 expressing uncertainty about the Company’s ability to continue as a going concern. This means that there is substantial doubt whether the Company can continue as an ongoing business without additional financing and/or generating profits from its operations. If the Company is unable to continue as a going concern and the Company fails, investors in the Company could lose their entire investment.

A lack of diversification will increase the risk of an investment in the Company. Results of operations and financial condition may deteriorate if the Company fails to diversify.

The current business of the Company consists of the manufacturing, marketing and distribution of generic and premium branded E-liquid which is the liquid used in vaporizers, E-cigarettes and other vaping hardware and accessories. Larger companies have the ability to manage their risk by diversification. However, the Company lacks diversification, in terms of both the nature and geographic scope. As a result, the Company will likely be impacted more acutely by factors affecting its industry or the regions in which it operates than if the Company were more diversified, enhancing the risk profile. If the Company cannot diversify or expand operations, the Company’s financial condition and results of operations could deteriorate.

The market for E-liquid is a niche market, subject to a great deal of uncertainty, and is still evolving.

E-liquid and other vaping products, having recently been introduced to market, are at an early stage of development, represent a niche market and are evolving rapidly and are characterized by an increasing number of market entrants. The Company’s future sales and any future profits are substantially dependent upon the widespread acceptance and use of E-liquid. Rapid growth in the use of, and interest in, E-liquid is recent, and may not continue on a lasting basis. The demand and market acceptance for these products is subject to a high level of uncertainty. Therefore, the Company is subject to all of the business risks associated with a new enterprise in a niche market, including risks of unforeseen capital requirements, failure of widespread market acceptance of E-liquid, in general or, specifically the Company’s Products, failure to establish business relationships and competitive disadvantages as against larger and more established competitors. Results of operations may be adversely affected by decreases in the general level of economic activity and the demand for E-liquid products.

The Company is dependent on its management to manage and operate the business.

The Company manages its capital structure and makes adjustments to it, based on the funds available to the Company, in order to maintain its daily operations. The Board of Directors does not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company’s management to sustain the future development of the business. In part, the Company’s success is largely dependent on the continued service of the members of the management team, who are critical in establishing corporate strategies, focus and future growth. The Company’s success will depend on the ability to attract and retain a qualified and competent management team in order to manage operations. Therefore, the Company’s operations may be severely disrupted, and may incur additional expenses to recruit and retain new officers. In addition, if any of the Company’s executives join a competitor or forms a competing business, the Company may lose existing customers.

Management has no experience in the tobacco industry.

The Company’s management team has no prior experience in the tobacco industry, which could impair the Company’s ability to comply with legal and regulatory requirements. There can be no assurance that the management team will be able to implement and affect programs and policies in an effective and timely manner that adequately respond to increased legal and regulatory compliance imposed by such laws and regulations. Failure to comply with such laws and regulations could lead to the imposition of fines and penalties and further result in the deterioration of the Company’s operations.

The market for E-liquid and other vaping products is relatively new and emerging. If the market develops more slowly or differently than the Company expects, the business, growth prospects and financial condition would be adversely affected.

The market for E-liquid and other vaping products is relatively new and many may not achieve or sustain high levels of demand and market acceptance. While traditional tobacco products are well established and revenue from traditional cigarette sales represent a substantial majority of total industry revenue, smokeless tobacco products and E-liquid products only represent a small portion of the industry. There can be no assurance that E-liquid products become widely adopted, or the market for smokeless products develop as the Company expects. If the market for E-liquid develops more slowly, or differently than expected, the business, growth prospects and financial condition of the Company would be adversely affected. In addition, if the Company fails to successfully market, brand and bring its Products to market, the business could face material adverse effects.

The Company may experience intense competition in the industry which it currently operates.

Conventional tobacco sales have been declining, which could have a material adverse effect on the Company.

Conventional tobacco sales, in terms of volume, have been declining in the United States as a result of many regulatory restrictions, increased awareness in smoking cessation and a general decline in social acceptability of smoking. Although the vapor industry is growing rapidly, it represents a small portion of the overall tobacco industry. A continual decline in tobacco sales could adversely affect the growth of the E-liquid niche, which could have a material adverse effect on the business, results of operations and financial condition.

The Company competes with foreign importers who may not comply with government regulations.

The Company faces competition from foreign importers of E-liquid and other vaping products who may illegally ship their products into the United States, the European Union, Canada or any other market for direct delivery to customers. These market participants may not have the added cost and expense of complying with government regulations and taxes, and as a result, will be able to offer their products at a more competitive price, potentially allowing them to capture a larger market share. Moreover, should the Company be unable to sell certain of its Products during any regulatory approval process, there can be no assurances that the Company will be able to recapture those customers lost to foreign domiciled competitors during any “blackout” periods, during which the Company may be unable to sell its Products. This competitive disadvantage may have a material adverse effect on the business, results of operations and our financial condition.

Warranty claims, product liability claims and product recalls could harm the business, results of operations and financial condition.

The Company is inherently exposed to potential warranty and product liability claims, in the event that the Company’s Products fail to perform as expected or such failure of our Products results, or is alleged to result, in bodily injury or property damage (or both). Such claims may arise despite quality controls, proper testing and instruction for use of our Products, either due to a defect during manufacturing or due to the individual’s improper use of the product. In addition, if any of the Company’s Products are, or are alleged, to be defective, then the Company may be required to participate in a recall.

The tobacco industry in general has historically been subject to frequent product liability claims. As a result, the Company may experience product liability claims from the marketing and sale of E-liquid and other vaping products. Any product liability claim brought against the Company, with or without merit, could result in:

●	liabilities that substantially exceed the Company’s product liability insurance, which the Company would then be required to pay from other sources, if available;

●	an increase in the Company’s product liability insurance rates or the inability to maintain insurance coverage in the future on acceptable terms, or at all;

●	damage to the Company’s reputation and the reputation of its Products and brands, resulting in lower sales;

●	regulatory investigations that could require costly recalls or product modifications;

●	litigation costs; and

●	the diversion of management’s attention from managing the Company’s business.

Any one or more of the foregoing could have a material adverse effect on the business, results of operations and financial condition.

The Company must comply with regulations imposed by government authorities and may be required to obtain the approval of various government agencies to market its Products.

E-liquid and other vaping products are new to the marketplace and may be subject to regulation as a tobacco product and possibly as a drug and drug device if marketed using therapeutic claims. Most E-liquid and other vaping products are sold as a means of delivering nicotine to the body. Government authorities in the United States, the European Union, Canada and in other countries, extensively regulate, among other things, the research, development, testing, approval, manufacturing, labeling, post-approval monitoring and reporting, packaging, promotion, storage, advertising, distribution, marketing and export and import of electronic products for the vaporization and administration of inhaled doses of nicotine including vaporizers and related E-liquid, E-cigarettes, cigars, cigarillos and pipes, as well as cartridges of nicotine solutions and related products. The Company must comply with these regulations, as applicable, in the jurisdictions where it offers and sells its Products. The process of obtaining regulatory approvals and the subsequent compliance with applicable federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources.

The Food and Drug Administration (“FDA”) is the regulatory agency which oversees tobacco products in the United States. The FDA has previously indicated that it intends to regulate E-cigarettes under the Tobacco Control Act through the issuance of deeming regulations that would include E-cigarettes, E-liquid and other vaping products under the definition of a “tobacco product” under the Tobacco Control Act subject to the FDA’s jurisdiction. On April 25, 2014, the FDA announced a proposed rule (the “Proposed Rule”) seeking to establish, for the first time, federal regulatory authority over, among other tobacco products, E-cigarettes, E-liquid and other vaping products (collectively, “Deemed Tobacco Products”).

If approved by the FDA in its current form, the final Proposed Rule would mandate with respect to Deemed Tobacco Products such as E-cigarettes, E-liquid and other vaping products:

●	a prohibition on sales to those younger than 18 years of age and requirements for verification by means of photographic identification;

●	health warnings on product packages and in advertisements; and

●	a ban on vending machine sales unless the vending machines are located in a facility where the retailer ensures that individuals under 18 years of age are prohibited from entering at any time.

Also under the Proposed Rule, manufacturers of newly Deemed Tobacco Products would be subject to, among other requirements, the following:

●	registration with, and reporting of product and ingredient listings to, the FDA;

●	no marketing of new tobacco products prior to FDA review;

●	no direct and implied claims of reduced risk such as “light”, “low” and “mild” descriptions unless FDA confirms (a) that scientific evidence supports the claim and (b) that marketing the product will benefit public health;

●	payment of user fees; and

●	no distribution of free samples.

The Company’s Products are subject to product safety regulations by federal, state, and local organizations. Accordingly, the Company may be required, or may voluntarily determine to, obtain approval of its Products from one or more of the organizations engaged in regulating product safety. These approvals could require significant time and resources from the Company’s technical staff, and, if redesign were necessary, could result in a delay in the introduction of the Company’s Products in various markets or ultimately require the Company to exit from that market. There can be no assurance that the Company will obtain any or all of the approvals that may be required to market its Products.

Limitation by states and cities on sales of E-liquid may have a material adverse effect on the Company's ability to sell its Products in the United States.

Certain states and cities have enacted laws which preclude the use of E-liquid and other vaping products where traditional tobacco-burning cigarettes cannot be used and others have proposed legislation that would categorize E-liquid and other vaping products as tobacco products, equivalent to their tobacco burning counterparts. If the use of E-liquid and other vaping products is banned in places where the use of traditional tobacco burning cigarettes is banned, E-liquid and other vaping products may lose their appeal as an alternative to cigarettes, which may have the effect of reducing the demand for the Company’s Products and as a result have a material adverse effect on the Company’s business, results of operations and financial condition.

The Company may be affected if E-liquid is taxed like other tobacco products or the Company is required to collect and remit sales tax on certain of the Company’s internet sales.

Presently the Company’s Products are not taxed like cigarettes or other tobacco products, all of which have faced significant increases in the amount of taxes collected on the sale of their products. Should state and federal governments and or taxing authorities impose taxes similar to those levied against cigarettes and tobacco products on the Company’s Products, it may have a material adverse effect on the demand for the Company’s Products. Moreover the Company may be unable to establish the systems and processes needed to track and submit the taxes collected through internet sales, which would limit the Company's ability to market its Products through its websites which would have a material adverse effect on the Company’s business, results of operations and financial condition.

The Company may be subject to litigation in the ordinary course of business.

From time to time, the Company may be subject to various legal proceedings and claims, either asserted or unasserted. Any such claims, whether with or without merit, could be time-consuming and expensive to defend and could divert management’s attention and resources. There can be no assurance that the outcome of future litigation, if any, will not have a material adverse effect on the business, results of operations and financial condition.

On January 6, 2016, Yaron Elkayam, Pinchas Mamane and Levent Dikmen filed a three count complaint against the Company in the Circuit Court of Hillsborough County, Florida alleging (i) breach of contract, (ii) breach of implied covenant of good faith and fair dealing, and (iii) fraud in the inducement seeking damages in the amount of approximately $900,000 of Promissory Notes issued on July 1, 2015 as a result of the acquisition of E Vapor Labs. On February 23, 2016, the Company filed a motion to dismiss the complaint on the basis of failure to allege sufficient jurisdictional facts and failure to satisfy constitutional due process requirements to exercise jurisdiction. There can be no assurance that the outcome of this complaint would not have a material adverse effect on the business, results of operations and financial condition.

The Company may become dependent on foreign sales to maintain operations.

If the FDA or other state or federal government agencies restrict or prohibit the sale E-liquid or other vaping products in the U.S., in part or in whole, the Company’s ability to maintain operations will become dependent on the ability to successfully commercialize its Products and brands in foreign jurisdictions where our Products can be sold. The Company’s inability to establish distribution channels in foreign jurisdictions, specifically those that allow for the sale of E-liquid will deprive the Company of the operating revenue that may be required to fund any domestic regulatory approvals to maintain the Company’s business operations.

The Company’s Products face intense media attention and public pressure.

E-liquid and other vaping products are new to the marketplace and since its introduction, certain members of the media, politicians, government regulators and advocate groups, including independent medical physicians have called for an outright ban of all such devices, pending regulatory reviews and a demonstration of safety. A partial or outright ban would have a material adverse effect on the business, results of operation and financial condition.

The Company may be exposed to 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. In the event that inventory will have to be purchased in a foreign currency, the Company may be exposed to foreign currency risk as the Company does not use derivative financial instruments to reduce exposure.

Risks Associated with the Company’s Common Shares

There is no predictable method by which investors in the securities of the Company shall be able to realize any gain or return on their investment in the Company, or shall be able to recover all or any substantial portion of the value of their investment. There is, currently no public market for the securities of the Company, and no assurance can be given that a market will develop or that an investor will be able to liquidate his investment without considerable delay, if at all. Consequently, should the investor suffer a change in circumstances arising from an event not contemplated at the time of his investment, and should the investor therefore wish to transfer the common stock owned by him, he may find he has only a limited or no ability to transfer or market the common stock. Accordingly, purchasers of the common stock need to be prepared to bear the economic risk of their investment for an indefinite period of time. If a market should develop, the price may be highly volatile. Factors such as those discussed in this “Risk Factors” section may have a significant impact upon the market price of the securities of the Company. Owing to what may be expected to be the low price of the securities, many brokerage firms may not be willing to effect transactions in the securities.

Even if an investor finds a broker willing to effect a transaction in these securities, the combination of brokerage commissions and any other selling costs may exceed the selling price. Further, many lending institutions will not permit the use of such securities as collateral for any loans. The Company has no agreement with any securities broker or dealer that is a member of the National Association of Securities Dealers, Inc., to act as a market maker for the Company’s securities. Should the Company fail to obtain one or more market makers for the Company’s securities, the trading level and price of the Company’s securities will be materially and adversely affected. Should the Company happen to obtain only one market maker for the Company’s securities, the market maker would in effect dominate and control the market for such securities. The Company’s registered securities are covered by a Securities and Exchange Commission rule that imposes additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors. For purposes of the rule, the phrase “accredited investors” means, in general terms, institutions with assets in excess of $5,000,000, or individuals having a net worth in excess of $1,000,000 or having an annual income that exceeds $200,000 (or that, when combined with a spouse’s income, exceeds $300,000). For transactions covered by the rule, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser’s written, agreement to the transaction prior to the sale. Consequently, the rule may affect the ability of broker-dealers to sell the Company’s securities and also may affect the ability of investors in securities of the Company to sell their securities in any market that might develop therefore.

Of the currently issued and outstanding shares of common stock of the Company, approximately 23,657,274 Common Shares (approximately 23.76% of the total number of shares outstanding) are owned by, or are under the direct or indirect control of Company insiders. That number of shares is enough to dominate and control the price and trading volume in the Company’s securities. Because those shares are controlled by such a limited number of persons, selling decisions can be expected to have a substantial impact upon (or “overhang” over) the market, if any, for the common stock. Any sale of a large number of shares over a short period of time could significantly depress the market price of the common stock.

The majority of the Company’s authorized but unissued common stock remains unissued. The Board of Directors has authority to issue such unissued shares without the consent or vote of the stockholders of the Company. The issuance of these shares may dilute the interests of investors in the securities of the Company and will reduce their proportionate ownership and voting power in the Company.

The Company is subject to compliance with securities law, which exposes the Company to potential liabilities, including potential rescission rights.

The Company has offered and sold common stock to investors pursuant to certain exemptions from the registration requirements of the Securities Act of 1933, as well as those of various state securities laws. The basis for relying on such exemptions is factual; that is, the applicability of such exemptions depends upon the Company’s conduct and that of those persons contacting prospective investors and making the offering. The Company has not received a legal opinion to the effect that any of our prior offerings were exempt from registration under any federal or state law. Instead, the Company has relied upon the operative facts as the basis for such exemptions, including information provided by investors themselves.

If any prior offering did not qualify for such exemption, an investor would have the right to rescind its purchase of the securities if it so desired. It is possible that if an investor should seek rescission, such investor would succeed. A similar situation prevails under state law in those states where the securities may be offered without registration in reliance on the partial preemption from the registration or qualification provisions of such state statutes under the National Securities Markets Improvement Act of 1996. If investors were successful in seeking rescission, the Company would face severe financial demands that could adversely affect our business and operations. Additionally, if the Company did not in fact qualify for the exemptions upon which it has relied, the Company may become subject to significant fines and penalties imposed by the SEC and state securities agencies.

The Company does not intend to pay cash dividends in the foreseeable future.

On January 17, 2008, the Board of Directors declared a cash dividend to its common stock Shareholders of Record on February 4, 2008 in the amount of $0.035 per share of common stock, which was distributed on February 15, 2008. The Company currently intends to retain all future earnings for use in the operation and expansion of the Company’s business. The Company does not intend to pay any cash dividends in the foreseeable future but will review this policy as circumstances dictate.

There is currently no market for the Company’s securities and there can be no assurance that any market will ever develop or that the Company’s common stock will be listed for trading. Therefore, investors may be unable to liquidate their investments in the Company’s common stock.

The Company’s securities have been trading on the over-the-counter market until it was moved to Pink Sheets in February 2011, under the symbol “GLLA” as the trading activity was not sufficient for continuing to trade over the counter. The Company is a fully reporting OTC Markets company and trades on the OTC QB under the symbol “GLLA.” There has not been any established trading market for the Company’s common stock and there is currently no market for the Company’s securities. Even if the Company is ultimately approved for trading on an exchange, there can be no assurance as the prices at which the Company’s common stock will trade if a trading market develops, of which there can be no assurance. Until an orderly market develops, (if ever) in the Company’s common stock, there can be no assurance that investors will be able to liquidate their investments.

The Company’s common stock is subject to the Penny Stock Regulations.

Once it commences trading, (if ever) the Company’s common stock could be subject to the SEC’s “penny stock” rules to the extent that the price remains less than $5.00. Those rules, which require delivery of a schedule explaining the penny stock market and the associated risks before any sale, may further limit your ability to sell your shares.

The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share. The Company’s common stock currently has no “market price” and when and if a trading market develops, may fall within the definition of penny stock and subject to rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000, or annual incomes exceeding $200,000 or $300,000, together with their spouse).

For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser’s prior written consent to the transaction. Additionally, for any transaction, other than exempt transactions, involving a penny stock, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the Commission relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealers presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Consequently, the `penny stock` rules may restrict the ability of broker-dealers to sell the Company’s common stock and may affect the ability of investors to sell their common stock in the secondary market.

The Company’s common stock is illiquid and may in the future be subject to price volatility unrelated to the Company’s operations.

The Company’s common stock has no market price and, if and when a market price is established, could fluctuate substantially due to a variety of factors, including market perception of the Company’s ability to achieve our planned growth, quarterly operating results of other companies in the same industry, trading volume in the Company’s common stock, changes in general conditions in the economy and the financial markets or other developments affecting the Company’s competitors or us. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on the Company’s common stock. Sales of substantial amounts of common stock, or the perception that such sales could occur, could adversely affect the market price of the Company’s common stock (if and when a market price is established) and could impair the Company’s ability to raise capital through the sale of the Company’s equity securities.

Other Risks

The Company’s ability to continue as a going concern is dependent on the ability to further implement its business plan, raise capital, and generate revenues.

The time required for the Company to become profitable from operations is highly uncertain, and the Company cannot assure that it will achieve or sustain operating profitability or generate sufficient cash flow to meet its planned capital expenditures. If required, the Company’s ability to obtain additional financing from other sources also depends on many factors beyond its control, including the state of the capital markets and the prospects for its business. The necessary additional financing may not be available to the Company or may be available only on terms that would result in further dilution to the current owners of its common stock.

The Company cannot assure that it will generate sufficient cash flow from operations or obtain additional financing to meet its obligations. Should any of these events not occur, its financial condition will be adversely affected.

The Company’s new line of business has a limited operating history and, accordingly, investors will not have any basis on which to evaluate the Company’s ability to achieve its business objectives.

The Company has limited operating results to date. Since the Company does not have an established operating history or regular sales as of yet, investors will have no basis upon which to evaluate the Company’s ability to achieve its business objectives.

The absence of any significant operating history for the Company makes forecasting its revenue and expenses difficult, and the Company may be unable to adjust its spending in a timely manner to compensate for unexpected revenue shortfalls or unexpected expenses.

As a result of the absence of any operating history for the Company, it is difficult to accurately forecast the Company’s future revenue. In addition, the Company has limited meaningful historical financial data upon which to base planned operating expenses. Current and future expense levels are based on the Company’s operating plans and estimates of future revenue. Revenue and operating results are difficult to forecast because they generally depend on the Company’s ability to promote and sell its Products. As a result, the Company may be unable to adjust its spending in a timely manner to compensate for any unexpected revenue shortfall, which would result in further substantial losses. The Company may also be unable to expand its operations in a timely manner to adequately meet demand to the extent it exceeds expectations.

The Company’s limited operating history does not afford investors a sufficient history on which to base an investment decision.

The Company is currently in the early stages of developing its business. There can be no assurance that at this time that the Company will operate profitably or will have adequate working capital to meet its obligations as they become due.

Investors must consider the risks and difficulties frequently encountered by early stage companies, particularly in rapidly evolving markets. Such risks include the following:

●	competition;

●	ability to anticipate and adapt to a competitive market;

●	ability to effectively manage expanding operations; amount and timing of operating costs and capital expenditures relating to expansion of our business, operations, and infrastructure; and

●	dependence upon key personnel to market and sell our services and the loss of one of our key managers may adversely affect the marketing of our services.

The Company cannot be certain that its business strategy will be successful or that the Company will successfully address these risks. In the event that the Company does not successfully address these risks, its business, prospects, financial condition, and results of operations could be materially and adversely affected and the Company may not have the resources to continue or expand its business operations.

Dependence on the Company’s management, without whose services, the Company’s business operations could cease.

At this time, the Company’s management is wholly responsible for the development and execution of the business plan. The Company’s management is under no contractual obligation to remain employed by the Company, although they have no present intent to leave. If the Company’s management should choose to leave the Company for any reason before the Company has hired additional personnel, the Company’s operations may fail. Even if the Company is able to find additional personnel, it is uncertain whether the Company could find qualified management who could develop the business along the lines described herein or would be willing to work for compensation the Company could afford. Without such management, the Company could be forced to cease operations and investors in the Company’s common stock or other securities could lose their entire investment.

Lack of additional working capital may cause curtailment of any expansion plans while the raising of capital through a sale of equity securities would dilute existing shareholders’ percentage of ownership.

The Company’s available capital resources may not be adequate to fund its working capital requirements. Any shortage of capital could affect the Company’s ability to fund its working capital requirements to sustain operations. If the Company requires additional capital, funds may not be available on acceptable terms, if at all. In addition, if the Company raises additional capital through the sale of equity or convertible debt securities, the issuance of these securities could dilute existing shareholders. If funds are not available, the Company could be placed in the position of having to cease all operations.

The Company does not presently have a traditional credit facility with a financial institution. This absence may adversely affect the Company’s operations.

The Company does not presently have a traditional credit facility with a financial institution. The absence of a traditional credit facility with a financial institution could adversely impact the Company’s operations. If adequate funds are not otherwise available, the Company may be required to delay, scale back or eliminate portions of its operations. Without such credit facilities, the Company could be forced to cease operations and investors in the Company’s common stock or other securities could lose their entire investment.

The Company’s success is substantially dependent on general economic conditions and business trends, particularly concerning the demand for E-liquid and other vaping products. A downturn of which could adversely affect the Company’s operations.

The success of the Company’s operations depends to a significant extent upon a number of factors relating to personal and business spending. These factors include economic conditions, activity in the financial markets, general business conditions, personnel cost, inflation, interest rates and taxation. The Company’s business is affected by the general condition and economic stability of its customers and their continued willingness to purchase the Company’s products in the future. An overall decline in the demand for E-liquid and other vaping products could cause a reduction in the Company’s sales and the Company could face a situation where it is unable to achieve sales and thereby be forced to cease operations.

The Company will need to increase the size of its organization, and may experience difficulties in managing growth.

The Company 15 key individuals engaged as consultants and thirty five full-time employees. The Company expects to experience a period of significant expansion in headcount, facilities, infrastructure and overhead and anticipates that further expansion will be required to address potential growth and market opportunities. Future growth will impose significant added responsibilities on members of management, including the need to identify, recruit, maintain and integrate managers. The Company’s future financial performance and its ability to compete effectively will depend, in part, on its ability to manage any future growth effectively.

The Company may not have adequate internal accounting controls. While the Company has certain internal procedures in its budgeting, forecasting and in the management and allocation of funds, the Company’s internal controls may not be adequate.

The Company is constantly striving to improve its internal accounting controls. While the Company believes that its internal controls are adequate for its current level of operations, the Company believes that it may need to employ additional accounting staff as the Company’s operations ramp up. The Company has appointed an outside Independent Director as Chairman of the Audit Committee, however there is no guarantee that actions undertaken by the Audit Committee will be adequate or successful or that such improvements will be carried out on a timely basis. If, in the future, the Company does not have adequate internal accounting controls, the Company may not be able to appropriately budget, forecast and manage its funds. The Company may also be unable to prepare accurate accounts on a timely basis to meet its continuing financial reporting obligations and the Company may not be able to satisfy its obligations under U.S. securities laws.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

The Company occupies office space at 475 Fentress Blvd., Unit L, Daytona Beach, FL 32114. The Company entered into an operating lease agreement for the rental premises in Daytona Beach, Florida, USA for a period of 36 months, commencing on January 1, 2015 and ending on December 31, 2017, with payments made monthly. The Company also occupies office space in Budapest, Hungary on a month to month basis.

The Company has no investments in real estate.

ITEM 3. LEGAL PROCEEDINGS

On January 5, 2016, Yaron Elkayam, Pinchas Mamane and Levent Dikmen filed a three count complaint against the Company in the Circuit Court of Hillsborough County, Florida alleging (i) breach of contract, (ii) breach of implied covenant of good faith and fair dealing, and (iii) fraud in the inducement seeking damages in the amount of approximately $900,000 of Promissory Notes issued on July 1, 2015 as a result of the acquisition of E Vapor Labs. On February 23, 2015, the Company filed a motion to dismiss the complaint on the basis of failure to allege sufficient jurisdictional facts and failure to satisfy constitutional due process requirements to exercise jurisdiction. There can be no assurance that the outcome of this complaint would not have a material adverse effect on the business, results of operations and financial condition. The legal proceeding has been brought in Circuit Court of the Thirteenth Judicial Circuit in and for Hillsborough County, State of Florida, Civil Division under the following caption: Yaron Elkayam, Pinchas Mamane, Levent Dikmen, Plaintiffs, v. Gilla, Inc., Case No. 16-CA-0047, Division H, filed January 5, 2016.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s securities trade on the over-the-counter market as a fully reporting OTC Markets company trading on the OTC QB under the symbol “GLLA”. The following table sets forth for the periods indicated the range of high and low closing bid quotations per share as reported by the over-the-counter market. These quotations represent inter-dealer prices, without retail markups, markdowns or commissions and may not necessarily represent actual transactions. The market for the Common Stock has been sporadic and there have been long periods during which there were few, if any, transactions in the Common Stock and no reported quotations. Accordingly, reliance should not be placed on the quotes listed below, as the trades and depth of the market may be limited, and therefore, such quotes may not be a true indication of the current market value of the Company’s Common Stock.

2014	HIGH		LOW
First Quarter	$	0.24	$	0.09
Second Quarter	$	0.33	$	0.14
Third Quarter	$	0.29	$	0.14
Fourth Quarter	$	0.30	$	0.14

2015	HIGH		LOW
First Quarter	$	0.28	$	0.13
Second Quarter	$	0.18	$	0.09
Third Quarter	$	0.19	$	0.09
Fourth Quarter	$	0.17	$	0.09

On December 31, 2015, the closing price of the Company’s Common Stock as reported on the OTC QB was $0.17 per share. On December 31, 2015, the Company had in excess of 448 beneficial stockholders of our Common Stock and 99,560,923 shares of our Common Stock were issued and outstanding.

DIVIDENDS

On January 17, 2008, the Board of Directors of the Company declared a cash dividend to its Common Stock Shareholders of Record on February 4, 2008 in the amount of $0.035 per share of Common Stock, which was distributed on February 15, 2008. The Company has not determined when it shall make its next dividend payment.

RECENT SALES OF UNREGISTERED SECURITIES

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, that have not been previously reported in a Form 8-K or Form 10-Q, except for the following:

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 the vendor pursuant to the asset purchase agreement dated October 21, 2015. 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.

On November 2, 2015, the Company issued 211,389 Common Shares at a price of $0.118 per Common Share, as a settlement of $25,000 in consulting fees owed unrelated parties. These Common Shares had a fair value of $0.15 per Common Share. 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.

On December 2, 2015, the Company closed the acquisition of all of the assets of TMA and issued 819,672 Common Shares at a price of $0.122 per Common Share to the vendor pursuant to the asset purchase agreement dated November 30, 2015. 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.

On December 7, 2015, the Company issued 100,000 Common Shares at a price of $0.10 per Common Share, as a settlement of $10,000 in prepaid consulting fees to an unrelated party. These Common Shares had a fair value of $0.11 per Common Share. 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.

On December 31, 2015, the Company agreed to issue 151,745 Common Shares at $0.132 per Common Share, as a settlement of $20,000 in consulting fees owed to unrelated parties, pursuant to the exemption from the registration requirements of the Securities Act provided by Section 4(2) of the Securities Act. These Common Shares remain unissued.

Subsequent Events

On January 25, 2016, the Company received a form of election whereby a holder of a Convertible Debenture elected to convert a total of $23,000 of the Convertible Debentures into Common Shares of the Company, pursuant to the exemption from registration requirements of the Securities Act provided by Regulation S of the Securities Act. These Common Shares remain unissued.

On February 2, 2016, the Company settled $48,000 in consulting fees payable to a related party and agreed to issue 480,000 Common Shares at a price of $0.10 per Common Share, pursuant to the exemption from the registration requirements of the Securities Act provided by Section 4(2) of the Securities Act. These Common Shares remain unissued.

ITEM 6. SELECTED FINANCIAL DATA

Earnings per share for each of the fiscal years shown below are based on the weighted average number of Common Shares outstanding.

	Years ended December 31,
	2015			2014
Revenues (including consulting revenue)	$	1,163,096		$	608,035

Net Loss	$	(3,048,337	)	$	(3,096,390	)

Earnings (Loss) Per Share	$	(0.03	)	$	(0.04	)

Total assets	$	2,231,055		$	1,086,485

Total liabilities	$	5,000,695		$	2,639,901

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The information and financial data discussed below is derived from the audited consolidated financial statements of Gilla Inc. for the year ended December 31, 2015. The financial statements were prepared and presented in accordance with United States generally accepted accounting principles and are expressed in U.S. Dollars. The information and financial data discussed below is only a summary and should be read in conjunction with the financial statements and related notes of Gilla Inc. contained elsewhere in this Annual Report, which fully represent the financial condition and operations of Gilla Inc., but which are not necessarily indicative of future performance.

Overview

The current business of the Company consists of the manufacturing, marketing and distribution of generic and premium branded 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 of smoking. Gilla’s product portfolio includes Craft Vapes, Craft Clouds, Vape Warriors, Miss Pennysworth’s Elixirs, The Mad Alchemist, Replicant and Coil Glaze E-liquid brands.

Critical Accounting Policies

Basis of Preparation

The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for annual financial statements and with Form 10-K and article 8 of the Regulation S-X of the United States Securities and Exchange Commission (“SEC”).

Basis of Consolidation

These consolidated 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. and its wholly owned subsidiary Gilla Europe Kft.; Gilla Operations Worldwide Limited (“Gilla Worldwide”); Gilla Franchises, LLC and its wholly owned subsidiary Legion of Vape, LLC.; and Snoke Distribution Canada Ltd. and its wholly owned subsidiary Snoke Distribution USA, LLC. All inter-company accounts and transactions have been eliminated in preparing these consolidated 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’s Hungarian subsidiary maintains its books in the Hungarian Forint (HUF) 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 accumulated other comprehensive income in stockholders' equity. The Company has not, to the date of these consolidated financial statements, entered into derivative instruments to offset the impact of foreign currency fluctuations.

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 December 31, 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 and cash equivalents, trade receivables, 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 and cash equivalents 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.

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.

Inventory

Inventory consists of finished E-liquid bottles, E-liquid components, bottles, E-cigarettes and accessories as well as related packaging. Inventory is stated at the lower of cost as determined by the first-in, first-out (FIFO) cost method, or market value. The Company measures inventory write-downs as the difference between the cost of inventory and market value. At the point of any inventory write-downs to market, the Company establishes a new, lower cost basis for that inventory, and any subsequent changes in facts and circumstances do not result in the restoration of the former cost basis or increase in that newly established cost basis.

The Company reviews product sales and returns from the previous 12 months and future demand forecasts and writes off any excess or obsolete inventory. The Company also assesses inventory for obsolescence by testing the products to ensure they have been properly stored and maintained so that they will perform according to specifications. In addition, the Company assesses the market for competing products to determine that the existing inventory will be competitive in the marketplace.

If there were to be a sudden and significant decrease in future demand for our products, or if there were a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements, the Company could be required to write down inventory and accordingly gross margin could be adversely affected.

Income Taxes

The Company follows Accounting Standards Codification subtopic 740-10, Income Taxes (“ASC 740-10”) which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Temporary differences between taxable income reported for financial reporting purposes and income tax purposes include, but are not limited to, accounting for intangibles, debt discounts associated with convertible debt, equity based compensation and depreciation and amortization. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of available evidence it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Goodwill

Goodwill represents the excess purchase price over the estimated fair value of net assets acquired by the Company in business combinations. The Company accounts for goodwill and intangible assets in accordance with ASC 350 Intangibles-Goodwill and Other (“ASC 350”). ASC 350 requires that goodwill and other intangibles with indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value. In addition, ASC 350 requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests when circumstances indicate that the recoverability of the carrying amount of goodwill may be in doubt. Application of the goodwill impairment test requires judgment, including the identification of reporting units; assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions or the occurrence of one or more confirming events in future periods could cause the actual results or outcomes to materially differ from such estimates and could also affect the determination of fair value and/or goodwill impairment at future reporting dates.

Use of Estimates

The preparation of consolidated 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 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 and impairment of property and equipment, impairment of goodwill, accruals, 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.

Convertible Debt Instruments

The Company accounts for convertible debt instruments when the Company has determined that the embedded conversion options should not be bifurcated from their host instruments in accordance with ASC 470-20 Debt with Conversion and Other Options. The Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. The Company amortizes the respective debt discount over the term of the notes, using the straight-line method, which approximates the effective interest method. The Company records, when necessary, induced conversion expense, at the time of conversion for the difference between the reduced conversion price per share and the original conversion price per share.

Warrants

The Company accounts for common stock purchase warrants at fair value in accordance with ASC 815-40, Derivatives and Hedging. The Black-Scholes option pricing valuation method is used to determine fair value of these warrants consistent with ASC 718, Compensation – Stock Compensation. Use of this method requires that the Company make assumptions regarding stock value, dividend yields, expected term of the warrants and risk free interest rates.

Intangible Assets

On acquisition, intangible assets, other than goodwill, are initially recorded at their fair value. Following initial recognition, intangible assets with a finite life are amortized on a straight line basis over their useful life. Useful lives are assessed at year end.

The following useful lives are used in the calculation of amortization:

Brands		5 years
Customer relationships		5 years

Recent Accounting Pronouncements

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and other than the below, does not expect the future adoption of any such pronouncements to have a significant impact on its results of operations, financial condition or cash flow.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), requiring an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 will supersede nearly all existing revenue recognition guidance under U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers, deferring the effective date for ASU 2014-09 by one year, and thus, the new standard will be effective for us beginning on February 1, 2018 with early adoption permitted on or after February 1, 2017. This standard may be adopted using either the full or modified retrospective methods. Management of the Company is currently evaluating adoption methods and the impact of this standard on the consolidated financial statements.

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. Management of the Company does not expect the adoption of ASU 2014-15 to have a material impact on the consolidated financial statements.

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”). ASU 2015-17 simplifies the presentation of deferred income taxes by eliminating the separate classification of deferred income tax liabilities and assets into current and noncurrent amounts in the consolidated balance sheet statement of financial position. The amendments in the update require that all deferred tax liabilities and assets be classified as noncurrent in the consolidated balance sheet. The amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods therein and may be applied either prospectively or retrospectively to all periods presented. Early adoption is permitted. Management of the Company is currently evaluating adoption methods and the impact of this standard on the consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires lessees to recognize all leases with terms in excess of one year on their balance sheet as a right-of-use asset and a lease liability at the commencement date. The new standard also simplifies the accounting for sale and leaseback transactions. The amendments in this update are effective for annual periods beginning after December 15, 2018, and interim periods therein and must be adopted using a modified retrospective method for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. Management of the Company is currently evaluating adoption methods and the impact of this standard on the consolidated financial statements.

Results of Operations – Year ended December 31, 2015 compared to the year ended December 31, 2014.

Revenue

For the year ended December 31, 2015, the Company generated $1,163,096 in sales from E-liquid, vaporizers, E-cigarettes and accessories (“E-liquid”) as compared to $581,822 in sales for the year ended December 31, 2014. For the year ended December 31, 2014, the Company also generated consulting revenue of $26,213 (as discussed below) for total sales and revenues in the year ended December 31, 2014 of $608,035. For the year ended December 31, 2015, E-liquid sales of $1,163,096 was all generated in the United States. For the year ended December 31, 2014, E-liquid sales of $581,822 was generated in three geographic locations, $558,420 was generated in Europe, $11,953 was generated in Canada and the remaining $11,449 was generated in the United States.

The Company’s cost of goods sold for the year ended December 31, 2015 was $908,887 which represents E-liquid, bottles, hardware and related packaging as compared to $490,720 for the year ended December 31, 2014. Gross profit for the year ended December 31, 2015 was $254,209 as compared to $91,102 for the comparative period in 2014.

For the year ended December 31, 2015, the Company generated Nil in consulting services provided to clients in the tobacco industry as compared to $26,213 for the year ended December 31, 2014.

Operating Expenses

For the year ended December 31, 2015, the Company incurred an administrative expense of $1,983,144, consulting fees to related parties of $605,180, depreciation expense of $20,986, amortization expense of $25,632, bad debt expense of $20,370, loss on settlement of accounts receivable of $24,582, impairment of website expense of $73,325 and impairment of inventory expense of $75,964. Total operating expenses for the year ended December 31, 2015 were $2,829,153. For the year ended December 31, 2014, the Company incurred an administrative expense of $1,472,196, consulting fees to related parties of $628,956, depreciation expense of $2,783, amortization expense of $6,666, loss on sale of fixed asset of $654, bad debt expense of $27,731 and impairment of inventory expense of $101,458. Total operating expenses for the year ended December 31, 2014 were $2,240,444. Administrative costs were primarily comprised of rent, legal and audit fees, marketing fees, travel expenses, consulting fees and employee wages. The increase in administrative expenses of $510,918 is attributable to increased operations as a result of the acquired businesses during the period and the organic growth within the business. The decrease in consulting fees due to related parties of $23,776 is attributable to the effects of foreign exchange translation. Bad debt expense for the year ended December 31, 2015 relates to an allowance for uncollected receivables and the bad debt expense for the year ended December 31, 2014 relates to the write off of uncollectible receivables. The impairment of website and inventory recorded for the year ended December 31, 2015 and 2014 was due to website and inventory obsolescence.

Loss from Operations

For the year ended December 31, 2015, the Company incurred a loss from operations of $2,574,944 as compared to $2,123,129 for the year ended December 31, 2014 due to the reasons discussed above.

Other Expenses

For the year ended December 31, 2015, the Company incurred a foreign exchange gain of $155,519, amortization of debt discount of $239,330, loss on settlement of debt of $4,431 and interest expense of $385,151. For the year ended December 31, 2014, the Company incurred a foreign exchange loss of $43,010, amortization of debt discount of $715,314, loss on loan receivable of $65,850, gain on settlement of debt of $435, gain on deconsolidation of a subsidiary of $126,867 and interest expense of $276,389. For the year ended December 31, 2015, the Company incurred total other expenses of $473,393 as compared to $ 973,261 for the year ended December 31, 2014.

Net Loss and Comprehensive Loss

Net loss amounted to $3,048,337 for the year ended December 31, 2015 compared to a loss of $3,096,390 for the year ended December 31, 2014.

Comprehensive loss amounted to $2,820,698 for the year ended December 31, 2015 compared to a comprehensive loss of $3,009,240 for the year ended December 31, 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, Euros and Hungarian Forints to U.S. dollars.

Liquidity and Capital Resources

For the year ended December 31, 2015 compared to the year ended December 31, 2014

As at December 31, 2015, the Company had total assets of $2,231,055 (compared to total assets of $1,086,485 at December 31, 2014) consisting of cash and cash equivalents of $81,696, trade receivables of $45,534, inventory of $154,700, other current assets of $322,326, property and equipment of $150,349, website development of $9,083, intangibles of $215,283 and goodwill of $1,252,084. The increase in assets at December 31, 2015 from December 31, 2014, is primarily the result of the acquisitions of E Vapor Labs (see “Acquisition of E Vapor Labs”), VaporLiq and the assets of the Craft Vapes E-liquid brand (see “Acquisition of CV Brands”) and The Mad Alchemist E-liquid brand (see “Acquisition of TMA Brands”).

As at December 31, 2015, the Company had total liabilities of $5,000,695 (compared to total liabilities of $2,639,901 at December 31, 2014) consisting of accounts payable of $687,767, accrued liabilities of $251,517, accrued interest due to related parties of $131,755, customer deposits of $ 372,500, loans from shareholders of $27,528, due to related parties of $996,939, Promissory Notes of $495,193, amounts owing on acquisitions of $150,549, Convertible Debentures of $80,658, advances on Credit Facility of $212,415, long term loans from shareholders of $461,250, long term due to related parties of $662,140, long term amounts owing on acquisitions of $196,127, long term Promissory Notes of $267,857 and long term Convertible Debentures of $6,500.

At December 31, 2015, the Company had negative working capital of $2,802,565 and an accumulated deficit of $8,750,688.

As at December 31, 2014, the Company had total assets of $1,086,485 consisting of cash and cash equivalents of $496,724, trade receivables of $37,125, inventory of $78,901, other current assets of $378,548, 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, 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 due to related parties of $100,000 and long term 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 year ended December 31, 2015, the Company used cash of $890,890 (December 31, 2014: $1,315,018) 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 year ended December 31, 2015, net cash used in investing activities was $250,452 attributable to the addition of capital assets and the acquisitions of completed during the year ended December 31, 2015 (see “Acquisition of E Vapor Labs”, “Acquisition of CV Brands” and “Acquisition of TMA Brands”). For year ended December 31, 2014, net cash used in investing activates was $54,919 attributable to the disposal of capital assets and website development.

Net cash flow from financing activities

For the year ended December 31, 2015, net cash provided by financing activities was $632,286 compared to net cash provided by financing activities of $1,426,399 for the year ended December 31, 2014. Net cash provided by financing activities for the year ended December 31, 2015 was primarily attributable to the net proceeds from the sale of Convertible Debenture Units (see “Secured Note No.3” and “Convertible Debenture Units”), issuance of common stock, net proceeds advanced from related parties and the net repayments made on the Credit Facility (see “Credit Facility”).

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	$	22,942
Receivables		48,356
Other current assets		21,195
Inventory		122,309
Fixed assets		118,867
Unallocated purchase price		847,265
Total assets acquired	$	1,180,934

Liabilities assumed:
Accounts payable	$	206,252
Loan payable		25,000
Total liabilities assumed	$	231,252

Consideration:
Cash	$	225,000
Promissory Notes A, unsecured and non-interest bearing, due November 1, 2015		196,026
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	$	949,682

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 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 Shares 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.

As at December 31, 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 based on the Company’s estimate of cost of financing for comparable notes with similar term and risk profiles. Over the term of the respective Promissory Notes, interest will be accrued at 12% per annum to accrete the Promissory Notes to their respective principal amounts.

The Company is not able to complete the purchase price allocation as the Company has disputed the consideration amount and is currently undergoing negotiations (note 20).

The results of operations of E Vapor Labs have been included in the consolidated statements of operations from the acquisition date. The following table presents pro forma results of operations of the Company and E Vapor Labs as if the companies had been combined as of January 1, 2014. The pro forma condensed combined financial information is presented for informational purposes only. The unaudited pro forma results of operations are not necessarily indicative of results that would have occurred had the acquisition taken place at the beginning of the earliest period presented, or of future results.

	December 31, 2015			December 31, 2014
Pro forma revenue	$	1,679,867		$	2,937,623
Pro forma loss from operations	$	(2,738,649	)	$	(1,478,631	)
Pro forma net loss	$	(3,216,321	)	$	(2,451,892	)

Acquisition of CV Brands

On November 2, 2015, the Company closed the acquisition of all of the assets of 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 following summarizes the fair value of the assets acquired and the consideration transferred at the acquisition date:

Assets acquired:
Inventory	$	11,335
Equipment		11,872
Intangibles		63,000
Goodwill		87,000
Total assets acquired	$	173,207

Consideration:
Cash	$	23,207
1,000,000 Common Shares at $0.15 per share		150,000
Total consideration	$	173,207

In consideration for the acquisition, the Company issued 1,000,000 Common Shares of the Company valued at $0.15 per share, paid cash consideration of $23,207 and agreed to a quarterly earn-out based on the gross profit stream derived from product sales of the acquired brands. The earn-out commences on the closing date and pays up to a maximum of 25% of the gross profit stream.

Intangible assets consist primarily of customer relationships and brands. Brand intangibles represents the estimated fair value of the trade names acquired. Customer relationship intangibles relates to the ability to sell existing and future products to 901 Vaping’s existing and potential customers. The preliminary estimated useful life and fair values of the identifiable intangible assets are as follows:

	Estimated Useful Life (in years)		Amount
Brands		5	$	30,000
Customer relationships		5		33,000
			$	63,000

The results of operations of 901 Vaping have been included in the consolidated statements of operations from the acquisition date, though revenue and net income from 901 Vaping were not material for the year ended December 31, 2015. Pro forma results of operations have not been presented because the acquisition was not material to the results of operations.

Acquisition of TMA Brands

On December 2, 2015, the Company acquired all of the assets of TMA, an E-liquid manufacturer, including the assets, rights and title to own and operate The Mad Alchemist and Replicant E-liquid brands. The following summarizes the fair value of the assets acquired and the consideration transferred at the acquisition date:

Assets acquired:
Inventory	$	41,462
Equipment		36,579
Intangibles		157,000
Goodwill		208,376
Total assets acquired	$	443,417

Consideration:
819,672 Common Shares at $0.122 per share	$	100,000
Deferred payments		343,417
Total consideration	$	443,417

On the closing date, the Company issued 819,672 Common Shares valued at $0.122 per share for a total value of $100,000; agreed to pay a total of $400,000 in deferred payments, payable in ten (10) equal payments of $20,000 in cash and $20,000 in common stock every three (3) months following the closing date, and agreed to a quarterly earn-out based on the gross profit stream derived from product sales of the acquired brands. The earn-out commences on the closing date and pays up to a maximum of 25% of the gross profit stream. The number of Common Shares issuable will be calculated and priced using the weighted average closing market price of the Company, as quoted by the OTC Markets Group, for the five trading days prior to each issuance date. Further, a 12% discount rate has been used to calculate the present value of the deferred payments. Over the term of the respective deferred payments, interest will be accrued at 12% per annum to accrete the payments to their respective principal amounts.

Intangible assets consist primarily of customer relationships and brands. Brand intangibles represents the estimated fair value of the trade names acquired. Customer relationship intangibles relates to the ability to sell existing and future products to TMA’s existing and potential customers. The preliminary estimated useful life and fair values of the identifiable intangible assets are as follows:

	Estimated Useful Life (in years)		Amount
Brands		5	$	60,000
Customer relationships		5		97,000
			$	157,000

The results of operations of TMA have been included in the consolidated statements of operations from the acquisition date, though revenue and net income from TMA were not material for the year ended December 31, 2015. Pro forma results of operations have not been presented because the acquisition was not material to the results of operations.

Secured Note No.3

The Company accrued interest of $11,994 during the year ended December 31, 2015 (December 31, 2014: Nil) on the Secured Note No.3 which is included in accrued liabilities. On December 31, 2015, the Company fully settled the Secured Note No.3 and all accrued interest owing with the issuance of $227,000 of Convertible Debenture Units.

Convertible Debenture Units

On December 31, 2015, the Company issued 650 unsecured subordinated convertible debenture units (the “Convertible Debenture Units”) for proceeds of $650,000. Each Convertible Debenture Unit consisted of an unsecured subordinated convertible debenture having a principal amount of $1,000 (the “Convertible Debentures No.2”) and warrants exercisable for the purchase of 5,000 Common Shares of the Company (note 15). The Convertible Debentures No.2 mature on January 31, 2018 and bear interest at a rate of 8% per annum, which is payable quarterly in arrears. The Convertible Debentures No.2 are convertible into Common Shares of the Company at a fixed conversion rate of $0.10 per share at any time prior to the maturity date. The Company will have the option to force conversion of the Convertible Debentures No.2 at any time after six months from issuance and prior to the maturity date of January 31, 2018. Of the $650,000 Convertible Debentures No.2 issued, $276,000 were issued in settlement of loans from related parties (note 18), $10,000 were issued in settlement of related party consulting fees (note 18), $20,000 were issued in settlement of consulting fees owing to an unrelated party and $227,000 were issued in settlement of loans from shareholders.

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 thereon 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. The Credit Facility is secured by all of the Company’s inventory and accounts due relating to any inventory as granted in an intercreditor and subordination agreement by and among the Company, the Secured Note holder and the Lender to establish the relative rights and priorities of the secured parties against the Company and a security agreement by and between the Company and the Lender.

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 $89,590 (CAD $124,000) from the Credit Facility including $17,918 (CAD $24,800) of advances from the Company’s Chief Executive Officer and Chief Financial Officer as their participation in the Credit Facility.

On September 1, 2015, the Company was advanced $122,825 (CAD $170,000) from the Credit Facility including $24,565 (CAD $34,000) of advances from the Company’s Chief Executive Officer and Chief Financial Officer as their participation in the Credit Facility.

During the year ended December 31, 2015, the Company paid $30,670 (December 31, 2014: $25,363) of interest and standby fees as a result of the Credit Facility.

Satisfaction of Our Cash Obligations for the Next 12 Months

These consolidated 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 consolidated financial statements, at December 31, 2015, the Company has an accumulated deficit of $8,750,688 and a working capital deficiency of $2,802,565 as well as negative cash flows from operating activities of $890,890 for the year ended December 31, 2015. These conditions represent material uncertainty that cast significant doubts about the Company's ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon achieving a profitable level of operations or on the ability of the Company to obtain necessary financing to fund ongoing operations. Management believes that the Company will not be able to continue as a going concern for the next twelve months without additional financing or increased revenues.

To meet these objectives, the Company continues to seek other sources of financing in order to support existing operations and expand the range and scope of its business. However, there are no assurances that any such financing can be obtained on acceptable terms and in a timely manner, if at all. Failure to obtain the necessary working capital would have a material adverse effect on the business prospects and, depending upon the shortfall, the Company may have to curtail or cease its operations.

These consolidated 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.

Inflation

The Company does not believe that inflation has had a material effect on its business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, it may not be able to fully offset such higher costs through price increases. The Company’s inability or failure to do so could adversely affect our business, financial condition and results of operations.

Recent Accounting Pronouncements

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and 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.

Material Commitments

a)	Operating Lease

The future minimum payment under an operating lease for the use of a vehicle amounts to approximately CAD $799 per month. The lease expires on April 30, 2016. Minimum annual lease payments in CAD are as follows:

2016		$	3,196
		$	3,196

b)	Premises Lease

Effective January 1, 2015, a subsidiary of the Company entered into an operating lease agreement for a rental premises in Daytona Beach, Florida, USA. The terms of this agreement are to be for a period of 36 months and ending on December 31, 2017 with payments made monthly. Minimum annual lease payments are as follows:

2016	$	56,110
2017		56,110
	$	112,220

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.

d)	Employment Agreements

Pursuant to certain employment agreements with the Company’s management, the Company has agreed to pay termination amounts in the first year of up to twelve months of annual entitlements under such agreements, less any amounts paid during the first year, ending on December 1, 2016.

Financial Transactions