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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☑
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the
Fiscal Year Ended December 31, 2016
OR
☐
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.
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(Exact
name of registrant as specified in its charter)
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Nevada
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88-0335710
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(State
or Other Jurisdiction of Incorporation or
Organization)
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(I.R.S.
Employer Identification Number)
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475 Fentress Blvd., Unit L, Daytona Beach, Florida
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32114
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(Address
of Principal Executive Offices)
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(Zip
Code)
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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.
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☐
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Yes
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☑
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No
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Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
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☐
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Yes
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☑
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No
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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
☑ No ☐
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 ☑ No ☐
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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.☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller
reporting company.
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Large
accelerated filer
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Accelerated
filer
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☐
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Non-accelerated
filer
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☐
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Smaller
reporting company
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☑
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Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes
☐ No
☑
The
aggregate market value of the voting common stock held by
non-affiliates of the Registrant on June 30, 2016, was
approximately $15,554,722 based on the average bid and asked prices
on such date of $0.17. The registrant does not have any
non-voting equities.
The
Registrant had 116,655,636 shares of common stock (“Common
Shares” or “Common Stock”), $0.0002 par value per
share, outstanding on March 30, 2017.
TABLE OF CONTENTS
FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 2016
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Page
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Part I
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ITEM
1.
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Business.
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4
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ITEM
1A.
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Risk
Factors.
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15
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ITEM
1B.
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Unresolved
Staff Comments.
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25
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ITEM
2.
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Properties.
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25
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ITEM
3.
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Legal
Proceedings.
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25
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ITEM
4.
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Mine
Safety Disclosures.
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25
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Part II
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ITEM
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
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26
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ITEM
6.
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Selected
Financial Data.
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26
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ITEM
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operation.
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27
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ITEM
7A.
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Quantitative
and Qualitative Disclosures About Market Risk.
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41
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ITEM
8.
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Financial
Statements and Supplementary Data.
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F-1
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ITEM
9.
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure.
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42
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ITEM
9A.
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Controls
and Procedures.
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42
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ITEM
9B.
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Other
Information.
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43
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Part III
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ITEM
10.
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Directors,
Executive Officers and Corporate Governance.
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44
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ITEM
11.
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Executive
Compensation.
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48
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ITEM
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
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50
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ITEM
13.
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Certain
Relationships and Related Transactions, and Director
Independence.
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52
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ITEM
14.
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Principal
Accounting Fees and Services.
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59
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ITEM
15.
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Exhibits,
Financial Statement Schedules.
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59
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Signatures
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62
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2
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 United States Securities and Exchange
Commission (the "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.
3
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.
The Company’s registered address is 475 Fentress Blvd., Unit
L, Daytona Beach, Florida 32114.
BUSINESS OF ISSUER
The
current business of the Company consists of the manufacturing,
marketing and distribution of generic and premium branded e-liquid
(“E-liquid”), which is used in vaporizers, electronic
cigarettes (“E-cigarettes”), and other vaping hardware
and accessories. E-liquid is heated by an atomizer to deliver the
sensation of smoking (“vaping” or
“vaporizing”) and sometimes even mimic traditional
smoking implements, such as cigarettes or cigars, in their use
and/or appearance, without burning tobacco. When vaporized, some
E-liquids release nicotine, while others merely release flavored
vapor, which allows users to replicate the smoking experience,
nicotine free.
Gilla
aims to be a global leader in the manufacturing and distribution of
E-liquid for the vapor industry. The Company provides consumers
with choice and quality across categories and price points to
deliver the most efficient and effective vaping solutions for
nicotine. The Company has global sales across 25 countries and
currently has top recognized brands in countries such as Belgium,
the Netherlands and Denmark.
Gilla’s
proprietary product portfolio includes the following brands: Coil
Glaze™, Siren, The Drip Factory, Craft Vapes™, Craft
Clouds, Surf Sauce, Vinto Vape, VaporLiq, Vape Warriors,
Vapor’s Dozen, Miss Pennysworth’s Elixirs, The Mad
Alchemist™, Replicant, Enriched CBD and Crown
E-liquid™. The Company currently owns and markets 15 brands
which is comprised of over 125 proprietary flavors.
Gilla
has built a strong platform for growth through investing in or
acquiring in brands and distribution to consumers. Over the past
two years, 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 product portfolio to meet
consumer tastes, while maintaining a high degree of standards
across all of its operations.
Gilla Manufactures
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Gilla Markets
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Gilla Innovates
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Gilla Sells
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Gilla
owns proprietary manufacturing operations and a global distribution
platform to ensure the efficient, sustainable production and supply
of E-liquid. The Company strives to meet and exceed customer
expectations.
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The
Company invests in global marketing initiatives and targeted sales
programs to attract and inform consumers and to build its brands.
Gilla helps consumers make educated choices about E-liquid and
related vaping products.
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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.
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Everyone
at the Company understands the vapor industry and how they can
assist in building valuable relationships with customers and
consumers. Gilla is passionate about delivering unparalleled
customer service to extend the Company’s sales
reach.
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The Company’s Products
The
Company’s current products include generic and premium
branded E-liquid, the liquid used in vaporizers, E-cigarettes, and
other vaping hardware and accessories (the “Products”).
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.
4
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, if stipulated, a variable percentage of
pharmaceutical grade nicotine. The Company offers over 500 base
flavors of generic E-liquid and a portfolio of premium branded
E-liquid mixtures which are available in nicotine strengths ranging
from 0 mg/ml to 24 mg/ml 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. E-liquids are generally available in
nicotine strengths of 0 mg/ml, 1.5mg/ml, 3 mg/ml, 6 mg/ml, 12
mg/ml, 18 mg/ml and 24 mg/ml.
The
Company focuses purely on the development of proprietary E-liquid
Products. As such, the Company does not manufacture any vaping
hardware such as vaporizer modules, E-cigarettes or other vaping
accessories. Any hardware sold by the Company is manufactured and
supplied to the Company by third parties. The Company’s
E-liquid Products are generally compatible with any brand or type
of vaping hardware which continue to evolve rapidly.
Premium Brand Portfolio
The
Company’s diversified portfolio approach to manufacturing and
distributing E-liquid Products provides customers with the
flexibility to select from Gilla’s catalog of premium brands
to directly cater to unique consumer opportunities that exist in
the niche marketplaces in which the Company operates. This allows
the Company to allocate resources to its highest growth
opportunities on a global scale. Gilla’s portfolio of brands
offer 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
proprietary product portfolio includes the following brands: Coil
Glaze™, Siren, The Drip Factory, Craft Vapes™, Craft
Clouds, Surf Sauce, Vinto Vape, VaporLiq, Vape Warriors,
Vapor’s Dozen, Miss Pennysworth’s Elixirs, The Mad
Alchemist™, Replicant, Enriched CBD and Crown
E-liquid™. The Company currently owns and markets 15 brands
which is comprised of over 125 proprietary flavors.
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 in-house marketing and design
specialists develop and launch new attractive brands and product
offerings from the Company’s growing catalog of proprietary
flavor recipes. Innovative new packaging and marketing components
are also critical to Gilla’s ongoing customer and consumer
relations. Gilla’s in-house compliance specialists also
provide the Company with a first mover advantage to quickly respond
to and adapt to changing local regulations globally.
Manufacturing, Distribution, Principal Markets & Marketing
Methods
Manufacturing and Distribution Platform
The
Company maintains and operates its own manufacturing and
distribution platform, which operate from leased premises in the
United States (Daytona Beach, FL), Canada (Toronto, ON), Slovakia
(Nove Zamky) and Hungary (Budapest). Gilla’s international
logistics and supply chain management platform was developed by
replicating successful distribution and marketing models of
bottling and beverage companies, such as Coca Cola and Diageo, with
an ultimate focus on servicing global clients locally with strong
store level marketing support.
5
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
vaporizer modules in the industry has led to vape shops and other
retailers allocating more shelf space to E-liquid brands to satisfy
the demand for liquids to refill vaporizer tanks. 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 2025.
One of
the Company’s key strengths is its geographic reach. The
Company currently services 25 countries covering three continents.
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 new products, services and programs that will
assist the Company in cultivating long-term partnerships with its
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 a number of different E-liquid flavors and products.
Vape shops typically carry an assortment of both generic and
premium E-liquid products that are differentiated by price and
flavor complexity as well as an assortment of vaping
hardware.
Gilla
leverages strong store level marketing support of its E-liquid
Products such as targeted sales programs, promotions, best-in-class
point-of-sale marketing and other sales giveaways to both end
consumers and vape shop personnel to attract and incentivize vape
shops to carry the Products and further increase shelf space and
sell through. The Company focuses on servicing these vape shops
locally with industry-leading customer service and by partnering
with recognized distribution partners in those jurisdictions. These
initiatives have proven to be successful for Gilla as the Products
are available in vape stores internationally having top recognized
brands in multiple countries in Europe such as Belgium, the
Netherlands and Denmark.
Gaining
access to new vape shops and retail outlets is a distributor-driven
business. As such, Gilla partners with leading local distributors
which have access to retail networks and have existing
infrastructure to distribute the Products. In certain jurisdictions
across the EU, the Company has exclusive distribution partners of
its Products who are required to maintain and grow sales by a
pre-determined amount to maintain exclusivity. Assisting these
distributors with Gilla’s store level marketing has proven to
enhance sell-through and awareness.
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.
Gilla
aims to be a global leader in the manufacturing and distribution of
E-liquid for the vapor industry. The Company provides consumers
with choice and quality across categories and price points to
deliver the most efficient and effective vaping solutions for
nicotine. The Company has grown through investments in
manufacturing and distribution, E-liquid brands and acquisitions to
both broaden Gilla’s portfolio depth and geographical
footprint. Gilla’s business model targets the high growth
vaping industry to generate high margins returns on premium
E-liquid brands to yield positive results for its shareholders,
while creating value for its customers and consumers. The Company
seeks to leverage its existing infrastructure and industry know-how
to further its bespoke business model across different regulatory
jurisdictions and new environments.
6
The
Company is targeting new geographic regions such as Russia, the
Middle East and Asia by leveraging existing infrastructure and
underutilized capacity. Management also continues to evaluate new
verticals which may be applicable to the Company’s expertise
in the vape and vapor products industry, including but not limited
to the cannabis sector.
The
Company has developed a strong platform for growth based on the
following key elements:
●
Diversified Proprietary 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 25 countries
spanning three continents.
●
Efficient Supply and Procurement -
Gilla’s manufacturing facilities ensure efficient,
sustainable production and supply of E-liquid 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 are key to
driving growth.
1.
Focus
on core business
The
Company’s premium E-liquid Products can generate margins in
excess of 70%. A focus on driving recurring sales higher margin
Products contained within Gilla’s portfolio will improve
overall margins which can support a vast amount of the
Company’s operating and overhead costs allowing the Company
to enhance revenues and profitability.
2.
Expand
global reach
The
Company’s ability to innovate and launch new brands is a
competitive advantage. Gilla can leverage its existing
infrastructure and available manufacturing capacity to facilitate
growth in and to efficiently access new geographic regions such as
Russia, the Middle East and Asia.
3.
Bespoke
business model
The
Company currently operates in a regulated industry. Gilla can
leverage its proprietary know-how to further its bespoke business
model across different regulatory jurisdictions and new verticals
to introduce additional products to accelerate revenue growth and
margins.
4.
Pursue
strategic acquisition opportunities
The
Company is focused exclusively on E-liquids and vaping delivery
solutions. Gilla has a strong platform to enter new markets and
verticals through strategic acquisitions.
5.
Invest
in brand and marketing efforts
The
Company’s store level marketing strategy has proven to
enhance sell-through. Gilla’s continued focus on servicing
global clientele locally through best-in-class point-of-sale
marketing and targeted sales programs can enhance awareness and
demand for the Products.
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.
7
Employees
As at
the date of this Annual Report, the Company has eight (8) key
individuals engaged as consultants and twenty-one (21) 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. The
Company also retains reputable external legal advisors and
consultants with extensive knowledge of local laws and regulations.
These legal advisors and consultants work in jurisdictions that the
Company operates. The Company has no unionized
employees.
Being
in the growth-stage, the Company intends to increase (or decrease)
its number of employees 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. Generally, the
E-liquid niche of the vapor industry is extremely competitive with
low barriers to entry, however, recent regulatory requirements in
the United States and the European Union have created regulatory
hurdles and approvals for new entrants to those
markets.
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 or brands, 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) E-liquid and vaping companies, (ii) tobacco
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. 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 or E-cigarette excise taxes, higher
absolute prices and larger gaps between price categories, and
product regulation that diminishes the ability to differentiate
products or ability to market products in certain
jurisdictions.
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 launched 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, such as the Company,
to capture a larger share of the vaping market. The Company also
faces competition from smaller tobacco companies that are much
larger, well capitalized, and more established than the
Company.
The
Company faces direct competition from independent pure play
E-cigarette and vaping companies, including Vapor Corp., Vapor
Group, Inc., Electronic Cigarettes International Group Ltd., Vapor
Hub International Inc. and other private companies that currently
own, distribute and market competing products. The Company also
faces indirect competition from 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.
8
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 conducts
intellectual property surveillance of direct and indirect
competition as well as potential threats that would become the
Company’s competition. This surveillance addresses direct and
indirect competitors as well as threats that could be market
followers or intellectual property barriers for future
development.
Trademarks
The
Company owns trademarks on certain of its brands including: Coil
Glaze™, Craft Vapes™, The Mad Alchemist™ and
Crown E-liquid™. 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
its Products or vaporizers.
Trade Secrets
Certain
aspects of the business, which management considers extremely
valuable to the Company’s success and market leadership, have
been retained as “in house” trade secrets in an effort
to avoid public disclosure through the patent process. The decision
to protect these intellectual property or proprietary information
is primarily driven by the low profitability of being able to
detect or establish infringement of such intellectual
property.
Contractual Restrictions
The
Company seeks to avoid disclosure of its intellectual property and
proprietary information by requiring all employees as a condition
of employment to enter into non-disclosure, confidentially and
intellectual property assignment agreements. 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 the Company’s
proprietary information.
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-liquid, E-cigarettes, cigars,
cigarillos and pipes, as well as cartridges of nicotine solutions
and related vapor 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 the key regulatory matters generally
affecting the E-liquid and vaping products marketplace in the
United States, the European Union and Canada. This summary 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-liquid, E-cigarettes and other vaping
products 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-liquid, E-cigarettes and
other vaping products as “drugs” or
“devices” or a “combination product” under
the Federal Food, Drug and
Cosmetic Act unless marketed for therapeutic
purposes.
9
Since
the Company does not market its 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 may be 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
Products.
The FDA
had previously indicated that it intended to regulate E-cigarettes
under the Tobacco Control Act through the issuance of
“Deeming Regulations” that would include E-liquid,
E-cigarettes, and other vaping products (collectively,
“Deemed Tobacco Products”) under the Tobacco Control
Act and subject to the FDA’s jurisdiction.
On May
10, 2016, the FDA issued the “Deeming Regulations” (the
“Deeming Regulations”) which came into effect August 8,
2016. The Deeming Regulations amended the definition of
“tobacco products” to include E-liquid, E-cigarettes
and other vaping products. Deemed Tobacco Products include, but are
not limited to, E-liquids, atomizers, batteries, cartomizers,
clearomisers, tank systems, flavors, bottles that contain E-liquids
and programmable software. Beginning August 8, 2016, Deemed Tobacco
Products became subject to all FDA regulations applicable to
cigarettes, cigarette tobacco, and other tobacco products which
require:
●
a prohibition on
sales to those younger than 18 years of age and requirements for
verification by means of photographic identification;
●
health and
addictiveness warnings on product packages and in
advertisements;
●
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;
●
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;
●
ban on free
samples; and
●
childproof
packaging.
In
addition, the Deeming Regulations requires any Deemed Tobacco
Product that was not commercially marketed as of the
“grandfathering” date of February 15, 2007, to obtain
premarket approval before it can be marketed in the United States.
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
(“SE Exemption”) and receipt of an SE exemption
determination. The Company cannot predict if its Products, all of
which would be considered “non-grandfathered”, will
receive the required premarket approval from the FDA if the Company
were to undertake obtaining premarket approval though any of the
available pathways.
Since
there were virtually no E-liquid, E-cigarette or other vaping
products on the market as of February 15, 2007, there is no way to
utilize the less onerous SE or SE Exemption pathways that
traditional tobacco companies can utilize. In order to obtain
premarket approval, practically all E-liquid, E-cigarettes or other
vaping products would have to follow the PMTA pathway which would
cost hundreds of thousands of dollars per application. Furthermore,
the Deeming Regulations also effectively froze the U.S. market on
August 8, 2016 since any new E-liquid, E-cigarette or other vaping
product would be required to obtain an FDA marketing authorization
though one of the aforementioned pathways. Deemed Tobacco Products
that were on the market prior to August 8, 2016 were provided with
a two-year grace period where such products can continue to market
until the August 8, 2018 PMTA submission deadline. Upon submission
of a PMTA, products would then be given an additional twelve months
of market access pending the FDA’s review. Without obtaining
marketing authorization by the FDA prior to August 8, 2019, such
products would be required to be removed from the market until such
authorization could be obtained.
10
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-liquid, E-cigarettes and other vaping
products where traditional tobacco burning cigarettes cannot be
used and certain states have proposed legislation that would
categorize vaping products as tobacco products, equivalent to their
tobacco burning counterparts. If these bills become laws, vaping
products may lose their appeal as an alternative to traditional
cigarettes, which may have the effect of reducing the demand for
the Products.
The
Company may be required to discontinue, prohibit or suspend sales
of its Products in 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-liquid, E-cigarettes and 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 constituent
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.
11
If
E-liquid, E-cigarettes or other vaping products are subject to one
or more significant regulatory initiatives 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 issued the “New Tobacco
Product Directive” and is intended to regulate “tobacco
products”, including cigarettes, roll-your-own tobacco,
cigars and smokeless tobacco, and “electronic cigarettes and
herbal products for smoking”, including E-liquid,
E-cigarettes, refill containers, liquid holding tanks and E-liquid
bottles sold directly to consumers. The New Tobacco Product
Directive became effective May 20, 2016.
The New
Tobacco Product Directive introduces a number of new regulatory
requirements for E-liquid, E-cigarettes and other vaping products,
which includes the following: (i) restricts the amount of nicotine
that E-cigarettes and E-liquid can contain; (ii) requires E-liquid,
E-cigarettes and refill containers to be sold in child and
tamper-proof packaging and nicotine liquids to contain only
“ingredients of high purity”; (iii) provides that
E-liquid, E-cigarettes 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; (iv)
significantly restricts the advertising and promotion of E-liquid,
E-cigarettes and other vaping products; and (v) requires
E-cigarette, E-liquid and other vaping product manufacturers and
importers to notify EU Member States before placing new products on
the market and to report annually such to Member States (including
on their sales volumes, types of users and their
“preferences”). Failure to make annual reports to
Member State Competent Authorities or to properly notify prior to a
substantive change to an existing product or introduction of a new
product could result in the Company’s inability to market or
sell its Products and cause material adverse effect on the
Company’s business, results of operations and financial
condition.
The New
Tobacco Product Directive requires Member States to transpose into
law New Tobacco Product Directive provisions by May 20, 2016. An
“EU directive” requires Member States to achieve
particular results. However, it does not dictate the means by which
they do so. Its effect depends on how Member States transpose the
New Tobacco Product Directive into their national laws. Member
States may decide, for example, to introduce further rules
affecting E-liquid, E-cigarettes and other vaping products (for
example, age restrictions) provided that these are compatible with
the principles of free movement of goods in the Treaty on the
Functioning of the European Union. The Tobacco Product Directive
also includes provisions that allow Member States to ban specific
E-liquid, E-cigarettes and other vaping products or specific types
of E-liquid, E-cigarettes 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 three Member
States impose a ban and it is found to be duly justified, the
European Commission could implement an European Union wide ban.
Similarly, the New Tobacco Product Directive provides that Member
States may prohibit a certain category of tobacco, flavouring 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
are also other national laws in Member States regulating E-liquid,
E-cigarettes 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.
12
Since
no scientific evidence demonstrating safety, quality and efficacy
with respect to the intended purpose of E-liquid, E-cigarettes 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-liquid,
E-cigarettes and other vaping products that do not contain
nicotine. E-liquid, E-cigarettes 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-liquid, E-cigarettes and other vaping products.
However, there are vape shops operating throughout Canada selling
E-liquid, E-cigarettes and other vaping products containing
nicotine without any implications from Health Canada. E-liquid,
E-cigarettes 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-liquid, E-cigarettes and other
vaping products. The application of these federal laws to E-liquid,
E-cigarettes 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
The
Company is the resulting entity of a reverse merger on November 21,
2012 of a company engaged in the sale and distribution of
E-cigarettes and vaporizers. Prior to the reverse merger, the
Company was a mineral-property development company. On November 21,
2012, the reverse merger was completed and the principal business
of the Company was that of the sale and distribution E-cigarettes.
The current business of the Company consists of the manufacturing,
marketing and distribution of generic and premium branded E-liquid,
which is used in vaporizers, E-cigarettes, and other vaping
hardware and accessories.
The
Company has focused building a strong platform for growth though
investing in brands and distribution to consumers. Over the past
two years, the Company has developed and acquired manufacturing
operations, premium E-liquid brands and a global distribution
platform.
Acquisition of E-liquid Manufacturing Business
On July
1, 2015, the Company closed the acquisition of all the issued and
outstanding shares of E Vapor Labs Inc. (“E Vapor
Labs”), a Florida based E-liquid manufacturer. Pursuant to a
share purchase agreement, dated June 25, 2015, the Company acquired
E Vapor Labs for a total purchase price of $1,125,000 payable to
the vendors of E Vapor Labs on the following basis: (i) $225,000 in
cash on closing; and (ii) $900,000 in promissory notes issued on
closing. The promissory notes were issued in three equal tranches
of $300,000 due four (4), nine (9) and eighteen (18) months
respectfully from closing. The promissory notes were all unsecured,
non-interest bearing, and on each respective maturity date for each
of the three tranches of promissory notes issued, at the option of
the vendors, up to one-third of each tranche of the promissory
notes could be repaid in Common Shares of the Company, calculated
using the five day weighted average closing market price prior to
the maturity of the promissory notes. The promissory notes were all
subject to adjustments as outlined in the share purchase
agreement.
The
acquisition of E Vapor Labs provided the Company with its own
E-liquid manufacturing platform located in the United States. The
scalability of this manufacturing facility provided the Company
with an opportunity to continue to manufacture and distribute
private-label products for E Vapor Labs’ existing clientele
while at the same time providing the Company with the required
infrastructure to aggressively pursue a consolidation strategy of
the highly-fragmented E-liquid industry to build the
Company’s global E-liquid portfolio and manufacture such
Products in house.
13
Acquisition of an Online E-liquid Retailer
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 online retailer. Pursuant to a share purchase agreement,
dated July 14, 2015, the Company acquired VaporLiq for a total
purchase price of $126,975 payable to the vendors of VaporLiq on
the following basis: (i) 500,000 Common Shares of the Company
valued at $0.17 per Common Share for a total value of $85,000; and
(ii) 500,000 Common Share purchase warrants with a deemed value of
$41,975, which were exercisable to acquire 500,000 Common Shares at
an exercise price of $0.20 for a period of 18 months from the date
of issuance.
The
acquisition of VaporLiq provided the Company with a recognized
online brand in the industry and access to VaporLiq’s
existing customer base and business relationships.
Acquisitions of Premium E-liquid Brands
Craft Vapes Brands
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 “Craft Vapes
Brands”). Pursuant to an asset purchase agreement, dated
October 21, 2015, the Company purchased the assets of 901 Vaping
for a total purchase price of $173,207 which included the
following: (i) the issuance of 1,000,000 Common Shares of the
Company valued at $0.15 per Common Share for an aggregate value of
$150,000; (ii) cash consideration equal to 901 Vaping’s
inventory and equipment of $23,207; and (iii) a quarterly-earn out
based on the gross profit stream derived from product sales of the
Craft Vapes 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.
The Mad Alchemist Brands
On
December 2, 2015, the Company acquired all of the assets of The Mad
Alchemist, LLC (“TMA”), an E-liquid manufacturer,
including the assets, rights and title to own and operate The Mad
Alchemist and Replicant E-liquid brands (the “The Mad
Alchemist Brands”). Pursuant to an asset purchase agreement
(the “TMA Asset Purchase Agreement”), dated November
30, 2015, the Company purchased the assets of TMA for a total
purchase price of $500,000 which included the following: (i) the
issuance of 819,672 Common Shares of the Company valued at $0.122
per Common Share for an aggregate 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) a quarterly-earn out based on the gross
profit stream derived from product sales of The Mad Alchemist
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
April 15, 2016, the Company entered into a settlement agreement
(the “TMA Settlement Agreement”) with TMA and the
vendors of TMA (collectively, the “TMA Vendors”).
Subject to the terms and conditions of the TMA Settlement
Agreement, the parties settled (i) any and all compensation and
expenses owing by the Company to the TMA Vendors and (ii) the
$400,000 in remaining cash payable by the Company to the TMA
Vendors pursuant to the TMA Asset Purchase Agreement in exchange
for the Company paying to the TMA Vendors a total settlement
consideration of $133,163 payable as $100,000 in cash and $33,163
in the Company’s assets as a payment-in-kind. Of the $100,000
payable in cash under the TMA Settlement Agreement, $45,000 was
paid upon signing of the settlement, $27,500 was payable thirty
days following signing of the settlement and the remaining $27,500
was payable at the later of (i) sixty days following the signing of
the TMA Settlement Agreement or (ii) the completion of the
historical audit of TMA. In addition, Company and the TMA Vendors
mutually terminated all employment agreements between the Company
and the TMA Vendors, entered into on closing of the TMA Asset
Purchase Agreement, and all amounts were fully settled pursuant to
the TMA Settlement Agreement.
The
acquisitions of the Craft Vapes Brands and The Mad Alchemist Brands
provided the Company with the ability to quickly expand its Product
portfolio with internationally recognized E-liquid brands while
gaining access to new personal and know-how to further grow the
business organically and expand into key targeted international
markets.
14
International Growth and Expansion
In
January of 2016, the Company furthered its international growth and
expansion by establishing a wholly-owned subsidiary in Hungary and
hiring a leading E-cigarette sales, distribution and customer
service management team based in Budapest, Hungary. The move
allowed the Company to immediately gain access to a leading
distribution and customer service platform accessing over 25
countries.
ITEM 1A. RISK FACTORS.
In
addition to other information in this Annual Report, the following
risk factors should be carefully considered in evaluating the
Registrant’s business because such factors may have a
significant impact on the business, operating results, liquidity
and financial condition. The materialization of any of the risks
set forth below would mean that the Registrant’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, or that are
currently considered to be immaterial, may impact the business,
operating results, liquidity and financial condition. If any of
such risks occur, the business, operating results, liquidity and
financial condition could be materially affected in an adverse
manner. Under such circumstances, the trading price of the
Registrant’s securities could decline, and investors may lose
all or part of their investment.
Risks Related to the Company’s Business
The Company’s auditors have issued an opinion expressing
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 Corporation’s auditors issued an opinion
in their audit report dated March 31, 2017 expressing uncertainty
about the Company’s ability to continue as a going concern.
This means there exists 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.
The market for E-liquid and other vaping products is a niche market
and 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.
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 global market entrants. The Company’s
future sales and any future profits are substantially dependent
upon the widespread acceptance and use of vaping products. Rapid
growth in the use of, and interest in, E-liquid and other vaping
products 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 and other vaping
products, in general or, specifically the 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 and other
vaping products.
Furthermore,
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 vaping products represent only a small portion of the
industry. There can be no assurance that E-liquid and other vaping
products become widely adopted, or the market for vaping products
develop as the Company expects. If the market for E-liquid and
other vaping products develops more slowly, or differently than
expected, the business, growth prospects and financial condition of
the Company would be adversely affected.
15
The Company must comply with regulations imposed by government
authorities and may be required to obtain the approval of various
government agencies to market the Products.
The
Products are subject to regulation by governmental authorities in
certain jurisdictions. The Company must comply with such
regulations, as applicable, in the relevant jurisdictions where the
Company offers and sells the Products. Achievement of the
Company’s business objectives are contingent, in part, upon
compliance with necessary and applicable regulatory requirements
enacted by these governmental authorities and obtaining all
regulatory approvals necessary. The Company cannot predict the time
required to secure all appropriate regulatory approvals. These
approvals could require significant time and resources from the
Company’s technical staff, and, if revisions are necessary,
could result in a delay in the introduction of the 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 the
Products. Any delays in obtaining, or failure to obtain regulatory
approvals would significantly delay the development of the
Company’s plans and could have a material adverse effect on
the business, results of operations and financial condition of the
Company.
The regulation of tobacco products by the FDA in the United States
and the issuance of Deeming Regulations may materially adversely
affect the Company.
The
Deeming Regulations issued by the FDA require any Deemed Tobacco
Products, which include E-liquid and other vaping products, that
were not commercially marketed as of the grandfathering date of
February 15, 2007, to obtain premarket approval by the FDA before
any new E-liquid or other vaping products can be marketed in the
United States. However, any Deemed Tobacco Products that were on
the market in the United States prior to August 8, 2016 have a
two-year grace period, ending August 8, 2018, during which a
premarket application though the PMTA pathway must be completed and
filed. Upon submission of a PMTA, products would then be given an
additional twelve months of market access pending the FDA’s
review. Without obtaining marketing authorization by the FDA prior
to August 8, 2019, such products would be required to be removed
from the market until such authorization could be obtained. Failure
to complete the required premarket application, an endeavor that
would be extremely time consuming and financially costly, could
prevent the Company from marketing and selling the Products in the
United States and, thus, may have a material effect on the
business, financial condition and results of operations. Further,
there can be no guarantee that if the Company were to complete a
premarket application for each of the Products, that any of such
applications would be approved by the FDA.
The Company may experience intense competition in the E-liquid and
vapor products industry which it currently operates.
The
Company may face intense competition from other companies, some of
which can be expected to have longer operating histories and more
financial resources, market penetration and experience than the
Company. Increased competition by larger and better financed
competitors could materially and adversely affect the business,
financial condition and results of operation of the
Company.
Because
the E-liquid and vapor products industry has relatively low
barriers to entry, the Company expects to face additional
competition from new entrants. To become and remain competitive,
the Company will require research and development, marketing, sales
and support. The Company may not have sufficient resources to
maintain research and development, marketing, sales and support
efforts on a competitive basis which could materially and adversely
affect the business, financial condition and results of operations
of the Company.
The Products contain nicotine which is highly addictive and use of
E-liquid and other vaping products may pose a health risk to
users.
Certain
of the Products contain nicotine which is considered to be a highly
addictive substance. According to the FDA, E-liquid and other
vaping products may contain other ingredients known to be toxic to
humans. Additionally, vaping products may be more attractive to
young individuals as a smoking alternative, perceived to be less
damaging to one’s health than traditional cigarettes. The FDA
or any other state or federal government agency could ban certain
ingredients and/or force reformulations of certain Products for the
purposes of protecting the public’s general health. There
have been instances of vaping devices exploding during charging.
Such instances can cause bodily harm and could jeopardize consumer
sentiment. Any one or all of these considerations in tandem could
have a negative impact on the Company’s ability to
effectively market and sell the Products and could result in a
material adverse effect on the Company’s financial condition
and results of operations.
16
The rapid development of the vaping industry has not provided
sufficient time for the medical profession to study the health
effects of using vaping products.
The
rapid development of vaping products has not provided sufficient
time for the medical profession to study the long-term health
effects of using such products. Therefore, it is uncertain as to
whether or not E-liquid and other vaping products are safe for
their intended use. If the medical profession were to determine
conclusively that using E-liquid and other vaping products posed a
significant threat to long-term human health, consumption could
decline rapidly and the Company may be forced to modify certain of
the Products. Such an outcome may have material adverse effect on
the Company’s financial condition and results of
operations.
If the Company’s transfer pricing policies get challenged,
the Company’s income tax expense may be adversely affected
which may have a significant impact on the Company’s future
earnings and future cash flows.
The
Company conducts its business operations in various jurisdictions
and through separate legal entities within such jurisdictions. The
Compay and certain of its subsidiaries provide products and
services to, and may from time to time undertake certain
significant transactions with, other currently existing or new
subsidiaries in different jurisdictions. The tax laws of these
jurisdictions, have detailed transfer pricing rules which require
that all transactions with non-resident related parties be priced
using arm’s length pricing principles and that
contemporaneous documentation must exist to support such pricing.
The taxation authorities in the jurisdictions where the Company
carries on business could challenge its arm’s length related
party transfer pricing policies. International transfer pricing is
a subjective area of taxation and generally involves a significant
degree of judgment. If any of these taxation authorities are
successful in challenging the Company’s transfer pricing
policies, its income tax expense may be adversely affected and the
Company could also be subjected to interest and penalty charges.
Any such increase in its income tax expense and related interest
and penalties could have a significant impact on the
Company’s future earnings and future cash flows.
17
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 Company is dependent on its management team to operate the
business who has no prior experience in the tobacco
industry.
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 be dependent 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 its existing customers.
18
Furthermore,
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, product packaging 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 Company may be subject to litigation in the ordinary course of
business. Furthermore, warranty claims, product liability claims
and product recalls could harm the business, results of operations
and financial condition.
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.
Furthermore,
the Company is inherently exposed to potential warranty and product
liability claims, in the event that the Products fail to perform as
expected or such failure of the 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 the 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 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 the Products and
its 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
primary business.
Any one
or more of the foregoing could have a material adverse effect on
the business, results of operations and financial
condition.
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. In July of
2016, the Company filed its Answer, Affirmative Defences and
Counterclaim. There can be no assurance that the outcome of this
complaint would not have a material adverse effect on the business,
results of operations and financial condition. The legal proceeding
has been brought in Circuit Court of the Thirteenth Judicial
Circuit in and for Hillsborough County, State of Florida, Civil
Division under the following caption: Yaron Elkayam, Pinchas
Mamane, Levent Dikmen, Plaintiffs, v. Gilla, Inc., Case No.
16-CA-0047, Division H, filed January 5, 2016.
The Company is substantially dependent on third party suppliers to
sustain operations.
The
Company is substantially dependent on third-party suppliers. The
Company depends on the ability of its suppliers to deliver raw
materials on a timely basis, in adequate quantities, at a
consistent quality and at a reasonable cost in order to meet
operational needs. Changes in business conditions, wars,
governmental changes and other factors beyond the Company’s
control which are not presently anticipated, could affect the
ability of a supplier to meet the Company’s needs.
Furthermore, if the Company experiences significant growth and
demand for the Products, there can be no assurance that the
additional supply of raw materials will be available in a timely
manner. Loss of any of the Company’s suppliers, or the
disruption in the supply of raw materials, could have a material
adverse effect on the business and on existing relationships with
the Company’s customers.
19
The Corporation may be affected if the Products are taxed like
other tobacco products or the Company is required to collect and
remit sales tax on certain of its sales.
Presently,
the Products are not taxed like cigarettes or other tobacco
products in the jurisdictions which the Company operates.
Cigarettes and other tobacco products have generally faced
significant increases in the amount of taxes collected on the sale
of their products. Should any state or federal government or taxing
authority in the jurisdictions which the Company operates 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 its Products. Moreover, the
Company may be unable to establish the systems and processes needed
to track and submit the taxes collected, which would limit the
Company’s ability to market the Products and operate
efficiently which could have a material adverse effect on the
Company’s business, results of operations and financial
condition.
The Company competes with importers, distributors and/or
manufacturers who may not comply with government
regulations.
The
Company faces competition from importers, distributors and/or
manufacturers who may illegally ship their products into the
jurisdictions which the Company operates including the United
States, the European Union and Canada. 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 the 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 financial
condition.
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 as a result
of many regulatory restrictions, increased awareness in smoking
cessation and a general decline in social acceptability of smoking.
Although the E-liquid and vapor products 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 Corporation does not own any patents and intellectual property
rights.
The
Company does not own any patents or proprietary rights to any
vaping hardware which must be used in combination with the
Products. Competitors offering similar products to the Company, may
own such patents or proprietary rights and may disturb the market
which could have a material adverse effect on the business, results
of operations and financial condition.
The Company may be subject to intellectual property infringement
claims.
The
Company’s commercial success and value depends, in part, upon
the Company not infringing the intellectual property rights of
others. A number of the Company’s competitors, and its third
parties, may have issued or pending patents or trademarks, and may
obtain additional patents, trademarks and proprietary rights for
technologies and branding similar to those used by the Company in
the Products. Some of these patents or trademarks may grant very
broad protection to the owners of such intellectual property. The
Company cannot determine with certainty whether any issued patents,
trademarks, or the issuance of any intellectual property rights,
would require the Company to obtain licenses or cease certain
activities. The Company may become subject to claims by other
parties that its Products infringe their intellectual property
rights due to the growth of Products in the Company’s target
markets, the overlap in functionality of these products and the
prevalence of these products.
20
The Company may become dependent on foreign sales to maintain
operations.
If the
FDA, Health Canada or any other state or federal government agency
restricts or prohibits the sale of E-liquid and other vaping
products in the U.S. or Canada, in part or in whole, the
Company’s ability to maintain operations will become
dependent on the ability to successfully market the Products and
brands in foreign jurisdictions where the 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 and other vaping products 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 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 vaping products,
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.
The
Company’s global business operates in U.S. Dollars, Canadian
Dollars, Euros, British Pounds and Hungarian Forint. The
Company’s functional and reporting currency is the U.S.
Dollar. Accordingly, the revenues and expenses of operating under
another currency other than U.S. Dollars will be translated at
average rates of exchange in effect during the applicable reporting
period. Assets and liabilities will be translated at the exchange
rates in effect at the balance sheet date. As a result, the
Company’s consolidated financial position is subject to
foreign currency fluctuation risk, which could materially adversely
impact its operating results and cash flows. Although the Company
may enter into currency hedging arrangements in respect of its
foreign currency cash flows, there can be no assurance that the
Company will do so, or if they do, that the full amount of the
foreign currency exposure will be hedged at any time.
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 their 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 their investment, and should the
investor therefore wish to transfer the Common Shares owned by
them, they may find that there is only a limited or no ability to
transfer or market the Common Shares. Accordingly, purchasers of
Common Shares 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.
21
Of the
currently issued and outstanding Common Shares of the Company,
approximately 25,157,274 Common Shares (approximately 21.57% of the
total number of Common 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
Shares.
The
majority of the Company’s authorized but unissued Common
Shares remains unissued. The Board of Directors has authority to
issue such unissued Common Shares without the consent or vote of
the stockholders of the Company. The issuance of these Common
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 Shares 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 the 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
pre-emption 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 its business and operations. Additionally,
if the Corporation 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
of its Common Share shareholders of record on February 4, 2008 in
the amount of $0.035 per share, 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 Common Shares will be listed for trading on a recognized
exchange. Therefore, investors may be unable to liquidate their
investments.
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 Common Shares and there is
currently no market for the Company’s securities. Even if the
Company is ultimately approved for trading on a recognized
exchange, there can be no assurance as the prices at which the
Common Shares will trade if a trading market develops, of which
there can be no assurance. Until an orderly market develops, if
ever, in the Common Shares, there can be no assurance that
investors will be able to liquidate their investments.
The Common Shares are illiquid and may in the future be subject to
price volatility unrelated to the Company’s
operations.
22
The
Common Shares have no market price and, if and when a market price
is established, could fluctuate substantially due to a variety of
factors, including but not limited to market perception of the
Company’s ability to achieve planned growth, quarterly
operating results of other companies in the same industry, trading
volume in the Common Shares, changes in general conditions in the
economy and the financial markets or other developments affecting
the Company or its competitors. 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 Common Shares.
Sales of substantial amounts of Common Shares, or the perception
that such sales could occur, could adversely affect the market
price of the Common Shares (if and when a market price is
established) and could impair the Company’s ability to raise
capital through the sale of 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
securities.
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 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:
23
●
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 will need to increase the size of its organization, and
may experience difficulties in managing growth.
The
Company currently has eight (8) key individuals engaged as
consultants and twenty-one (21) 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.
24
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 entered into a lease agreement for office space in
Budapest, Hungary for a period of one year ending on July 8, 2017,
with payments made monthly. The Company also occupies office space
in Toronto, Canada 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. In July of
2016, the Company filed its Answer, Affirmative Defences and
Counterclaim. There can be no assurance that the outcome of this
complaint would not have a material adverse effect on the business,
results of operations and financial condition. The legal proceeding
has been brought in Circuit Court of the Thirteenth Judicial
Circuit in and for Hillsborough County, State of Florida, Civil
Division under the following caption: Yaron Elkayam, Pinchas
Mamane, Levent Dikmen, Plaintiffs, v. Gilla, Inc., Case No.
16-CA-0047, Division H, filed January 5, 2016.
ITEM 4. MINE SAFETY DISCLOSURES.
Not
applicable.
25
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 quoted on the OTC QB under the
symbol “GLLA”. The following table sets forth for the
periods indicated the range of high and low closing price 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 Company's Common Shares has been sporadic and
there have been long periods during which there were few, if any,
transactions in the Common Shares 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 Shares.
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
|
2016
|
HIGH
|
LOW
|
First
Quarter
|
$0.20
|
$0.09
|
Second
Quarter
|
$0.20
|
$0.13
|
Third
Quarter
|
$0.21
|
$0.13
|
Fourth
Quarter
|
$0.15
|
$0.07
|
On
December 31, 2016, the closing price of the Company’s Common
Shares as reported on the OTC QB was $0.15 per share. On December
31, 2016, the Company had in excess of 448 beneficial shareholders
of Common Shares and 100,753,638 Common Shares issued and
outstanding.
DIVIDENDS
On
January 17, 2008, the Board of Directors declared a cash dividend
to its Common Share shareholders of record on February 4, 2008 in
the amount of $0.035 per share, 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 Annual Report, the Company 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.
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,
|
|
|
2016
|
2015
|
Revenues
|
$4,550,793
|
$1,163,096
|
|
|
|
Net
Loss
|
$(4,500,206)
|
$(3,048,337)
|
|
|
|
Earnings (Loss) Per
Share
|
$(0.04)
|
$(0.03)
|
|
|
|
Total
assets
|
$2,422,954
|
$2,231,055
|
|
|
|
Total
liabilities
|
$8,113,864
|
$5,000,695
|
26
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, 2016. 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
Gilla
Inc. was incorporated under the laws of the State of Nevada on
March 28, 1995 under the name of Truco, Inc. The Company later
changed its name to Web Tech, Inc., and then to Cynergy, Inc.,
Mercantile Factoring Credit Online Corp., Incitations, Inc., Osprey
Gold Corp. and to its present name. The Company adopted the present
name, Gilla Inc., on February 27, 2007. The Company’s
registered address is 475 Fentress Blvd., Unit L, Daytona Beach,
Florida 32114.
The
current business of the Company consists of the manufacturing,
marketing and distribution of generic and premium branded E-liquid,
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 and sometimes even mimic
traditional smoking implements, such as cigarettes or cigars, in
their use and/or appearance, but do not burn tobacco. The Company
provides consumers with choice and quality across various
categories and price points to deliver the most efficient and
effective vaping solutions for nicotine related products.
Gilla’s proprietary product portfolio includes the following
brands: Coil Glaze™, Siren, The Drip Factory, Craft
Vapes™, Craft Clouds, Surf Sauce, Vinto Vape, VaporLiq, Vape
Warriors, Vapor’s Dozen, Miss Pennysworth’s Elixirs,
The Mad Alchemist™, Replicant, Enriched CBD and Crown
E-liquid™.
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
subsidiaries Gilla Europe Kft. and Gilla Operations Europe s.r.o.;
Gilla Operations Worldwide Limited (“Gilla Worldwide”);
Gilla Franchises, LLC and its wholly owned subsidiary Legion of
Vape, LLC; and Snoke Distribution Canada Ltd. and its wholly owned
subsidiary Snoke Distribution USA, LLC. All inter-company accounts
and transactions have been eliminated in preparing these
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 and Slovakian subsidiaries
maintain their books and records in Euros (EUR) which is also their
functional currency. The Company’s Hungarian subsidiary
maintains its books and records in 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 Financial
Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) No. 830, Foreign Currency Matters (“ASC
830”). 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 foreign 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, as at the date of these consolidated financial statements,
entered into derivative instruments to offset the impact of foreign
currency fluctuations.
27
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 ASC No. 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, 2016 and 2015 that have been
included in the diluted loss per share calculation as the effects
would have been anti-dilutive.
Cash and Cash Equivalents
The
Company considers all highly liquid investments with original
maturities of three months or less to be cash
equivalents.
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 deposits,
promissory notes, convertible debentures, loans from shareholders,
amounts owing on acquisitions, credit facility and term loan. 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 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.
Advertising Costs
In
accordance with ASC No. 720, Other
Expenses (“ASC 720”), the Company expenses the
production costs of advertising the first time the advertising
takes place. The Company expenses all advertising costs as
incurred. During the years ended December 31, 2016 and 2015, the
Company expensed $nil (December 31, 2015: $90,800) in production
costs. During the year ended December 31, 2016, the Company
expensed $315,174 (December 31, 2015: $159,125) as corporate
promotions, these amounts have been recorded as administrative
expense.
28
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. 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.
Property and Equipment
Property
and Equipment are measured at cost less accumulated depreciation
and accumulated impairment losses. Costs include expenditures that
are directly attributable to the acquisition of the asset. Gains
and losses on disposal of an item of property and equipment are
determined by comparing the proceeds from disposal with the
carrying amount of property and equipment, and are recognized in
the statement of operations.
Depreciation
is recognized in the statement of operations on a straight-line
basis over the estimated useful lives of each part of an item of
property and equipment, since this most closely reflects the
expected pattern of consumption of the future economic benefits
embodied in the asset.
The
estimated useful lives of the respective assets are as
follows:
Furniture
and equipment:
|
3
years
|
Computer
hardware:
|
3
years
|
Manufacturing
equipment:
|
3
years
|
Depreciation
methods, useful lives and residual values are reviewed at each
financial year-end and adjusted if appropriate.
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 the Company’s 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.
Shipping and Handling Costs
The
Company does not record shipping income. When the Company charges
its customers, a cost associated with shipping and handling it
records that cost in administrative expenses as an offset to the
Company’s shipping expense.
29
Income Taxes
The
Company follows ASC No. 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 consolidated financial
statements 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.
Impairment of Long Lived Assets
Long-lived
assets to be held and used by the Company are periodically reviewed
to determine whether any events or changes in circumstances
indicate that the carrying amount of the asset may not be
recoverable. For long-lived assets to be held and used, the Company
bases its evaluation on impairment indicators such as the nature of
the assets, the future economic benefit of the assets, any
historical or future profitability measurements, as well as other
external market conditions or factors that may be present. In the
event that facts and circumstances indicate that the carrying
amount of an asset or asset group may not be recoverable and an
estimate of future undiscounted cash flows is less than the
carrying amount of the asset, an impairment loss will be recognized
for the difference between the carrying value and the fair
value.
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 No. 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.
Comprehensive Income or Loss
The
Company reports comprehensive income or loss in its consolidated
financial statements. In addition to items included in net income
or loss, comprehensive income or loss includes items charged or
credited directly to stockholders’ equity, such as foreign
currency translation adjustments and unrealized gains or losses on
available for sale marketable securities.
Use of Estimates
The
preparation of consolidated 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 the Company’s estimates could be affected by
external conditions, including those unique to the Company’s
industry and general economic conditions. It is possible that these
external factors could have an effect on the Company’s
estimates that could cause actual results to differ from its
estimates. The Company re-evaluates all of its accounting estimates
at least quarterly based on the conditions and records adjustments
when necessary.
30
Website Development Costs
Under
the provisions of ASC No. 350, Intangibles – Goodwill and Other
(“ASC 350”), the Company capitalizes costs incurred in
the website application and infrastructure development stage.
Capitalized costs are amortized over the estimated useful life of
the website which the Company considers to be five years. Ongoing
website post-implementation cost of operations, including training
and application, will be expensed as incurred.
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 No.
470-20, Debt with Conversion and
Other Options (“ASC 470-20”). 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 No. 815-40, Derivatives and Hedging (“ASC
815-40”). The Black-Scholes option pricing valuation method
is used to determine fair value of these warrants consistent with
ASC No. 718, Compensation –
Stock Compensation (“ASC 718”). 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.
Stock Issued in Exchange for Services
The
valuation of the Company’s common stock issued in exchange
for services is valued at an estimated fair market value as
determined by the most readily determinable value of either the
stock or services exchanged.
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
|
Results of Operations – Year ended December 31, 2016 compared
to the year ended December 31, 2015.
Revenue
For the
year ended December 31, 2016, the Company generated $4,550,793 in
sales from E-liquid, vaporizers, E-cigarettes and accessories as
compared to $1,163,096 in sales for the year ended December 31,
2015. During the year ended December 31, 2016, the Company focused
on building its international sales having recently developed and
acquired manufacturing operations, premium E-liquid brands and a
global distribution platform. Of the $4,550,793 in revenue
generated for the year ended December 31, 2016, $2,596,172 (57% of
total sales) was generated in the United States, $1,904,889 (42% of
total sales) was generated in Europe and $49,732 (1% of total
sales) was generated in Canada, a result of internationally
recognized brands contained within the Company’s E-liquid
product portfolio. For the year ended December 31, 2015, all of the
Company sales focused in the United States.
31
The
Company’s cost of goods sold for the year ended December 31,
2016 was $1,927,657 which represents E-liquid, bottles, hardware
and related packaging as compared to $908,887 for the year ended
December 31, 2015. Gross profit for the year ended December 31,
2016 was $2,623,136 with margins of 58% as compared to a gross
profit of $254,209 and margins of 22% for the comparative period in
2015. The Company’s increased margins during the comparative
period were the result of increased sales of high margin premium
E-liquid products compared to lower margin sales of generic
E-liquid and private-label sales.
Operating Expenses
For the
year ended December 31, 2016, the Company incurred an
administrative expense of $5,305,326, consulting fees to related
parties of $473,149, depreciation expense of $56,055, amortization
expense of $94,000, bad debt expense of $256,280, impairment of
fixed asset expense of $70,142, impairment of inventory expense of
$39,124, impairment of intangible asset expense of $122,983,
impairment of goodwill expense of $208,376, gain on related party
settlement of $9,263, loss on issuance of Common Shares of $28,426
and a gain on settlement of $274,052. Total operating expenses for
the year ended December 31, 2016 was $6,370,547. 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.
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 $3,322,212 is
attributable to increased operations of the Company due to
significant growth between the comparative periods as a result of
the acquisitions completed during fiscal 2015 and organic growth.
The decrease in consulting fees due to related parties of $132,031
is attributable to the effects of foreign exchange translation. Bad
debt expense for the year ended December 31, 2016 relates to the
write off of uncollectible receivables whereas bad debt expense for
the year ended December 31, 2015 relates to an allowance for
uncollected receivables. The impairment of fixed assets of $70,142
during the year ended December 31, 2016 is the result of a write
off of manufacturing equipment that was not in working order and
that the Company has been unable to sell. The impairment of website
and inventory recorded for the years ended December 31, 2016 and
2015 is due to the write off of website and inventory obsolescence.
During the year ended December 31, 2016, the Company entered into
the TMA Settlement Agreement and recorded a gain on settlement in
the amount of $274,052. Further, the Company tested goodwill and
intangibles acquired though the acquisition of the assets of TMA
and fully impaired such assets in the amount of $208,376 and
$122,983, respectively, which formerly represented the value of The
Mad Alchemist Brands, customer relationships, workforce and
business acumen that was acquired.
Loss from Operations
For the
year ended December 31, 2016, the Company incurred a loss from
operations of $3,747,411 as compared to $2,574,944 for the year
ended December 31, 2015 due to the reasons discussed
above.
Other Expenses
For the
year ended December 31, 2016, total other expenses were $752,795
attributable to a foreign exchange loss of $35,477, amortization of
debt discount of $94,546 and interest expense of $622,772. For the
year ended December 31, 2015, total other expenses were $473,393
attributable to a foreign exchange gain of $155,519, amortization
of debt discount of $239,330, interest expense of $385,151 and a
loss on settlement of debt of $4,431.
Net Loss and Comprehensive Loss
Net
loss amounted to $4,500,206 for the year ended December 31, 2016
compared to a net loss of $3,048,337 for the year ended December
31, 2015.
Comprehensive
net loss amounted to $4,514,452 for the year ended December 31,
2016 compared to a comprehensive net loss of $2,820,698 for the
year ended December 31, 2015. The change in comprehensive net loss
compared to net loss is 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.
32
Liquidity and Capital Resources
For the year ended December 31, 2016 compared to the year ended
December 31, 2015
As at
December 31, 2016, the Company had total assets of $2,422,954
(compared to total assets of $2,231,055 at December 31, 2015)
consisting of cash and cash equivalents of $184,754, trade
receivables of $80,409, inventory of $545,135, other current assets
of $462,708, property and equipment of $93,068, website development
of $7,083, intangibles of $160,300 and goodwill of $889,497. The
assets of the Company are primarily the result of the acquisitions
of E Vapor Labs (see “Acquisition of E Vapor Labs”),
the Craft Vapes Brands (see “Acquisition of Craft Vapes
Brands”) and The Mad Alchemist Brands (see
“Acquisition of The Mad
Alchemist Brands”).
As at
December 31, 2016, the Company had total liabilities of $8,113,864
(compared to total liabilities of $5,000,695 at December 31, 2015)
consisting of accounts payable of $1,757,821, accrued liabilities
of $404,633, accrued interest due to related parties of $263,790,
customer deposits of $56,834, loans from shareholders of $502,288,
due to related parties of $1,478,883, Unsecured Promissory Notes of
$783,317, amounts owing on acquisition of $55,000, Term Loan of
$1,144,337, long term loans from shareholders of $497,351, long
term due to related parties of $1,085,906 and Convertible
Debentures of $83,704.
At
December 31, 2016, the Company had negative working capital of
$5,173,897 and an accumulated deficit of $13,250,894.
As at
December 31, 2015, the Company had total assets of $2,231,055
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.
As at
December 31, 2015, the Company had total liabilities of $5,000,695
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, Unsecured Promissory Notes of
$495,193, amounts owing on acquisition 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 acquisition
of $196,127, long term Unsecured 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.
Net cash used in operating activities
For the
year ended December 31, 2016, the Company used cash of $1,939,969
(December 31, 2015: $890,890) in operating activities to fund
administrative, marketing and sales. The increase 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, 2016, net cash used in investing activities
was $78,841 attributable to the addition of capital assets. During
the year ended December 31, 2015, net cash used in investing
activities was $250,452 attributable to the addition of capital
assets and the acquisition of businesses (see “Acquisition of E Vapor Labs”,
“Acquisition of Craft Vapes
Brands” and “Acquisition of The Mad Alchemist
Brands”).
33
Net cash flow from financing activities
For the
year ended December 31, 2016, net cash provided by financing
activities was $2,061,414 compared to net cash provided by
financing activities of $632,286 for the year ended December 31,
2015. Net cash provided by financing activities for the year ended
December 31, 2016 was primarily attributable to the net proceeds
from the Term Loan (see “Term Loan”), net proceeds from
the Shareholder Loan (see “Shareholder Loan”), net proceeds
from related parties and net proceeds received from the issuance
and repayments of Convertible Debentures (see “Convertible Debentures Series
C”).
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:
|
Allocation
|
Measurement
Period Adjustments
|
Final
Allocation
|
Cash
|
$22,942
|
-
|
$22,942
|
Receivables
|
48,356
|
(1,705)
|
46,651
|
Other current
assets
|
21,195
|
(24)
|
21,171
|
Inventory
|
122,309
|
4,428
|
126,737
|
Fixed
assets
|
118,867
|
7
|
118,874
|
Intangible
assets
|
-
|
160,000
|
160,000
|
Goodwill
|
847,265
|
(154,211)
|
693,054
|
Total
assets acquired
|
$1,180,934
|
|
$1,189,429
|
|
|
|
|
Liabilities
assumed:
|
|
|
|
Accounts
payable
|
$206,252
|
-
|
$206,252
|
Accrued
liabilities
|
-
|
28,000
|
28,000
|
Loan
payable
|
25,000
|
-
|
25,000
|
Total
liabilities assumed
|
$231,252
|
|
$259,252
|
|
|
|
|
Consideration:
|
|
|
|
Cash
|
$225,000
|
-
|
$225,000
|
Promissory Notes A,
unsecured and non-interest bearing, due November 1,
2015
|
196,026
|
(19,505)
|
176,521
|
Promissory Notes B,
unsecured and non-interest bearing, due April 1, 2016
|
275,555
|
-
|
275,555
|
Promissory Notes C,
unsecured and non-interest bearing, due January 1,
2017
|
253,101
|
-
|
253,101
|
Total
consideration
|
$949,682
|
|
$930,177
|
In consideration for the acquisition, the Company paid to the
vendors, $225,000 in cash on closing and issued $900,000 in
unsecured promissory notes on closing (collectively, the
“Unsecured Promissory Notes”). The Unsecured Promissory
Notes were issued in three equal tranches of $300,000 due four (4),
nine (9) and eighteen (18) months respectfully from closing
(individually, “Promissory Notes A”, “Promissory
Notes B”, and “Promissory Notes C” respectively).
The Unsecured Promissory Notes are all unsecured, non-interest
bearing, and on the maturity date, at the option of the vendors, up
to one-third of each tranche of the Unsecured Promissory Notes can
be repaid in Common Shares of the Company, calculated using the 5
day weighted average closing market price prior to the maturity of
the Unsecured Promissory Notes. The Unsecured Promissory Notes, are
all and each subject to adjustments as outlined in the share
purchase agreement (the “SPA”), dated June 25,
2015.
34
At December 31, 2015, the Company adjusted the Promissory Notes A
for $116,683 which is the known difference in the working capital
balance at closing of the acquisition from the amount specified in
the SPA. Further, a 12% discount rate has been used to calculate
the present value of the Unsecured Promissory Notes based on the
Company’s estimate of cost of financing for comparable notes
with similar term and risk profiles. Over the term of the
respective Unsecured Promissory Notes, interest will be accrued at
12% per annum to accrete the Unsecured Promissory Notes to their
respective principal amounts.
|
Promissory Note
A
|
Promissory Note
B
|
Promissory Note
C
|
Total
|
Present value at
acquisition date
|
$293,204
|
$275,555
|
$253,101
|
$821,860
|
Working capital
adjustment
|
(97,178)
|
-
|
-
|
(97,178)
|
Interest expense
related to accretion
|
7,547
|
16,065
|
14,756
|
38,368
|
Present
value at December 31, 2015
|
$203,573
|
$291,620
|
$267,857
|
$763,050
|
|
|
|
|
|
Measurement period
adjustment
|
(19,505)
|
-
|
-
|
(19,505)
|
Interest expense
related to accretion
|
(751)
|
8,380
|
32,143
|
39,772
|
Present
value at December 31, 2016
|
$183,317
|
$300,000
|
$300,000
|
$783,317
|
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 E Vapor
Lab’s existing and potential customers. The estimated useful
life and fair values of the identifiable intangible assets are as
follows:
|
Estimated
Useful
Life (in
years)
|
Amount
|
Brands
|
5
|
$20,000
|
Customer
relationships
|
5
|
140,000
|
|
|
$160,000
|
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, 2015. 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,
2016
|
December
31,
2015
|
Pro forma
revenue
|
$4,572,332
|
$1,679,867
|
Pro forma loss from
operations
|
$(3,590,177)
|
$(2,738,649)
|
Pro forma net
loss
|
$(4,362,320)
|
$(3,216,321)
|
Acquisition of Craft Vapes 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 assets, rights and title to own and operate the Craft Vapes
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
|
35
In consideration for the acquisition, the Company issued 1,000,000
Common Shares valued at $0.15 per share for a total value of
$150,000, 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 Craft Vapes Brands. The earn-out commences on
the closing date and pays up to a maximum of 25% of the gross
profit stream. As of December 31, 2016, no amounts have been
accrued or paid in relation to the quarterly earn-out.
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 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 resulting from the acquired assets from
901 Vaping have been included in the consolidated statements of
operations from the acquisition date, though revenue and net income
from the acquired assets were not material for the year ended
December 31, 2016. Pro forma results of operations have not been
presented because the acquisition was not material to the results
of operations.
Acquisition of The Mad Alchemist Brands
On December 2, 2015, the Company closed the acquisition of all of
the assets of TMA, an E-liquid manufacturer, including the assets,
rights and title to own and operate The Mad Alchemist 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
short term
|
149,134
|
Deferred payments
long term
|
194,283
|
Total
consideration
|
$443,417
|
In
consideration for the acquisition, the Company issued 819,672
Common Shares valued at $0.122 per share for a total value of
$100,000; agreed to pay a total of $400,000 in deferred payments
(the “Amounts Owing on Acquisition”), payable in ten
(10) equal payments of $20,000 in cash and $20,000 in Common Shares
every three (3) months following the closing date; and agreed to a
quarterly earn-out based on the gross profit stream derived from
product sales of The Mad Alchemist Brands. The earn-out commences
on the closing date and pays up to a maximum of 25% of the gross
profit stream. The number of Common Shares issuable will be
calculated and priced using the 5 day weighted average closing
market price prior to each issuance date. Further, a 12% discount
rate has been used to calculate the present value of the Amounts
Owing on Acquisition. Over the term of the respective deferred
payments, interest will be accrued at 12% per annum to accrete the
payments to their respective principal amounts. During the year
ended December 31, 2016, the Company recorded $9,583 in interest
expense related to the accretion of the Amounts Owing on
Acquisition.
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 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 resulting from the acquired assets from TMA
have been included in the consolidated statements of operations
from the acquisition date, though revenue and net income from the
acquired assets were not material for the year ended December 31,
2016. Pro forma results of operations have not been presented
because the acquisition was not material to the results of
operations.
On
April 15, 2016, the Company entered into a settlement agreement
(the “TMA Settlement Agreement”) with TMA and the
vendors of TMA (collectively, the “TMA Vendors”).
Subject to the terms and conditions of the TMA Settlement
Agreement, the parties settled: (i) any and all compensation and
expenses owing by the Company to the TMA Vendors and (ii) the
$400,000 of Amounts Owing on Acquisition payable by the Company to
TMA Vendors pursuant to the TMA Asset Purchase Agreement in
exchange for the Company paying to the TMA Vendors a total
settlement consideration of $133,163 payable as $100,000 in cash
and $33,163 in the Company’s assets as a payment-in-kind. Of
the $100,000 payable in cash under the TMA Settlement Agreement,
$45,000 was paid upon execution of the settlement, $27,500 was
payable thirty days following the signing of the settlement and the
remaining $27,500 was payable at the later of (i) sixty days
following the signing of the TMA Settlement Agreement, or (ii) the
completion of the historical audit of TMA. As a result of the TMA
Settlement Agreement, the Company has recorded a gain on settlement
in the amount of $274,051. As at December 31, 2016, $55,000
(December 31, 2015: $346,676) remains payable to the TMA Vendors.
In addition, the Company and the TMA Vendors mutually terminated
all employment agreements between the Company and the TMA vendors,
entered into on closing of the TMA Asset Purchase Agreement, and
all amounts were fully settled pursuant to the TMA Settlement
Agreement. Due to this change in circumstances, the Company tested
goodwill and intangibles for impairment and as a result, the
Company has fully impaired goodwill and intangible assets related
to the acquired assets of TMA in the amount of $208,376 and
$122,983, respectively, which formerly represented the value of
brands, customer relationships, workforce and business acumen
acquired.
Term Loan
On
January 18, 2016, the Company entered into a term loan (the
“Term Loan”) with the Lenders, whereby the Lenders
would loan the Company the aggregate principal amount of CAD
$1,000,000 for capital expenditures, marketing expenditures and
working capital. The agent who arranged the Term Loan was not a
related party of the Company. The Term Loan bears interest at a
rate of 16% per annum, on the outstanding principal, and shall
mature on July 3, 2017, whereby any outstanding principal together
with all accrued and unpaid interest thereon shall be due and
payable. The Term Loan is 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 Lenders in
the following priority: first, to pay the monthly interest due on
the Term Loan; and second, to repay any remaining principal
outstanding on the Term Loan. The Company may elect to repay the
outstanding principal of the Term Loan together with all accrued
and unpaid interest thereon prior to the maturity, subject to an
early repayment penalty of the maximum of (i) 3 months interest on
the outstanding principal; or (ii) 50% of the interest payable on
the outstanding principal until maturity (the “Early
Repayment Penalty”). The Term Loan shall be immediately due
and payable at the option of the Lenders if there is a change in
key personnel meaning the Company’s current Chief Executive
Officer and Chief Financial Officer. On January 18, 2016 and in
connection to the Term Loan, the Company issued warrants for the
purchase of 250,000 Common Shares 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.
36
On July
15, 2016, the Company and the Lenders of the Term Loan entered into
a Term Loan Amendment (the “Term Loan Amendment”) in
which the Lenders agreed to extend to the Company an additional CAD
$600,000 in principal to increase the Term Loan facility up to the
aggregate principal amount of CAD $1,600,000. The parties also
extended the maturity date of the Term Loan to July 2, 2018 with
all other terms of the Term Loan remaining the same. The
Company’s Chief Executive Officer and its Chief Financial
Officer are both participants in the consortium of Lenders having
each committed to provide a total of CAD $150,000 of the initial
principal of the Term Loan and the additional principal of the Term
Loan pursuant to the Term Loan Amendment. Neither the Chief
Executive Officer nor the Chief Financial Officer participated in
the warrants issued or warrants extended in connection with the
Term Loan Amendment.
During
the year ended December 31, 2016, the Company was advanced
$1,219,840 (CAD $1,600,000) from the Term Loan including the CAD
$294,000 and CAD $3,093 rolled in from the Credit Facility as well
as CAD $240,581 of advances from the Company’s Chief
Executive Officer and its Chief Financial Officer.
During
the year ended December 31, 2016, the Company expensed $140,540
(December 31, 2015: $nil) in interest as a result of the Term Loan.
Pursuant to the Cash Sweep, during the year ended December 31,
2016, the Company paid $187,898 to the Lenders consisting of
$111,083 in interest and $76,815 in principal payments and at
December 31, 2016, the Company owes the Lenders $81,060 in arrears
consisting of $29,471 in interest and $51,589 in principal
payments.
At
December 31, 2016, the amount owing on the Term Loan is as
follows:
|
December
31,
2016
|
December
31,
2015
|
Amount
advanced
|
$1,219,840
|
$-
|
Exchange gains
during the year
|
(28,159)
|
-
|
Principal payments
made
|
(76,815)
|
-
|
Interest
accrued
|
140,540
|
-
|
Interest payments
made
|
(111,069)
|
-
|
Amount owing at end
of year
|
$1,144,337
|
$-
|
Shareholder Loan
On
March 2, 2016, the Company entered into a loan agreement (the
“Loan Agreement”) with a shareholder, whereby the
shareholder would make available to the Company the aggregate
principal amount of CAD $670,000 (USD $518,714) (the
“Shareholder Loan”) for capital expenditures, marketing
expenditures and working capital. Under the terms of the Loan
Agreement, the Shareholder Loan was made available to the Company
in two equal tranches of CAD $335,000 (USD $259,357), for a total
loan amount of CAD $670,000 (USD $518,714), with the first tranche
(“Loan Tranche A”) received on the closing date and the
second tranche (“Loan Tranche B”) received on April 14,
2016. At December 31, 2016, CAD $52,000 (USD $38,730) of the Loan
Tranche B was being held in trust by the shareholder to be released
on the incurrence of specific expenses. The Shareholder Loan bears
interest at a rate of 6% per annum, on the outstanding principal,
and shall mature on March 2, 2018, whereby any outstanding
principal together with all accrued and unpaid interest thereon
shall be due and payable. The Company shall also repay 5% of the
initial principal amount of Loan Tranche A and 5% of Loan Tranche
B, monthly in arrears, with the first principal repayment beginning
on June 30, 2016. At December 31, 2016, $474,065 of the amounts
owing on the Loan Agreement have been recorded as current
liabilities to reflect the monthly principal payments due over the
next year. The Company may elect to repay the outstanding principal
of the Shareholder Loan together with all accrued and unpaid
interest thereon prior to maturity without premium or penalty. The
Company also agreed to service the Shareholder Loan during the term
prior to making any payments to the Company’s Chief Executive
Officer, Chief Financial Officer and Board of Directors. The
Shareholder Loan is secured by a general security agreement
granting a general security interest over all the assets of the
Company.
The
Company accrued interest of $22,832 during the year ended December
31, 2016 (December 31, 2015: $nil) on the Shareholder Loan. Accrued
interest owing on the Shareholder Loan at December 31, 2016 is
$23,433 (December 31, 2015: $nil) which is included in accrued
liabilities. At December 31, 2016, the Company owes the lender
$174,656 in principal payments.
37
Convertible Debentures Series C
On May
20, 2016, the Company issued 375 unsecured subordinated convertible
debenture units (the “Convertible Debentures Series C”)
for proceeds of $375,000. Each Convertible Debentures Series C
consisted of an unsecured subordinated convertible debenture having
a principal amount of $1,000 and warrants exercisable for the
purchase of 10,000 Common Shares of the Company at a price of $0.20
per CommonShare for a period of twenty-four months from the date of
issuance. The Convertible Debentures Series C mature on January 31,
2018 and bear interest at a rate of 8% per annum, accrued quarterly
in arrears. The face value of the Convertible Debentures Series C,
together with all accrued and unpaid interest thereon, are
convertible into Common Shares of the Company at a fixed conversion
rate of $0.10 per Common Share at any time prior to maturity. The
Company also has the option to force conversion of any outstanding
Convertible Debentures Series C at any time after six months from
issuance and prior to maturity. For Canadian holders, the Company
may only force conversion of any outstanding Convertible Debentures
Series C at such time that the Company is a reporting issuer within
the jurisdiction of Canada. Of the $375,000 in face value of
Convertible Debentures Series C issued on May 20, 2016, $55,000
were issued in settlement of amounts owing to related parties and
$10,000 were issued in settlement of amounts owing to an employee.
The Company incurred costs of $22,725 as a result of the issuance
of Convertible Debentures Series C on May 20, 2016.
On
December 31, 2016, the Company issued an additional 275 units of
Convertible Debentures Series C for proceeds of $275,000 which were
fully issued in exchange for cash.
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,
2016, the Company has an accumulated deficit of $13,250,894 and a
working capital deficiency of $5,173,897 as well as negative cash
flows from operating activities of $1,939,969 for the year ended
December 31, 2016. 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
the Company’s 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 its 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.
38
Material Commitments
a)
Premises Lease
– Florida, USA
Effective
January 1, 2015, a subsidiary of the Company entered into an
operating lease agreement for a rental premises in Daytona Beach,
Florida, USA. The terms of this agreement are to be for a period of
36 months and ending on December 31, 2017 with payments made
monthly. Minimum annual lease payments are as follows:
2017
|
$56,110
|
|
|
b)
Premises Lease
– Budapest, Hungary
Effective
January 2, 2017, a subsidiary of the Company entered into a lease
agreement for a rental premises in Budapest, Hungary. The terms of
the agreement are to be for a period of one year ending on December
31, 2017 with payments made monthly. Minimum annual lease payments
are denominated in Euros and are as follows:
2017
|
|
€ 27,000
|
|
|
Effective
May 23, 2016, a subsidiary of the Company entered into a lease
agreement for office space in Budapest, Hungary. The terms of the
agreement are to be for a period of one year ending on July 8, 2017
with payments made monthly. Minimum annual lease payments are
denominated in Euros and are as follows:
2017
|
|
€ 41,289
|
|
|
c)
Litigation
The
Company is subject to certain legal proceedings and claims, which
arise in the ordinary course of its business. Although occasional
adverse decisions or settlements may occur, the Company believes
that the final disposition of such matters should not have a
material adverse effect on its financial position, results of
operations or liquidity.
On
January 6, 2016, Yaron Elkayam, Pinchas Mamane and Levent Dimen
filed a three count complaint against the Company in the Circuit
Court of Hillsborough County, Florida alleging (i) breach of
contract, (ii) breach of implied covenant of good faith and fair
dealing, and (iii) fraud in the inducement seeking damages in the
amount of approximately $900,000 of Unsecured Promissory Notes
issued on July 1, 2015 as a result of the acquisition of E Vapor
Labs. 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.
d)
Charitable Sales
Promotion
On
January 21, 2016, the Company entered into an agreement with
Wounded Warriors Family Support Inc. in which the Company agreed to
make a donation of $1.00 for each sale of its “Vape
Warriors” E-liquid product during the period from January 1,
2016 to December 31, 2016, with a minimum donation of $50,000.
During the year ended December 31, 2016 the Company has accrued the
full $50,000 in charitable contributions regarding this
agreement.
e)
Royalty
Agreement
On June
14, 2016, the Company entered into a royalty agreement related to
an E-liquid recipe purchased from an unrelated party in which the
Company agreed to pay to the recipe developer, a royalty of $0.25
per 60ml of E-liquid sold that contains the recipe, up to a maximum
of $100,000. Although the Company has the ability to sell the
E-liquid globally, the royalty is paid only on the E-liquid sold
within the United States. During the year ended December 31, 2016,
the Company has paid $8,275and owes $1,408 related to the royalty
agreement.
39
Subsequent Events
Subsequent
to the year ended December 31, 2016, the Company entered into the
following transactions:
On
January 4, 2017, the Company terminated a consulting agreement
entered into as of April 13, 2016 for cause. As a result, the
1,000,000 Common Share purchase warrants issued in connection to
the consulting agreement were terminated, effective
immediately.
On
January 12, 2017, the Company entered into a bridge loan agreement
with a shareholder (the “Bridge Loan Agreement”),
whereby the shareholder would make available to the Company the
aggregate principal amount of CAD $200,000 (the “Bridge
Loan”) in two equal tranches of CAD $100,000. The Company
received the first tranche on January 12, 2017 (“Bridge Loan
Note A”) and the second tranche on January 18, 2017
(“Bridge Loan Note B”). The Bridge Loan is non-interest
bearing and matures on March 12, 2017. Pursuant to the terms of the
Bridge Loan Agreement, the shareholder received a 5% upfront fee
upon the closing of Bridge Loan Note A and a 5% upfront fee upon
the closing of Bridge Loan Note B. The Bridge Loan is secured by
the general security agreement issued in connection to the Secured
Note. On January 12, 2017 and in connection to the Bridge Loan
Agreement, the Company issued warrants for the purchase of 50,000
Common Shares of the Company exercisable until January 11, 2017 at
a price of $0.20 per Common Share, with 25,000 of such purchase
warrants vesting upon the closing of Bridge Loan Note A and the
remaining 25,000 purchase warrants vestingupon the closing of
Bridge Loan Note B. On January 12, 2017, the Company closed Bridge
Loan Note A and 25,000 of the purchase warrants became fully vested
and exercisable. On January 18, 2017, the Company closed Bridge
Loan Note B and 25,000 of the purchase warrants became fully vested
and exercisable.
On
January 20, 2017, the Company issued an additional 75 units of
Convertible Debentures Series C for proceeds of
$75,000.
On
January 31, 2017, the Company issued and sold on a private
placement basis, 7,546,012 private placement units at a price of
$0.10 per unit for total proceeds of $754,601. Each private
placement unit consisted of one Common Share of the Company and a
half Common Share purchase warrant. On January 31, 2017, the
Company issued 7,546,012 Common Shares and warrants for the
purchase of 3,773,006 Common Shares of the Company exercisable over
twelve months at an exercise price of $0.20 per Common Share. On
January 31, 2017 and in connection to the issuance of private
placement units, the Company issued warrants for the purchase of
411,361 Common Shares of the Company as a commission payment with
the purchase warrants having the same terms as the warrants issued
as part of the private placement units.
On
February 17, 2017, the Company issued and sold on a private
placement basis, 1,815,896 private placement units at a price of
$0.10 per unit for total proceeds of $181,590. Each private
placement unit consisted of one Common Share of the Company and a
half Common Share purchase warrant. On February 17, 2017, the
Company issued 1,815,896 Common Shares and warrants for the
purchase of 907,948 Common Shares of the Company exercisable over
twelve months at an exercise price of $0.20 per Common Share. On
February 17, 2017 and in connection to the issuance of private
placement units, the Company issued warrants for the purchase of
108,954 Common Shares of the Company as a commission payment with
the purchase warrants having same terms as the warrants issued as
part of the private placement units.
On
February 27, 2017, the Company and the Lenders of the Term Loan
entered into a term loan amendment (the “Term Loan Amendment
No.2”) to amend certain terms and conditions of the Term
Loan. Pursuant to the Term Loan Amendment No.2, the parties agreed
to modify the Cash Sweep to be calculated as the total of CAD
$0.01667 per ml of E-liquid sold by the Company within a monthly
period, such modification to be retroactively applied as of January
1, 2017. The Lenders also agreed to cancel the Early Repayment
Penalty and waive any interest payment penalties due under the Term
Loan. On February 27, 2017 and in connection to the Term Loan
Amendment No.2, the Company agreed to issue 500,000 private
placement units at a price of $0.10 per unit, such private
placement units remain unissued.
40
On
March 8, 2017 and in connection to an employment agreement, the
Company issued warrants for the purchase of 1,500,000 Common Shares
of the Company exercisable over twenty-four months at an exercise
price of $0.25 per Common Share. The purchase warrants will vest in
three equal tranches, with the first tranche vesting upon the
employee generating over $25,000 in sales of new business for two
consecutive months, the second tranche vesting upon the employee
generating cumulative sales of over $500,000 and the third tranche
vesting upon the employee generating cumulative sales of over
$1,000,000 of new business.
On
March 21, 2017, the Company issued and sold on a private placement
basis, 6,540,090 private placement units at a price of $0.10 per
unit for total proceeds of $654,009. Each private placement unit
consisted of one Common Share of the Company and a half Common
Share purchase warrant. On March 21, 2017, the Company issued
6,540,090 Common Shares and warrants for the purchase of 3,270,045
Common Shares of the Company exercisable over twelve months at an
exercise price of $0.20 per Common Share. On March 21, 2017 and in
connection to the issuance of private placement units, the Company
issued warrants for the purchase of 27,623 Common Shares of the
Company as a commission payment with the purchase warrants having
the same terms as the warrants issued as part of the private
placement units.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
This
item is not applicable to smaller reporting companies.
41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA.
GILLA INC.
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2016 and 2015
(Amounts expressed in US Dollars)
F-1
TABLE OF CONTENTS
Report of Independent Registered Public Accounting
Firm
|
F-3
|
|
|
Consolidated Balance Sheets as at December 31, 2016 and
2015
|
F-4
|
|
|
Consolidated Statements of Operations and Comprehensive Loss for
the years ended December 31, 2016 and 2015
|
F-5
|
|
|
Consolidated Statement of Changes in Stockholders’ Deficiency
for the years ended December 31, 2016 and 2015
|
F-6
to F-7
|
|
|
Consolidated Statements of Cash Flows for the years ended December
31, 2016 and 2015
|
F-8
|
|
|
Notes to Consolidated Financial Statements
|
F-9
to F-38
|
F-2
Report of the Independent Registered Public Accounting
Firm
We have audited the accompanying consolidated balance sheets of
Gilla Inc. and its subsidiaries (the “Company”) as at
December 31, 2016 and 2015, and the related consolidated statements
of operations and comprehensive loss, changes in stockholders'
deficiency and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not
for expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of the Company as of December 31, 2016, and 2015, and the
results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles
in the United States of America.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in note 2 to the consolidated financial
statements, the Company has accumulated significant deficit and has
negative cash flows and working capital deficiency. The
Company’s future success is dependent upon its ability to
raise sufficient capital, not only to cover its cash flow needs,
but also to continue to develop and be able to profitably market
its products. Those factors raise substantial doubt about its
ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ MNP LLP
March 30, 2017
|
Chartered Professional Accountants
|
Toronto, Ontario
|
Licensed Public Accountants
|
F-3
Gilla Inc.
Consolidated Balance Sheets
As at December 31, 2016 and 2015
(Amounts expressed in US Dollars)
|
December
31,
2016
|
December
31,
2015
|
ASSETS
|
||
Current
assets
|
|
|
Cash and cash
equivalents
|
$184,754
|
$81,696
|
Trade receivables
(net of allowance for doubtful accounts $nil (December 31, 2015:
$20,370))
|
80,409
|
45,534
|
Inventory (note
6)
|
545,135
|
154,700
|
Other current
assets (note 5)
|
462,708
|
322,326
|
Total current
assets
|
1,273,006
|
604,256
|
Long term
assets
|
|
|
Property and
equipment (note 7)
|
93,068
|
150,349
|
Website development
(note 8)
|
7,083
|
9,083
|
Intangibles (note
9)
|
160,300
|
215,283
|
Goodwill (note
10)
|
889,497
|
1,252,084
|
Total long term
assets
|
1,149,948
|
1,626,799
|
|
|
|
Total
assets
|
$2,422,954
|
$2,231,055
|
LIABILITIES
|
||
Current
liabilities
|
|
|
Accounts
payable
|
$1,757,821
|
$687,767
|
Accrued liabilities
(note 11)
|
404,633
|
251,517
|
Accrued interest -
related parties (note 19)
|
263,790
|
131,755
|
Customer
deposits
|
56,834
|
372,500
|
Loans from
shareholders (note 11)
|
502,288
|
27,528
|
Due to related
parties (note 19)
|
1,478,883
|
996,939
|
Promissory notes
(note 4)
|
783,317
|
495,193
|
Amounts owing on
acquisition (note 4)
|
55,000
|
150,549
|
Convertible
debentures (note 14)
|
-
|
80,658
|
Credit facility
(note 12)
|
-
|
212,415
|
Term loan (note
13)
|
1,144,337
|
-
|
Total current
liabilities
|
6,446,903
|
3,406,821
|
|
|
|
Long term
liabilities
|
|
|
Loans from
shareholders (note 11)
|
497,351
|
461,250
|
Due to related
parties (note 19)
|
1,085,906
|
662,140
|
Amounts owing on
acquisition (note 4)
|
-
|
196,127
|
Promissory notes
(note 4)
|
-
|
267,857
|
Convertible
debentures (note 14)
|
83,704
|
6,500
|
Total long term
liabilities
|
1,666,961
|
1,593,874
|
|
|
|
Total
liabilities
|
8,113,864
|
5,000,695
|
|
|
|
Going concern (note
2)
|
|
|
Related party
transactions (note 19)
|
|
|
Commitments and
contingencies (note 21)
|
|
|
Subsequent events
(note 24)
|
|
|
STOCKHOLDERS’ DEFICIENCY
|
||
Common stock:
$0.0002 par value, 300,000,000 common shares authorized;
100,753,638 and 99,560,923 common shares issued and outstanding as
of December 31, 2016 and 2015, respectively (note 15)
|
$20,151
|
$19,913
|
Additional paid-in
capital
|
7,047,979
|
5,581,585
|
Common shares to be
issued (note 18)
|
146,550
|
20,000
|
Accumulated
deficit
|
(13,250,894)
|
(8,750,688)
|
Accumulated other
comprehensive income
|
345,304
|
359,550
|
Total
stockholders’ deficiency
|
(5,690,910)
|
(2,769,640)
|
Total liabilities
and stockholders’ deficiency
|
$2,422,954
|
$2,231,055
|
The
accompanying notes are an integral part of these consolidated
financial statements
F-4
Gilla Inc.
Consolidated Statements of Operations and Comprehensive
Loss
For the Years Ended December 31, 2016 and 2015
(Amounts expressed in US Dollars)
|
2016
|
2015
|
|
|
|
Sales
revenue
|
$4,550,793
|
$1,163,096
|
Cost of goods
sold
|
1,927,657
|
908,887
|
Gross
profit
|
2,623,136
|
254,209
|
|
|
|
Operating
expenses
|
|
|
Administrative
|
5,305,326
|
1,983,114
|
Consulting fees -
related parties (note 19)
|
473,149
|
605,180
|
Depreciation
|
56,055
|
20,986
|
Amortization
|
94,000
|
25,632
|
Bad debt
expense
|
256,280
|
20,370
|
Loss on settlement
of account receivable
|
-
|
24,582
|
Impairment of fixed
assets (note 7)
|
70,142
|
-
|
Impairment of
website (note 8)
|
-
|
73,325
|
Impairment of
inventory (note 6)
|
39,124
|
75,964
|
Impairment of
intangible assets (note 9)
|
122,983
|
-
|
Impairment of
goodwill (note 10)
|
208,376
|
-
|
Gain on related
party settlement (note 19)
|
(9,263)
|
-
|
Loss on issuance of
common shares (note 15)
|
28,426
|
-
|
Gain on settlement
(note 4d)
|
(274,052)
|
-
|
Total operating
expenses
|
6,370,547
|
2,829,153
|
|
|
|
Loss from
operations
|
(3,747,411)
|
(2,574,944)
|
|
|
|
Other income
(expenses):
|
|
|
Foreign exchange
gain (loss)
|
(35,477)
|
155,519
|
Loss on settlement
of debt
|
-
|
(4,431)
|
Amortization of
debt discount
|
(94,546)
|
(239,330)
|
Interest expense,
net
|
(622,772)
|
(385,151)
|
|
|
|
Total other
expenses
|
(752,795)
|
(473,393)
|
|
|
|
Net loss before
income taxes
|
(4,500,206)
|
(3,048,337)
|
Income taxes (note
20)
|
-
|
-
|
Net
loss
|
$(4,500,206)
|
$(3,048,337)
|
|
|
|
Loss per share
(basic and diluted)
|
$(0.04)
|
$(0.03)
|
|
|
|
Weighted average
number of common shares outstanding (basic and
diluted)
|
100,238,844
|
95,008,270
|
|
|
|
|
|
|
Comprehensive
loss:
|
|
|
Net
loss
|
$(4,500,206)
|
$(3,048,337)
|
|
|
|
Foreign exchange
translation adjustment
|
(14,246)
|
227,639
|
|
|
|
Comprehensive
loss
|
$(4,514,452)
|
$(2,820,698)
|
The
accompanying notes are an integral part of these consolidated
financial statements
F-5
Gilla Inc.
Consolidated Statement of Changes in Stockholders’
Deficiency
For the Years Ended December 31, 2016 and 2015
(Amounts expressed in US Dollars)
|
Common
Stock
|
Additional
Paid-In
|
Shares To
Be
|
Accumulated
|
Accumulated
Other
Comprehensive
|
Total
Stockholders’
|
|
|
Shares
|
Amount
|
Capital
|
Issued
|
Deficit
|
Income
|
Deficiency
|
Balance, December 31,
2014
|
92,698,018
|
$18,542
|
$3,998,482
|
$-
|
$(5,702,351)
|
$131,911
|
$(1,553,416)
|
|
|
|
|
|
|
|
|
Common shares issued for settlement
of
interest payable on convertible
debentures
|
4,918
|
1
|
737
|
-
|
-
|
-
|
738
|
|
|
|
|
|
|
|
|
Common shares issued for settlement
of
interest payable on convertible
debentures
to a director of the
Company
|
2,385
|
-
|
358
|
-
|
-
|
-
|
358
|
|
|
|
|
|
|
|
|
Common shares issued for conversions
of convertible debentures
|
2,299,999
|
460
|
160,540
|
-
|
-
|
-
|
161,000
|
|
|
|
|
|
|
|
|
Common shares issued for conversion
of convertible debentures to a director of the
Company
|
228,572
|
45
|
15,955
|
-
|
-
|
-
|
16,000
|
|
|
|
|
|
|
|
|
Common shares issued for settlement
of
consulting fees
|
300,000
|
60
|
32,940
|
-
|
-
|
-
|
33,000
|
|
|
|
|
|
|
|
|
Common shares issued for settlement
of
marketing costs
|
408,597
|
82
|
44,864
|
-
|
-
|
-
|
44,946
|
|
|
|
|
|
|
|
|
Common shares issued for acquisition
of subsidiary
|
500,000
|
100
|
84,900
|
-
|
-
|
-
|
85,000
|
|
|
|
|
|
|
|
|
Warrants issued for acquisition of
subsidiary
|
-
|
-
|
41,975
|
-
|
-
|
-
|
41,975
|
|
|
|
|
|
|
|
|
Common shares issued for settlement
of
consulting fees
|
60,000
|
12
|
11,388
|
-
|
-
|
-
|
11,400
|
|
|
|
|
|
|
|
|
Common shares issued for settlement
of
interest payable on convertible
debentures
|
201,945
|
40
|
33,221
|
-
|
-
|
-
|
33,261
|
|
|
|
|
|
|
|
|
Common shares issued on acquisition
of a business
|
1,000,000
|
200
|
149,800
|
-
|
-
|
-
|
150,000
|
|
|
|
|
|
|
|
|
Common shares issued for settlement
of
consulting fees
|
211,389
|
42
|
31,666
|
-
|
-
|
-
|
31,708
|
|
|
|
|
|
|
|
|
Common shares issued for settlement
of
related party
loans
|
500,000
|
100
|
49,900
|
-
|
-
|
-
|
50,000
|
|
|
|
|
|
|
|
|
Common shares issued for
cash
|
225,428
|
45
|
22,498
|
-
|
-
|
-
|
22,543
|
|
|
|
|
|
|
|
|
Common shares issued on acquisition
of a business
|
819,672
|
164
|
99,836
|
-
|
-
|
-
|
100,000
|
|
|
|
|
|
|
|
|
Common shares issued for settlement
of prepaid consulting fees
|
100,000
|
20
|
10,980
|
-
|
-
|
-
|
11,000
|
|
|
|
|
|
|
|
|
Common shares to be issued for
settlement of consulting fees
|
-
|
-
|
-
|
20,000
|
-
|
-
|
20,000
|
|
|
|
|
|
|
|
|
Warrants issued as stock based
compensation
|
-
|
-
|
141,545
|
-
|
-
|
-
|
141,545
|
|
|
|
|
|
|
|
|
Warrants issued with convertible
debentures
|
-
|
-
|
516,343
|
-
|
-
|
-
|
516,343
|
|
|
|
|
|
|
|
|
Embedded conversion feature of
convertible debentures
|
-
|
-
|
133,657
|
-
|
-
|
-
|
133,657
|
|
|
|
|
|
|
|
|
Foreign currency translation
gain
|
-
|
-
|
-
|
-
|
-
|
227,639
|
227,639
|
|
|
|
|
|
|
|
|
Net loss
|
-
|
-
|
-
|
-
|
(3,048,337)
|
-
|
(3,048,337)
|
|
|
|
|
|
|
|
|
Balance, December
31, 2015
|
99,560,923
|
$19,913
|
$5,581,585
|
$20,000
|
$(8,750,688)
|
$359,550
|
$(2,769,640)
|
The
accompanying notes are an integral part of these consolidated
financial statements
F-6
Gilla Inc.
Consolidated Statement of Changes in Stockholders’
Deficiency
For the Years Ended December 31, 2016 and 2015
(Amounts expressed in US Dollars)
Continued
|
Common
Stock
|
Additional
Paid-In
|
Shares To
Be
|
Accumulated
|
Accumulated
Other
Comprehensive
|
Total
Stockholders’
|
|
|
Shares
|
Amount
|
Capital
|
Issued
|
Deficit
|
Income
|
Deficiency
|
Balance, December 31,
2015
|
99,560,923
|
$19,913
|
$5,581,585
|
$20,000
|
$(8,750,688)
|
$359,550
|
$(2,769,640)
|
|
|
|
|
|
|
|
|
Common shares to be issued for
conversion of convertible debentures (note 18)
|
-
|
-
|
-
|
23,000
|
-
|
-
|
23,000
|
|
|
|
|
|
|
|
|
Common shares issued for settlement
of
deferred fees owing to a related
party
|
480,000
|
96
|
76,704
|
-
|
-
|
-
|
76,800
|
|
|
|
|
|
|
|
|
Common shares issued for settlement
of
consulting fees
|
562,715
|
112
|
78,668
|
(20,000)
|
-
|
-
|
58,780
|
|
|
|
|
|
|
|
|
Common shares issued for employment
income
to a related
party
|
150,000
|
30
|
20,970
|
-
|
-
|
-
|
21,000
|
|
|
|
|
|
|
|
|
Common shares to be issued for
settlement of consulting fees (note 18)
|
-
|
-
|
-
|
68,550
|
-
|
-
|
68,550
|
|
|
|
|
|
|
|
|
Common shares to be issued for
settlement of consulting fees (note 18)
|
-
|
-
|
-
|
55,000
|
-
|
-
|
55,000
|
|
|
|
|
|
|
|
|
Warrants issued as stock based
compensation (note
17)
|
-
|
-
|
662,777
|
-
|
-
|
-
|
662,777
|
|
|
|
|
|
|
|
|
Warrants issued with convertible
debentures (note 16)
|
-
|
-
|
378,608
|
-
|
-
|
-
|
378,608
|
|
|
|
|
|
|
|
|
Embedded conversion feature of
convertible debentures (note 14)
|
-
|
-
|
248,667
|
-
|
-
|
-
|
248,667
|
|
|
|
|
|
|
|
|
Foreign currency translation
gain
|
-
|
-
|
-
|
-
|
-
|
(14,246)
|
(14,246)
|
|
|
|
|
|
|
|
|
Net loss
|
-
|
-
|
-
|
-
|
(4,500,206)
|
-
|
(4,500,206)
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2016
|
100,753,638
|
$20,151
|
$7,047,979
|
$146,550
|
$(13,250,894)
|
$345,304
|
$(5,690,910)
|
The
accompanying notes are an integral part of these consolidated
financial statements
F-7
Gilla Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2016 and 2015
(Amounts Expressed in US Dollars)
|
2016
|
2015
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
Net
loss
|
$(4,500,206)
|
$(3,048,337)
|
Items
not requiring an outlay of cash
|
|
|
Depreciation
|
56,055
|
20,986
|
Amortization
|
94,000
|
25,632
|
Stock based
compensation (note 17)
|
811,481
|
240,945
|
Interest on amounts
owing on acquisition
|
9,583
|
-
|
Bad debt
expense
|
256,280
|
20,370
|
Interest on
promissory notes
|
39,772
|
-
|
Amortization of
debt discount
|
94,546
|
239,330
|
Gain on related
party settlement
|
9,263
|
-
|
Loss on issuance of
common shares (note 15)
|
28,426
|
-
|
Gain on settlement
(note 4d)
|
(274,051)
|
4,431
|
Interest on
promissory notes
|
-
|
41,626
|
Impairment of
inventory
|
39,124
|
75,964
|
Impairment of
website
|
-
|
73,325
|
Impairment of
intangible assets
|
122,983
|
-
|
Impairment of
goodwill
|
208,376
|
-
|
Impairment of fixed
assets
|
70,142
|
-
|
Loss on settlement
of account receivable
|
-
|
24,582
|
Changes
in operating assets and liabilities
|
|
|
Trade
receivable
|
(311,174)
|
(7,779)
|
Other current
assets
|
(147,283)
|
72,833
|
Inventory
|
(439,019)
|
(27,326)
|
Accounts
payable
|
1,175,835
|
286,161
|
Accrued
liabilities
|
153,116
|
182,500
|
Customer
deposits
|
(313,413)
|
372,500
|
Due to related
parties
|
759,689
|
418,891
|
Amounts owing on
acquisition
|
(45,000)
|
-
|
Interest owing on
term loan
|
29,472
|
-
|
Accrued
interest-related parties
|
132,035
|
92,476
|
Net
cash used in operating activities
|
(1,939,969)
|
(890,890)
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
Disposal (addition)
of capital assets
|
(78,841)
|
(2,245)
|
Acquisition of
businesses
|
-
|
(248,207)
|
Website
development
|
-
|
-
|
Net
cash used in investing activities
|
(78,841)
|
(250,452)
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
Net cash acquired
from acquisitions of subsidiaries
|
-
|
28,323
|
Proceeds from
credit facility
|
-
|
212,415
|
Repayments to
credit facility
|
-
|
(324,463)
|
Proceeds from term
loan
|
783,629
|
-
|
Repayments to term
loan
|
(78,485)
|
-
|
Loans to subsidiary
prior to acquisition
|
-
|
(25,000)
|
Shareholder loans
received
|
470,467
|
230,189
|
Shareholder loans
paid
|
-
|
(5,687)
|
Proceeds from
related parties
|
659,038
|
873,633
|
Repayments to
related parties
|
(260,510)
|
(496,665)
|
Repayments of
convertible debentures
|
(75,000)
|
-
|
Proceeds from sale
of convertible debentures
|
562,275
|
117,000
|
Proceeds from
issuance of common shares
|
-
|
22,541
|
Net
cash provided by financing activities
|
2,061,414
|
632,286
|
Effect of exchange
rate changes on cash
|
60,454
|
94,028
|
Net
increase in cash
|
103,058
|
(415,028)
|
Cash
at beginning of year
|
81,696
|
496,724
|
Cash
at end of year
|
$184,754
|
$81,696
|
|
|
|
Supplemental
Schedule of Cash Flow Information:
|
|
|
Cash
paid for interest
|
$116,507
|
$40,058
|
Cash
paid for income taxes
|
$-
|
$-
|
|
|
|
Non
cash financing activities:
|
|
|
Common shares
issued in settlement of related party and shareholder
loans
|
$-
|
$50,000
|
Common shares
issued in settlement of related party deferred fees
|
$76,800
|
$-
|
Common shares
issued for settlement of interest payable
|
$-
|
$34,356
|
Common shares
issued/to be issued for settlement of consulting and marketing fees
payable
|
$55,000
|
$132,054
|
Debentures issued
for settlement of related party and shareholder loans
|
$35,000
|
$503,000
|
Debentures issued
for settlement of amounts owing to an employee
|
$10,000
|
$ -
|
Debentures issued
for payment of consulting fees payable to related
parties
|
$20,000
|
$10,000
|
Debentures issued
for settlement of consulting and marketing fees
payable
|
$-
|
$20,000
|
The
accompanying notes are an integral part of these consolidated
financial statements
F-8
Gilla
Inc.
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts expressed in US Dollars)
1. NATURE OF OPERATIONS
Gilla
Inc. (“Gilla”, the “Company” or the
“Registrant”) was incorporated under the laws of the
state of Nevada on March 28, 1995 under the name of Truco,
Inc.
On July
1, 2015, the Company closed the acquisition of all the issued and
outstanding shares of E Vapor Labs Inc. (“E Vapor
Labs”), a Florida based E-liquid manufacturer. Pursuant to a
share purchase agreement, dated June 25, 2015, the Company acquired
E Vapor Labs for a total purchase price of $1,125,000 payable to
the vendors of E Vapor Labs on the following basis: (i) $225,000 in
cash on closing; and (ii) $900,000 in unsecured promissory notes
issued on closing. The unsecured promissory notes were issued in
three equal tranches of $300,000 due four (4), nine (9) and
eighteen (18) months respectfully from closing.
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 online retailer. Pursuant to a share purchase agreement,
dated July 14, 2015, the Company acquired VaporLiq for a total
purchase price of $126,975 payable to the vendors of VaporLiq on
the following basis: (i) 500,000 Common Shares of the Company
valued at $0.17 per share for a total value of $85,000; and (ii)
500,000 Common Share purchase warrants with a deemed value of
$41,975, which were exercisable to acquire 500,000 Common Shares at
an exercise price of $0.20 for a period of eighteen (18) months
from the date of issuance.
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 the assets, rights and title to
own and operate the Craft Vapes™, Craft Clouds and Miss
Pennysworth’s Elixirs E-liquid brands (the “Craft Vapes
Brands”). Pursuant to an asset purchase agreement, dated
October 21, 2015, the Company purchased the assets of 901 Vaping
for a total purchase price of $173,207 which included: (i) the
issuance of 1,000,000 Common Shares of the Company valued at $0.15
per share for an aggregate value of $150,000; (ii) cash
consideration equal to 901 Vaping’s inventory and equipment
of $23,207; and (iii) a quarterly-earn out based on the gross
profit stream derived from product sales of the Craft Vapes 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
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
“The Mad Alchemist Brands”). Pursuant to an asset
purchase agreement (the “TMA Asset Purchase
Agreement”), dated November 30, 2015, the Company purchased
the assets of TMA for a total purchase price of $500,000 which
included: (i) the issuance of 819,672 Common Shares of the Company
valued at $0.122 per share for an aggregate 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) a quarterly-earn out based on the gross
profit stream derived from product sales of The Mad Alchemist
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.
The
current business of the Company consists of the manufacturing,
marketing and distribution of generic and premium branded E-liquid
(“E-liquid”), which is the liquid used in vaporizers,
electronic cigarettes (“E-cigarettes”), and other
vaping hardware and accessories. E-liquid is heated by the atomizer
to deliver the sensation of smoking and sometimes even mimic
traditional smoking implements, such as cigarettes or cigars, in
their use and/or appearance, but do not burn tobacco. The Company
provides consumers with choice and quality across various
categories and price points to deliver the most efficient and
effective vaping solutions for nicotine related products.
Gilla’s proprietary product portfolio includes the following
brands: Coil Glaze™, Siren, The Drip Factory, Craft
Vapes™, Craft Clouds, Surf Sauce, Vinto Vape, VaporLiq, Vape
Warriors, Vapor’s Dozen, Miss Pennysworth’s Elixirs,
The Mad Alchemist™, Replicant, Enriched CBD and Crown
E-liquid™.
F-9
2. GOING CONCERN
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,
2016, the Company has an accumulated deficit of $13,250,894 and a
working capital deficiency of $5,173,897 as well as negative cash
flows from operating activities of $1,939,969 for the year ended
December 31, 2016. 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.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
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”).
(b)
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
subsidiaries Gilla Europe Kft. and Gilla Operations Europe s.r.o.;
Gilla Operations Worldwide Limited (“Gilla Worldwide”);
Gilla Franchises, LLC and its wholly owned subsidiary Legion of
Vape, LLC; and Snoke Distribution Canada Ltd. and its wholly owned
subsidiary Snoke Distribution USA, LLC. All inter-company accounts
and transactions have been eliminated in preparing these
consolidated financial statements.
(c)
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 and Slovakian subsidiaries
maintain their books and records in Euros (EUR) which is also their
functional currency. The Company’s Hungarian subsidiary
maintains its books and records in 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 Financial
Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) No. 830, Foreign Currency Matters (“ASC
830”). 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 foreign 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, as at the date of these consolidated financial statements,
entered into derivative instruments to offset the impact of foreign
currency fluctuations.
(d)
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 ASC No. 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, 2016 and 2015 that have been
included in the diluted loss per share calculation as the effects
would have been anti-dilutive.
F-10
(e)
Cash and Cash
Equivalents
The
Company considers all highly liquid investments with original
maturities of three months or less to be cash
equivalents.
(f)
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 deposits,
promissory notes, convertible debentures, loans from shareholders,
amounts owing on acquisitions, credit facility and term loan. 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 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.
(g)
Advertising
Costs
In
accordance with ASC No. 720, Other
Expenses (“ASC 720”), the Company expenses the
production costs of advertising the first time the advertising
takes place. The Company expenses all advertising costs as
incurred. During the years ended December 31, 2016 and 2015, the
Company expensed $nil (December 31, 2015: $90,800) in production
costs. During the year ended December 31, 2016, the Company
expensed $315,174 (December 31, 2015: $159,125) as corporate
promotions, these amounts have been recorded as administrative
expense.
(h)
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. 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.
(i)
Property and
Equipment
Property and
Equipment are measured at cost less accumulated depreciation and
accumulated impairment losses. Costs include expenditures that are
directly attributable to the acquisition of the asset. Gains and
losses on disposal of an item of property and equipment are
determined by comparing the proceeds from disposal with the
carrying amount of property and equipment, and are recognized in
the statement of operations.
Depreciation is
recognized in the statement of operations on a straight-line basis
over the estimated useful lives of each part of an item of property
and equipment, since this most closely reflects the expected
pattern of consumption of the future economic benefits embodied in
the asset.
F-11
The
estimated useful lives of the respective assets are as
follows:
Furniture
and equipment:
|
3
years
|
Computer
hardware:
|
3
years
|
Manufacturing
equipment:
|
3
years
|
Depreciation
methods, useful lives and residual values are reviewed at each
financial year-end and adjusted if appropriate.
(j)
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 the Company’s 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.
(k)
Shipping and
Handling Costs
The
Company does not record shipping income. When the Company charges
its customers, a cost associated with shipping and handling it
records that cost in administrative expenses as an offset to the
Company’s shipping expense.
(l)
Income
Taxes
The
Company follows ASC No. 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 consolidated financial
statements 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.
(m)
Impairment of Long
Lived Assets
Long-lived assets
to be held and used by the Company are periodically reviewed to
determine whether any events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. For
long-lived assets to be held and used, the Company bases its
evaluation on impairment indicators such as the nature of the
assets, the future economic benefit of the assets, any historical
or future profitability measurements, as well as other external
market conditions or factors that may be present. In the event that
facts and circumstances indicate that the carrying amount of an
asset or asset group may not be recoverable and an estimate of
future undiscounted cash flows is less than the carrying amount of
the asset, an impairment loss will be recognized for the difference
between the carrying value and the fair value.
F-12
(n)
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 No. 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.
(o)
Comprehensive
Income or Loss
The
Company reports comprehensive income or loss in its consolidated
financial statements. In addition to items included in net income
or loss, comprehensive income or loss includes items charged or
credited directly to stockholders’ equity, such as foreign
currency translation adjustments and unrealized gains or losses on
available for sale marketable securities.
(p)
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 the Company’s
estimates could be affected by external conditions, including those
unique to the Company’s industry and general economic
conditions. It is possible that these external factors could
have an effect on the Company’s estimates that could cause
actual results to differ from its estimates. The Company
re-evaluates all of its accounting estimates at least quarterly
based on the conditions and records adjustments when
necessary.
(q)
Website Development
Costs
Under the provisions of ASC No.
350, Intangibles –
Goodwill and Other (“ASC 350”), the Company
capitalizes costs incurred in the website application and
infrastructure development stage. Capitalized costs are amortized
over the estimated useful life of the website which the Company
considers to be five years. Ongoing website post-implementation
cost of operations, including training and application, will be
expensed as incurred.
(r)
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 No.
470-20, Debt with Conversion and
Other Options (“ASC 470-20”). 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.
(s)
Warrants
The
Company accounts for common stock purchase warrants at fair value
in accordance with ASC No. 815-40, Derivatives and Hedging (“ASC
815-40”). The Black-Scholes option pricing valuation method
is used to determine fair value of these warrants consistent with
ASC No. 718, Compensation –
Stock Compensation (“ASC 718”). 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.
F-13
(t)
Stock Issued in
Exchange for Services
The
valuation of the Company’s common stock issued in exchange
for services is valued at an estimated fair market value as
determined by the most readily determinable value of either the
stock or services exchanged.
(u)
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
|
(v)
Recent Accounting
Pronouncements
The
Company has reviewed all recently issued, but not yet effective,
accounting pronouncements and other than the below, does not expect
the future adoption of any such pronouncements to have a
significant impact on its results of operations, financial
condition or cash flow.
In May
2014, the FASB issued 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
(“ASU 2015-14”), deferring the effective date for ASU
2014-09 by one year, and thus, the new standard will be effective
for us beginning on January 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
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.
On
March 30, 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation
(Topic 718) (“ASU
2016-09”). This
update requires that all excess tax benefits and tax deficiencies
arising from share-based payment awards should be recognized as
income tax expense or benefit on the income statement. The
amendment also states that excess tax benefits should be classified
along with other income tax cash flows as an operating activity. In
addition, an entity can make an entity-wide accounting policy
election to either estimate the number of awards expected to vest
or account for forfeitures as they occur. The provisions of this
update are effective for annual and interim periods beginning
after December 15, 2016. The Company is currently evaluating
the impact the adoption of this standard will have on its financial
statements.
F-14
In
April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers
(Topic 606), Identifying Performance Obligations and
Licensing (“ASU 2016-10”). ASU 2016-10 clarifies
the following two aspects of Topic 606: identifying performance
obligations and the licensing implementation guidance, while
retaining the related principles for those areas. The provisions of
this update are effective for annual and interim periods beginning
after December 15, 2017, with early application permitted. The
Company is currently evaluating the impact the adoption of this
standard will have on its financial statements.
In May
2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic
606), Narrow-Scope
Improvements and Practical Expedients (“ASU
2016-12”). The core principal of ASU 2016-12 is the
recognition of revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those
goods or services. The provisions of this update are
effective for annual and interim periods beginning
after December 15, 2017, with early application permitted. The
Company is currently evaluating the impact the adoption of this
standard will have on its financial statements.
In June
2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses
(Topic 326), Measurement of Credit Losses on Financial
Instruments (“ASU 2016-13”), which requires
financial assets measured at amortized cost be presented at the net
amount expected to be collected. The allowance for credit losses is
a valuation account that is deducted from the amortized cost basis.
The measurement of expected losses is based upon historical
experience, current conditions, and reasonable and supportable
forecasts that affect the collectability of the reported amount.
This guidance is effective for fiscal years beginning
after December 15, 2019, with early adoption permitted. The
Company is evaluating the guidance and has not yet determined the
impact on its consolidated financial statements.
In
August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230),
Classification of Certain Cash Receipts and Cash Payments (a
consensus of the Emerging Issues Task Force) (“ASU
2016-15”), which clarifies how certain cash receipts and cash
payments are presented and classified in the statement of cash
flows. Among other clarifications, the guidance requires that cash
proceeds received from the settlement of corporate-owned life
insurance (COLI) policies be classified as cash inflows from
investing activities and that cash payments for premiums on COLI
policies may be classified as cash outflows for investing
activities, operating activities or a combination of both. The
guidance is effective for fiscal years beginning
after December 15, 2017, with early adoption permitted.
Retrospective application is required. The Company is evaluating
the guidance and has not yet determined the impact on its
consolidated financial statements.
4. BUSINESS COMBINATIONS
(a) On
July 1, 2015, the Company closed the acquisition of all the issued
and outstanding shares of E Vapor Labs, a Florida based E-liquid
manufacturer. The Company purchased E Vapor Labs in order to
procure an E-liquid manufacturing platform allowing the Company to
secure large private label contracts as well as manufacture its own
brands going forward. The following summarizes the fair value of
the assets acquired, liabilities assumed and the consideration
transferred at the acquisition date:
Assets
acquired:
|
Allocation
|
Measurement
Period Adjustments
|
Final
Allocation
|
Cash
|
$22,942
|
-
|
$22,942
|
Receivables
|
48,356
|
(1,705)
|
46,651
|
Other current
assets
|
21,195
|
(24)
|
21,171
|
Inventory
|
122,309
|
4,428
|
126,737
|
Fixed
assets
|
118,867
|
7
|
118,874
|
Intangible
assets
|
-
|
160,000
|
160,000
|
Goodwill
|
847,265
|
(154,211)
|
693,054
|
Total
assets acquired
|
$1,180,934
|
|
$1,189,429
|
|
|
|
|
Liabilities
assumed:
|
|
|
|
Accounts
payable
|
$206,252
|
-
|
$206,252
|
Accrued
liabilities
|
-
|
28,000
|
28,000
|
Loan
payable
|
25,000
|
-
|
25,000
|
Total
liabilities assumed
|
$231,252
|
|
$259,252
|
|
|
|
|
Consideration:
|
|
|
|
Cash
|
$225,000
|
-
|
$225,000
|
Promissory Notes A,
unsecured and non-interest bearing, due November 1,
2015
|
196,026
|
(19,505)
|
176,521
|
Promissory Notes B,
unsecured and non-interest bearing, due April 1, 2016
|
275,555
|
-
|
275,555
|
Promissory Notes C,
unsecured and non-interest bearing, due January 1,
2017
|
253,101
|
-
|
253,101
|
Total
consideration
|
$949,682
|
|
$930,177
|
F-15
In
consideration for the acquisition, the Company paid to the vendors,
$225,000 in cash on closing and issued $900,000 in unsecured
promissory notes on closing (collectively, the “Unsecured
Promissory Notes”). The Unsecured Promissory Notes were
issued in three equal tranches of $300,000 due four (4), nine (9)
and eighteen (18) months respectfully from closing (individually,
“Promissory Notes A”, “Promissory Notes B”,
and “Promissory Notes C” respectively). The Unsecured
Promissory Notes are all unsecured, non-interest bearing, and on
the maturity date, at the option of the vendors, up to one-third of
each tranche of the Unsecured Promissory Notes can be repaid in
Common Shares of the Company, calculated using the 5 day weighted
average closing market price prior to the maturity of the Unsecured
Promissory Notes. The Unsecured Promissory Notes, are all and each
subject to adjustments as outlined in the share purchase agreement
(the “SPA”), dated June 25, 2015.
At
December 31, 2015, the Company adjusted the Promissory Notes A for
$116,683 which is the known difference in the working capital
balance at closing of the acquisition from the amount specified in
the SPA. Further, a 12% discount rate has been used to calculate
the present value of the Unsecured Promissory Notes based on the
Company’s estimate of cost of financing for comparable notes
with similar term and risk profiles. Over the term of the
respective Unsecured Promissory Notes, interest will be accrued at
12% per annum to accrete the Unsecured Promissory Notes to their
respective principal amounts.
|
Promissory Note
A
|
Promissory Note
B
|
Promissory Note
C
|
Total
|
Present value at
acquisition date
|
$293,204
|
$275,555
|
$253,101
|
$821,860
|
Working capital
adjustment
|
(97,178)
|
-
|
-
|
(97,178)
|
Interest expense
related to accretion
|
7,547
|
16,065
|
14,756
|
38,368
|
Present
value at December 31, 2015
|
$203,573
|
$291,620
|
$267,857
|
$763,050
|
|
|
|
|
|
Measurement period
adjustment
|
(19,505)
|
-
|
-
|
(19,505)
|
Interest expense
related to accretion
|
(751)
|
8,380
|
32,143
|
39,772
|
Present
value at December 31, 2016
|
$183,317
|
$300,000
|
$300,000
|
$783,317
|
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 E Vapor Lab’s
existing and potential customers. The estimated useful life and
fair values of the identifiable intangible assets are as
follows:
|
Estimated
Useful
Life (in
years)
|
Amount
|
Brands
|
5
|
$20,000
|
Customer
relationships
|
5
|
140,000
|
|
|
$160,000
|
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, 2015. 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.
F-16
|
December
31, 2016
|
December 31,
2015
|
Pro forma
revenue
|
$4,572,332
|
$1,679,867
|
Pro forma loss from
operations
|
$(3,590,177)
|
$(2,738,649)
|
Pro forma net
loss
|
$(4,362,320)
|
$(3,216,321)
|
(b) On
July 14, 2015, the Company closed the acquisition of all the issued
and outstanding shares of VaporLiq, an E-liquid online retailer.
The Company purchased VaporLiq mainly to access industry
relationships and knowhow of various E-liquid brands that VaporLiq
transacts with. The following summarizes the fair value of the
assets acquired, liabilities assumed and the consideration
transferred at the acquisition date:
Assets
acquired:
|
|
Cash
|
$5,381
|
Website
|
10,000
|
Inventory
|
2,150
|
Goodwill
|
109,444
|
Total
assets acquired
|
$126,975
|
|
|
Total
liabilities assumed
|
$-
|
|
|
Consideration:
|
|
500,000 Common
Shares at $0.17 per share
|
$85,000
|
500,000
warrants
|
41,975
|
Total
consideration
|
$126,975
|
The
warrants were exercisable over eighteen (18) months with an
exercise price of $0.20 per Common Share.
The
goodwill is attributable to business acumen and access to key
E-liquid brands that the Company may leverage for further
acquisitions.
The
results of operations of VaporLiq have been included in the
consolidated statements of operations from the acquisition date,
though revenue and net income from VaporLiq were not material for
the year ended December 31, 2016. Pro forma results of operations
have not been presented because the acquisition was not material to
the results of operations.
(c) 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 assets, rights and title to own and operate
the Craft Vapes 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 valued at $0.15 per share for a total value of
$150,000, 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 Craft Vapes Brands. The earn-out commences on
the closing date and pays up to a maximum of 25% of the gross
profit stream. As of
December 31, 2016, no amounts have been accrued or paid in relation
to the quarterly earn-out.
F-17
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 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 resulting from the acquired assets from 901
Vaping have been included in the consolidated statements of
operations from the acquisition date, though revenue and net income
from the acquired assets were not material for the year ended
December 31, 2016. Pro forma results of operations have not been
presented because the acquisition was not material to the results
of operations.
(d) On December 2, 2015, the
Company closed the acquisition of all of the assets of TMA, an
E-liquid manufacturer, including the assets, rights and title to
own and operate The Mad Alchemist 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
short term
|
149,134
|
Deferred payments
long term
|
194,283
|
Total
consideration
|
$443,417
|
In
consideration for the acquisition, the Company issued 819,672
Common Shares valued at $0.122 per share for a total value of
$100,000; agreed to pay a total of $400,000 in deferred payments
(the “Amounts Owing on Acquisition”), payable in ten
(10) equal payments of $20,000 in cash and $20,000 in Common Shares
every three (3) months following the closing date; and agreed to a
quarterly earn-out based on the gross profit stream derived from
product sales of The Mad Alchemist Brands. The earn-out commences
on the closing date and pays up to a maximum of 25% of the gross
profit stream. The number of Common Shares issuable will be
calculated and priced using the 5 day weighted average closing
market price prior to each issuance date. Further, a 12% discount
rate has been used to calculate the present value of the Amounts
Owing on Acquisition. Over the term of the respective deferred
payments, interest will be accrued at 12% per annum to accrete the
payments to their respective principal amounts. During the year
ended December 31, 2016, the Company recorded $9,583 in interest
expense related to the accretion of the Amounts Owing on
Acquisition.
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 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
|
|
|
|
F-18
The
results of operations resulting from the acquired assets from TMA
have been included in the consolidated statements of operations
from the acquisition date, though revenue and net income from the
acquired assets were not material for the year ended December 31,
2016. Pro forma results of operations have not been presented
because the acquisition was not material to the results of
operations.
On
April 15, 2016, the Company entered into a settlement agreement
(the “TMA Settlement Agreement”) with TMA and the vendors of TMA (collectively,
the “TMA Vendors”). Subject to the terms and conditions
of the TMA Settlement Agreement, the parties settled: (i) any and
all compensation and expenses owing by the Company to the TMA
Vendors and (ii) the $400,000 of Amounts Owing on Acquisition
payable by the Company to TMA Vendors pursuant to the TMA Asset
Purchase Agreement in exchange for the Company paying to the TMA
Vendors a total settlement consideration of $133,163 payable as
$100,000 in cash and $33,163 in the Company’s assets as a
payment-in-kind. Of the $100,000 payable in cash under the TMA
Settlement Agreement, $45,000 was paid upon execution of the
settlement, $27,500 was payable thirty days following the signing
of the settlement and the remaining $27,500 was payable at the
later of (i) sixty days following the signing of the TMA Settlement
Agreement, or (ii) the completion of the historical audit of TMA.
As a result of the TMA Settlement Agreement, the Company has
recorded a gain on settlement in the amount of $274,051. As at
December 31, 2016, $55,000 (December 31, 2015: $346,676) remains
payable to the TMA Vendors. In addition, the Company and the TMA
Vendors mutually terminated all employment agreements between the
Company and the TMA vendors, entered into on closing of the TMA
Asset Purchase Agreement, and all amounts were fully settled
pursuant to the TMA Settlement Agreement. Due to this change in
circumstances, the Company tested goodwill and intangibles for
impairment and as a result, the Company has fully impaired goodwill
and intangible assets related to the acquired assets of TMA in the
amount of $208,376 and $122,983, respectively, which formerly
represented the value of brands, customer relationships, workforce
and business acumen acquired.
5. OTHER CURRENT ASSETS
Other
current assets consist of the following:
|
December
31,
2016
|
December
31,
2015
|
Vendor deposits
|
$13,256
|
$175,700
|
Prepaid
expenses
|
301,348
|
88,274
|
Trade currency
|
45,000
|
45,000
|
Other
receivables
|
103,104
|
13,352
|
|
$462,708
|
$322,326
|
Other
receivables include VAT receivable, HST receivable and holdback
amounts related to the Company’s merchant services
account.
6. INVENTORY
Inventory
consists of the following:
|
December
31,
2016
|
December
31,
2015
|
Vaping hardware and
accessories
|
$105,496
|
$-
|
E-liquid bottles -
finished goods
|
181,392
|
65,247
|
E-liquid
components
|
158,050
|
57,988
|
Bottles and
packaging
|
100,197
|
31,465
|
|
$545,135
|
$154,700
|
During
the year ended December 31, 2016, the Company wrote off $14,671 in
obsolete inventory recorded in Gilla Europe Kft., the
Company’s Hungarian subsidiary and $24,453 in obsolete
inventory recorded in E Vapor Labs Inc., the Company’s U.S.
subsidiary, that it was unable to sell. During the year ended
December 31, 2015, the Company wrote off $75,964 in obsolete
inventory recorded in Charlie’s Club, an e-commerce website
of the Company, and Gilla Operations, the Company’s primary
operating subsidiary in the United States.
During
the year ended December 31, 2016 and 2015, the Company expensed
$1,927,657 and $908,887 of inventory as cost of goods sold,
respectively. At December 31, 2016, the full amount of the
Company’s inventory serves as collateral for the
Company’s secured borrowings.
F-19
7. PROPERTY AND EQUIPMENT
Property
and equipment consists of the following:
|
December
31,
2016
|
December 31,
2015
|
||
|
Cost
|
Accumulated
Depreciation
|
Net
|
Net
|
Furniture and
equipment
|
$63,947
|
$18,030
|
$45,917
|
$1,156
|
Computer
hardware
|
29,722
|
13,737
|
15,985
|
5,525
|
Manufacturing
equipment
|
52,856
|
21,690
|
31,166
|
143,668
|
|
$146,525
|
$53,457
|
$93,068
|
$150,349
|
Depreciation
expense for the years ended December 31, 2016 and 2015 amounted to
$56,055 and $20,986 respectively. During the year ended December
31, 2016, the Company wrote off manufacturing equipment with a net
book value of $70,142 that was not in working order and that the
Company has not been able to sell. As a result of the write off,
the Company recorded an impairment of fixed asset expense in the
amount of $70,142.
At
December 31, 2016, the full amount of the Company’s property
and equipment serves as collateral for the Company’s secured
borrowings.
8. WEBSITE DEVELOPMENT
Website
development consists of the following:
|
December
31,
2016
|
December 31,
2015
|
||
|
Cost
|
Accumulated
Amortization
|
Net
|
Net
|
VaporLiq
website
|
$10,000
|
$2,917
|
$7,083
|
$9,083
|
|
|
|
|
|
Amortization
expense on website development for the years ended December 31,
2016 and 2015 amounted to $2,000 and $20,915 respectively. During
the year ended December 31, 2015, the Company impaired the
Charlie’s Club website as it was determined to be obsolete
due to the shift in direction the Company has pursued from the sale
of E-cigarettes to the manufacturing and sale of E-liquid. As a
result, the Company recorded an impairment in the amount of
$73,325.
The
estimated amortization expense for the next 3 years ending December
31, 2017, 2018 and 2019 approximates $2,000 per year. For the year
ending December 31, 2020 it approximates $1,083.
9. INTANGIBLE ASSETS
Intangible
assets consist of the following:
|
December
31,
2016
|
December 31,
2015
|
||
|
Cost
|
Accumulated
Amortization
|
Net
|
Net
|
Brands
|
$50,000
|
$13,000
|
$37,000
|
$88,000
|
Customer
relationships
|
173,000
|
49,700
|
123,300
|
127,283
|
|
$223,000
|
$62,700
|
$160,300
|
$215,283
|
|
|
|
|
|
During
the year ended December 31, 2016, the Company determined that the
intangible assets acquired in the acquisition of the assets of TMA
were impaired and as a result recorded an impairment of intangible
assets in the amount of $122,983.
Amortization
expense on intangible assets for the years ended December 31, 2016
and 2015 amounted to $92,000 and $4,717 respectively. The estimated
amortization expense for the next 4 years ending December 31, 2017,
2018 and 2019 approximates $44,600 per year. For the year ending
December 31, 2020 it approximates $26,500.
F-20
10. GOODWILL
|
2016
|
2015
|
As
at January 1
|
$1,252,084
|
$-
|
Acquisitions (note
4)
|
-
|
1,252,084
|
Measurement period
adjustment (note 4)
|
(154,211)
|
-
|
Impairment
|
(208,376)
|
-
|
As
at December 31
|
$889,497
|
$1,252,084
|
|
|
|
During
the year ended December 31, 2016, the Company tested the goodwill
for impairment and as a result the Company fully impaired the
goodwill related to the acquisition of the assets of TMA in the
amount of $208,376 which formerly represented the value of
workforce and business acumen acquired.
11. LOANS FROM SHAREHOLDERS
The
Company has outstanding current loans from shareholders as
follows:
|
December
31,
2016
|
December
31,
2015
|
Non-interest
bearing, unsecured, no specific terms of repayment
|
$5,000
|
$5,000
|
Bears interest of
1.5% per month on a cumulative basis, unsecured, no specific terms
of repayment(i)
|
23,223
|
22,528
|
Bears interest of
6% per annum on a cumulative basis, secured by the assets of the
Company, matures on March 2, 2018(v)
|
474,065
|
-
|
|
$502,288
|
$27,528
|
The
Company has outstanding long term loans from shareholders as
follows:
|
December
31,
2016
|
December
31,
2015
|
Bears interest of
10% per annum on a cumulative basis, secured by the assets of the
Company, matures on July 1, 2018(ii)
|
$372,400
|
$361,250
|
Bears interest of
10% per annum on a cumulative basis, secured by the assets of the
Company, matures on July 1, 2018(iii)
|
100,000
|
100,000
|
Bears interest of
6% per annum on a cumulative basis, secured by the assets of the
Company, matures on March 2, 2018(v)
|
24,951
|
-
|
|
$497,351
|
$461,250
|
(i)
During the year
ended December 31, 2016, the Company accrued interest of $5,992 on
this shareholder loan (December 31, 2015: $6,327). Total accrued
interest owing on the shareholder loan at December 31, 2016 is
$12,784 (December 31, 2015: $6,686) which is included in accrued
liabilities.
(ii)
On February 13,
2014, the Company entered into a secured promissory note (the
“Secured Note”) with a shareholder, whereby the Company
agreed to pay the party the aggregate unpaid principal amount of
CAD $500,000 (USD $372,400) (December 31, 2015: CAD $500,000; USD
$361,250) on or before August 13, 2014, bearing interest at a rate
of 10% per annum, such interest to accrue monthly and added to the
principal. The Secured Note is secured by a general security
agreement granting a general security interest over all the assets
of the Company. During the years ended December 31, 2014 and 2015,
the Company and the shareholder extended the maturity date of the
Secured Note to January 1, 2016 and July 1, 2017 respectively.
During the year ended December 31, 2016, the Company and the
shareholder extended the maturity date of the Secured Note to July
1, 2018.
The
Company accrued interest of $44,888 during the year ended December
31, 2016 (December 31, 2015: $40,412) on the Secured Note. Accrued
interest owing on the Secured Note at December 31, 2016 is $93,221
(December 31, 2015: $47,617) which is included in accrued
liabilities.
F-21
(iii)
On July 15, 2014,
the Company entered into a secured promissory note (the
“Secured Note No.2”) with a shareholder, whereby the
Company agreed to pay the party the aggregate unpaid principal
amount of $100,000 on or before July 18, 2014, bearing interest at
a rate of 10% per annum, such interest to accrue monthly and added
to the principal. The Secured Note No.2 is secured by the general
security agreement issued with the Secured Note. During the years
ended December 31, 2014 and 2015, the Company and the shareholder
extended the maturity date of the Secured Note No.2 to January 1,
2016 and July 1, 2017, respectively. During the year ended December
31, 2016, the Company and the shareholder extended the maturity
date of the Secured Note No.2 to July 1, 2018.
The
Company accrued interest of $11,863 during the year ended December
31, 2016 (December 31, 2015: $10,738) on the Secured Note No.2.
Accrued interest owing on the Secured Note No.2 at December 31,
2016 is $25,152 (December 31, 2015: $13,289) which is included in
accrued liabilities.
In
connection to the maturity date extension of Secured Note and
Secured Note No.2 (together, the “Secured Notes”), the
Company issued 250,000 warrants to purchase Common Shares of the
Company exercisable until July 1, 2018 with an exercise price of
$0.20 per Common Share, see note 16(g).
(iv)
On June 29, 2015,
the Company entered into a secured promissory note (the
“Secured Note No.3”) with a shareholder, whereby the
Company agreed to pay the party the aggregate unpaid principal
amount of CAD $300,000 (USD $240,180) on or before January 1, 2016,
bearing interest at a rate of 10% per annum, such interest to
accrue monthly and added to the principal. The Secured Note No.3
was secured by the general security agreement issued with the
Secured Note. In connection to the Secured Note No.3, the Company
issued 500,000 warrants to purchase Common Shares of the Company
exercisable over one year with an exercise price of $0.15 per
Common Share, see note 14(c).
The
Company accrued interest of $11,994 on the Secured Note No.3 during
the year ended December 31, 2015. On December 31, 2015, the Secured
Note No.3 and all accrued interest owing was settled with the
issuance of face value $227,000 of Convertible Debentures Series
B.
(v)
On March 2, 2016,
the Company entered into a loan agreement (the “Loan
Agreement”) with a shareholder, whereby the shareholder would
make available to the Company the aggregate principal amount of CAD
$670,000 (USD $518,714) (the “Shareholder Loan”) for
capital expenditures, marketing expenditures and working capital.
Under the terms of the Loan Agreement, the Shareholder Loan was
made available to the Company in two equal tranches of CAD $335,000
(USD $259,357), for a total loan amount of CAD $670,000 (USD
$518,714), with the first tranche (“Loan Tranche A”)
received on the closing date and the second tranche (“Loan
Tranche B”) received on April 14, 2016. At December 31, 2016,
CAD $52,000 (USD $38,730) of the Loan Tranche B was being held in
trust by the shareholder to be released on the incurrence of
specific expenses. The Shareholder Loan bears interest at a rate of
6% per annum, on the outstanding principal, and shall mature on
March 2, 2018, whereby any outstanding principal together with all
accrued and unpaid interest thereon shall be due and payable. The
Company shall also repay 5% of the initial principal amount of Loan
Tranche A and 5% of Loan Tranche B, monthly in arrears, with the
first principal repayment beginning on June 30, 2016. At December
31, 2016, $474,065 of the amounts owing on the Loan Agreement have
been recorded as current liabilities to reflect the monthly
principal payments due over the next year. The Company may elect to
repay the outstanding principal of the Shareholder Loan together
with all accrued and unpaid interest thereon prior to maturity
without premium or penalty. The Company also agreed to service the
Shareholder Loan during the term prior to making any payments to
the Company’s Chief Executive Officer, Chief Financial
Officer and Board of Directors. The Shareholder Loan is secured by
a general security agreement granting a general security interest
over all the assets of the Company.
The
Company accrued interest of $22,832 during the year ended December
31, 2016 (December 31, 2015: $nil) on the Shareholder Loan. Accrued
interest owing on the Shareholder Loan at December 31, 2016 is
$23,433 (December 31, 2015: $nil) which is included in accrued
liabilities. At December 31, 2016, the Company owes the lender
$174,656 in principal payments.
12. CREDIT FACILITY
On
August 1, 2014, the Company entered into a revolving credit
facility (the “Credit Facility”) with an unrelated
party acting as an agent to a consortium of participants (the
“Lenders”), whereby the Lenders would make a revolving
credit facility in the aggregate principal amount of CAD $500,000
for the exclusive purpose of purchasing inventory for sale in the
Company’s ordinary course of business to approved customers.
The Credit Facility charged interest at a rate of 15% per annum on
all drawn advances and a standby fee of 3.5% per annum on the
undrawn portion of the Credit Facility. The Credit Facility matured
on August 1, 2015 whereby the outstanding advances together with
all accrued and unpaid interest thereon would be due and payable.
On August 1, 2014, and in connection to the Credit Facility, the
Company issued 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 were both participants of the consortium of
participants of the Credit Facility, each having committed to
provide ten percent of the principal amount of the Credit Facility.
The Credit Facility was secured by all of the Company’s
inventory and accounts due relating to any inventory as granted in
an intercreditor and subordination agreement by and among the
Company, the Secured Note holder and the Lenders to establish the
relative rights and priorities of the secured parties against the
Company and a security agreement by and between the Company and the
Lenders.
F-22
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, 2016, the Company paid $2,189 (December
31, 2015: $30,670) of interest and standby fees as a result of the
Credit Facility.
On
January 18, 2016, and in connection to the Term Loan (note 13), the
Company and the Lenders entered into a loan termination agreement
whereby the Company and the Lenders terminated and retired the
Credit Facility. As a result, the CAD $294,000 in amounts advanced
from the Credit Facility and the CAD $3,093 in accrued interest
owing on the Credit facility were rolled into the Term
Loan.
13. TERM LOAN
On
January 18, 2016, the Company entered into a term loan (the
“Term Loan”) with the Lenders, whereby the Lenders
would loan the Company the aggregate principal amount of CAD
$1,000,000 for capital expenditures, marketing expenditures and
working capital. The agent who arranged the Term Loan was not a
related party of the Company. The Term Loan bears interest at a
rate of 16% per annum, on the outstanding principal, and shall
mature on July 3, 2017, whereby any outstanding principal together
with all accrued and unpaid interest thereon shall be due and
payable. The Term Loan is 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 Lenders in
the following priority: first, to pay the monthly interest due on
the Term Loan; and second, to repay any remaining principal
outstanding on the Term Loan. The Company may elect to repay the
outstanding principal of the Term Loan together with all accrued
and unpaid interest thereon prior to the maturity, subject to an
early repayment penalty of the maximum of (i) 3 months interest on
the outstanding principal; or (ii) 50% of the interest payable on
the outstanding principal until maturity (the “Early
Repayment Penalty”). The Term Loan shall be immediately due
and payable at the option of the Lenders if there is a change in
key personnel meaning the Company’s current Chief Executive
Officer and Chief Financial Officer. On January 18, 2016 and in
connection to the Term Loan, the Company issued warrants for the
purchase of 250,000 Common Shares 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 (note 16 (i) issued on August 1, 2014 in
connection with the Credit Facility until December 31, 2017, with
all other terms of the warrants remaining the same.
The
Company’s Chief Executive Officer and Chief Financial Officer
are both participants of the consortium of Lenders of the Term
Loan, each having committed to provide ten percent of the principal
amount of the Term Loan. Neither the Chief Executive Officer nor
the Chief Financial Officer participated in the warrants issued or
warrants extended in connection with the Term Loan and both parties
have been appropriately abstained from voting on the Board of
Directors to approve the Term Loan, where applicable.
On July
15, 2016, the Company and the Lenders of the Term Loan entered into
a Term Loan Amendment (the “Term Loan Amendment”) in
which the Lenders agreed to extend to the Company an additional CAD
$600,000 in principal to increase the Term Loan facility up to the
aggregate principal amount of CAD $1,600,000. The parties also
extended the maturity date of the Term Loan to July 2, 2018 with
all other terms of the Term Loan remaining the same. The
Company’s Chief Executive Officer and its Chief Financial
Officer are both participants in the consortium of Lenders having
each committed to provide a total of CAD $150,000 of the initial
principal of the Term Loan and the additional principal of the Term
Loan pursuant to the Term Loan Amendment. Neither the Chief
Executive Officer nor the Chief Financial Officer participated in
the warrants issued or warrants extended in connection with the
Term Loan Amendment.
F-23
On July
15, 2016 and in connection to the Term Loan Amendment, the Company
issued warrants for the purchase of 300,000 Common Shares of the
Company (note 16 (p)) at an exercise price of $0.20 per Common
Share, such purchase warrants expiring on December 31, 2018. The
Company also extended the expiration dates of i) the 250,000
purchase warrants (note 16 (i) issued on January 18, 2016 in
connection to the Term Loan and ii) the 250,000 purchase warrants
(note 16(i)) issued on August 1, 2014 and extended on January 18,
2016 in connection to the Term Loan both until December 31, 2018,
with all other terms of the warrants remaining the
same.
During
the year ended December 31, 2016, the Company was advanced
$1,219,840 (CAD $1,600,000) from the Term Loan including the CAD
$294,000 and CAD $3,093 rolled in from the Credit Facility (note
12) as well as CAD $240,581 of advances from the Company’s
Chief Executive Officer and Chief Financial Officer.
During
the year ended December 31, 2016, the Company expensed $140,540
(December 31, 2015: $nil) in interest as a result of the Term Loan.
Pursuant to the Cash Sweep, during the year ended December 31,
2016, the Company paid $187,898 to the Lenders consisting of
$111,083 in interest and $76,815 in principal payments and at
December 31, 2016, the Company owes the Lenders $81,060 in arrears
consisting of $29,471 in interest and $51,589 in principal
payments.
At
December 31, 2016, the amount owing on the Term Loan is as
follows:
|
December 31,
2016
|
December 31,
2015
|
Amount
advanced
|
$1,219,840
|
$-
|
Exchange gains
during the year
|
(28,159)
|
-
|
Principal payments
made
|
(76,815)
|
-
|
Interest
accrued
|
140,540
|
-
|
Interest payments
made
|
(111,069)
|
-
|
Amount owing at end
of year
|
$1,144,337
|
$-
|
14. CONVERTIBLE DEBENTURES
Convertible Debentures Series A
On
September 3, 2013, December 23, 2013 and February 11, 2014, the
Company issued $425,000, $797,000 and $178,000, respectively, of
unsecured subordinated convertible debentures (“Convertible
Debentures Series A”). The Convertible Debentures Series A
matured on January 31, 2016 and charged interest at a rate of 12%
per annum, payable quarterly in arrears. The Convertible Debentures
Series A were convertible into Common Shares of the Company at a
fixed conversion rate of $0.07 per Common Share at any time prior
to the maturity date. Of the $178,000 in face value of Convertible
Debentures Series A issued on February 11, 2014, $3,000 were issued
in settlement of loans from shareholders and $50,000 were issued in
settlement of loans from related parties.
Convertible Debentures Series B
On
December 31, 2015, the Company issued 650 unsecured subordinated
convertible debenture units (“Convertible Debentures Series
B”) for proceeds of $650,000. Each Convertible Debentures
Series B consisted of an unsecured subordinated convertible
debenture having a principal amount of $1,000 and warrants
exercisable for the purchase of 5,000 Common Shares of the Company
at a price of $0.20 per Common Share for a period of twenty-four
months from the date of issuance (note 16). The Convertible
Debentures Series B mature on January 31, 2018 and bear interest at
a rate of 8% per annum, payable quarterly in arrears. The face
value of the Convertible Debentures Series B, together with all
accrued and unpaid interest thereon, are convertible into Common
Shares of the Company at a fixed conversion rate of $0.10 per
Common Share at any time prior to maturity. The Company also has
the option to force conversion of any outstanding Convertible
Debentures Series B at any time after six months from issuance and
prior to maturity. Of the $650,000 in face value of Convertible
Debentures Series B issued on December 31, 2015, $276,000 were
issued in settlement of loans from related parties (note 19),
$10,000 were issued in settlement of related party consulting fees
(note 19), $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.
F-24
Convertible Debentures Series C
On May
20, 2016, the Company issued 375 unsecured subordinated convertible
debenture units (the “Convertible Debentures Series C”)
for proceeds of $375,000. Each Convertible Debentures Series C
consisted of an unsecured subordinated convertible debenture having
a principal amount of $1,000 and warrants exercisable for the
purchase of 10,000 Common Shares of the Company at a price of $0.20
per Common Share for a period of twenty-four months from the date
of issuance (note 16 (n). The Convertible Debentures Series C
mature on January 31, 2018 and bear interest at a rate of 8% per
annum, accrued quarterly in arrears. The face value of the
Convertible Debentures Series C, together with all accrued and
unpaid interest thereon, are convertible into Common Shares of the
Company at a fixed conversion rate of $0.10 per Common Share at any
time prior to maturity. The Company also has the option to force
conversion of any outstanding Convertible Debentures Series C at
any time after six months from issuance and prior to maturity. For
Canadian holders, the Company may only force conversion of any
outstanding Convertible Debentures Series C at such time that the
Company is a reporting issuer within the jurisdiction of Canada. Of
the $375,000 in face value of Convertible Debentures Series C
issued on May 20, 2016, $55,000 were issued in settlement of
amounts owing to related parties (note 19) and $10,000 were issued
in settlement of amounts owing to an employee. The Company incurred
costs of $22,725 as a result of the issuance of Convertible
Debentures Series C on May 20, 2016.
On
December 31, 2016, the Company issued an additional 275 units of
Convertible Debentures Series C for proceeds of $275,000 which were
fully issued in exchange for cash.
The
Company evaluated the terms and conditions of the Convertible
Debentures Series A, Convertible Debentures Series B and each
tranche of Convertible Debentures Series C (together, the
“Convertible Debentures”) under the guidance of ASC No.
815, Derivatives and
Hedging (“ASC 815”). The conversion feature met
the definition of conventional convertible for purposes of applying
the conventional convertible exemption. The definition of
conventional contemplates a limitation on the number of shares
issuable under the arrangement. The instrument was convertible into
a fixed number of shares and there were no down round protection
features contained in the contracts.
Since a
portion of the Convertible Debentures were issued in exchange for
nonconvertible instruments at the original instrument’s
maturity date, the guidance of ASC 470-20-30-19 & 20 were
applied. The fair value of the newly issued Convertible Debentures
were equal to the redemption amounts owed at the maturity date of
the original instruments. Therefore, there was no gain or loss on
extinguishment of debt recorded. After the exchange occurred, the
Company was required to consider whether the new hybrid contracts
embodied a beneficial conversion feature
(“BCF”).
For the
face value $425,000 of Convertible Debentures Series A issued on
September 3, 2013, the calculation of the effective conversion
amount did not result in a BCF because the effective conversion
price was greater than the Company’s stock price on the date
of issuance, therefore no BCF was recorded. However, for the face
value $797,000 of Convertible Debentures Series A that were issued
on December 23, 2013 and the face value $178,000 of Convertible
Debentures Series A that were issued on February 11, 2014, the
calculation of the effective conversion amount resulted in a BCF
because the effective conversion price was less than the
Company’s stock price on the date of issuance and a BCF in
the amount of $797,000 and $178,000, respectively, were recorded in
additional paid-in capital.
For the
face value $650,000 of Convertible Debenture Series B issued on
December 31, 2015, the relative fair value of the purchase warrants
included in the issuance totaling $287,757 was calculated using the
Black-Scholes option pricing model. The resulting fair value of
such Convertible Debentures Series B issuance was calculated to be
$362,243. The calculation of the effective conversion amount
resulted in a BCF because the effective conversion price was less
than the Company’s stock price on the date of issuance and a
BCF in the amount of $133,657 was recorded in additional paid-in
capital.
For the
face value $375,000 of Convertible Debentures Series C issued on
May 20, 2016 (“Convertible Debentures Series C-1”), the
relative fair value of the purchase warrants included in the
issuance totaling $234,737 (note 16 (n)) was calculated using the
Black-Scholes option pricing model. The resulting fair value of
such Convertible Debentures Series C-1 was calculated to be
$140,263. The calculation of the effective conversion amount
resulted in a BCF because the effective conversion price was less
than the Company’s stock price on the date of issuance and a
BCF in the amount of $117,538, net of transaction costs, was
recorded in additional paid-in capital.
For the
face value $275,000 of Convertible Debentures Series C issued on
December 31, 2016 (“Convertible Debentures Series
C-2”), the relative fair value of the purchase warrants
included in the issuance totaling $143,871 (note 16(r)) was
calculated using the Black-Scholes option pricing model. The
resulting fair value of such Convertible Debentures Series C-2 was
calculated to be $131,129. The calculation of the effective
conversion amount resulted in a BCF because the effective
conversion price was less than the Company’s stock price on
the date of issuance and a BCF in the amount of $131,129, was
recorded in additional paid-in capital.
The BCF
and the fair value of the purchase warrants, which represents debt
discount, is accreted over the life of the Convertible Debentures
using the effective interest rate. Interest expense related to debt
discount was recorded as follows:
|
December 31,
2016
|
December 31,
2015
|
Convertible
Debentures Series A
|
$17,341
|
$232,830
|
Convertible
Debentures Series B
|
52,781
|
6,500
|
Convertible
Debentures Series C-1
|
21,674
|
-
|
Convertible
Debentures Series C-2
|
2,750
|
-
|
|
$94,546
|
$239,330
|
F-25
Convertible
Debentures as of December 31, 2016 and 2015, are as
follows:
Balance,
December 31, 2014
|
$24,828
|
Face value
Convertible Debentures Series B
|
650,000
|
Relative fair value
of detachable warrants
|
(287,757)
|
BCF
|
(362,243)
|
Amortization of
debt discount
|
239,330
|
Conversions
|
(177,000)
|
Balance,
December 31, 2015
|
87,158(1)
|
Face value
Convertible Debentures Series C-1
|
375,000
|
Face value
Convertible Debentures Series C-2
|
275,000
|
Relative fair value
of detachable warrants
|
(378,608)
|
BCF
|
(248,667)
|
Transaction
costs
|
(22,725)
|
Amortization of
debt discount
|
94,546
|
Conversion
|
(23,000)
|
Cash
settlements
|
(75,000)
|
Balance,
December 31, 2016
|
$83,704
|
(1)
At December 31,
2015, $80,658 of Convertible Debentures were classified as current
liabilities and $6,500 of Convertible Debentures were classified as
long term liabilities on the balance sheet.
Conversions and Repayments of Convertible Debentures Series
A
The
Company received forms of election whereby holders of the
Convertible Debentures Series A elected to convert the face value
of the debentures into Common Shares of the Company at $0.07 per
share pursuant to the terms of the Convertible Debentures Series A.
As at December 31, 2016, the Company received the following forms
of elections from holders of the Convertible
Debentures:
Date Form
of
Election
Received
|
Face Value of
Convertible Debentures Series A Converted
|
Number
of
Common
Shares Issued on Conversion
|
April 15,
2014
|
$50,000
|
714,286
|
September 30,
2014
|
800,000
|
11,428,572
|
November 10,
2014
|
275,000
|
3,928,571
|
March 9,
2015(1)
|
52,000
|
742,857
|
July 15,
2015
|
105,000
|
1,500,000
|
September 1,
2015
|
20,000
|
285,714
|
|
$1,302,000
|
18,600,000
|
(1)
On March 9, 2015,
the Company settled interest payable on the Convertible Debentures
Series A in the amount of $1,096 with the issuance of Common Shares
at a price of $0.15 per Common Share, of which, $358 of interest
payable on the Convertible Debentures Series A was settled with a
Director of the Company (note 19).
On
January 25, 2016, the Company received a form of election to
convert face value $23,000 of Convertible Debentures Series A, such
328,571 Common Shares remain unissued. On March 10, 2016, the
Company settled face value $25,000 of Convertible Debentures Series
A with a cash payment. On July 6, 2016, the Company settled face
value $50,000 of Convertible Debentures Series A and agreed to pay
to the holders such face value in monthly payments ending on
November 1, 2016. As at December 31, 2016, the $50,000 was fully
paid.
As at
December 31, 2016, all Convertible Debentures Series A had been
fully settled and no amounts remain owing.
F-26
Conversions and Repayments of Convertible Debentures Series B &
C
As at
December 31, 2016, face value $650,000 of Convertible Debentures
Series B and face value $650,000 of Convertible Debentures Series C
remain owing to their respective debenture holders.
Interest on Convertible Debentures
During
the year ended December 31, 2016, the Company recorded interest
expense in the amount of $74,162 (December 31, 2015: $21,845) on
the Convertible Debentures.
15. COMMON STOCK
During
the year ended December 31, 2016, the Company:
|
●
|
Issued
480,000 Common Shares at $0.10 per share for settlement of $48,000
in deferred fees owing to a related party (note 19). The amount
allocated to Shareholders’ Deficiency, based on the fair
value, amounted to $76,800. The balance of $28,800 has been
recorded as a loss on settlement of debt;
|
|
●
|
Issued
562,715 Common Shares at an average price of $0.141 per share for
settlement of $79,154 in consulting fees. The amount allocated to
Shareholders’ Deficiency, based on the fair value, amounted
to $78,780. The balance of $374 has been recorded as a gain on
settlement of debt; and
|
|
●
|
Issued
150,000 Common Shares at $0.14 per share for $21,000 in related
party employment income (note 19).
|
During
the year ended December 31, 2015, the Company:
|
●
|
Issued
100,000 Common Shares at a fair value of $0.11 per share for
settlement of $10,000 in prepaid consulting fees to an unrelated
party. The amount allocated to Shareholders’ Deficiency,
based on the fair value, amounted to $11,000. The balance of $1,000
has been recorded as a loss on settlement of debt in the statement
of operations and comprehensive loss;
|
|
●
|
Issued
819,672 Common Shares at $0.122 per share for a total value of
$100,000 in part consideration for an acquisition of a
business;
|
|
●
|
Issued
225,428 Common Shares at $0.10 per share for cash proceeds of
$22,543;
|
|
●
|
Issued 500,000 Common Shares at $0.10 per share for settlement of
$50,000 of related party loans;
|
|
●
|
Issued
211,389 Common Shares at a fair value of $0.15 per share for
settlement of $25,000 in consulting fees to unrelated parties. The
amount allocated to Shareholders’ Deficiency, based on the
fair value, amounted to $31,708. The balance of $6,708 has been
recorded as a loss on settlement of debt in the statement of
operations and comprehensive loss;
|
|
●
|
Issued 1,000,000 Common Shares of the Company valued at $0.15 per
share for a total value of $150,000 in part consideration for an
acquisition of a business;
|
|
●
|
Issued
201,945 Common Shares at a fair value of $0.11 per share for
settlement of $20,194 in interest payable on a Convertible
Debenture Series A to an unrelated party. The amount allocated to
Shareholders’ Deficiency, based on the fair value, amounted
to $33,261 and includes the value of the purchase warrants issued.
The balance of $13,067 has been recorded as a loss on settlement of
debt in the statement of operations and comprehensive
loss;
|
|
●
|
Issued
60,000 Common Shares at $0.19 per share for settlement of $11,400
in consulting fees to an unrelated party;
|
|
●
|
Issued
500,000 Common Shares at $0.17 per share for consideration paid in
the amount of $85,000 for the acquisition of a
subsidiary;
|
|
●
|
Issued
4,918 Common Shares at $0.15 per share for settlement of $738 in
interest payable on Convertible Debentures Series A to unrelated
parties;
|
|
●
|
Issued
2,385 Common Shares at $0.15 per share for settlement of $358 in
interest payable on Convertible Debentures Series A to a Director
of the Company;
|
|
●
|
Issued
2,299,999 Common Shares at $0.07 per share as a result of the
conversion of $161,000 of Convertible Debentures Series
A;
|
|
●
|
Issued
228,572 Common Shares at $0.07 per share to a Director of the
Company as a result of the conversion of $16,000 of Convertible
Debentures Series A;
|
|
●
|
Issued
300,000 Common Shares at $0.11 per share as compensation for
$33,000 in consulting fees to an unrelated party; and
|
|
●
|
Issued
408,597 Common Shares valued at a fair value of $0.11 per share for
settlement of $61,290 in marketing costs owing to an unrelated
party. The amount allocated to Shareholders’ Deficiency,
based on the fair value, amounted to $44,946. The balance of
$16,344 has been recorded as a gain on settlement of debt in the
statement of operations and comprehensive loss.
|
F-27
16. WARRANTS
The
following schedule summarizes the outstanding Common Share purchase
warrants of the Company:
|
December 31,
2016
|
December 31,
2015
|
||||
|
Warrants
Outstanding
|
Weighted Average
Exercise Price
|
Weighted Average
Life Remaining (yrs)
|
Warrants
Outstanding
|
Weighted Average
Exercise Price
|
Weighted Average
Life Remaining (yrs)
|
Beginning of
year
|
8,177,373
|
$0.25
|
1.39
|
1,510,640
|
$0.25
|
1.87
|
Issued
|
11,935,000
|
0.21
|
2.05
|
6,677,373
|
0.25
|
1.73
|
Cancelled
|
(1,125,000)
|
0.25
|
1.13
|
-
|
-
|
-
|
Expired
|
(1,427,373)
|
0.19
|
-
|
(10,640)
|
0.15
|
-
|
End of
year
|
17,560,000
|
$0.23
|
1.21
|
8,177,373
|
$0.25
|
1.39
|
|
|
|
|
|
|
|
During
the years ended December 31, 2016 and 2015 the Company has issued
warrants to purchase Common Shares of the Company as
follows:
Issuance
Date
|
|
Number
of
Warrants
|
Expected Life in
Years
|
Exercise Price
($)
|
Risk Free
Rate
|
Dividend
Yield
|
Expected
Volatility
|
Fair Value
($)
|
January 30,
2015
|
(a)
|
250,000
|
2
|
0.30
|
0.71%
|
Nil
|
320%
|
38,719
|
May 29,
2015
|
(b)
|
250,000
|
2
|
0.40
|
0.85%
|
Nil
|
298%
|
35,362
|
May 29,
2015
|
(b)
|
250,000
|
2
|
0.50
|
0.85%
|
Nil
|
298%
|
35,134
|
May 29,
2015
|
(b)
|
250,000
|
2
|
0.60
|
0.85%
|
Nil
|
298%
|
34,934
|
May 29,
2015
|
(b)
|
250,000
|
2
|
0.70
|
0.85%
|
Nil
|
298%
|
34,755
|
June 29,
2015
|
(c)
|
500,000
|
1
|
0.15
|
0.51%
|
Nil
|
166%
|
40,643
|
July 14,
2015
|
(d)
|
500,000
|
1.5
|
0.20
|
0.51%
|
Nil
|
219%
|
41,975
|
July 15,
2015
|
(e)
|
201,945
|
1
|
0.20
|
0.52%
|
Nil
|
174%
|
11,047
|
November 5,
2015
|
(f)
|
725,428
|
1
|
0.20
|
0.60%
|
Nil
|
186%
|
48,398
|
December 30,
2015
|
(g)
|
250,000
|
1.5
|
0.20
|
0.88%
|
Nil
|
190%
|
26,821
|
December 31,
2015
|
(h)
|
3,250,000
|
2
|
0.20
|
1.19%
|
Nil
|
265%
|
516,343
|
January 18,
2016
|
(i)
|
250,000
|
2.46
|
0.20
|
0.91%
|
Nil
|
263%
|
51,598
|
February 18,
2016
|
(j)
|
300,000
|
2
|
0.25
|
0.80%
|
Nil
|
275%
|
30,501
|
February 18,
2016
|
(k)
|
1,500,000
|
2
|
0.25
|
0.80%
|
Nil
|
275%
|
152,503
|
March 2,
2016
|
(l)
|
1,000,000
|
2
|
0.20
|
0.91%
|
Nil
|
271%
|
158,995
|
April 13,
2016
|
(m)
|
1,750,000
|
2
|
0.25
|
0.88%
|
Nil
|
264%
|
241,754
|
May 20,
2016
|
(n)
|
3,750,000
|
2
|
0.20
|
1.03%
|
Nil
|
259%
|
234,737
|
May 20,
2016
|
(o)
|
85,000
|
2
|
0.20
|
1.03%
|
Nil
|
259%
|
14,225
|
July 15,
2016
|
(p)
|
300,000
|
2.46
|
0.20
|
0.91%
|
Nil
|
263%
|
45,799
|
December 22,
2016
|
(q)
|
250,000
|
1.5
|
0.20
|
0.87%
|
Nil
|
180%
|
18,840
|
December 31,
2016
|
(r)
|
2,750,000
|
2
|
0.20
|
1.20%
|
Nil
|
259%
|
143,871
|
|
18,612,373
|
|
|
|
|
|
1,956,955
|
F-28
(a)
Issued in connection to a supply and distribution agreement. The
Company fully expensed the value of the purchase warrants in stock
based compensation which has been recorded as an administrative
expense.
(b)
Issued in connection to a commission agreement, the Company issued
warrants for the purchase of 1,000,000 Common Shares of the
Company. 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 sales 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 sales 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 sales agent delivering $1,500,001 in sales revenue Gilla
Worldwide. The Company booked the value of the vested purchase
warrants in the amount of $35,362 as a prepaid to be expensed over
the two year life of the commission agreement. During the year
ended December 31, 2016, the Company expensed $17,681 in stock
based compensation which has been recorded as an administrative
expense. No portion of the value of the unvested purchase warrants
has been expensed as the sales agent had not yet delivered any
sales revenue to Gilla Worldwide.
(c)
Issued in connection to the Secured Note No.3. The Company booked
the value of the purchase warrants as prepaid to be expensed over
six months which is the life of the Secured Note No.3. No amounts
were expensed related to this prepaid during the years ended
December 31, 2016. During the year ended December 31, 2015, the
Company recorded $20,321 in interest expense related to these
purchase warrants.
(d)
Issued as part of the consideration for the acquisition of
VaporLiq.
(e)
Issued in connection with a private placement. No stock based
compensation expense was recorded since the purchase warrants were
issued as part of a private placement of Common
Shares.
(f)
Issued in connection with a private placement. No stock based
compensation expense was recorded since the purchase warrants were
issued as part of a private placement of Common
Shares.
(g)
Issued in connection to the Secured Notes, the Company booked
the value of the purchase warrants as prepaid to be expensed over
the life of the Secured Notes. During the year ended December 31,
2016, the Company expensed $17,881 of the prepaid as financing fees
which has been recorded as interest expense.
(h)
Issued in connection to the issuance of Convertible Debentures
Series B. The value of the purchase warrants along with the
BCF represents debt discount on the Convertible Debentures Series B
and is accreted over the life of the debenture using the effective
interest rate. For the year ended December 31, 2016, the Company
recorded interest expense in the amount of $52,781 related to debt
discount which includes the accretion of the BCF of the Convertible
Debentures Series B (note 14).
(i)
Issued in connection to the Term Loan (note 13). On July 15, 2016
and in connection to the Term Loan Amendment, the Company extended
the expiration date of these purchase warrants to December 31,
2018, with all other terms of the warrants remaining the same. The
Company booked the value of the purchase warrants of $51,598 as a
prepaid to be expensed over the life of the Term Loan. During the
year ended December 31, 2016, the Company expensed $22,888 of the
prepaid as financing fees which has been recorded as interest
expense. On January 18, 2016 and in connection to the Term Loan
(note 13), the Company extended the expiration date of the 250,000
purchase warrants issued on August 1, 2014 to be exercisable until
December 31, 2017. On July 15, 2016, the Company entered into the
Term Loan Amendment and extended the expiration date of these
purchase warrants to December 31, 2018, with all other terms of the
warrants remaining the same. The Company booked the value of the
purchase warrants in the amount of $42,325 as a prepaid to be
expensed over the life of the Term Loan. During the year ended
December 31, 2016, the Company expensed $17,829 of the prepaid as
financing fees which has been recorded as interest
expense.
(j)
Issued in relation to a consulting agreement. The purchase warrants
shall vest quarterly in eight equal tranches, with the first
tranche vesting immediately and the final tranche vesting on
November 18, 2017. If the consulting agreement was terminated prior
to the expiration of the purchase warrants, any unexercised fully
vested warrants would expire thirty calendar days following the
effective termination date and any unvested warrants would be
automatically canceled. During the year ended December 31, 2016,
the Company expensed $16,511 as stock based compensation in
relation to the above purchase warrants which has been recorded as
an administrative expense. On August 31, 2016, the Company
terminated the consulting agreement and 187,500 of the unvested
warrants have been cancelled and the remaining 112,500 vested
warrants remain outstanding and exercisable until February 17, 2018
as mutually agreed in the termination.
F-29
(k)
Issued in relation to a consulting agreement. The purchase warrants
shall vest quarterly in eight equal tranches, with the first
tranche vesting immediately and the final tranche vesting on
November 18, 2017. If the consulting agreement was terminated prior
to the expiration of the purchase warrants, any unexercised fully
vested warrants would expire thirty calendar days following the
effective termination date and any unvested warrants shall be
automatically canceled. During the year ended December 31, 2016,
the Company expensed $108,656 as stock based compensation in
relation to the above purchase warrants which has been recorded as
an administrative expense. On October 25, 2016, the Company
terminated the consulting agreement and 937,500 unvested warrants
have been cancelled and the remaining 562,500 vested warrants
remain outstanding and exercisable until March 31, 2018 as mutually
agreed in the termination.
(l)
Issued in connection to the Loan Agreement (note 11). The warrants
shall vest in two equal tranches, with 500,000 purchase warrants to
vest upon the close of Loan Tranche A and the remaining 500,000
purchase warrants to vest upon the close of Loan Tranche B. On
March 3, 2016 and April 14, 2016, the Company closed Loan Tranche A
and Loan Tranche B, respectively, at which dates the purchase
warrants became fully vested and exercisable. The Company booked
the value of the purchase warrants of $158,995 as a prepaid to be
expensed over the life of the Shareholder Loan. During the year
ended December 31, 2016, the Company expensed $63,156 of the
prepaid as financing fees which has been recorded as interest
expense.
(m)
Issued in connection to a consulting agreement. Forty percent of
the purchase warrants vested immediately with the remaining sixty
percent vesting in equal tranches of fifteen percent on September
30, 2016, December 31 2016, June 30, 2017 and December 31, 2017. If
the consulting agreement is terminated prior to the expiration of
the purchase warrants, any unexercised fully vested warrants shall
expire ninety calendar days following the effective termination
date and any unvested warrants shall be automatically cancelled.
During the year ended December 31, 2016, the Company expensed
$205,828 as stock based compensation in relation to the above
purchase warrants which has been recorded as an administrative
expense. Subsequent to the year ended December 31, 2016, the
Company terminated the consulting agreement for cause and all
Common Share purchase warrants issued in connection to the
consulting agreement were cancelled (note 24).
(n)
Issued in connection to the issuance of Convertible Debentures
Series C-1. The value of the purchase warrants along with the BCF
represents debt discount on the Convertible Debentures Series C-1
and is accreted over the life of the debenture using the effective
interest rate. For the year ended December 31, 2016, the Company
recorded interest expense in the amount of $21,674 related to debt
discount which includes the accretion of the BCF (note
14).
(o)
Issued as a commission payment related to the issuance of the
Convertible Debentures Series C-1. The value of the purchase
warrants in the amount of $14,225 were recorded as a reduction to
the proceeds received for the Convertible Debentures Series C-1
(note 14).
(p)
Issued in connection to the Term Loan Amendment (note 13). The
Company booked the value of the purchase warrants in the amount of
$45,799 as a prepaid financing fee to be expensed over the life of
the Term Loan. During the year ended December 31, 2016, the Company
expensed $10,732 of the prepaid as financing fees which has been
recorded as interest expense.
(q)
Issued in connection to the Secured Notes. The Company booked the
value of the purchase warrants in the amount of $18,840 was booked
as prepaid to be expensed over the life of the Secured Notes.
During the year ended December 31, 2016, the Company expensed $306
of the prepaid as financing fees which has been recorded as
interest expense.
(r)
Issued in connection to the issuance of Convertible Debentures
Series C-2. The value of the purchase warrants along with the BCF
represents debt discount on the Convertible Debentures Series C-2
and is accreted over the life of the debenture using the effective
interest rate. For the year ended December 31, 2016, the Company
recorded interest expense in the amount of $2,750 related to debt
discount which includes the accretion of the BCF of Convertible
Debentures Series C-2 (note 14).
F-30
17. STOCK BASED COMPENSATION
The
Company recorded stock based compensation as follows:
|
December 31, 2016
|
Warrants
Issued as Stock Based Compensation
|
|
Warrants issued in
connection to the Term Loan (note 16(i))
|
$51,598
|
Warrants issued in
connection to the Term Loan (note 16(i))
|
42,325
|
Warrants issued in
connection to a consulting agreement (note 16(j))
|
16,511
|
Warrants issued in
connection to a consulting agreement (note 16(k))
|
108,656
|
Warrants issued in
connection the Shareholder Loan (note 16(l))
|
158,995
|
Warrants issued in
connection to a consulting agreement (note 16(m))
|
205,828
|
Warrants issued as
commission related to Convertible Debentures Series C-1 (note
16(o))
|
14,225
|
Warrants issued in
connection to the Term Loan (note 16(p))
|
45,799
|
Warrants issued in
connection to the Secured Notes (note 16(q))
|
18,840
|
Total
Warrants Issued as Stock Based Compensation
|
662,777
|
|
|
Shares
issued for consulting fees
|
59,154
|
Shares
to be issued for consulting fees
|
68,550
|
Shares
issued for employment income to a related party
|
21,000
|
Total
Stock Based Compensation
|
$811,481
|
|
December 31,
2015
|
Warrants
Issued as Stock Based Compensation
|
|
Warrants issued in
connection to a supply and distribution agreement (note
16(a))
|
$38,719
|
Warrants issued in
connection to a commission agreement (note 16(b))
|
35,362
|
Warrants issued in
connection to the Secured Note No.3 (note 16(c))
|
40,643
|
Warrants issued in
connection to the Secured Notes (note 16(g))
|
26,821
|
Total
Warrants Issued as Stock Based Compensation
|
141,545
|
|
|
Shares
issued for consulting fees
|
79,400
|
Shares
to be issued for consulting fees
|
20,000
|
Total
Stock Based Compensation
|
$240,945
|
18. SHARES TO BE ISSUED
As at
December 31, 2016, the Company had $146,550 in shares to be issued
consisting of the following:
●
328,571 Common
Shares, valued at $0.07 per share, to be issued due to a con
version of $23,000 of Convertible Debentures Series A;
●
320,022 Common
Shares, valued at an average of $0.156 per share, to be issued due
to the settlement of $50,000 in consulting fees owing to a
shareholder;
●
143,715 Common
Shares, valued at an average of $0.129 per share, to be issued due
to the settlement of $18,550 in consulting fees owing to unrelated
parties, and
●
366,667 Common
Shares, valued at $0.15 per share, to be issued due to the
settlement of $55,000 in consulting fees owing to an unrelated
party.
The
above Common Shares have not yet been issued.
As at
December 31, 2015, the Company had $20,000 in shares to be issued
consisting of the following:
●
151,745 Common
Shares, valued at $0.132 per share, to be issued due to the
settlement of consulting fees owing to unrelated
parties.
19. RELATED PARTY TRANSACTIONS
Transactions
with related parties are incurred in the normal course of business
and are as follows:
(a)
|
The
Company’s current and former officers and shareholders have
advanced funds on an unsecured, non-interest bearing basis to the
Company, unless stated otherwise below, for travel related and
working capital purposes. The Company has not entered into any
agreement on the repayment terms for these
advances.
|
F-31
Advances
from related parties were as follows:
|
December
31,
2016
|
December
31,
2015
|
Advances by and
amounts payable to Officers of the Company, two of which are also
Directors
|
$95,759
|
$242,758
|
Advances by and
consulting fees payable to a corporation owned by two Officers of
the Company, one of which is also a Director
|
313,745
|
196,581
|
Consulting fees
owing to persons related to Officers who are also Directors of the
Company
|
77,463
|
37,028
|
Advances by
Officers of the Company, one of which is also a Director, bears
interest at 1.5% per month
|
901,784
|
355,802
|
Amounts payable to
a corporation formerly related by virtue of a common Officer of the
Company
|
-
|
30,294
|
Amounts payable to
a corporation related by virtue of common Officers and a common
Director of the Company
|
76,407
|
50,976
|
Consulting fees and
director fees payable to Directors of the Company
|
13,725
|
83,500
|
|
$1,478,883
|
$996,939
|
At
December 31, 2016, the Company had deferred amounts of $1,085,906
(December 31, 2015: $662,140) owing to related parties. The
deferred amounts consist of $572,506 (December 31, 2015: $300,890)
owing to Officers of the Company, two of which are also Directors
for consulting fees payable, amounts of $141,000 owing to Directors
of the Company for Director fees payable and amounts of $372,400
(CAD $500,000) (December 31, 2015: $361,250; CAD $500,000) owing to
a corporation owned by two Officers of the Company, one of which is
also a Director for management service fees payable. The amounts
are non-interest bearing and payable on April 1, 2018, in exchange
for agreeing to defer the fees, the Directors and Officers will
receive an incentive bonus equal to 10% of the amount deferred and
payable on April 1, 2018. The bonus will be expensed over the term
of the deferrals, no amount of the bonus has been expensed for the
year ended December 31, 2016. During the year ended December 31,
2016, the Company settled $48,000 of the deferred amounts owing to
an Officer and Director of the Company with 480,000 Common Shares
of the Company (note 15).
(b)
|
Interest
accrued to related parties were as follows:
|
|
December
31,
2016
|
December
31,
2015
|
|
|
|
Interest accrued on
advances by Officers of the Company, one of which is also a
Director
|
$234,121
|
$129,729
|
Advances by and
consulting fees payable to a corporation owned by two Officers of
the Company, one of which is also a Director
|
29,669
|
2,026
|
|
$263,790
|
$131,755
|
(c)
|
Transactions
with related parties were as follows:
|
During
the year ended December 31, 2016, the Company expensed $72,394
(December 31, 2015: $49,977) in rent expense payable to a
corporation related by virtue of a common Officer and a common
Director of the Company.
During
the year ended December 31, 2016, the Company expensed $22,304
(December 31, 2015: $25,293) in costs related to a vehicle for the
benefit of two Officers who are also Directors of the Company and
for the benefit of a person related to an Officer and Director of
the Company. The Company also expensed $206,445 (December 31, 2015: $173,599 in
travel and entertainment expenses incurred by Officers and
Directors of the Company.
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
were issued on May 19, 2016 (note 15).
On May
20, 2016, the Company issued face value $55,000 of Convertible
Debentures Series C to related parties consisting of $10,000 to a
person related to an Officer and Director for settled of fees
payable, $10,000 to a Director of the Company for settlement of
Director fees payable and $35,000 to a corporation owned by two
Officers of the Company, one of which is also a Director, for
settlement of loans payable.
On May
20, 2016, the Company issued face value $15,000 of Convertible
Debentures Series C to two Directors of the Company for
cash.
On June
17, 2016, the Company issued 150,000 Common Shares at a price of
$0.14 per Common Share to a person related to an Officer and
Director of the Company on the signing of a new employment
agreement.
F-32
During
the year ended December 31, 2015, the Company settled $358 of
interest payable on Convertible Debentures Series A with a Director
of the Company at $0.15 per Common Share, and the Common Shares
were issued on April 13, 2015.
During
the year ended December 31, 2016, amounts owing to a former related
party in the amount of $9,263 were forgiven, as a result the
Company recorded a gain on settlement in the amount of
$9,263.
During
the year ended December 31, 2015, the Company issued 228,572 Common
Shares at $0.07 per share to a Director of the Company as a result
of the conversion of face value $16,000 of Convertible Debentures
Series A, and the shares were issued on April 13,
2015.
The
Company expensed consulting fees payable to related parties as
follows:
|
December
31,
2016
|
December
31,
2015
|
Directors
|
$-
|
$92,750
|
Officers
|
330,900
|
273,974
|
Corporation
formerly related by virtue of common Officers and a common
Director
|
-
|
74,396
|
Corporation owned
by two Officers, one of which is also a Director
|
-
|
92,799
|
Persons related to
a Director
|
142,249
|
71,261
|
|
$473,149
|
$605,180
|
The
Company’s Chief Executive Officer and Chief Financial Officer
are both participants of the consortium of Lenders of the Credit
Facility and the Term Loan, each committed to provide a total of
CAD $150,000 of the Term Loan (notes 12 and 13).
20. INCOME TAXES
Under
ASC No. 740, Income Taxes
(“ASC 740”), income taxes are recognized for the
following: a) amount of tax payable for the current year and b)
deferred tax liabilities and assets for future tax consequences of
events that have been recognized differently in the financial
statements than for tax purposes.
The
Company has non-capital losses of $7,512,930 (2015: $5,080,614) in
US non-capital losses, $3,210,343 (2015: $2,043,349) in Canadian
non-capital losses, $404,0732 (2015: $401,897) in Irish non-capital
losses and $202,920 (2015: $65,163) in Hungarian non-capital
losses.
|
United
States
|
Canada
|
Ireland
|
Hungary
|
Slovakia
|
Total
|
2032
|
$(434,283)
|
$(626,235)
|
$-
|
$-
|
$-
|
$(1,060,518)
|
2033
|
(1,016,051)
|
(438,761)
|
-
|
-
|
-
|
(1,454,812)
|
2034
|
(2,159,772)
|
(301,868)
|
(372,764)
|
-
|
-
|
(2,834,404)
|
2035
|
(1,470,508)
|
(676,485)
|
(29,133)
|
(65,163)
|
-
|
(2,241,289)
|
2036
|
(2,432,316)
|
(1,166,994)
|
(2,175)
|
(137,757)
|
-
|
(3,739,242)
|
|
$(7,512,930)
|
$(3,210,343)
|
$(404,072)
|
$(202,920)
|
$-
|
$(11,330,266)
|
The
reconciliation of income taxes at the statutory income tax rates to
the income tax expense is as follows:
|
December
31,
2016
|
December
31,
2015
|
Loss before income
taxes
|
$4,500,206
|
$3,048,336
|
Applicable tax rate
ranges from 10% to 35%
|
|
|
Expected income tax
(recovery) at the statutory rates
|
(1,439,417)
|
(981,895)
|
Permanent
differences
|
200,042
|
171,912
|
Tax benefits
not recognized
|
1,239,375
|
809,983
|
Provision for
income taxes
|
$-
|
$-
|
The
components of the temporary differences and the country of origin
at December 31, 2016 and 2015 are as follows (applying the combined
Canadian federal and provincial statutory income tax rate of 26%,
the US income tax rate of 35%, the Irish income tax rate of 12.5%,
the Hungarian income tax rate of 10% and the Slovakian income tax
rate of 22% for both the years). No deferred tax assets are
recognized on these differences as it is not probable that
sufficient taxable profit will be available to realize such
assets.
F-33
|
United
States
|
Canada
|
||
|
December
31,
2016
|
December
31,
2015
|
December
31,
2016
|
December
31,
2015
|
Loss before income
taxes
|
$3,103,756
|
$2,317,527
|
$1,291,477
|
$(578,775)
|
Applicable tax rate
ranges from 10% to 35%
|
|
35%
|
|
26.5%
|
Expected income tax
(recovery) at the statutory rates
|
(1,086,315)
|
(811,134)
|
(342,241)
|
(153,375)
|
Permanent
differences
|
177,943
|
164,649
|
22,099
|
7,263
|
Tax benefits
not recognized
|
908,372
|
646,485
|
320,142
|
146,112
|
Income
taxes-current and deferred
|
$-
|
$-
|
$-
|
$-
|
|
Ireland
|
Hungary
|
||
|
December
31,
2016
|
December
31,
2015
|
December
31,
2016
|
December
31,
2015
|
Loss before income
taxes
|
$(2,301)
|
$87,276
|
$111,489
|
$64,758
|
Applicable tax rate
ranges from 10% to 35%
|
12.5%
|
12.5%
|
10%
|
10%
|
Expected income tax
(recovery) at the statutory rates
|
288
|
(10,910)
|
(11,149)
|
(6,476)
|
Permanent
differences
|
|
-
|
1
|
-
|
Tax benefits
not recognized
|
-
|
10,910
|
11,148
|
6,476
|
Income
taxes-current and deferred
|
$288
|
$-
|
$-
|
$-
|
|
Slovakia
|
|
|
December
31,
2016
|
December
31,
2015
|
Loss before income
taxes
|
$(4,216)
|
$-
|
Applicable tax rate
ranges from 10% to 35%
|
22%
|
22%
|
Expected income tax
(recovery) at the statutory rates
|
928
|
-
|
Permanent
differences
|
-
|
-
|
Tax benefits
not recognized
|
-
|
-
|
Income
taxes-current and deferred
|
$928
|
$-
|
Deferred
tax asset components as of December 31, 2016 and 2015 are as
follows:
|
December
31,
2016
|
December
31,
2015
|
Operating losses
available to offset future income taxes
|
$(11,330,266)
|
$(7,951,215)
|
Expected
income tax recovery at a statutory rate of 35%
|
3,535,016
|
2,502,523
|
Valuation
allowance
|
(3,535,016)
|
(2,502,523)
|
Income taxes
– current and deferred
|
$-
|
$-
|
As the
Company has not earned significant revenues, it has provided a 100
percent valuation allowance on the net deferred tax asset as of
December 31, 2016 and 2015. Management believes the Company has no
uncertain tax position.
As the
Company is delinquent in its historical tax filings it has accrued
$90,000 in penalties which the Company estimates it will be
assessed on filing of the delinquent returns. The accrued penalties
have been recorded as an administrative expense during the year
ended December 31, 2016.
F-34
21. COMMITMENTS AND CONTINGENCIES
a)
Premises Lease – Florida, USA
Effective
January 1, 2015, a subsidiary of the Company entered into an
operating lease agreement for a rental premises in Daytona Beach,
Florida, USA. The terms of this agreement are to be for a period of
36 months and ending on December 31, 2017 with payments made
monthly. Minimum annual lease payments are as follows:
2017
|
$56,110
|
|
|
b)
Premises Leases – Budapest, Hungary
Effective
January 2, 2017, a subsidiary of the Company entered into a lease
agreement for a rental premises in Budapest, Hungary. The terms of
the agreement are to be for a period of one year ending on December
31, 2017 with payments made monthly. Minimum annual lease payments
are denominated in Euros and are as follows:
2017
|
|
€ 27,000
|
|
|
Effective
May 23, 2016, a subsidiary of the Company entered into a lease
agreement for office space in Budapest, Hungary. The terms of the
agreement are to be for a period of one year ending on July 8, 2017
with payments made monthly. Minimum annual lease payments are
denominated in Euros and are as follows:
2017
|
|
€ 41,289
|
|
|
c)
Litigation
The
Company is subject to certain legal proceedings and claims, which
arise in the ordinary course of its business. Although occasional
adverse decisions or settlements may occur, the Company believes
that the final disposition of such matters should not have a
material adverse effect on its financial position, results of
operations or liquidity.
On
January 6, 2016, Yaron Elkayam, Pinchas Mamane and Levent Dimen
filed a three count complaint against the Company in the Circuit
Court of Hillsborough County, Florida alleging (i) breach of
contract, (ii) breach of implied covenant of good faith and fair
dealing, and (iii) fraud in the inducement seeking damages in the
amount of approximately $900,000 of Unsecured Promissory Notes
issued on July 1, 2015 as a result of the acquisition of E Vapor
Labs. 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.
d)
Charitable Sales Promotion
On
January 21, 2016, the Company entered into an agreement with
Wounded Warriors Family Support Inc. in which the Company agreed to
make a donation of $1.00 for each sale of its “Vape
Warriors” E-liquid product during the period from January 1,
2016 to December 31, 2016, with a minimum donation of $50,000.
During the year ended December 31, 2016 the Company has accrued the
full $50,000 in charitable contributions regarding this
agreement.
e)
Royalty Agreement
On June
14, 2016, the Company entered into a royalty agreement related to
an E-liquid recipe purchased from an unrelated party in which the
Company agreed to pay to the recipe developer, a royalty of $0.25
per 60ml of E-liquid sold that contains the recipe, up to a maximum
of $100,000. Although the Company has the ability to sell the
E-liquid globally, the royalty is paid only on the E-liquid sold
within the United States. During the year ended December 31, 2016,
the Company has paid $8,275and owes $1,408 related to the royalty
agreement.
F-35
22. FINANCIAL INSTRUMENT
(i)
Credit Risk
Credit
risk is the risk of financial loss to the Company if a customer or
counterparty to a financial instrument fails to meet its
contractual obligations. The Company’s credit risk is
primarily attributable to fluctuations in the realizable values of
its cash and trade receivable. Cash accounts are maintained with
major international financial institutions of reputable credit and
therefore bear minimal credit risk. In the normal course of
business, the Company is exposed to credit risk from its customers
and the related accounts receivable are subject to normal
commercial credit risks. A substantial portion of the
Company’s accounts receivable are concentrated with a limited
number of large customers all of which the Company believes are
subject to normal industry credit risks. At December 31, 2016, the
Company recorded bad debt of $256,280 (2015: $20,370) in regards to
customers with past due amounts. For
the year ended December 31, 2016, 15% (December 31, 2015: 38%) of
the Company’s trade receivables are due from one customer and
51% of the trade receivables are due from four customers. During
the year ended December 31, 2016, 31% of the Company’s sales
were to one customer.
(ii)
Liquidity Risk
Liquidity
risk is the risk that the Company will not be able to meet its
financial obligations as they fall due. The Company’s
approach to managing liquidity risk is to ensure, as far as
possible, that it will have sufficient liquidity to meet its
liabilities when due, under both normal and stressed conditions,
without incurring unacceptable losses or risking damage to the
Company’s reputation. The Company manages liquidity risk by
closely monitoring changing conditions in its investees,
participating in the day to day management and by forecasting cash
flows from operations and anticipated investing and financing
activities. At December 31, 2016, the Company had liabilities due
to unrelated parties through its financial obligations over the
next five years in the aggregate principal amount of $5,211,638. Of
such amount, the Company has obligations to repay $4,630,583 over
the next twelve months with the remaining $581,055 becoming due
within the following four year period.
(iii) Foreign
Currency Risk
Currency
risk is the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in foreign
exchange rates. The risks and
fluctuations are related to cash and accounts payable and accrued
liabilities that are denominated in CAD, HUF and
EUR.
Analysis by currency in Canadian, Hungarian and Slovakian
equivalents is as follows:
December 31, 2016
|
Accounts Payable
|
Accounts Receivable
|
Cash
|
CAD
|
$204,350
|
$219
|
$3,166
|
HUF
|
$334,698
|
$46,138
|
$127,788
|
EUR
|
$18,672
|
$-
|
$10,328
|
The
effect of a 10% strengthening of the United States Dollar against
the Canadian Dollar, the Hungarian Forint and the Euro at the
reporting date on the CAD, HUF and EUR-denominated trade
receivables and payables carried at that date would, had all other
variables held constant, have resulted in an increase in profit for
the year and increase of net assets of $20,097, $16,077 and $934,
respectively. A 10% weakening in the exchange rate would, on the
same basis, have decreased profit and decreased net assets by
$20,097, $16,077 and $934 respectively.
The
Company purchases inventory in a foreign currency, at December 31,
2016, the Company included $238,888 (December 31, 2015: $146) in
inventory purchased in a foreign currency on its consolidated
balance sheet. The Company does not use derivative financial
instruments to reduce its exposure to this risk.
(iv)
Interest Rate Risk
Interest
rate risk is the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in market
interest rates. The Company is exposed to interest rate risk on its
fixed interest rate financial instruments. These fixed-rate
instruments subject the Company to a fair value risk. The interest
rates on all of the Company’s existing interest bearing debt
are fixed. Sensitivity to a plus or minus 25 basis points change in
rates would not significantly affect the fair value of this
debt.
23. SEGMENTED
INFORMATION
The
Company currently operates in only one business segment, namely,
manufacturing, marketing and distributing of E-liquid, vaporizers,
E-cigarettes, and vaping accessories in North America and
Europe. Total long lived assets by geographic location are as
follows:
F-36
|
December
31,
2016
|
December
31,
2015
|
Canada
|
$826
|
$-
|
United
States
|
1,125,704
|
1,624,669
|
Europe
|
23,418
|
2,130
|
|
$1,149,948
|
$1,626,799
|
Total
sales by geographic location are as follows:
|
December
31,
2016
|
December
31,
2015
|
Canada
|
$49,732
|
$-
|
United
States
|
2,596,172
|
1,163,096
|
Europe
|
1,904,889
|
-
|
|
$4,550,793
|
$1,163,096
|
24. SUBSEQUENT EVENTS
On
January 4, 2017, the Company terminated a consulting agreement
entered into as of April 13, 2016 for cause. As a result, the
1,000,000 Common Share purchase warrants issued in connection to
the consulting agreement were terminated, effective
immediately.
On
January 12, 2017, the Company entered into a bridge loan agreement
with a shareholder (the “Bridge Loan Agreement”),
whereby the shareholder would make available to the Company the
aggregate principal amount of CAD $200,000 (the “Bridge
Loan”) in two equal tranches of CAD $100,000. The Company
received the first tranche on January 12, 2017 (“Bridge Loan
Note A”) and the second tranche on January 18, 2017
(“Bridge Loan Note B”). The Bridge Loan is non-interest
bearing and matures on March 12, 2017. Pursuant to the terms of the
Bridge Loan Agreement, the shareholder received a 5% upfront fee
upon the closing of Bridge Loan Note A and a 5% upfront fee upon
the closing of Bridge Loan Note B. The Bridge Loan is secured by
the general security agreement issued in connection to the Secured
Note. On January 12, 2017 and in connection to the Bridge Loan
Agreement, the Company issued warrants for the purchase of 50,000
Common Shares of the Company exercisable until January 11, 2017 at
a price of $0.20 per Common Share, with 25,000 of such purchase
warrants vesting upon the closing of Bridge Loan Note A and the
remaining 25,000 purchase warrants vesting upon the closing of
Bridge Loan Note B. On January 12, 2017, the Company closed Bridge
Loan Note A and 25,000 of the purchase warrants became fully vested
and exercisable. On January 18, 2017, the Company closed Bridge
Loan Note B and 25,000 of the purchase warrants became fully vested
and exercisable.
On
January 20, 2017, the Company issued an additional 75 units of
Convertible Debentures Series C for proceeds of
$75,000.
On
January 31, 2017, the Company issued and sold on a private
placement basis, 7,546,012 private placement units at a price of
$0.10 per unit for total proceeds of $754,601. Each private
placement unit consisted of one Common Share of the Company and a
half Common Share purchase warrant. On January 31, 2017, the
Company issued 7,546,012 Common Shares and warrants for the
purchase of 3,773,006 Common Shares of the Company exercisable over
twelve months at an exercise price of $0.20 per Common Share. On
January 31, 2017 and in connection to the issuance of private
placement units, the Company issued warrants for the purchase of
411,361 Common Shares of the Company as a commission payment with
the purchase warrants having the same terms as the warrants issued
as part of the private placement units.
On
February 17, 2017, the Company issued and sold on a private
placement basis, 1,815,896 private placement units at a price of
$0.10 per unit for total proceeds of $181,590. Each private
placement unit consisted of one Common Share of the Company and a
half Common Share purchase warrant. On February 17, 2017, the
Company issued 1,815,896 Common Shares and warrants for the
purchase of 907,948 Common Shares of the Company exercisable over
twelve months at an exercise price of $0.20 per Common Share. On
February 17, 2017 and in connection to the issuance of private
placement units, the Company issued warrants for the purchase of
108,954 Common Shares of the Company as a commission payment with
the purchase warrants having same terms as the warrants issued as
part of the private placement units.
F-37
On
February 27, 2017, the Company and the Lenders of the Term Loan
entered into a term loan amendment (the “Term Loan Amendment
No.2”) to amend certain terms and conditions of the Term
Loan. Pursuant to the Term Loan Amendment No.2, the parties agreed
to modify the Cash Sweep to be calculated as the total of CAD
$0.01667 per ml of E-liquid sold by the Company within a monthly
period, such modification to be retroactively applied as of January
1, 2017. The Lenders also agreed to cancel the Early Repayment
Penalty and waive any interest payment penalties due under the Term
Loan. On February 27, 2017 and in connection to the Term Loan
Amendment No.2, the Company agreed to issue 500,000 private
placement units at a price of $0.10 per unit, such private
placement units remain unissued.
On
March 8, 2017 and in connection to an employment agreement, the
Company issued warrants for the purchase of 1,500,000 Common Shares
of the Company exercisable over twenty-four months at an exercise
price of $0.25 per Common Share. The purchase warrants will vest in
three equal tranches, with the first tranche vesting upon the
employee generating over $25,000 in sales of new business for two
consecutive months, the second tranche vesting upon the employee
generating cumulative sales of over $500,000 and the third tranche
vesting upon the employee generating cumulative sales of over
$1,000,000 of new business.
On
March 21, 2017, the Company issued and sold on a private placement
basis, 6,540,090 private placement units at a price of $0.10 per
unit for total proceeds of $654,009. Each private placement unit
consisted of one Common Share of the Company and a half Common
Share purchase warrant. On March 21, 2017, the Company issued
6,540,090 Common Shares and warrants for the purchase of 3,270,045
Common Shares of the Company exercisable over twelve months at an
exercise price of $0.20 per Common Share. On March 21, 2017 and in
connection to the issuance of private placement units, the Company
issued warrants for the purchase of 27,623 Common Shares of the
Company as a commission payment with the purchase warrants having
the same terms as the warrants issued as part of the private
placement units.
F-38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
FINANCIAL DISCLOSURE.
Changes in registrant’s Certifying Accountant
None.
ITEM 9A. CONTROLS AND PROCEDURES.
EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
During
the year, the Company has initiated disclosure controls and
procedures that are designed to ensure that material information
required to be disclosed in the Company’s periodic reports
filed under the Securities Exchange Act of 1934, as amended, or
1934 Act, is recorded, processed, summarized, and reported within
the time periods specified in the SEC’s rules and forms and
to ensure that such information is accumulated and communicated to
the Company’s management, including its chief executive
officer (principal executive officer) and chief financial officer
(principal accounting officer) as appropriate, to allow timely
decisions regarding required disclosure. During the year ended
December 31, 2016, the Company carried out an evaluation, under the
supervision and with the participation of its management, including
the chief executive officer (principal executive officer) and the
chief financial officer (principal accounting officer), of the
effectiveness of the design and operation of the Company’s
disclosure controls and procedures, as defined in Rule 13(a)-15(e)
under the 1934 Act. Based on this evaluation, because of the
Company’s limited resources and limited number of employees,
management concluded that its disclosure controls and procedures
were ineffective as at December 31, 2016.
REPORT
OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
|
The
Company’s management is responsible for establishing and
maintaining adequate internal control over financial reporting. The
Company’s internal control over financial reporting is
designed to provide reasonable assurances regarding the reliability
of financial reporting and the preparation of the financial
statements of the Company in accordance with U.S. generally
accepted accounting principles, or GAAP. Because of its inherent
limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in
conditions, or that the degree or compliance with the policies or
procedures may deteriorate.
With
the participation of the Company’s chief executive officer
(principal executive officer) and chief financial officer
(principal accounting officer), management conducted an evaluation
of the effectiveness of the Company’s internal control over
financial reporting as at December 31, 2016 based on the framework
in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
("COSO"). Based on the Company’s evaluation and the material
weaknesses described below, management concluded that the Company
did not maintain effective internal control over financial
reporting as at December 31, 2016 based on the COSO framework
criteria. Management has identified control deficiencies regarding
the lack of segregation of duties and the need for a stronger
internal control environment. Management of the Company believes
that these material weaknesses are due to the small size of the
Company’s accounting staff. The small size of the
Company’s accounting staff may prevent adequate controls in
the future, such as segregation of duties, due to the cost/benefit
of such remediation. To mitigate the current limited resources and
limited employees, the Company relies heavily on direct management
oversight of transactions, along with the use of legal and
accounting professionals. As the Company grows, the number of
employees is expected to increase, which will enable the Company to
implement adequate segregation of duties within the internal
control framework.
These
control deficiencies could result in a misstatement of account
balances that would result in a reasonable possibility that a
material misstatement to the Company’s consolidated financial
statements may not be prevented or detected on a timely basis.
Accordingly, the Company has determined that these control
deficiencies as described above together constitute a material
weakness.
In
light of this material weakness, the Company performed additional
analyses and procedures in order to conclude that its consolidated
financial statements for the year ended December 31, 2016 included
in this Annual Report on Form 10-K were fairly stated in accordance
with US GAAP. Accordingly, management believes that despite the
Company’s material weaknesses, its consolidated financial
statements for the year ended December 31, 2016 are fairly stated,
in all material respects, in accordance with US GAAP.
42
This
Annual Report does not include an attestation report of the
Company’s registered public accounting firm regarding
internal control over financial reporting. Management’s
report was not subject to attestation by the Company’s
registered public accounting firm pursuant to temporary rules of
the Securities and Exchange Commission that permit the Company to
provide only management’s report in this Annual Report on
Form 10-K.
LIMITATIONS
ON EFFECTIVENESS OF CONTROLS AND PROCEDURES
The
Company’s management, including its chief executive officer
(principal executive officer) and chief financial officer
(principal accounting officer), does not expect that the
Company’s disclosure controls and procedures or internal
controls will prevent all errors and all fraud. A control system,
no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the
control system are met. Further, the design of a control system
must reflect the fact that there are resource constraints and the
benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company
have been detected. These inherent limitations include, but are not
limited to, the realities that judgments in decision-making can be
faulty and that breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more
people, or by management override of the control. The design of any
system of controls also is based in part upon certain assumptions
about the likelihood of future events and there can be no assurance
that any design will succeed in achieving its stated goals under
all potential future conditions. Over time, controls may become
inadequate because of changes in conditions, or the degree of
compliance with the policies or procedures may deteriorate. Because
of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be
detected.
Changes in Internal Controls
During
the fiscal year ended December 31, 2016, there have been no changes
in the Company’s internal control over financial reporting
that have materially affected or are reasonably likely to
materially affect the Company’s internal controls over
financial reporting.
ITEM 9B. OTHER INFORMATION.
Please
refer to the consolidated financial statements for additional costs
and expenditures and other financial information.
43
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.
DIRECTORS AND EXECUTIVE OFFICERS
Name
|
Age
|
Position
|
Graham
Simmonds
|
43
|
Chairman of the
Board of Directors and Chief Executive Officer
|
Gerald
Goldberg
|
73
|
Director and
Chairman of the Audit Committee
|
Henry
J. Kloepper
|
67
|
Lead
Independent Director and Chairman of the Compensation and
Governance Committees
|
Daniel
Yuranyi
|
60
|
Director and Chief
Procurement Officer
|
Dr.
Blaise A. Aguirre
|
52
|
Director
|
Christopher
Rich
|
63
|
Director
|
Stanley D.
Robinson
|
67
|
Director
|
Ashish
Kapoor
|
39
|
Chief
Financial Officer and Interim Corporate Secretary
|
The
business experience of the persons listed above during the past
five years are as follows:
Graham Simmonds (Chairman of the Board of Directors and Chief
Executive Officer)
Mr.
Simmonds has served as Chairman of the Board of Directors since May
14, 2015 and as Chief Executive Officer of the Company since
November 15, 2012. Mr. Simmonds has over 18 years of experience in
public company management and business development projects within
both the gaming and technology sectors. Mr. Simmonds is licensed
and/or has previously been licensed/registered with a number of
horse racing and gaming commissions in the United States and
Canada. Mr. Simmonds developed and launched the first in-home
digital video horse racing service in North America and is a former
director and partner in eBet Technologies Inc., a licensed ADW
operator and software developer for the online horse racing
industry in the United States. eBet Technologies Inc. was
successfully sold to Sportech PLC in December of 2012. Mr. Simmonds
is a director and the CEO of Baymount Incorporated, a diversified
investment and venture capital firm, a director and the CEO of
LiveReel Media Corporation and is the former chairman and CEO of
DealNet Capital Corp., a consumer finance company listed on the TSX
Venture Exchange in Toronto, Canada.
We
believe Mr. Simmonds is well-qualified to serve as Chairman of the
Board of Directors due to his public company experience,
operational experience and business contacts.
Gerald Goldberg (Director and Chairman of the Audit
Committee)
Mr.
Goldberg has served as a Director of the Company since June 29,
2016 and is currently the Chairman of the Audit Committee. Mr.
Goldberg is a Chartered Professional Accountant and is a senior
partner in the accounting firm of Schwartz Levitsky Feldman LLP, in
Toronto, Canada. Mr. Goldberg was previously a partner in Grant
Thornton and its predecessor firm for over 15 years. Mr. Goldberg
has over 30 years of experience in the service, distribution,
retail, mining, natural resources and oil & gas, real estate,
not-for-profit entities and manufacturing industries, with a strong
emphasis in taxation and business advisory services. Mr. Goldberg
is also active in corporate finance and development and has been
involved in the structure and design of numerous innovative
financing instruments, tax shelters and syndications, both in
Canada and the United States. Mr. Goldberg is actively involved
with the audit of various publicly listed companies in both Canada
and abroad. Mr. Goldberg also has tremendous experience as an
independent director, chairman and member of the audit committee of
publicly listed companies, non-for-profit companies, educational
and other institutions, organizations and companies.
We
believe Mr. Goldberg is well-qualified to serve as a member of the
Board of Directors and as Chairman of the Audit Committee due to
experience as a Chartered Professional Accountant and public
company experience.
44
Henry J. Kloepper (Lead Independent Director and Chairman of the
Compensation and Governance Committees)
Mr.
Kloepper has served as the Company’s Lead Independent
Director since April 13, 2013 and is currently the Chairman of the
Compensation and Governance Committees. Mr. Kloepper is a leading
financier and has been involved in investment banking and corporate
finance for over 30 years. Mr. Kloepper brings a rounded knowledge
of the capital markets, strategic growth, and investments. Mr.
Kloepper is currently the interim CEO of NWT Uranium Corp., and
chair of Unique Broadband Systems Inc. Mr. Kloepper is the former
CEO of Frontier Lithium Inc. and was previously a director and
president of Mogul Energy International Inc. and has held executive
positions with Award Capital, JP Morgan, Citibank, Bank of America,
and North American Trust in the US, Canada, and
Europe.
We
believe Mr. Kloepper is well-qualified to serve as Lead Independent
Director and Chairman of the Audit Committee due to his public
company experience, financial markets knowledge and business
contacts.
Daniel Yuranyi (Director and Chief Procurement
Officer)
Mr.
Yuranyi has served as a Director and officer of the Company since
November 15, 2012. Mr. Yuranyi has over 30 years of experience in
the transportation, logistics, and distribution businesses having
successfully built and operated his own companies on a number of
occasions. Mr. Yuranyi has held senior positions with Loomis and
Gelco Express which was later sold to Air Canada. After helping
build a division of Gelco Express from $1M to more than $12M in
annualized sales, Mr. Yuranyi left to start a new business of his
own called United Messengers which quickly grew to become the
largest same-day messenger service in Canada. Most recently, Mr.
Yuranyi has invested in building distribution relationships with
European brands in the energy drink and bottled water
businesses.
We
believe Mr. Yuranyi is well-qualified to serve as a member of the
Board of Directors due to his experience in the distribution field
and business contacts.
Dr. Blaise A. Aguirre (Director)
Dr.
Aguirre has served as a Director of the Company since November 7,
2014. Dr. Aguirre, an internationally known expert, author and
lecturer in child and adolescent psychiatry, is the founding
medical director of 3East at McLean Hospital, and is an assistant
professor of psychiatry at Harvard Medical School. Dr. Aguirre
served as an independent director of Investors Capital Holdings
Ltd. from October 28, 2011 until its sale to RCS Capital Company
(RCAP:NYSE) in 2014. Previously, Dr. Aguirre was a broker with
Investors Capital Company having obtained his series 7 and 63
securities licenses. Dr. Aguirre sits on the board of directors
that oversees the annual running of the Illinois Marathon in
Champaign, IL and is an advisor to privately held companies
including Hanah and Mirah. Dr. Aguirre is also a board member of
the Oprah Winfrey Leadership Academy for Girls (OWLAG). Dr. Aguirre
was a member of the Medical Advisory Board of IVPCARE Inc. prior to
their buyout by Walgreens. Dr. Aguirre has developed and maintains
enduring relationships with institutional money managers and
venture capitalists and has developed expertise as a small cap
stock analyst.
We
believe Dr. Aguirre is well-qualified to serve as a member of the
Board of Directors due to his medical experience, financial markets
knowledge and business contacts.
Christopher Rich (Director)
Mr.
Rich has served as a Director of the Company since November 7,
2014. Mr. Rich is a successful television, film and theater actor
and producer who studied acting at the University of Texas and
later at Cornell University, where he received a master’s
degree in theater arts. Mr. Rich began his performing career in New
York performing on stage in many off-Broadway and regional
productions. Mr. Rich has appeared in many television series, most
notably on Murphy Brown and Reba. On the big screen, Mr. Rich
starred in The Joy Luck Club, Flight of the Intruder, and the
independent art film Prisoners of Inertia with Amanda Plummer. Mr.
Rich has appeared in numerous television movies, with credits
including Going Home opposite Jason Robards in one of his last
performances. Most recently, Mr. Rich starred in Southern Christmas
opposite Bo Derek and Shelley Long.
We
believe Mr. Rich is well-qualified to serve as a member of the
Board of Directors due to his film experience and
business/marketing contacts.
45
Stanley D. Robinson (Director)
Mr.
Robinson has served as a Director of the Company since October 29,
2008. Mr. Robinson is currently a Supervisory Geologist with
Northquest Ltd. and was formerly a Geologist/Exploration Manager
with Kilo Goldmines Ltd. Mr. Robinson is an exploration geologist
with over 30 years of experience in Africa (Angola, Democratic
Republic of Congo, Ghana, Tanzania, Burkina Faso), Canada and South
America. Mr. Robinson’s principal technical expertise is in
the management of gold and base metal exploration projects, from
grassroots to feasibility stage, geological interpretations with an
emphasis on structure and alteration, and in the identification of
projects with economic potential. Mr. Robinson has extensive
experience in managing exploration projects in remote locations and
in climatic environments that range from permafrost to tropical and
semi-desert.
We
believe Mr. Robinson is well-qualified to serve as a member of the
Board of Directors due to his public company experience and
business contacts.
Ashish Kapoor (Chief Financial Officer and Interim Corporate
Secretary)
Mr.
Kapoor has served as the Company’s Chief Financial Officer
since November 15, 2012 and as the Company’s Interim
Corporate Secretary since May 5, 2015. Mr. Kapoor has over 15 years
of experience in providing capital markets advisory and assurance
services as a finance professional. After obtaining his Chartered
Accountant designation at Ernst & Young, Mr. Kapoor has gained
over 10 years of experience in investment banking, advising client
across various industries. As a senior vice president at Macquarie
Capital Markets Canada Ltd., Mr. Kapoor was responsible for the
Canadian telecom, media, entertainment and technology investment
banking and principal investing group. During his 10 years at
Macquarie, Mr. Kapoor completed in excess of $3B in successful
principal investments and advised on a further $4B of mergers and
acquisitions for third party clients. Mr. Kapoor is a director and
the CFO of LiveReel Media Corporation and was formerly the CFO of
DealNet Capital Corp., a consumer finance company, and Transeastern
Power Trust, an independent power producer focused on renewable
energy sources. Mr. Kapoor obtained his Chartered Accountant
designation as part of the Ernst & Young’s Toronto
practice and was awarded the Gold Medal for first place in Ontario,
and the Bronze Medal for third place in Canada on the 2000
Chartered Accountancy Uniform Final Examination. Mr. Kapoor is also
a CFA Charter holder and holds a Masters of Accounting and a
Bachelor of Arts degree from University of Waterloo.
SIGNIFICANT EMPLOYEES
The
Company does not expect to receive a significant contribution from
employees that are not executive officers.
FAMILY RELATIONSHIPS
There
are no directors, executive officers or persons nominated or
persons chosen by the Company to become a director or executive
officer of the Company who are directly related to an individual
who holds the position of director or executive officer or is
nominated to one of the said positions.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
There
are no material events that have occurred in the last five years
that would affect the evaluation of the ability or integrity of any
director, person nominated to become a director, executive officer,
promoter or control person of the Company.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE
Section
16(a) of the Exchange Act requires that the executive officers and
directors, and persons who beneficially own more than 10% of the
equity securities of reporting companies, file reports of ownership
and changes in ownership with the Securities and Exchange
Commission. Officers, directors and greater than 10% shareholders
are required by SEC regulation to furnish the Company with copies
of all Section 16(a) forms they file. Based solely on the
Company’s review of the copies of such forms received, the
Company believes that during the year ended December 31, 2016 all
such filing requirements applicable to the Company were complied
with on a timely basis, except for the following
filings:
46
Name and
Relation to the Company
|
|
Number of Late
Reports
|
|
Transactions
Not
Timely
Reported
|
|
Known Failures
to File a
Required Form
(Type of
Form indicated
herein)
|
Graham
Simmonds
(Chairman and
Chief Executive Officer)
|
|
5
|
|
4
|
|
Form
4, Form 5
|
Daniel
Yuranyi
(Director and
Chief Procurement Officer)
|
|
2
|
|
1
|
|
Form
4, Form 5
|
Ashish
Kapoor
(Chief
Financial Officer)
|
|
2
|
|
1
|
|
Form
4, Form 5
|
Dr.
Blaise A. Aguirre
(Director)
|
|
2
|
|
1
|
|
Form
4, Form 5
|
Henry
J. Kloepper
(Director)
|
|
2
|
|
1
|
|
Form
4, Form 5
|
Gerald
Goldberg
(Director)
|
|
1
|
|
1
|
|
Form
3
|
The
Company intends on remediating and filing such aforementioned
delinquent forms as soon as reasonably possible.
CODE OF ETHICS
The
Company has adopted a corporate Code of Ethics (the “Code of
Ethics”) that is applicable the Company’s officers,
directors and employees. The Code of Ethics requires that the
Company’s officers, directors and employees avoid conflicts
of interest, comply with all laws and other legal requirements,
conduct business in an honest and ethical manner, act in the
Company’s best interest, provide full, fair, accurate, timely
and understandable disclosure in public reports, ensure prompt
internal reporting of code violations, and provide accountability
for adherence to the code. The Code of Ethics was filed with the
SEC as Exhibit 99.2 to the Company’s Annual Report on Form
10-K for the year ended December 31, 2013 and is incorporated
herein by reference.
To the
knowledge of the Company’s management, there have been no
reported violations of the Code of Ethics. In the event of any
future amendments to, or waivers from, the provisions of the Code
of Ethics, the Company intends to describe on its Internet website,
within four business days following the date of a waiver or a
substantive amendment, the date of the waiver or amendment, the
nature of the amendment or waiver, and the name of the person to
whom the waiver was granted.
NOMINATIONS OF DIRECTORS
The
Board of Directors does not have a separate Nominations Committee
(the “Nominations Committee”) or a formal procedure
with respect to the nomination of directors, and such functions are
addressed by the entire Board. There have been no material changes
to the procedures by which security holders may recommend nominees
to the Board.
AUDIT COMMITTEE
The
purpose of the Company’s Audit Committee (the “Audit
Committee”) is to act on behalf of the Board of Directors and
oversee all material aspects of the Company's reporting, control,
and audit functions, except those specifically related to the
responsibilities of another standing committee of the Board. The
Audit Committee's role includes a particular focus on the
qualitative aspects of financial reporting to shareholders and on
Company processes for the management of business/financial risk and
for compliance with significant applicable legal, ethical, and
regulatory requirements.
In
addition, the Audit Committee is responsible for: (1) selection and
oversight of the Company’s independent accountant; (2)
establishing procedures for the receipt, retention and treatment of
complaints regarding accounting, internal controls and auditing
matters; (3) establishing procedures for the confidential,
anonymous submission by the Company’s employees of concerns
regarding accounting and auditing matters; (4) establishing
internal financial controls; (5) engaging outside advisors; and (6)
funding for the outside auditor and any outside advisors engagement
by the Audit Committee.
The
Audit Committee’s role also includes coordination with other
Board committees and maintenance of strong, positive working
relationships with management, external and internal auditors,
counsel, and other committee advisors.
47
The
Audit Committee is composed of Gerald Goldberg, Henry J. Kloepper
and Dr. Blaise A. Aguirre. Gerald Goldberg serves as the Chairman
of the Audit Committee and audit committee financial expert. Mr.
Goldberg is independent of management. The Audit Committee adopted
a charter on January 15, 2014 which was filed with the SEC as
Exhibit 99.1 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2013 and is incorporated herein by
reference.
COMPENSATION COMMITTEE
The
Board of Directors does not have a separate Compensation Committee
(the “Compensation Committee”), and such functions are
addressed by the entire Board. Although there is no formal
committee in place, Henry J. Kloepper serves as the Chairman of the
ad hoc Compensation Committee consisting of members of the
Board.
GOVERNANCE COMMITTEE
The
Board of Directors does not have a separate Governance Committee
(the “Governance Committee”), and such functions are
addressed by the entire Board. Although there is no formal
committee in place, Henry J. Kloepper serves as the Chairman of the
ad hoc Governance Committee consisting of members of the
Board.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The
following table sets forth information concerning the annual and
long-term compensation awarded to, earned by, payable/paid to
Graham Simmonds the Company’s Chairman of the Board of
Directors and Chief Executive Officer, Gerald Goldberg the
Company’s Director and Chairman of the Audit Committee, Henry
J. Kloepper the Company’s Lead Independent Director and
Chairman of the Compensation and Governance Committees, Daniel
Yuranyi the Company’s Director and Chief Procurement Officer,
Dr. Blaise A. Aguirre the Company’s Director, Christopher
Rich the Company’s Director, Stanley D. Robinson the
Company’s Director, Ashish Kapoor the Company’s Chief
Financial Officer and Interim Corporate Secretary, Ernest Eves the
Company’s former Chairman of the Board of Directors and
Carrie J. Weiler the Company’s former Corporate Secretary,
for all services rendered in all capacities to the Company for the
years ended December 31, 2016, 2015 and 2014.
Name/Title
|
Year
|
Salary
$(1)
|
Bonus
$(1)
|
Other
Annual
Compensation
$(1)
|
Restricted
Option
Stocks/
Payouts
Awarded
#
|
Graham
Simmonds(2)(3)(4)(7)
Chairman of the
Board of Directors and Chief Executive Officer
|
2016
|
$120,000
|
-
|
-
|
-
|
2015
|
$113,494
|
-
|
-
|
-
|
|
2014
|
$108,662
|
-
|
-
|
-
|
|
Gerald
Goldberg(2)(5)(9)(10)
Chairman of the
Audit Committee
|
2016
|
$9,000
|
-
|
-
|
-
|
2015
|
-
|
-
|
-
|
-
|
|
2014
|
-
|
-
|
-
|
-
|
|
Henry
J. Kloepper(2)(5)(10)
Lead
Independent Director and Chairman of the Compensation and
Governance Committees
|
2016
|
$18,000
|
-
|
-
|
-
|
2015
|
$18,000
|
-
|
-
|
-
|
|
2014
|
-
|
-
|
-
|
-
|
|
Daniel
Yuranyi(2)(3)
Director and Chief
Procurement Officer
|
2016
|
$90,720
|
-
|
-
|
-
|
2015
|
$93,974
|
-
|
-
|
-
|
|
2014
|
$108,662
|
-
|
-
|
-
|
|
Dr.
Blaise A. Aguirre(2)(5)(10)
Director
|
2016
|
$18,000
|
-
|
-
|
-
|
2015
|
$18,000
|
-
|
-
|
-
|
|
2014
|
-
|
-
|
-
|
-
|
|
Christopher
Rich(2)(5)
Director
|
2016
|
$18,000
|
-
|
-
|
-
|
2015
|
$18,000
|
-
|
$92,750(8)
|
-
|
|
2014
|
-
|
-
|
$76,000(8)
|
-
|
|
Stanley D.
Robinson(2)(5)
Director
|
2016
|
$18,000
|
-
|
-
|
-
|
2015
|
$18,000
|
-
|
-
|
-
|
|
2014
|
-
|
-
|
-
|
-
|
|
Ashish
Kapoor(2)(3)(4)(6)
Chief
Financial Officer and Interim Corporate Secretary
|
2016
|
$120,000
|
-
|
-
|
-
|
2015
|
$113,494
|
-
|
-
|
-
|
|
2014
|
$108,662
|
-
|
-
|
-
|
|
Ernest
Eves(5)(7)
Former
Chairman of the Board of Directors
|
2016
|
-
|
-
|
-
|
-
|
2015
|
$7,500
|
-
|
-
|
-
|
|
2014
|
-
|
-
|
-
|
-
|
|
Carrie
J. Weiler(3)(6)
Former
Corporate Secretary
|
2016
|
-
|
-
|
-
|
-
|
2015
|
$5,873
|
-
|
-
|
-
|
|
2014
|
$27,165
|
-
|
-
|
-
|
48
(1)
All figures in the
table above are denominated in U.S. Dollars unless otherwise noted.
The Company’s Canadian subsidiary maintains its books and
records in Canadian Dollars. The Company’s financial
statements are converted to U.S. Dollars (the reporting currency)
for consolidation purposes. For the year ended December 31, 2016,
the exchange rate used to translate amounts in Canadian Dollars to
U.S. Dollars was 0.7560 (December 31, 2015: 0.7831;December 31,
2014: 0.9055).
(2)
As at December 31,
2016, other than the SimKap Agreement (as defined below), the
Company had not entered into any formal employment agreements with
any of the Company’s officers and directors.
(3)
Commencing on
November 15, 2012, the Company and each of Messrs. Simmonds and,
Yuranyi and Kapoor had agreed that, as remuneration for their
respective services, each of Messrs. Simmonds and, Yuranyi and
Kapoor would each be paid $10,000 Canadian Dollars per month, and
that such compensation would be accrued monthly and payable at such
times as determined by the Company. The Company and Ms. Weiler had
agreed that the Company shall accrue consideration at a rate of
$2,500 Canadian Dollars per month, such consideration payable at
such times as determined by the Company.
(4)
Commencing on April
1, 2013, compensation with respect to the services of Mr. Simmonds
and Mr. Kapoor in their respective roles with the Company were paid
by the Company to SimKap in accordance with the terms of the SimKap
Agreement in lieu of payments to Mr. Simmonds and Mr. Kapoor. On
March 31, 2015, the SimKap Agreement was mutually terminated by all
parties, effective immediately, with all parties mutually waving
any applicable termination notices and non-compete periods.
Commencing on April 1, 2015, the Company and each of Mr. Simmonds
and Mr. Kapoor had agreed that, for their respective services, each
of Mr. Simmonds and Mr. Kapoor would each be paid $10,000 U.S.
Dollars per month, and that such compensation would be accrued
monthly and payable at such times as determined by the
Company.
(5)
Commencing on
January 1, 2015, the Board of Directors agreed to pay each of the
Company’s independent directors $1,500 U.S. Dollars per month
for their services, and that such compensation would be accrued
monthly and payable at such times as determined by the
Company.
(6)
On May 5, 2015, Mr.
Kapoor was appointed as Interim Corporate Secretary of the Company
following the resignation of Ms. Weiler as Corporate Secretary of
the Company. Mr. Kapoor was appointed as the Company’s
Corporate Secretary with no additional compensation to be paid to
Mr. Kapoor for such appointment.
(7)
On May 14, 2015,
the Board of Directors appointed Mr. Simmonds to serve as Chairman
of the Board of Directors following the resignation of Mr. Eves as
a Director and as the Chairman of the Board. Mr. Simmonds was
appointed as the Chairman of the Board of Directors with no
additional compensation to be paid to Mr. Simmonds for such
appointment.
(8)
Compensation with
respect to the other services rendered to the Company by Mr. Rich
were paid to Rich Richies Inc. During the year ended December 31,
2016, the Company paid a total of $Nil (December 31, 2015: $92,750;
December 31, 2014: $76,000) U.S. Dollars to such
affiliate.
(9)
On June 29, 2016,
the Board of Directors appointed Mr. Goldberg to serve as a
Director of the Company.
(10)
On June 29, 2016,
the Board of Directors appointed Messrs. Goldberg and, Kloepper and
Aguirre to serve as members of the Company’s Audit Committee,
with Mr. Goldberg serving as Chairman of the Audit
Committee.
49
OPTIONS/SAR GRANTS TABLE
There
were no options granted to employees and no grants to key employees
in fiscal years 2016, 2015 and 2014.
COMPENSATION OF DIRECTORS
There
are no formal agreements with respect to the election and
compensation of directors.
Commencing
on January 1, 2015, the Board of Directors agreed to pay each of
the Company’s independent directors $1,500 U.S. Dollars per
month for their services, and that such compensation would be
accrued monthly and payable at such times as determined by the
Company.
The
Company does not maintain a pension plan for its employees,
officers or directors.
EMPLOYMENT CONTRACTS
The
Board of Directors appoints officers annually and each executive
officer serves at the discretion of the Board.
Other
than the SimKap Agreement (as defined below), the Company has not
entered into any formal employment agreements with any of the
Company’s officers and directors. However, commencing on
November 15, 2012, the Company and each of Messrs. Yuranyi and,
Simmonds and Kapoor had agreed that, as remuneration for their
respective services, each of Messrs. Yuranyi and, Simmonds and
Kapoor would each be paid $10,000 Canadian Dollars per month, and
that such compensation would be accrued monthly and payable at such
times as determined by the Company.
Commencing
on April 1, 2013, the services of Mr. Simmonds, as the
Company’s Chief Executive Officer, and Mr. Kapoor, as the
Company’s Chief Financial Officer, were provided to the
Company in accordance with the terms of a consulting agreement (the
“SimKap Agreement”), between the Company and SimKap
Advisory Corp. (“SimKap”), a company controlled by Mr.
Simmonds and Mr. Kapoor. Under the SimKap Agreement, the Company
agreed to pay SimKap fees with respect to various professional
services to be provided to it under the Agreement, including
monthly fees in respect of the management services of Mr. Simmonds
and Mr. Kapoor in the amount of $10,000 Canadian Dollars per
executive. On March 31, 2015, the SimKap Agreement was mutually
terminated by all parties, effective immediately, with all parties
mutually waving any applicable termination notices and non-compete
periods.
Commencing
on April 1, 2015, the Company and each of Mr. Simmonds and Mr.
Kapoor had agreed that, for their respective services, each of Mr.
Simmonds and Mr. Kapoor would each be paid $10,000 U.S. Dollars per
month, and that such compensation would be accrued monthly and
payable at such times as determined by the Company.
Commencing
on January 1, 2015, the Board of Directors agreed to pay each of
the Company’s independent directors $1,500 U.S. Dollars per
month for their services, and that such compensation would be
accrued monthly and payable at such times as determined by the
Company.
As at
December 31, 2016, the Company did not have any formal employment
agreements with any of the Company’s officers or
directors.
REPORT ON REPRICING OF OPTIONS/SARS
None.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
A) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS
The
table below sets forth the beneficial ownership of the
Company’s Common Shares, as of March 30, 2017,
by:
● all of the Company’s directors and executive
officers, individually,
● all of the Company’s directors and executive
officers, as a group, and
● all persons who beneficially owned more than 5% of
the Company’s outstanding Common Shares.
50
The
following persons (including any group as defined in Regulation
S-K, Section 228.403) are known to the Company, as the issuer, to
be beneficial owner of more than five percent (5%) of any class of
the said issuers voting securities.
To the
Company’s knowledge, none of the Common Shares listed below
are held under a voting trust or similar agreement. To the
Company’s knowledge, there are no pending arrangements,
including any pledges by any person of securities of the Company,
the operation of which may at a subsequent date result in a change
in control of the Company.
Name of
Beneficial
Owner
|
Number of
Common
Shares
Beneficially
Held
|
Number
of
Additional
Common
Shares
Deemed
Outstanding
|
Total Number
of
Common
Shares
Beneficially
Owned
|
Percentage
Owned
|
Graham
Simmonds
|
10,517,982(5)
|
4,850,000(6)(7)
|
15,367,982
|
12.65%
|
Daniel
Yuranyi
|
7,948,650
|
-
|
7,948,650
|
6.81%
|
Ashish
Kapoor
|
4,807,245(8)
|
725,000(9)(10)
|
5,532,245
|
4.71%
|
Dr. Blaise A.
Aguirre
|
1,213,397(11)
|
100,000(12)
|
1,313,397
|
1.12%
|
Christopher
Rich
|
510,000(13)
|
-
|
510,000
|
0.44%
|
Henry J.
Kloepper
|
100,000(14)
|
400,000(15)
|
500,000
|
0.43%
|
Stanley D.
Robinson
|
60,000
|
-
|
60,000
|
0.05%
|
Gerald
Goldberg
|
-
|
-
|
-
|
0.00%
|
Directors and
Executive Officers as a group
|
25,157,274
|
6,075,000
|
31,232,274
|
25.45%
|
|
|
|
|
|
Southshore Capital
Partners, LP
|
6,793,975
|
3,500,000(16)
|
10,293,975
|
8.57%
|
(1)
This table is based
upon 116,655,636 Common Shares issued and outstanding as of March
30, 2017.
(2)
Beneficial
ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting and
investment power with respect to the Common Shares. Common Shares
subject to options or warrants currently exercisable or exercisable
within 60 days are deemed outstanding for computing the percentage
of the person holding such options or warrants, but are not deemed
outstanding for computing the percentage of any other
person.
(3)
To the best of the
Company’s knowledge, except as otherwise indicated, each of
the persons named in the table above has sole voting and investment
power with respect to the Common Shares beneficially owned by such
person.
(4)
The mailing address
of each of the individuals and entities listed above is c/o Gilla
Inc., 475 Fentress Blvd., Unit L, Daytona Beach, FL
32114.
(5)
Includes 5,762,661
Common Shares owned by GraySim Family Trust, 3,930,321 Common
Shares owned by The Woodham Group Inc. and 750,000 of the 1,500,000
Common Shares owned by SimKap Advisory Corp., an entity owned 50%
by Mr. Simmonds and 50% by Mr. Kapoor (see footnote
8).
(6)
Includes $225,000
of Convertible Debentures held by The Woodham Group Inc., $50,000
of Convertible Debentures held by GraySim Family Trust and $17,500
of the $35,000 of Convertible Debentures held by SimKap Advisory
Corp., all convertible into Common Shares of the Company at a price
of $0.10 per share.
(7)
Includes 1,125,000
warrants held by The Woodham Group Inc., 250,000 warrants held by
GraySim Family Trust and 550,000 of the 1,100,000 warrants held by
SimKap Advisory Corp., all exercisable at $0.20 per
share.
(8)
Includes 3,757,245
Common Shares owned by 2364201 Ontario Corp. and 750,000 of the
1,500,000 Common Shares owned by SimKap Advisory Corp., an entity
owned 50% by Mr. Kapoor and 50% by Mr. Simmonds (see footnote
5).
(9)
Includes $17,500 of
the $35,000 of Convertible Debentures held by SimKap Advisory
Corp., convertible into Common Shares of the Company at a price of
$0.10 per share.
51
(10)
Includes 550,000 of
the 1,100,000 warrants held by SimKap Advisory Corp., exercisable
at $0.20 per share.
(11)
Includes 59,000
Common Shares owned by Dr. Aguirre’s spouse.
(12)
Includes $5,000 of
Convertible Debentures convertible into Common Shares of the
Company at a price of $0.10 per share and 50,000 warrants
exercisable at $0.20 per share.
(13)
Includes 510,000
Common Shares owned by Rich Richies Inc.
(14)
Includes 100,000
Common Shares owned by Mr. Kloepper’s spouse.
(15)
Includes $20,000 of
Convertible Debentures convertible into Common Shares of the
Company at a price of $0.10 per share and 200,000 warrants
exercisable at $0.20 per share, all held by Mr. Kloepper’s
spouse.
(16)
Includes $175,000
of Convertible Debentures convertible into Common Shares of the
Company at a price of $0.10 per share and 1,750,000 warrants
exercisable at $0.20 per share.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Detail
of related party transactions are described in notes 12, 13, 14 and
19 of the consolidated financial statements of the Company for the
years ended December 31, 2016 and 2015, and repeated
below.
Credit Facility (Note 12)
On
August 1, 2014, the Company entered into a revolving credit
facility (the “Credit Facility”) with an unrelated
party acting as an agent to a consortium of participants (the
“Lenders”), whereby the Lenders would make a revolving
credit facility in the aggregate principal amount of CAD $500,000
for the exclusive purpose of purchasing inventory for sale in the
Company’s ordinary course of business to approved customers.
The Credit Facility charged interest at a rate of 15% per annum on
all drawn advances and a standby fee of 3.5% per annum on the
undrawn portion of the Credit Facility. The Credit Facility matured
on August 1, 2015 whereby the outstanding advances together with
all accrued and unpaid interest thereon would be due and payable.
On August 1, 2014, and in connection to the Credit Facility, the
Company issued 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 were both participants of the consortium of
participants of the Credit Facility, each having committed to
provide ten percent of the principal amount of the Credit Facility.
The Credit Facility was secured by all of the Company’s
inventory and accounts due relating to any inventory as granted in
an intercreditor and subordination agreement by and among the
Company, the Secured Note holder and the Lenders to establish the
relative rights and priorities of the secured parties against the
Company and a security agreement by and between the Company and the
Lenders.
During
the year ended December 31, 2014, the Company was advanced $387,110
(CAD $449,083) from the Credit Facility for the purchase of
inventory including $77,453 (CAD $89,852) of advances from the
Company’s Chief Executive Officer and Chief Financial Officer
as their participation in the Credit Facility.
On
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, 2016, the Company paid $2,189 (December
31, 2015: $30,670) of interest and standby fees as a result of the
Credit Facility.
On
January 18, 2016, and in connection to the Term Loan (note 13), the
Company and the Lenders entered into a loan termination agreement
whereby the Company and the Lenders terminated and retired the
Credit Facility. As a result, the CAD $294,000 in amounts advanced
from the Credit Facility and the CAD $3,093 in accrued interest
owing on the Credit facility were rolled into the Term
Loan.
52
Term Loan (Note 13)
On
January 18, 2016, the Company entered into a term loan (the
“Term Loan”) with the Lenders, whereby the Lenders
would loan the Company the aggregate principal amount of CAD
$1,000,000 for capital expenditures, marketing expenditures and
working capital. The agent who arranged the Term Loan was not a
related party of the Company. The Term Loan bears interest at a
rate of 16% per annum, on the outstanding principal, and shall
mature on July 3, 2017, whereby any outstanding principal together
with all accrued and unpaid interest thereon shall be due and
payable. The Term Loan is 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 Lenders in
the following priority: first, to pay the monthly interest due on
the Term Loan; and second, to repay any remaining principal
outstanding on the Term Loan. The Company may elect to repay the
outstanding principal of the Term Loan together with all accrued
and unpaid interest thereon prior to the maturity, subject to an
early repayment penalty of the maximum of (i) 3 months interest on
the outstanding principal; or (ii) 50% of the interest payable on
the outstanding principal until maturity (the “Early
Repayment Penalty”). The Term Loan shall be immediately due
and payable at the option of the Lenders if there is a change in
key personnel meaning the Company’s current Chief Executive
Officer and Chief Financial Officer. On January 18, 2016 and in
connection to the Term Loan, the Company issued warrants for the
purchase of 250,000 Common Shares 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 (note 16 (i) issued on August 1, 2014 in
connection with the Credit Facility until December 31, 2017, with
all other terms of the warrants remaining the same.
The
Company’s Chief Executive Officer and Chief Financial Officer
are both participants of the consortium of Lenders of the Term
Loan, each having committed to provide ten percent of the principal
amount of the Term Loan. Neither the Chief Executive Officer nor
the Chief Financial Officer participated in the warrants issued or
warrants extended in connection with the Term Loan and both parties
have been appropriately abstained from voting on the Board of
Directors to approve the Term Loan, where applicable.
On July
15, 2016, the Company and the Lenders of the Term Loan entered into
a Term Loan Amendment (the “Term Loan Amendment”) in
which the Lenders agreed to extend to the Company an additional CAD
$600,000 in principal to increase the Term Loan facility up to the
aggregate principal amount of CAD $1,600,000. The parties also
extended the maturity date of the Term Loan to July 2, 2018 with
all other terms of the Term Loan remaining the same. The
Company’s Chief Executive Officer and its Chief Financial
Officer are both participants in the consortium of Lenders having
each committed to provide a total of CAD $150,000 of the initial
principal of the Term Loan and the additional principal of the Term
Loan pursuant to the Term Loan Amendment. Neither the Chief
Executive Officer nor the Chief Financial Officer participated in
the warrants issued or warrants extended in connection with the
Term Loan Amendment.
On July
15, 2016 and in connection to the Term Loan Amendment, the Company
issued warrants for the purchase of 300,000 Common Shares of the
Company (note 16 (p)) at an exercise price of $0.20 per Common
Share, such purchase warrants expiring on December 31, 2018. The
Company also extended the expiration dates of i) the 250,000
purchase warrants (note 16 (i) issued on January 18, 2016 in
connection to the Term Loan and ii) the 250,000 purchase warrants
(note 16(i)) issued on August 1, 2014 and extended on January 18,
2016 in connection to the Term Loan both until December 31, 2018,
with all other terms of the warrants remaining the
same.
During
the year ended December 31, 2016, the Company was advanced
$1,219,840 (CAD $1,600,000) from the Term Loan including the CAD
$294,000 and CAD $3,093 rolled in from the Credit Facility (note
12) as well as CAD $240,581 of advances from the Company’s
Chief Executive Officer and Chief Financial Officer.
During
the year ended December 31, 2016, the Company expensed $140,540
(December 31, 2015: $nil) in interest as a result of the Term Loan.
Pursuant to the Cash Sweep, during the year ended December 31,
2016, the Company paid $187,898 to the Lenders consisting of
$111,083 in interest and $76,815 in principal payments and at
December 31, 2016, the Company owes the Lenders $81,060 in arrears
consisting of $29,471 in interest and $51,589 in principal
payments.
At
December 31, 2016, the amount owing on the Term Loan is as
follows:
|
December 31,
2016
|
December 31,
2015
|
Amount
advanced
|
$1,219,840
|
$-
|
Exchange gains
during the year
|
(28,159)
|
-
|
Principal payments
made
|
(76,815)
|
-
|
Interest
accrued
|
140,540
|
-
|
Interest payments
made
|
(111,069)
|
-
|
Amount owing at end
of year
|
$1,144,337
|
$-
|
53
Convertible Debentures (Note 14)
Convertible Debentures Series A
On
September 3, 2013, December 23, 2013 and February 11, 2014, the
Company issued $425,000, $797,000 and $178,000, respectively, of
unsecured subordinated convertible debentures (“Convertible
Debentures Series A”). The Convertible Debentures Series A
matured on January 31, 2016 and charged interest at a rate of 12%
per annum, payable quarterly in arrears. The Convertible Debentures
Series A were convertible into Common Shares of the Company at a
fixed conversion rate of $0.07 per Common Share at any time prior
to the maturity date. Of the $178,000 in face value of Convertible
Debentures Series A issued on February 11, 2014, $3,000 were issued
in settlement of loans from shareholders and $50,000 were issued in
settlement of loans from related parties.
Convertible Debentures Series B
On
December 31, 2015, the Company issued 650 unsecured subordinated
convertible debenture units (“Convertible Debentures Series
B”) for proceeds of $650,000. Each Convertible Debentures
Series B consisted of an unsecured subordinated convertible
debenture having a principal amount of $1,000 and warrants
exercisable for the purchase of 5,000 Common Shares of the Company
at a price of $0.20 per Common Share for a period of twenty-four
months from the date of issuance (note 16). The Convertible
Debentures SeriesB mature on January 31, 2018 and bear interest at
a rate of 8% per annum, payable quarterly in arrears. The face
value of the Convertible Debentures Series B, together with all
accrued and unpaid interest thereon, are convertible into Common
Shares of theCompany at a fixed conversion rate of $0.10 per Common
Share at any time prior to maturity. The Company also has the
option to force conversion of any outstanding Convertible
Debentures Series B at any time after six months from issuance and
prior to maturity. Of the $650,000 in face value of Convertible
Debentures Series B issued on December 31, 2015, $276,000 were
issued in settlement of loans from related parties (note 19),
$10,000 were issued in settlement of related party consulting fees
(note 19), $20,000 were issued in settlement of consulting fees
owing to an unrelated party and $227,000 were issued in settlement
of loans from shareholders.
Convertible Debentures Series C
On May
20, 2016, the Company issued 375 unsecured subordinated convertible
debenture units (the “Convertible Debentures Series C”)
for proceeds of $375,000. Each Convertible Debentures Series C
consisted of an unsecured subordinated convertible debenture having
a principal amount of $1,000 and warrants exercisable for the
purchase of 10,000 Common Shares of the Company at a price of $0.20
per Common Share for a period of twenty-four months from the date
of issuance (note 16 (n). The Convertible Debentures Series C
mature on January 31, 2018 and bear interest at a rate of 8% per
annum, accrued quarterly in arrears. The face value of the
Convertible Debentures Series C, together with all accrued and
unpaid interest thereon, are convertible into Common Shares of the
Company at a fixed conversion rate of $0.10 per CommonShare at any
time prior to maturity. The Company also has the option to force
conversion of any outstanding Convertible Debentures Series C at
any time after six months from issuance and prior to maturity. For
Canadian holders, the Company may only force conversion of any
outstanding Convertible Debentures Series C at such time that the
Company is a reporting issuer within the jurisdiction of Canada. Of
the $375,000 in face value of Convertible Debentures Series C
issued on May 20, 2016, $55,000 were issued in settlement of
amounts owing to related parties (note 19) and $10,000 were issued
in settlement of amounts owing to an employee. The Company incurred
costs of $22,725 as a result of the issuance of Convertible
Debentures Series C on May 20, 2016.
On
December 31, 2016, the Company issued an additional 275 units of
Convertible Debentures Series C for proceeds of $275,000 which were
fully issued in exchange for cash.
The
Company evaluated the terms and conditions of the Convertible
Debentures Series A, Convertible Debentures Series B and each
tranche of Convertible Debentures Series C (together, the
“Convertible Debentures”) under the guidance of ASC No.
815, Derivatives and
Hedging (“ASC 815”). The conversion feature met
the definition of conventional convertible for purposes of applying
the conventional convertible exemption. The definition of
conventional contemplates a limitation on the number of shares
issuable under the arrangement. The instrument was convertible into
a fixed number of shares and there were no down round protection
features contained in the contracts.
Since a
portion of the Convertible Debentures were issued in exchange for
nonconvertible instruments at the original instrument’s
maturity date, the guidance of ASC 470-20-30-19 & 20 were
applied. The fair value of the newly issued Convertible Debentures
were equal to the redemption amounts owed at the maturity date of
the original instruments. Therefore, there was no gain or loss on
extinguishment of debt recorded. After the exchange occurred, the
Company was required to consider whether the new hybrid contracts
embodied a beneficial conversion feature
(“BCF”).
54
For the
face value $425,000 of Convertible Debentures Series A issued on
September 3, 2013, the calculation of the effective conversion
amount did not result in a BCF because the effective conversion
price was greater than the Company’s stock price on the date
of issuance, therefore no BCF was recorded. However, for the face
value $797,000 of Convertible Debentures Series A that were issued
on December 23, 2013 and the face value $178,000 of Convertible
Debentures Series A that were issued on February 11, 2014, the
calculation of the effective conversion amount resulted in a BCF
because the effective conversion price was less than the
Company’s stock price on the date of issuance and a BCF in
the amount of $797,000 and $178,000, respectively, were recorded in
additional paid-in capital.
For the
face value $650,000 of Convertible Debenture Series B issued on
December 31, 2015, the relative fair value of the purchase warrants
included in the issuance totaling $287,757 was calculated using the
Black-Scholes option pricing model. The resulting fair value of
such Convertible Debentures Series B issuance was calculated to be
$362,243. The calculation of the effective conversion amount
resulted in a BCF because the effective conversion price was less
than the Company’s stock price on the date of issuance and a
BCF in the amount of $133,657 was recorded in additional paid-in
capital.
For the
face value $375,000 of Convertible Debentures Series C issued on
May 20, 2016 (“Convertible Debentures Series C-1”), the
relative fair value of the purchase warrants included in the
issuance totaling $234,737 (note 16 (n)) was calculated using the
Black-Scholes option pricing model. The resulting fair value of
such Convertible Debentures Series C-1 was calculated to be
$140,263. The calculation of the effective conversion amount
resulted in a BCF because the effective conversion price was less
than the Company’s stock price on the date of issuance and a
BCF in the amount of $117,538, net of transaction costs, was
recorded in additional paid-in capital.
For the
face value $275,000 of Convertible Debentures Series C issued on
December 31, 2016 (“Convertible Debentures Series
C-2”), the relative fair value of the purchase warrants
included in the issuance totaling $143,871 (note 16(r)) was
calculated using the Black-Scholes option pricing model. The
resulting fair value of such Convertible Debentures Series C-2 was
calculated to be $131,129. The calculation of the effective
conversion amount resulted in a BCF because the effective
conversion price was less than the Company’s stock price on
the date of issuance and a BCF in the amount of $131,129, was
recorded in additional paid-in capital.
The BCF
and the fair value of the purchase warrants, which represents debt
discount, is accreted over the life of the Convertible Debentures
using the effective interest rate. Interest expense related to debt
discount was recorded as follows:
|
December 31,
2016
|
December 31,
2015
|
Convertible
Debentures Series A
|
$17,341
|
$232,830
|
Convertible
Debentures Series B
|
52,781
|
6,500
|
Convertible
Debentures Series C-1
|
21,674
|
-
|
Convertible
Debentures Series C-2
|
2,750
|
-
|
|
$94,546
|
$239,330
|
55
Convertible
Debentures as of December 31, 2016 and 2015, are as
follows:
Balance,
December 31, 2014
|
$24,828
|
Face value
Convertible Debentures Series B
|
650,000
|
Relative fair value
of detachable warrants
|
(287,757)
|
BCF
|
(362,243)
|
Amortization of
debt discount
|
239,330
|
Conversions
|
(177,000)
|
Balance,
December 31, 2015
|
$87,158(1)
|
Face value
Convertible Debentures Series C-1
|
375,000
|
Face value
Convertible Debentures Series C-2
|
275,000
|
Relative fair value
of detachable warrants
|
(378,608)
|
BCF
|
(248,667)
|
Transaction
costs
|
(22,725)
|
Amortization of
debt discount
|
94,546
|
Conversion
|
(23,000)
|
Cash
settlements
|
(75,000)
|
Balance,
December 31, 2016
|
$83,704
|
(i)
At
December 31, 2015, $80,658 of Convertible Debentures were
classified as current liabilities and $6,500 of Convertible
Debentures were classified as long term liabilities on the balance
sheet.
Conversions and Repayments of Convertible Debentures Series
A
The
Company received forms of election whereby holders of the
Convertible Debentures Series A elected to convert the face value
of the debentures into Common Shares of the Company at $0.07 per
share pursuant to the terms of the Convertible Debentures Series A.
As at December 31, 2016, the Company received the following forms
of elections from holders of the Convertible
Debentures:
Date Form
of
Election
Received
|
Face Value of
Convertible Debentures Series A Converted
|
Number
of
Common Shares
Issued on Conversion
|
April 15,
2014
|
$50,000
|
714,286
|
September 30,
2014
|
800,000
|
11,428,572
|
November 10,
2014
|
275,000
|
3,928,571
|
March 9,
2015(1)
|
52,000
|
742,857
|
July 15,
2015
|
105,000
|
1,500,000
|
September 1,
2015
|
20,000
|
285,714
|
|
$1,302,000
|
18,600,000
|
(1)
On
March 9, 2015, the Company settled interest payable on the
Convertible Debentures Series A in the amount of $1,096 with the
issuance of Common Shares at a price of $0.15 per Common Share, of
which, $358 of interest payable on the Convertible Debentures
Series A was settled with a Director of the Company (note
19).
On
January 25, 2016, the Company received a form of election to
convert face value $23,000 of Convertible Debentures Series A, such
328,571 Common Shares remain unissued. On March 10, 2016, the
Company settled face value $25,000 of Convertible Debentures Series
A with a cash payment. On July 6, 2016, the Company settled face
value $50,000 of Convertible Debentures Series A and agreed to pay
to the holders such face value in monthly payments ending on
November 1, 2016. As at December 31, 2016, the $50,000 was fully
paid.
56
As at
December 31, 2016, all Convertible Debentures Series A had been
fully settled and no amounts remain owing.
Conversions and Repayments of Convertible Debentures Series B &
C
As at
December 31, 2016, face value $650,000 of Convertible Debentures
Series B and face value $650,000 of Convertible Debentures Series C
remain owing to their respective debenture holders.
Interest on Convertible Debentures
During
the year ended December 31, 2016, the Company recorded interest
expense in the amount of $74,162 (December 31, 2015: $21,845) on
the Convertible Debentures.
Related Party Transactions (Note 19)
Transactions
with related parties are incurred in the normal course of business
and are as follows:
(a)
|
The
Company’s current and former officers and shareholders have
advanced funds on an unsecured, non-interest bearing basis to the
Company, unless stated otherwise below, for travel related and
working capital purposes. The Company has not entered into any
agreement on the repayment terms for these
advances.
|
Advances
from related parties were as follows:
|
December
31,
2016
|
December
31,
2015
|
Advances by and
amounts payable to Officers of the Company, two of which are also
Directors
|
$95,759
|
$242,758
|
Advances by and
consulting fees payable to a corporation owned by two Officers of
the Company, one of which is also a Director
|
313,745
|
196,581
|
Consulting fees
owing to persons related to Officers who are also Directors of the
Company
|
77,463
|
37,028
|
Advances by
Officers of the Company, one of which is also a Director, bears
interest at 1.5% per month
|
901,784
|
355,802
|
Amounts payable to
a corporation formerly related by virtue of a common Officer of the
Company
|
-
|
30,294
|
Amounts payable to
a corporation related by virtue of common Officers and a common
Director of the Company
|
76,407
|
50,976
|
Consulting fees and
director fees payable to Directors of the Company
|
13,725
|
83,500
|
|
$1,478,883
|
$996,939
|
At
December 31, 2016, the Company had deferred amounts of $1,085,906
(December 31, 2015: $662,140) owing to related parties. The
deferred amounts consist of $572,506 (December 31, 2015: $300,890)
owing to Officers of the Company, two of which are also Directors
for consulting fees payable, amounts of $141,000 owing to Directors
of the Company for Director fees payable and amounts of $372,400
(CAD $500,000) (December 31, 2015: $361,250; CAD $500,000) owing to
a corporation owned by two Officers of the Company, one of which is
also a Director for management service fees payable. The amounts
are non-interest bearing and payable on April 1, 2018, in exchange
for agreeing to defer the fees, the Directors and Officers will
receive an incentive bonus equal to 10% of the amount deferred and
payable on April 1, 2018. The bonus will be expensed over the term
of the deferrals, no amount of the bonus has been expensed for the
year ended December 31, 2016. During the year ended December 31,
2016, the Company settled $48,000 of the deferred amounts owing to
an Officer and Director of the Company with 480,000 Common Shares
of the Company (note 15).
(b)
|
Interest
accrued to related parties were as follows:
|
|
December
31,
2016
|
December
31,
2015
|
|
|
|
Interest accrued on
advances by Officers of the Company, one of which is also a
Director
|
$234,121
|
$129,729
|
Advances by and
consulting fees payable to a corporation owned by two Officers of
the Company, one of which is also a Director
|
29,669
|
2,026
|
|
$263,790
|
$131,755
|
(c)
|
Transactions
with related parties were as follows:
|
57
During
the year ended December 31, 2016, the Company expensed $72,394
(December 31, 2015: $49,977) in rent expense payable to a
corporation related by virtue of a common Officer and a common
Director of the Company.
During
the year ended December 31, 2016, the Company expensed $22,304
(December 31, 2015: $25,293) in costs related to a vehicle for the
benefit of two Officers who are also Directors of the Company and
for the benefit of a person related to an Officer and Director of
the Company. The Company also expensed $206,445
(December 31, 2015:
$173,599 in travel and entertainment expenses incurred by Officers
and Directors of the Company.
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
were issued on May 19, 2016 (note 15).
On May
20, 2016, the Company issued face value $55,000 of Convertible
Debentures Series C to related parties consisting of $10,000 to a
person related to an Officer and Director for settled of fees
payable, $10,000 to a Director of the Company for settlement of
Director fees payable and $35,000 to a corporation owned by two
Officers of the Company, one of which is also a Director, for
settlement of loans payable.
On May
20, 2016, the Company issued face value $15,000 of Convertible
Debentures Series C to two Directors of the Company for
cash.
On June
17, 2016, the Company issued 150,000 Common Shares at a price of
$0.14 per Common Share to a person related to an Officer and
Director of the Company on the signing of a new employment
agreement.
During
the year ended December 31, 2015, the Company settled $358 of
interest payable on Convertible Debentures Series A with a Director
of the Company at $0.15 per Common Share, and the Common Shares
were issued on April 13, 2015.
During
the year ended December 31, 2016, amounts owing to a former related
party in the amount of $9,263 were forgiven, as a result the
Company recorded a gain on settlement in the amount of
$9,263.
During
the year ended December 31, 2015, the Company issued 228,572 Common
Shares at $0.07 per share to a Director of the Company as a result
of the conversion of face value $16,000 of Convertible Debentures
Series A, and the shares were issued on April 13,
2015.
The
Company expensed consulting fees payable to related parties as
follows:
|
December
31,
2016
|
December
31,
2015
|
Directors
|
$-
|
$92,750
|
Officers
|
330,900
|
273,974
|
Corporation
formerly related by virtue of common Officers and a common
Director
|
-
|
74,396
|
Corporation owned
by two Officers, one of which is also a Director
|
-
|
92,799
|
Persons related to
a Director
|
142,249
|
71,261
|
|
$473,149
|
$605,180
|
The
Company’s Chief Executive Officer and Chief Financial Officer
are both participants of the consortium of Lenders of the Credit
Facility and the Term Loan, each committed to provide a total of
CAD $150,000 of the Term Loan (notes 12 and 13).
58
Director Independence
As of
the date of the filing of this Annual Report, Gerald Goldberg,
Henry J. Kloepper, Dr. Blaise A. Aguirre, Christopher Rich and
Stanley D. Robinson are the members of the Company’s Board of
Directors who are deemed to be independent as defined in Rule
10A(m)(3) of the Exchange Act. During the fiscal year ended
December 31, 2016, Gerald Goldberg was appointed to the Board of
Directors and deemed to be an independent member of the Board.
During the fiscal year ended December 31, 2015, Graham Simmonds was
appointed by the Board of Directors to serve as Chairman of the
Board of Directors to replace Ernest Eves. Mr. Simmonds is not
deemed to be an independent member of the Board.
The
Company’s Board of Directors currently has an Audit Committee
composed of Gerald Goldberg (Chairman of the Audit Committee and
lead financial expert), Henry J. Kloepper (Audit Committee Member)
and Dr. Blaise A. Aguirre (Audit Committee Member). During the
fiscal year ended December 31, 2016, the Board of Directors
appointed Gerald Goldberg, Henry J. Kloepper and Dr. Blaise A.
Aguirre to serve as members of the Audit Committee, with Gerald
Goldberg to serve as Chairman of the Audit Committee.
The
Company’s Board of Directors does not have a separate
Nominating Committee, Compensation Committee or Governance
Committee, and such functions are addressed by the entire Board.
Although the Board of Directors does not have a separate
Compensation Committee or Governance Committee, Henry J. Kloepper
serves as the Chairman of the Compensation and Governance
Committees.
Graham
Simmonds and Daniel Yuranyi are members of the Board of Directors
who are also officers of the Company and are not deemed independent
members of the Board.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND
SERVICES.
On
February 7, 2017, the Company’s Board of Directors engaged
MNP LLP to serve as the Company’s independent registered
public accounting firm for the fiscal year ended December 31,
2016.
(1) Audit Fees
MNP
LLP, the Company’s independent registered public accounting
firm, billed an aggregate of $85,000 (2015: $100,000) Canadian
Dollars for audit of the Company’s annual consolidated
financial statements for the fiscal year ended December 31, 2016
and included in the Company’s Annual Report on Form
10-K.
Schwartz
Levitsky Feldman LLP (“SLF LLP”), the Company’s
former independent registered public accounting firm, billed an
aggregate of $18,500 Canadian Dollars for review of the
Company’s quarterly consolidated financial statements for the
periods ended March 31, June 30 and September 31, 2015 and included
in the Company’s Quarterly Report on Form 10-Q.
(2) Audit Related Fees
No
other professional services were rendered by MNP LLP for audit
related services rendered during the fiscal years ended December
31, 2016 and 2015, in connection with, among other things, the
preparation of a Registration Statement on Form 10-K.
No
other professional services were rendered by SLF LLP for audit
related services rendered during the fiscal year ended December 31,
2015.
(3) Tax Fees
MNP
LLP, the Company’s independent registered public accounting
firm, billed an aggregate of $83,272 (2015: $Nil) Canadian Dollars
for tax compliance services for the fiscal year ended December 31,
2016.
No
professional services were rendered by SLF LLP for tax compliance,
tax advice, and tax planning the fiscal year ended December 31,
2015.
(4) All Other Fees
Not
applicable.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES.
59
Financial Statements
Audited
Consolidated Financial Statements of Gilla Inc. for the Years Ended
December 31, 2016 and 2015.
Exhibits
Exhibit
Number
|
|
Exhibit
Description
|
|
Filed
Herewith
|
|
Incorporated
by Reference
|
||||
|
|
|
Form
|
|
Exhibit
|
|
Filing Date
|
|||
|
|
|
|
|
|
|
|
|
||
3.1
|
|
Articles
of Incorporation.
|
|
|
|
10-SB
|
|
3.1
|
|
11/15/1999
|
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
Articles
of Amendment to the Articles of Incorporation.
|
|
|
|
8-K
|
|
3.2
|
|
5/14/2003
|
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
Bylaws.
|
|
|
|
10-SB
|
|
3.2
|
|
11/15/1999
|
|
|
|
|
|
|
|
|
|
|
|
10.1
|
|
Share
Purchase Agreement, by and between the Company and Credifinance
Capital Corp., dated as of June 22, 2012.
|
|
|
|
8-K
|
|
|
|
11/28/2012
|
|
|
|
|
|
|
|
|
|
|
|
10.2
|
|
Letter
of Intent, by and between the Company and Snoke Distribution Canada
Ltd., dated as of June 25, 2012.
|
|
|
|
8-K
|
|
|
|
11/28/2012
|
|
|
|
|
|
|
|
|
|
|
|
10.5
|
|
Loan
Agreement, by and between the Company and Credifinance Capital
Corp., dated as of April 15, 2011.
|
|
|
|
8-K
|
|
|
|
11/28/2012
|
|
|
|
|
|
|
|
|
|
|
|
10.6
|
|
Loan
Termination Agreement, by and between the Company and Credifinance
Capital Corp., dated as of November 15, 2012.
|
|
|
|
8-K
|
|
|
|
11/28/2012
|
|
|
|
|
|
|
|
|
|
|
|
10.7
|
|
New
Loan Agreement, by and between the Company and Credifinance Capital
Corp., dated as of November 15, 2012.
|
|
|
|
8-K
|
|
|
|
11/28/2012
|
|
|
|
|
|
|
|
|
|
|
|
10.8
|
|
6%
Convertible Credit Note, by and between the Company and
Credifinance Capital Corp., dated as of November 15,
2012.
|
|
|
|
8-K
|
|
|
|
11/28/2012
|
|
|
|
|
|
|
|
|
|
|
|
10.9
|
|
Form of
Gilla Inc. Private Placement Subscription Agreement and Investment
Letter, dated as of November 15, 2012.
|
|
|
|
8-K
|
|
|
|
11/28/2012
|
|
|
|
|
|
|
|
|
|
|
|
10.10
|
|
Exclusive
Distribution Agreement, by and between Snoke Distibution Canada
Ltd. and Ecoreal GmbH & Co. KG, dated as of November 24,
2011.
|
|
|
|
8-K
|
|
|
|
11/28/2012
|
|
|
|
|
|
|
|
|
|
|
|
10.11
|
|
Secured
Note from the Company to Gravitas Financial Inc., dated as of
February 13, 2014.
|
|
|
|
8-K
|
|
|
|
2/19/2014
|
|
|
|
|
|
|
|
|
|
|
|
10.12
|
|
General
Security Agreement, by and between the Company and Gravitas
Financial Inc., dated as of February 13, 2014.
|
|
|
|
8-K
|
|
|
|
2/19/2014
|
|
|
|
|
|
|
|
|
|
|
|
10.13
|
|
Letter
Agreement, by and between the Company and Drianan Marketing
Limited, dated as of January 22, 2014.
|
|
|
|
10-Q
|
|
|
|
5/21/2014
|
|
|
|
|
|
|
|
|
|
|
|
10.14
|
|
Purchase
and Sale Agreement, by and among the Company, Drinan Marketing
Limited, Andrew Hennessy and Michele Hennessy, dated as of January
23, 2014.
|
|
|
|
10-Q
|
|
|
|
5/21/2014
|
|
|
|
|
|
|
|
|
|
|
|
60
10.15
|
|
Loan
Agreement (for a Credit Facility), by and between the Company and
Sarasvati Investments Inc., dated as of August 1,
2014.
|
|
|
|
8-K
|
|
|
|
8/8/2014
|
|
|
|
|
|
|
|
|
|
|
|
10.16
|
|
Intercreditor
and Subordination Agreement, by and among the Company, Sarasvati
Investments Inc., and Gravitas Financial Inc., dated as of August
1, 2014.
|
|
|
|
8-K
|
|
|
|
8/8/2014
|
|
|
|
|
|
|
|
|
|
|
|
10.17
|
|
Security
Agreement from the Company to Sarasvati Investments Inc., dated as
of August 1, 2014.
|
|
|
|
8-K
|
|
|
|
8/8/2014
|
|
|
|
|
|
|
|
|
|
|
|
10.18
|
|
Secured
Note No.2 from the Company to Gravitas Financial Inc., dated as of
July 15, 2014.
|
|
|
|
10-Q
|
|
|
|
11/18/2014
|
|
|
|
|
|
|
|
|
|
|
|
10.19
|
|
Secured
Note Amendment, by and between the Company and Gravitas Financial
Inc., dated November 10, 2014.
|
|
|
|
10-Q
|
|
|
|
11/18/2014
|
|
|
|
|
|
|
|
|
|
|
|
10.20
|
|
Secured
Note No.3 from the Company to Gravitas Financial Inc., dated as of
June 29, 2015.
|
|
|
|
10-Q
|
|
|
|
11/20/2015
|
|
|
|
|
|
|
|
|
|
|
|
10.21
|
|
Form of
Unsecured Promissory Notes from the Company to the vendors of E
Vapor Labs Inc.
|
|
|
|
10-Q
|
|
|
|
11/20/2015
|
|
|
|
|
|
|
|
|
|
|
|
10.22
|
|
Term
Loan Agreement, by and between the Company and Sarasvati
Investments Inc., dated as of January 18, 2016.
|
|
|
|
8-K
|
|
|
|
1/22/2016
|
|
|
|
|
|
|
|
|
|
|
|
10.23
|
|
Loan
Termination Agreement, by and between the Company and Sarasvati
Investments Inc., dated as of January 18, 2016.
|
|
|
|
8-K
|
|
|
|
1/22/2016
|
|
|
|
|
|
|
|
|
|
|
|
10.24
|
|
Loan
Agreement, by and between the Company and Gravitas International
Corporation, dated as of March 2, 2016.
|
|
|
|
8-K
|
|
|
|
3/8/2016
|
|
|
|
|
|
|
|
|
|
|
|
10.25
|
|
General
Security Agreement, by and between the Company and Gravitas
International Corporation, dated as of March 2, 2016.
|
|
|
|
8-K
|
|
|
|
3/8/2016
|
|
|
|
|
|
|
|
|
|
|
|
10.26
|
|
Term
Loan Amendment, by and between the Company and Sarasvati
Investments Inc., dated as of July 15, 2016.
|
|
|
|
8-K
|
|
|
|
7/22/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Bridge
Loan Agreement, by and between Gravitas Financial Inc., dated as of
January 12, 2017.
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
Loan Amendment No.2, by and between the Company and Sarasvati
Investments Inc., dated as of February 27, 2017.
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
List of
Subsidiaries.
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
X
|
|
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Certification
of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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X
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Certification
of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
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X
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Certifications
of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
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X
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99.1
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Audit
Committee Charter.
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10-K
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99.1
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4/8/2014
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99.2
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Code of
Ethics.
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10-K
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99.2
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4/8/2014
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101.INS
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XBRL
Instance Document
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X
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101.SCH
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XBRL
Taxonomy Extension Schema
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X
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101.CAL
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XBRL
Taxonomy Extension Calculation Linkbase
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X
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101.DEF
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XBRL
Taxonomy Definition Linkbase
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X
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101.LAB
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XBRL
Taxonomy Extension label Linkbase
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X
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101.PRE
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XBRL
Taxonomy Extension Presentation Linkbase
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X
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*
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This
certification is deemed not filed for purposes of section 18 of the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”), or otherwise subject to the liability of that section,
nor shall it be deemed incorporated by reference into any filing
under the Securities Act or the Exchange Act.
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61
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf on March 31, 2017 by the undersigned,
thereunto authorized.
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GILLA INC.
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By:
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/s/
Graham Simmonds
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Graham
Simmonds
Chief
Executive Officer and Principal Executive Officer
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By: | /s/ Ashish Kapoor |
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Ashish
Kapoor
Chief Financial Officer and
Principal
Accounting Officer
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Pursuant
to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the
Registrant and in the capacities on the date(s)
indicated.
Name
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Title
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Date
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/s/
Graham Simmonds
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Graham
Simmonds
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Chairman/
CEO
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March
31, 2017
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/s/
Gerald Goldberg
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Gerald
Goldberg
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Director
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March
31, 2017
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/s/
Henry J. Kloepper
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Henry
J. Kloepper
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Director
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March
31, 2017
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/s/
Daniel Yuranyi
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Daniel
Yuranyi
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Director/CPO
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March
31, 2017
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/s/ Dr.
Blaise A. Aguirre
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Dr.
Blaise A. Aguirre
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Director
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March
31, 2017
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/s/
Christopher Rich
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Christopher
Rich
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Director
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March
31, 2017
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/s/
Stanley D. Robinson
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Stanley
D. Robinson
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Director
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March
31, 2017
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62