Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☑
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the quarterly period ended March 31, 2018
OR
☐
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the transition period from _______________ to
_______________
Commission File Number: 000-28107
GILLA INC.
(Exact
Name of Registrant as Specified in its Charter)
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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(416) 843-2881
Registrant’s telephone number, including area
code
Not Applicable
(Former
name, Former Address and Former Fiscal year, if changed since last
report.)
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements
for the past 90 days. ☑ Yes
☐ No
Indicate
by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post
such files). ☑ Yes ☐
No
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer
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☐
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Accelerated
filer
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☐
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Non-accelerated
filer
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☐
(Do not check if a smaller reporting company)
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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 Act). ☐
Yes ☑ No
Indicate
the number of shares outstanding of each of the issuer’s
classes of common stock, as of the latest practicable
date.
The
Registrant had 143,818,368 shares of common stock (“Common
Shares” or “Common Stock”), $0.0002 par value per
share, issued and outstanding as of June 28, 2018.
GILLA, INC.
INDEX
TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL
STATEMENTS
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Page
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PART I - Financial
Information
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Item 1.
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Interim Financial
Statements (Unaudited)
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3
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Condensed
Consolidated Interim Balance Sheets as at March 31, 2018
(Unaudited) and December 31, 2017 (Audited)
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3
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Unaudited Condensed
Consolidated Interim Statements of Operations and Comprehensive
Loss for the Three Months Ended March 31, 2018 and March 31,
2017
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4
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Unaudited Condensed
Consolidated Interim Statement of Changes in Shareholders’
Deficiency for the Three Months Ended March 31,
2018
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5
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Unaudited Condensed
Consolidated Interim Statements of Cash Flows for the Three Months
Ended March 31, 2018 and March 31, 2017
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6
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Notes to Unaudited
Condensed Consolidated Interim Financial Statements
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7
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Item 2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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35
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Item 3.
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Quantitative and
Qualitative Disclosures About Market Risk
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49
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Item
4.
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Controls and
Procedures
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49
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PART II - Other
Information
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49
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Item 1.
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Legal
Proceedings
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49
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Item
1A.
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Risk
Factors
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50
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Item 2.
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Unregistered Sales
of Equity Securities and Use of Proceeds
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50
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Item 3.
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Defaults Upon
Senior Securities
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50
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Item 4.
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Mine Safety
Disclosures
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50
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Item 5.
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Other
Information
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50
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Item
6.
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Exhibits
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51
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SIGNATURES
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52
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2
Gilla Inc.
Condensed Consolidated Interim Balance Sheets
(Amounts expressed in US Dollars)
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As at
March 31,
2018
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As at
December 31,
2017
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(unaudited)
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(audited)
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ASSETS
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||
Current
assets
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Cash
and cash equivalents
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$3,647
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$62,292
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Trade
receivables (net of allowance for doubtful accounts $283,011
(December 31, 2017 – $190,543)
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210,553
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232,386
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Inventory
(note 6)
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527,415
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451,318
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Other
current assets (note 5)
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353,429
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323,548
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Total
current assets
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1,095,044
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1,069,544
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Long
term assets
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Property
and equipment (note 7)
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249,860
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285,817
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Website
development (note 8)
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4,583
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5,083
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Intangibles
(note 9)
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652,416
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691,809
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Goodwill
(note 10)
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2,376,605
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2,376,605
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Total
long term assets
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3,283,464
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3,359,314
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Total
assets
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$4,378,508
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$4,428,858
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LIABILITIES
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Current
liabilities
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Accounts
payable
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$2,633,269
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$2,335,615
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Accrued
liabilities (note 11 and 13)
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720,658
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419,436
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Customer
deposits
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50,456
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97,400
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Loans
from shareholders (note 11)
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284,999
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257,303
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Due
to related parties (note 19)
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404,605
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252,841
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Promissory
notes (note 13)
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706,837
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498,522
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Amounts
owing on acquisition (note 4)
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653,627
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538,952
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Convertible
debentures (note 14)
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337,000
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277,149
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Term
loan (note 12)
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1,053,993
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1,051,334
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Total
current liabilities
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6,845,444
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5,728,552
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Long
term liabilities
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Promissory
notes (note 13)
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95,042
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346,002
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Amounts
owing on acquisitions (note 4)
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1,254,003
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1,364,274
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Loans
from shareholders (note 11)
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788,196
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794,635
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Accrued
interest - related parties (note 19)
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511,676
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468,825
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Due
to related parties (note 19)
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2,247,104
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2,281,773
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Total
long term liabilities
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4,896,021
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5,255,509
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Total
liabilities
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11,741,465
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10,984,061
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Going
concern (note 2)
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Related
party transactions (note 19)
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Commitments
and contingencies (note 21)
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Subsequent
events (note 24)
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STOCKHOLDERS'
DEFICIENCY
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Common
stock: $0.0002 par value, 300,000,000 common shares authorized;
143,218,368 and 134,869,261 common shares issued and outstanding as
of March 31, 2018 and December 31, 2017, respectively (note
15)
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$28,645
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$26,976
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Additional
paid-in capital
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13,667,570
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12,758,700
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Common
shares to be issued (note 18)
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23,000
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485,184
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Accumulated
deficit
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(21,360,143)
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(19,898,841)
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Accumulated
other comprehensive income
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277,971
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72,778
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Total
stockholders’ deficiency
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(7,362,957)
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(6,555,203)
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Total
liabilities and stockholders’ deficiency
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$4,378,508
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$4,428,858
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The
accompanying notes are an integral part of these unaudited
condensed consolidated interim financial statements
3
Gilla Inc.
Unaudited Condensed Consolidated Interim Statements of Operations
and Comprehensive Loss
(Amounts expressed in US Dollars)
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For the Three
Months Ended
March 31, 2018
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For the Three
Month Ended
March 31, 2017
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Sales
revenue
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$1,266,239
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$1,243,539
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Cost
of goods sold
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528,900
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546,733
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Gross
profit
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737,339
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696,806
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Operating
expenses:
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Administrative
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1,453,336
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997,350
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Consulting
fees - related parties (note 19)
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130,975
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119,459
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Depreciation
(note 7)
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30,761
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9,656
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Amortization
(note 8 and 9)
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39,892
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11,650
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Bad
debt expense
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93,030
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161,340
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Total
operating expenses
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1,747,994
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1,299,455
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Loss
from operations
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(1,010,655)
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(602,649)
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Other
income (expenses):
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Foreign
exchange gain (loss)
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(81,247)
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4,947
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Amortization
of debt discount on debentures
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(59,851)
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(71,289)
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Interest
expense, net
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(309,549)
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(229,277)
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Total
other expenses
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(450,647)
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(295,619)
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Net
loss before income taxes
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(1,461,302)
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(898,268)
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Income
tax recovery
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-
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-
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Net
loss
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$(1,461,302)
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$(898,268)
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Loss
per share (basic and diluted)
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$(0.013)
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$(0.008)
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Weighted
average number of common shares outstanding (basic and
diluted)
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113,809,179
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107,378,584
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Comprehensive
loss:
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Net
loss
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$(1,461,302)
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$(898,268)
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Foreign
exchange translation adjustment
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205,193
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(67,282)
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Comprehensive
loss
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$(1,256,109)
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$(965,550)
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The
accompanying notes are an integral part of these unaudited
condensed consolidated interim financial statements
4
Gilla Inc.
Unaudited Condensed Consolidated Interim Statement of Changes in
Stockholders’ Deficiency
(Amounts expressed in US Dollars)
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Common Stock
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Additional
Paid-In
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Shares To Be
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Accumulated
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Accumulated
Other Comprehensive
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Total Stockholders’
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Shares
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Amount
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Capital
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Issued
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Deficit
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Income
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Deficiency
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Balance, December 31, 2017
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134,869,261
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$26,976
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$12,758,700
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$485,184
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$(19,898,841)
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$72,778
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$(6,555,203)
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Private
placement units issued for cash (note 15)
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3,486,362
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697
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382,803
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-
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-
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-
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383,500
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Common
shares issued for settlement of consulting fees owing to unrelated
parties (note 15)
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190,909
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38
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20,962
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-
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-
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-
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21,000
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Common
shares issued on exercise of warrants (note 15)
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50,000
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10
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9,990
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-
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-
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-
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10,000
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Common
shares issued on conversion of debentures and settlement of accrued
interest on debentures (note 15)
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4,621,836
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924
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461,260
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(462,184)
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-
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-
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-
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Warrants
issued as stock based compensation (note 17)
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-
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-
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33,855
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-
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-
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-
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33,855
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Foreign
currency translation gain
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-
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-
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-
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-
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-
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205,193
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205,193
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Net
loss
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-
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-
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-
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-
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(1,461,302)
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-
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(1,461,302)
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Balance, March 31, 2018
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143,218,368
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$28,645
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$13,667,570
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$23,000
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$(21,360,143)
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$277,971
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$(7,362,957)
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The
accompanying notes are an integral part of these unaudited
condensed consolidated interim financial statements
5
Gilla Inc.
Unaudited Condensed Consolidated Interim Statements of Cash
Flows
(Amounts Expressed in US Dollars)
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For the Three
Months Ended
March 31, 2018
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For the Three
Months Ended
March 31, 2017
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CASH FLOWS FROM OPERATING ACTIVITIES:
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Net
loss
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$(1,461,302)
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$(898,268)
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Items not requiring an outlay of cash
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Depreciation
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30,761
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9,656
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Amortization
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39,892
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11,650
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Stock
based compensation (note 17)
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54,855
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39,077
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Amortization
of debt discount on amounts owing on acquisition
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64,769
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-
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Bad
debt expense
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93,030
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161,340
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Amortization
of debt discount on term loan
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25,435
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-
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Amortization
of debt discount on shareholder loans
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25,667
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-
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Amortization
of debt discount on promissory notes
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5,483
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-
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Amortization
of debt discount on debentures
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59,851
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71,289
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Interest
on term loan
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42,577
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42,563
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Changes in operating assets and liabilities
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Trade
receivable
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(87,157)
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(422,687)
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Other
current assets
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(28,520)
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43,794
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Inventory
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(86,787)
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(2,268)
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Accounts
payable
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318,068
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(77,542)
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Accrued
liabilities
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301,225
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26,691
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Customer
deposits
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(31,623)
|
23,795
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Due
to related parties
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148,893
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(23,984)
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Accrued
interest-related parties
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43,039
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77,625
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Net cash used in operating activities
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(441,844)
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(917,269)
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CASH FLOWS FROM INVESTING ACTIVITIES:
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Additions
of capital assets
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(590)
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(11,673)
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Net cash used in investing activities
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(590)
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(11,673)
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CASH FLOWS FROM FINANCING ACTIVITIES:
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Repayments
to promissory notes
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(26,560)
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-
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Payments
of amounts owing on acquisitions
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(20,000)
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-
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Repayments
to term loan
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(44,651)
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(110,809)
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Shareholder
loans received
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24,518
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150,380
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Repayments
to related parties
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(9,358)
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(241,454)
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Proceeds
from sale of convertible debentures
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-
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33,181
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Proceeds
from issuance of common shares
|
393,500
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1,277,903
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Net cash provided by financing activities
|
317,449
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1,109,201
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Effect
of exchange rate changes on cash
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66,340
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(49,277)
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Net (decrease) increase in cash
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(58,645)
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130,982
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Cash at beginning of year
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62,292
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184,754
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Cash at end of year
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$3,647
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$315,736
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Supplemental Schedule of Cash Flow Information:
|
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Cash
paid for interest
|
$48,858
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$57,514
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Cash
paid for income taxes
|
$-
|
$-
|
|
|
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Non cash financing activities:
|
|
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Common
shares issued in settlement of related party and shareholder
loans
|
$-
|
$222,587
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Common
shares issued for settlement of interest payable
|
$37,124
|
$-
|
Common
shares issued/to be issued for settlement of consulting fees
payable
|
$21,000
|
$-
|
Debentures
issued for settlement of related party and shareholder
loans
|
$-
|
$75,000
|
The
accompanying notes are an integral part of these unaudited
condensed consolidated interim financial statements
6
Gilla
Inc.
Notes to Unaudited Condensed Consolidated Interim Financial
Statements
(Amounts expressed in US Dollars)
1. NATURE OF OPERATIONS
Gilla
Inc. (“Gilla”, the “Company” or the
“Registrant”) was incorporated under the laws of the
state of Nevada on March 28, 1995 under the name of Truco, Inc. The
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 E-liquid (“E-liquid”),
which is the liquid used in vaporizers and electronic cigarettes
(“E-cigarettes”), and developer of turn-key vapor and
cannabis concentrate solutions for high-terpene vape oils, pure
crystalline, high-performance vape pens and other targeted
products.
2. GOING CONCERN
These unaudited condensed consolidated interim financial statements
have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the
normal course of business. As shown in these unaudited condensed
consolidated interim financial statements, at March 31, 2018, the
Company has an accumulated deficit of $21,360,143 (December 31,
2017 – $19,898,841) and a working capital deficiency of
$5,750,400 (December 31, 2017 – $4,659,008) as well as
negative cash flows from operating activities of $441,844 (March
31, 2017 – $917,269) for the three months ended March 31,
2018. 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 to
expand the range and scope of its business. However, there are no
assurances that any such financing can be obtained on acceptable
terms and in a timely manner, if at all. Failure to obtain the
necessary working capital would have a material adverse effect on
the business prospects and, depending upon the shortfall, the
Company may have to curtail or cease its operations.
These unaudited condensed consolidated interim financial statements
do not include any adjustments to the recorded assets or
liabilities, that might be material, should the Company have to
curtail operations or be unable to continue in
existence.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated interim financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States of America for
interim financial information and with the instructions to Form
10-Q. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in
the United States of America for complete consolidated financial
statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Interim results are not
necessarily indicative of the results that may beexpected for a
full year. These condensed consolidated interim financial
statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2017, as filed with the U.S. Securities and Exchange
Commission. Certain comparative figures have been reclassified to
conform with the current year’s presentation.
The
accounting policies of the Company are in accordance with
accounting principles generally accepted in the United States of
America. Outlined below are those policies considered particularly
significant:
(a)
Basis of
Consolidation
These
unaudited condensed consolidated interim financial statements
include the accounts of the Company and its wholly owned
subsidiaries: Gilla Operations, LLC; E Vapor Labs Inc. (“E
Vapor Labs”); Gilla Enterprises Inc. (“Gilla
Enterprises”) and its wholly owned subsidiaries Gilla Europe
Kft., Gilla Operations Europe s.r.o. and Vape Brands International
Inc. (“VBI”); HyStyle Brands Inc.; E-Liq World, LLC;
Charlie’s Club, Inc.; Gilla Operations Worldwide Limited
(“Gilla Worldwide”); Gilla Franchises, LLC and its
wholly owned subsidiary Legion of Vape, LLC; and Snoke Distribution
Canada Ltd. and its wholly owned subsidiary Snoke Distribution USA,
LLC. All inter-company accounts and transactions have been
eliminated in preparing these unaudited condensed consolidated
interim financial statements.
7
(b)
Advertising
Costs
In
accordance with the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification
(“ASC”) No. 720, Other
Expenses (“ASC 720”), Company expenses all
advertising costs as incurred. During the three month period ended
March 31, 2018, the Company expensed $15,702 (March 31, 2017
– $52,534) as corporate promotions which have been recorded
as an administrative expense.
(c)
Recently Adopted
Accounting Pronouncements
In May
2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic
606) (“ASU 2014-09”), requiring an entity to
recognize revenue when it transfers promised goods or services to
customers in an amount that reflects the consideration to which the
entity expects to be entitled to in exchange for those goods or
services. ASU 2014-09 will supersede nearly all existing revenue
recognition guidance under U.S. GAAP when it becomes
effective. ASU 2014-09 as amended by ASU No. 2015-14, ASU No.
2016-08, ASU No. 2016-10, ASU No. 2016-12 and ASU No. 2016-20, is
effective for interim and annual periods beginning after
December 15, 2017 and is applied on either a modified
retrospective or full retrospective basis. Adoption of ASU No.
2014-09 did not have an impact on the Company’s consolidated
financial statements.
In
April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers
(Topic 606): Identifying Performance Obligations and
Licensing (“ASU 2016-10”). ASU 2016-10 clarifies
the following two aspects of Topic 606: identifying performance
obligations and the licensing implementation guidance, while
retaining the related principles for those areas. The provisions of
this update are effective for annual and interim periods beginning
after December 15, 2017, with early application permitted.
Adoption of ASU No. 2016-10 did not have an impact on the
Company’s consolidated financial statements.
In May
2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic
606): Narrow-Scope
Improvements and Practical Expedients (“ASU
2016-12”). The core principal of ASU 2016-12 is the
recognition of revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those
goods or services. The provisions of this update are effective
for annual and interim periods beginning after December 15,
2017, with early application permitted. Adoption of ASU No. 2016-12
did not have an impact on the Company’s 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. Adoption of ASU No. 2016-15
did not have an impact on the Company’s consolidated
financial statements.
In
October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity
Transfers of Assets Other Than Inventory ("ASU 2016-16").
ASU 2016-16 prohibits the recognition of current and deferred
income taxes for an intra-entity transfer until the asset has been
sold to an outside party. The amendment in ASU 2016-16 is effective
for annual reporting periods beginning after December 15, 2017,
including interim reporting periods within those annual reporting
periods. Adoption of ASU No. 2016-16 did not have an impact on the
Company’s consolidated financial statements.
In May
2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718):
Scope of Modification Accounting (“ASU
2017-09”). ASU 2017-09 clarifies which changes to the terms
or conditions of a share-based payment award require an entity to
apply modification accounting in Topic 718. The standard is
effective for interim and annual reporting periods beginning after
December 15, 2017, with early adoption permitted. Adoption of ASU
No. 2017-09 did not have an impact on the Company’s
consolidated financial statements.
Effective January 1, 2018, the Company adopted ASU
No. 2016-01, Recognition and Measurement of
Financial Assets and Financial Liabilities (“ASU 2016-01”) which revises the
classification and measurement of investments in equity securities.
ASU 2016-01 requires that equity investments, except those
accounted for under the equity method of accounting, be measured at
fair value and changes in fair value are recognized in net income.
ASU 2016-01 also provides a new measurement alternative for equity
investments that do not have a readily determinable fair value
(cost method investments). These investments are measured at cost,
less any impairment, adjusted for observable price changes.
Adoption of ASU 2016-01 did not have an impact on the
Company’s consolidated financial
statements.
8
(d)
Recent Accounting
Pronouncements
The
Company has reviewed all recently issued, but not yet effective,
accounting pronouncements and other than the below, does not expect
the future adoption of any such pronouncements to have a
significant impact on its results of operations, financial
condition or cash flow.
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU
2016-02”). ASU 2016-02 requires lessees to recognize all
leases with terms in excess of one year on their balance sheet as a
right-of-use asset and a lease liability at the commencement date.
The new standard also simplifies the accounting for sale and
leaseback transactions. The amendments in this update are effective
for annual periods beginning after December 15, 2018, and interim
periods therein and must be adopted using a modified retrospective
method for leases existing at, or entered into after, the beginning
of the earliest comparative period presented in the financial
statements. Early adoption is permitted. The Company is evaluating
the guidance and has not yet determined the impact on its
consolidated financial statements.
In 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
January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment (“ASU
2017-04”). The new guidance eliminates the requirement to
calculate the implied fair value of goodwill (Step 2 of the current
two-step goodwill impairment test under ASC 350). Instead, entities
will record an impairment charge based on the excess of a reporting
unit’s carrying amount over its fair value (Step 1 of the
current two-step goodwill impairment test). ASU 2017-04 is
effective prospectively for reporting periods beginning after
December 15, 2019, with early adoption permitted for annual and
interim goodwill impairment testing dates after January 1, 2017.
The Company is evaluating the guidance and has not yet determined
the impact on its consolidated financial statements.
In July
2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260) Distinguishing
Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic
815): I. Accounting for Certain Financial Instruments with Down
Round Features; II. Replacement of the Indefinite Deferral for
Mandatorily Redeemable Financial Instruments of Certain Nonpublic
Entities and Certain Mandatorily Redeemable Noncontrolling
Interests with a Scope Exception (“ASU
2017-11”). ASU 2017-11 allows a financial instrument with a
down-round feature to no longer automatically be classified as a
liability solely based on the existence of the down-round
provision. The update also means the instrument would not have to
be accounted for as a derivative and be subject to an updated fair
value measurement at each reporting period. The standard is
effective for interim and annual reporting periods beginning after
December 15, 2018, with early adoption permitted. The Company is
evaluating the guidance and has not yet determined the impact on
its consolidated financial statements.
In February 2018, the FASB issued ASU No.
2018-02, Income Statement - Reporting
Comprehensive Income: Reclassification of Certain Tax effects from
Accumulated Other Comprehensive Income (“ASU
2018-02”) which allows for the reclassification from
accumulated other comprehensive income to retained earnings for the
stranded tax effects arising from the change in the reduction of
the U.S. federal statutory income tax rate to 21% from 35%. The tax
effects of items included in accumulated comprehensive income at
December 31, 2017 do not reflect the appropriate tax rate. ASU
2018-02 is effective for interim and annual periods beginning after
December 15, 2018. The Company is evaluating the guidance and has
not yet determined the impact on its consolidated financial
statements.
4. AMOUNTS OWING ON ACQUISITIONS
The
Company has outstanding current amounts owing on acquisitions as
follows:
|
March
31,
2018
|
December
31,
2017
|
Promissory Note
Settlement(a)
|
$120,000
|
$120,000
|
Due to TMA
Vendors(b)
|
55,000
|
55,000
|
Earn-Out on VBI
acquisition(c)
|
296,374
|
209,487
|
VTB on VBI
acquisition (c)
|
182,253
|
154,465
|
|
$653,627
|
$538,952
|
9
The
Company has outstanding long term amounts owing on acquisitions as
follows:
|
March
31,
2018
|
December
31,
2017
|
Promissory Note
Settlement(a)
|
$265,436
|
$270,967
|
Earn-Out on VBI
acquisition(c)
|
792,713
|
871,825
|
VTB on VBI
acquisition(c)
|
195,854
|
221,482
|
|
$1,254,003
|
$1,364,274
|
(a)
On July 1, 2015,
the Company acquired all of the issued and outstanding shares of E
Vapor Labs, a Florida based E-liquid manufacturer. The Company
acquired E Vapor Labs in order to procure an E-liquid manufacturing
platform allowing the Company to secure large private label
contracts as well as manufacture its own brands going
forward.
In
consideration for the acquisition, the Company paid to the vendors,
$225,000 in cash 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 were all unsecured and non-interest bearing. The
Unsecured Promissory Notes were 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 was the
known difference in the working capital balance at closing of the
acquisition from the amount specified in the SPA.
On
August 30, 2017, the Company entered into a settlement agreement
(the “Promissory Note Settlement”) with the holders of
the Unsecured Promissory Notes to settle all claims between them.
As a result of the Promissory Note Settlement, the Company agreed
to settle the Unsecured Promissory Notes with a total payment of
$600,000 payable as two (2) payments of $20,000 due September 21,
2017 and October 21, 2017 and $10,000 per month for the following
fifty-six (56) months beginning November 21, 2017. The Company may
prepay the balance of the Promissory Note Settlement at any time
and would receive a 10% discount on the outstanding balance upon
doing so. A 15% discount rate has been used to calculate the
present value of the Promissory Note Settlement based on the
Company’s estimate of cost of financing for comparable
instruments with similar term and risk profiles. Over the term of
the Promissory Note Settlement, interest will be accrued at 15% per
annum to accrete the Promissory Note Settlement to its respective
principal amount. During the three month period ended March 31,
2018, the Company recorded $14,469 in interest expense related to
the accretion of the Promissory Note Settlement (March 31, 2017
– $nil).
|
Total
|
Present value of
Promissory Note Settlement at the settlement date
|
$431,033
|
Payments
made
|
(60,000)
|
Interest expense
related to accretion
|
19,934
|
Present
value at December 31, 2017
|
$390,967
|
Payments
made
|
(20,000)
|
Interest expense
related to accretion
|
14,469
|
Less: Current
amount owing
|
(120,000)
|
Long
term portion at March 31, 2018
|
$265,436
|
(b)
On December 2,
2015, the Company acquired all of the assets of The Mad Alchemist,
LLC (“TMA”), an E-liquid manufacturer, including the
assets, rights and title to own and operate The Mad
Alchemist™ and Replicant E-liquid brands (the “TMA
Brands”).
In
consideration for the acquisition, the Company issued 819,672
Common Shares valued at $0.122 per share for a total value of
$100,000; agreed to pay a total of $400,000 in deferred payments
(the “Amounts Owing on Acquisition”), payable in ten
(10) equal payments of $20,000 in cash and $20,000 in Common Shares
every three (3) months following the closing date; and agreed to a
quarterly earn-out based on the gross profit stream derived from
product sales of the TMA Brands. No earn-out had ever been achieved
and the Company has since retired the TMA Brands.
10
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 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. As at March 31, 2018,
$55,000 (December 31, 2017 – $55,000) remains payable to the
TMA Vendors.
(c)
On July 31, 2017,
the Company’s wholly owned subsidiary, Gilla Enterprises,
acquired all of the issued and outstanding shares of VBI, a
Canada-based E-liquid manufacturer and distributor.
The
following summarizes the fair value of the assets acquired,
liabilities assumed and the consideration transferred at the
acquisition date:
|
Allocation
|
Assets
acquired:
|
|
Cash
|
$1,377
|
Receivables
|
5,576
|
Other current
assets
|
74,598
|
Inventory
|
83,820
|
Fixed
assets
|
214,765
|
Intangible
assets
|
704,846
|
Goodwill
|
1,596,553
|
Total
assets acquired
|
$2,681,535
|
|
|
Liabilities
assumed:
|
|
Bank
indebtedness
|
$5,597
|
Accounts
payable
|
218,028
|
Customer
deposits
|
33,008
|
Loans
payable
|
112,218
|
Capital
lease
|
125,893
|
Due to related
parties
|
15,707
|
Deferred tax
liability
|
186,793
|
Total
liabilities assumed
|
$697,244
|
|
|
Consideration:
|
|
Issuance of Common
Shares
|
$350,000
|
Issuance of
warrants
|
252,631
|
Vendor Take
Back
|
356,443
|
Earn
out
|
1,025,217
|
Total
consideration
|
$1,984,291
|
In
consideration for the acquisition, the Company paid to the vendors
of VBI the following consideration: (i) 2,500,000 Common Shares of
the Company valued at $0.14 per share for a total value of
$350,000; (ii) warrants for the purchase of 2,000,000 Common Shares
of the Company exercisable over twenty-four (24) months at an
exercise price of $0.20 per share from the closing date, such
warrants vesting in five (5) equal tranches every four (4) months
following the closing date; (iii) a total of CAD $550,000 in
non-interest bearing, unsecured vendor-take-back loans (the
“VTB”) due over twenty-four (24) months, with principal
repayments beginning five (5) months from the closing date until
maturity of up to CAD $25,000 per month; and (iv) an earn-out (the
“Earn-Out”) capped at: (a) the total cumulative amount
of CAD $2,000,000; or (b) five (5) years from the closing date. The
Earn-Out shall be calculated as: 15% of the gross profit generated
in Canada by VBI’s co-pack and distribution business; 10% of
the revenue generated in Canada by Gilla’s existing E-liquid
brands; and 15% of the revenue generated globally on VBI’s
existing E-liquid brands. Furthermore, the Earn-Out shall be
calculated and paid to the vendors of VBI quarterly in arrears and
only as 50% of the aforementioned amounts on incremental revenue
between CAD $300,000 and CAD $600,000 per quarter and 100% of the
aforementioned amounts on incremental revenue above CAD $600,000
per quarter with the Earn-Out payable to the vendors in the fifth
year repeated and paid to the vendors in four (4) quarterly
payments after the end of the Earn-Out period, subject to the
cumulative limit of the Earn-Out. No Earn-Out shall be payable to
the vendors of VBI if total revenue for the Earn-Out calculation
period is less than CAD $300,000 per quarter. A 15% discount rate
has been used to calculate the present value of the Earn-Out on the
Company’s estimate of cost of financing for comparable
instruments with similar term and risk profiles. Over the term of
the respective Earn-Out, interest will be accrued at 15% per annum
to accrete the Earn-Out to maximum payable amount.
11
|
Total
|
Present value of
Earn-Out at the acquisition date
|
$1,025,217
|
Interest expense
related to accretion
|
59,110
|
Exchange rate
differences
|
(3,015)
|
Present
value at December 31, 2017
|
$1,081,312
|
Interest expense
related to accretion
|
37,733
|
Exchange rate
differences
|
(29,958)
|
Less: Current
amount owing
|
(296,374)
|
Long
term portion at March 31, 2018
|
$792,713
|
A 15%
discount rate has been used to calculate the present value of the
VTB based on the Company’s estimate of cost of financing for
comparable instruments with similar term and risk profiles. Over
the term of the VTB, interest will be accrued at 15% per annum to
accrete the VTB to its respective principal amount.
|
Total
|
Present value of
the VTB at the acquisition date
|
$356,443
|
Interest expense
related to accretion
|
26,681
|
Exchange rate
differences
|
(7,177)
|
Present
value at December 31, 2017
|
$375,947
|
Interest expense
related to accretion
|
12,566
|
Exchange rate
differences
|
(10,406)
|
Less: Current
amount owing
|
(182,253)
|
Long
term portion at March 31, 2018
|
$195,854
|
The
results of operations of VBI 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
VBI as if the companies had been combined as of January 1, 2016.
The unaudited condensed combined pro forma 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.
|
March 31,
2018
|
March
31,
2017
|
Pro
forma revenue
|
$1,266,239
|
$1,691,581
|
Pro
forma loss from operations
|
$1,010,655
|
$649,633
|
Pro
forma net loss
|
$1,461,302
|
$943,349
|
5. OTHER CURRENT ASSETS
Other
current assets consist of the following:
|
March
31,
2018
|
December
31,
2017
|
Vendor
deposits
|
$38,490
|
$22,760
|
Prepaid
expenses
|
25,195
|
17,240
|
Trade
currency
|
22,906
|
23,550
|
Other
receivables
|
266,838
|
259,998
|
|
$353,429
|
$323,548
|
Other
receivables include VAT receivable, HST receivable and holdback
amounts related to the Company’s merchant services
accounts.
6. INVENTORY
Inventory
consists of the following:
|
March
31,
2018
|
December
31,
2017
|
E-liquid bottles -
finished goods
|
$153,954
|
$104,092
|
E-liquid
components
|
118,279
|
113,620
|
Bottles and
packaging
|
255,182
|
233,606
|
|
$527,415
|
$451,318
|
12
During the three month periods ended March 31, 2018 and 2017, the
Company expensed $528,900 and $546,733, respectively, of inventory
as cost of goods sold. At March 31, 2018, the full amount of the
Company’s inventory serves as collateral for the
Company’s secured borrowings. No provision has been recorded
against inventory.
7. PROPERTY AND EQUIPMENT
Property
and equipment consist of the following:
|
March
31,
2018
|
December
31,
2017
|
||
|
Cost
|
Accumulated
Depreciation
|
Net
|
Net
|
Furniture and
equipment
|
$79,347
|
$43,473
|
$35,874
|
$41,756
|
Leasehold
improvements
|
73,035
|
22,431
|
50,604
|
61,904
|
Computer
hardware
|
38,826
|
23,475
|
15,351
|
18,906
|
Manufacturing
equipment
|
209,952
|
61,921
|
148,031
|
163,251
|
|
$401,160
|
$151,300
|
$249,860
|
$285,817
|
During
the three month periods ended March 31, 2018 and 2017, the Company
expensed $30,761 and $9,656, respectively, in depreciation. At
March 31, 2018, 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:
|
March
31,
2018
|
December
31,
2017
|
||
|
Cost
|
Accumulated
Amortization
|
Net
|
Net
|
VaporLiq
website
|
$10,000
|
$5,417
|
$4,583
|
$5,083
|
Amortization
expense on website development for the three months ended March 31,
2018 and 2017 amounted to $500 for each period. The estimated
amortization expense for the years ended December 31, 2018 and 2019
approximates $2,000 per year. For the year ended December 31, 2020,
estimated amortization expense approximates $1,083.
9. INTANGIBLE ASSETS
Intangible
assets consist of the following:
|
March
31,
2018
|
December 31,
2017
|
||
|
Cost
|
Accumulated
Amortization
|
Net
|
Net
|
Brands
|
$394,413
|
$71,422
|
$322,991
|
$342,712
|
Customer
relationships
|
393,433
|
64,008
|
329,425
|
349,097
|
|
$787,846
|
$135,430
|
$652,416
|
$691,809
|
Amortization
expense on intangible assets for the three month periods ended
March 31, 2018 and 2017, amounted to $39,392 and $11,150,
respectively. The estimated amortization expense for the years
ending December 31, 2018 and 2019 approximates $157,564 per year.
For the years ending December 31, 2020, December 31, 2021 and
December 31, 2022 estimated amortization expense approximates
$153,464, $140,964 and $82,253, respectively.
13
10. GOODWILL
|
March 31,
2018
|
December
31,
2017
|
Opening balance
|
$2,376,605
|
$889,496
|
Measurement
period adjustment
|
-
|
-
|
Acquisition
of VBI (Note 4)
|
-
|
1,596,553
|
Impairment
|
-
|
(109,444)
|
End of period
|
$2,376,605
|
$2,376,605
|
During
the year ended December 31, 2017, the Company tested goodwill for
impairment, and as a result, the Company fully impaired goodwill
related to the acquisition of the assets of Vapor Liq in the amount
of $109,444 which formerly represented the value of business acumen
and access to key E-liquid brands acquired. The goodwill has been
impaired as it is difficult to allocate value to VaporLiq business
acumen and new purchases of brands are not due to business acumen
acquired from the acquisition.
11. LOANS FROM SHAREHOLDERS
The
Company has outstanding current loans from shareholders as
follows:
|
March
31,
2018
|
December
31,
2017
|
Bears interest of
1.5% per month on a cumulative basis, unsecured, no specific terms
of repayment(i)
|
$12,763
|
$13,116
|
Bears interest of
6% per annum on a cumulative basis, secured by the assets of the
Company, matured on March 2, 2018(iv)
|
248,192
|
244,187
|
Bears interest of
1.5% per month on a cumulative basis, unsecured, no specific terms
of repayment(vii)
|
24,044
|
-
|
|
$284,999
|
$257,303
|
The
Company has outstanding long term loans from shareholders as
follows:
|
March 31,
2018
|
December
31,
2017
|
Bears interest of 10% per annum on a cumulative
basis, secured by the assets of the Company, matures on April 30,
2019(ii)
|
$348,424
|
$351,679
|
Bears interest of 10% per annum on a cumulative
basis, secured by the assets of the Company, matures on April 30,
2019(iii)
|
92,296
|
90,828
|
Bears interest of 10% per annum on a cumulative
basis, secured by the assets of the Company, matures on April 30,
2019(v)
|
142,701
|
144,611
|
Bears interest of 10% per annum on a cumulative
basis, secured by the assets of the Company, matures on April 30,
2019(vi)
|
204,775
|
207,517
|
|
$788,196
|
$794,635
|
(i)
During the three month period ended March 31, 2018, the Company
accrued interest of $1,471 on this shareholder loan (March 31, 2017
– $1,399). Total accrued interest owing on such shareholder
loan at March 31, 2018 was $20,262 (December 31, 2017 –
$19,341) 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 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 years ended December 31, 2016 and 2017, the Company and
the shareholder extended the maturity date of the Secured Note to
July 1, 2018 and April 30, 2019, respectively. In connection to the maturity date extensions, the
Company issued warrants for the purchase of Common Shares (note
16(l and hh)). The relative fair value of the warrants issued were
recorded as debt discount to be amortized over the life of the
loan. At March 31, 2018, the value of the Secured Note was $348,424
(December 31, 2017 – $351,679) including a debt discount of
$39,376 (December 31, 2017 - $46,871). During the three month
periods ended March 31, 2018 and 2017, the Company expensed $7,495
and $2,386, respectively, in interest expense related to the
amortization of the debt discount. The amendments to the Secured
Note were accounted for as a modification of debt and no gain or
loss was recognized on the amendments.
14
During
the three month period ended March 31, 2018, the Company accrued
interest of $13,769 on the Secured Note (March 31, 2017 –
$11,914). Total accrued interest owing on the Secured Note at March
31, 2018 was $161,352 (December 31, 2017 – $151,948) which is
included in accrued liabilities.
(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 years ended
December 31, 2016 and 2017, the Company and the shareholder
extended the maturity date of the Secured Note No.2 to July 1, 2018
and April 30, 2019, respectively. In connection to the maturity
date extensions, the Company issued warrants for the purchase of
Common Shares (note 15(l and hh)). The relative fair value of the
warrants issued were recorded as debt discount to be amortized over
the life of the loan. At March 31, 2018, the value of the Secured
Note No.2 was $92,296 (December 31, 2017 - $90,828) including a
debt discount of $7,704 (December 31, 2017 – $9,172). During
the three month periods ended March 31, 2018 and 2017, the Company
expensed $1,468 and $629, respectively, in interest expense related
to the amortization of the debt discount. The amendments to the
Secured Note were accounted for as a modification of debt and no
gain or loss was recognized on the amendments.
During
the three month period ended March 31, 2018, the Company accrued
interest of $3,485 on the Secured Note No.2 (March 31, 2017 –
$3,155). Total accrued interest owing on the Secured Note No.2 at
March 31, 2018 was $41,742 (December 31, 2017 – $38,257)
which is included in accrued liabilities.
(iv)
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 (the “Shareholder
Loan”) for capital expenditures, marketing expenditures and
working capital. Under the terms of the Loan Agreement, the
Shareholder Loan was made available to the Company in two equal
tranches of CAD $335,000, for a total loan amount of CAD $670,000,
with the first tranche (“Loan Tranche A”) received on
March 3, 2016 and the second tranche (“Loan Tranche B”)
received on April 14, 2016. The Shareholder Loan bears interest at
a rate of 6% per annum, on the outstanding principal, and matured
on March 2, 2018, whereby the outstanding principal together with
all accrued and unpaid interest thereon became due and payable. The
Company was also to repay 5% of the initial principal amount of
Loan Tranche A and 5% of Loan Tranche B, monthly in arrears, with
the first principal repayment beginning on June 30, 2016. The
Company could elect to repay the outstanding principal of the
Shareholder Loan together with all accrued and unpaid interest
thereon prior to maturity without premium or penalty. The Company
also agreed to service the Shareholder Loan during the term prior
to making any payments to the Company’s Chief Executive
Officer, Chief Financial Officer and Board of Directors. The
Shareholder Loan is secured by a general security agreement
granting a general security interest over all the assets of the
Company. On March 2, 2016 and in connection to the Loan Agreement,
the Company issued warrants for the purchase of 1,000,000 Common
Shares exercisable until March 2, 2018 at an exercise price of
$0.20 per share. The warrants shall vest in two equal tranches,
with 500,000 warrants to vest upon the close of Loan Tranche A and
the remaining 500,000 warrants to vest upon the close of Loan
Tranche B. On March 3, 2016 and April 14, 2016, the Company closed
Loan Tranche A and Loan Tranche B, respectively, at which dates the
warrants became fully vested and exercisable (note 16(g)). The
relative fair value of the warrants issued were recorded as debt
discount to be amortized over the life of the loan. At March 31,
2018, the value of the Shareholder Loan was $248,192 (December 31,
2017 – $244,187), at March 31, 2018 the debt discount on this
loan had fully accreted. During the three month periods ended March
31, 2018 and 2017, the Company expensed $10,885 and $11,234,
respectively, in interest expense related to the amortization of
the debt discount. During the year ended December 31, 2017, CAD
$350,000 of the Shareholder Loan was assumed by a separate
shareholder (see (vii) below).
During
the three month period ended March 31, 2018, the Company accrued
interest of $4,622 on the Shareholder Loan (March 31, 2017 –
$7,994). Total accrued interest owing on the Shareholder Loan at
March 31, 2018 was $64,401 (December 31, 2017 – $61,523)
which is included in accrued liabilities. At March 31, 2018, the
Shareholder Loan was in default.
15
(v)
On January 12, 2017, the Company entered into a bridge loan
agreement (the “Bridge Loan Agreement”) with a
shareholder, whereby the shareholder would make available to the
Company the aggregate principal amount of CAD $200,000 (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 was to mature on March 12, 2017.
Pursuant to the terms of the Bridge Loan Agreement, the shareholder
received a 5% upfront fee upon the closing of Bridge Loan Note A
and a 5% upfront fee upon the closing of Bridge Loan Note B. The
Bridge Loan is secured by the general security agreement issued in
connection to the Secured Note. On January 12, 2017 and in
connection to the Bridge Loan Agreement, the Company issued
warrants for the purchase of 50,000 Common Shares exercisable until
January 11, 2018 at an exercise price of $0.20 per share, with
25,000 warrants to vest upon the closing of Bridge Loan Note A and
the remaining 25,000 warrants vest upon the closing of Bridge Loan
Note B. On January 12, 2017 and January 18, 2017, the Company
closed Bridge Loan Note A and Bridge Loan Note B, respectively, at
which dates the warrants became fully vested and exercisable (note
16(n)). During the year ended December 31, 2017, the Company and
the shareholder extended the maturity date of Bridge Loan to April
30, 2019 and, commencing on November 15, 2017, the Company began
accruing interest at a rate of 10% per annum. In connection to the
amendment, the Company issued warrants for the purchase of Common
Shares (note 16(hh)). The relative fair value of the warrants
issued were recorded as debt discount to be amortized over the life
of the loan. At March 31, 2018, the value of the Bridge Loan was
$142,701 (December 31, 2017 - $144,611) including a debt discount
of $12,419 (December 31, 2017 – $14,809). During the three
month periods ended March 31, 2018 and 2017, the Company expensed
$2,390 and $nil, respectively, in interest expense related to the
amortization of the debt discount. The amendment to the Bridge Loan
was accounted for as a modification of debt and no gain or loss was
recognized on the amendments.
During
the three month period ended March 31, 2018, the Company accrued
interest of $4,037 on the Bridge Loan (March 31, 2017 –
$nil). Total accrued interest owing on the Bridge Loan at March 31,
2018 was $5,904 (December 31, 2017 – $1,998) which is
included in accrued liabilities.
(vi) On
November 15, 2017, CAD $350,000 of the Shareholder Loan was assumed
by a separate shareholder (the “Shareholder Loan
No.2”). Upon assumption of the Shareholder Loan No.2, CAD
$52,000 (USD $41,449) was offset by the amount held in trust by the
shareholder under the Shareholder Loan (see (v) above) and CAD
$11,000 (USD $8,769) was forgiven by the shareholder. During the
year ended December 31, 2017 and as a result of the loan
forgiveness, the Company recorded a gain on loan settlement in the
amount of $8,221 and the principal amount due under the Shareholder
Loan No.2 was CAD $287,000. The Company agreed to repay the unpaid
principal amount of the Shareholder Loan No.2 on or before April
30, 2019, bearing interest at a rate of 10% per annum, such
interest to accrue monthly and due at maturity. In connection to
the amendment, the Company issued warrants for the purchase of
Common Shares (note 16(hh)). The relative fair value of the
warrants issued were recorded as debt discount to be amortized over
the life of the loan. At March 31, 2018, the value of the
Shareholder Loan No.2 was $204,775 (December 31, 2017 - $207,517)
including a debt discount of $17,822 (December 31, 2017 –
$16,939). During the three month periods ended March 31, 2018 and
2017, the Company expensed $3,429 and $nil, respectively, in
interest expense related to the amortization of the debt
discount.
During
the three month period ended March 31, 2018, the Company accrued
interest of $5,865 on the Shareholder Loan No.2 (March 31, 2017
– $nil). Total accrued interest owing on the Shareholder Loan
No.2 at March 31, 2018 was $11,299 (December 31, 2017 –
$5,701) which is included in accrued liabilities.
(vii) On
March 21, 2018, the Company received CAD $31,000 (USD $24,044) from
a Shareholder of the Company. The loan bears interest of 1.5% per
month on a cumulative basis is unsecured and has no specific terms
of repayment. During the three month period ended March 31, 2018,
the Company accrued interest of $105 on this shareholder loan
(March 31, 2017 – $nil). Total accrued interest owing on such
shareholder loan at March 31, 2018 was $105 (December 31, 2017
– $nil) which is included in accrued
liabilities.
16
12. TERM LOAN
On
January 18, 2016, the Company entered into a term loan (the
“Term Loan”) with an unrelated party acting as an agent
to a consortium of participants (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 was to mature on July 3, 2017, whereby any outstanding
principal together with all accrued and unpaid interest thereon
shall be due and payable. The Term Loan is secured by a
intercreditor and subordination agreement as well as a security
agreement. The Term Loan is subject to a monthly cash sweep,
calculated as the total of (i) CAD $0.50 for every E-liquid bottle,
smaller than 15 ml, sold by the Company within a monthly period;
and (ii) CAD $1.00 for every E-liquid bottle, greater than 15 ml,
sold by the Company within a monthly period (the “Cash
Sweep”). The Cash Sweep will be disbursed to the Lenders in
the following priority: first, to pay the monthly interest due on
the Term Loan; and second, to repay any remaining principal
outstanding on the Term Loan. The Company may elect to repay the
outstanding principal of the Term Loan together with all accrued
and unpaid interest thereon prior to the maturity, subject to an
early repayment penalty of the maximum of (i) 3 months interest on
the outstanding principal; or (ii) 50% of the interest payable on
the outstanding principal until maturity (the “Early
Repayment Penalty”). The Term Loan shall be immediately due
and payable at the option of the Lenders if there is a change in
key personnel meaning the Company’s current Chief Executive
Officer and Chief Financial Officer. On January 18, 2016 and in
connection to the Term Loan, the Company issued warrants for the
purchase of 250,000 Common Shares (note 16(d)) exercisable until
December 31, 2017 at an exercise price of $0.20 per share. In
addition, the Company also extended the expiration date of the
250,000 warrants (note 16(d)) issued on August 1, 2014 in
connection with the Credit Facility until December 31, 2017, with
all other terms of the warrants remaining the same. The relative
fair value of the warrants issued were recorded as debt discount to
be amortized over the life of the loan.
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 appropriately abstained from voting on the Board of Directors
to approve the Term Loan, where applicable.
On July
15, 2016, the Company and the Lenders of the Term Loan entered into
a term loan amendment (the “Term Loan Amendment”) in
which the Lenders agreed to extend to the Company an additional CAD
$600,000 in principal to increase the Term Loan facility up to the
aggregate principal amount of CAD $1,600,000. The parties also
extended the maturity date of the Term Loan to July 2, 2018 with
all other terms of the Term Loan remaining the same. The
Company’s Chief Executive Officer and its Chief Financial
Officer are both participants in the consortium of Lenders having
each committed to provide a total of CAD $150,000 of the initial
principal of the Term Loan and the additional principal of the Term
Loan pursuant to the Term Loan Amendment.
On July
15, 2016 and in connection to the Term Loan Amendment, the Company
issued warrants for the purchase of 300,000 Common Shares (note
16(k)) exercisable until December 31, 2018 at an exercise price of
$0.20 per share. The Company also extended the expiration dates of:
(i) the warrants for the purchase of 250,000 Common Shares (note
16(d)) issued on January 18, 2016 in connection to the Term Loan;
and (ii) the warrants for the purchase of 250,000 Common Shares
(note 16(d)) issued on August 1, 2014 and extended on January 18,
2016 in connection to the Term Loan, both until December 31, 2018,
with all other terms of the warrants remaining the same. The
relative fair value of the warrants issued were recorded as debt
discount to be amortized over the life of the loan.
During
the year ended December 31, 2016, the Company was advanced CAD
$1,600,000 from the Term Loan including the CAD $294,000 and CAD
$3,093 rolled in from a revolving credit facility the Company
previously entered into with the Lenders as well as CAD $240,581 of
advances from the Company’s Chief Executive Officer and Chief
Financial Officer.
On
February 27, 2017, the Company and the Lenders of the Term Loan
entered into a term loan amendment (the “Term Loan Amendment
No.2”) to amend certain terms and conditions of the Term
Loan. Pursuant to the Term Loan Amendment No.2, the parties agreed
to modify the Cash Sweep to be calculated as the total of CAD
$0.01667 per ml of E-liquid sold by the Company within a monthly
period, such modification to be retroactively applied as of January
1, 2017. The Lenders also agreed to cancel the Early Repayment
Penalty and waive any interest payment penalties due under the Term
Loan. On February 27, 2017 and in connection to the Term Loan
Amendment No.2, the Company agreed to issue 500,000 private
placement units at a price of $0.10 per unit as a settlement of
financing fees with a relative fair value of $48,485. Each unit
consisted of one Common Share and a half Common Share purchase
warrant exercisable over twelve months at an exercise price of
$0.20 per share. On April 4, 2017, the Company issued the 500,000
units. The Company’s Chief Executive Officer and its Chief
Financial Officer received a total of 93,622 units which included
93,622 Common Shares and warrants for the purchase of 46,811 Common
Shares. The Term Loan Amendment No.2 was accounted for as a
modification of debt and no gain or loss was recognized on the
amendment.
17
The
relative fair value of the warrants issued in relation to the Term
Loan and Term Loan amendments were recorded as debt discount to be
amortized over the life of the loan. At March 31, 2018, the value
of the Term Loan was $1,053,993 including a debt discount of
$33,609 (December 31, 2017 – $1,051,334 including a debt
discount of $54,815). During the three month periods ended March
31, 2018 and 2017, the Company expensed $25,435 and $14,300,
respectively, in interest expense related to the amortization of
the debt discount. 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 three month period ended March 31, 2018, the Company expensed
$42,577 in interest on the Term Loan (March 31, 2017 –
$42,563). Pursuant to the Cash Sweep, during the three month period
ended March 31, 2018, the Company paid a total of $44,651 to the
Lenders consisting of $42,394 in interest and $2,257 in principal
repayments. During the three month period ended March 31, 2017, the
Company paid a total of $110,809 to the Lenders consisting of
$57,514 in interest and $53,295 in principal payments.
The
amount owing on the Term Loan is as follows:
|
March 31,
2018
|
December
31,
2017
|
Opening
balance/amount advanced
|
$1,051,334
|
$1,061,269
|
Accretion
of debt discount
|
25,435
|
14,300
|
Exchange
loss (gain) during the period/year
|
(20,702)
|
86,143
|
Principal
payments made
|
(2,257)
|
(88,066)
|
Interest
accrued
|
42,577
|
173,035
|
Interest
payments made
|
(42,394)
|
(195,347)
|
Ending
balance
|
$1,053,993
|
$1,051,334
|
13. PROMISSORY NOTES
The
Company has outstanding current promissory notes as
follows:
|
March 31,
2018
|
December
31,
2017
|
|
|
|
Unsecured, bears interest at 15% per annum,
matures April 12, 2018(i)
|
$225,330
|
$230,109
|
Unsecured, bears interest at 15% per annum,
matures February 18, 2019(ii)
|
231,398
|
-
|
Unsecured, bears interest at 18% per annum,
matures June 19, 2019(iii)
|
30,000
|
30,000
|
Secured, bears interest at RBP + 2% per annum, due
on demand(iv)
|
38,778
|
39,855
|
Secured, bears interest at RBP + 3% per annum, due
on demand(v)
|
58,912
|
64,774
|
Lease agreement, bears interest at 4.7% per annum,
matures October 13, 2023(vi)
|
22,809
|
23,441
|
Unsecured, interest free, matured October 29,
2017(vii)
|
-
|
7,971
|
Secured, bears interest at 24%, matured March 6,
2018 (viii)
|
99,610
|
102,372
|
|
$706,837
|
$498,522
|
18
The
Company has outstanding long term promissory notes as
follows:
|
March
31,
2018
|
December
31,
2017
|
Unsecured, bears
interest at 15% per annum, matures February 18, 2019(ii)
|
$-
|
$234,034
|
Unsecured, bears
interest at 18% per annum, matures June 19, 2019(iii)
|
7,500
|
17,500
|
Lease agreement,
bears interest at 4.7% per annum, matures October 13,
2023(vi)
|
87,542
|
94,468
|
|
$95,042
|
$346,002
|
(i)
On October 12, 2017, the Company issued an unsecured promissory
note in the principal amount of CAD $300,000. The promissory note
matured on April 12, 2018 and bears interest at a rate of 15% per
annum, accrued monthly and due at maturity. In connection to the
promissory note, the Company issued warrants for the purchase of
100,000 Common Shares of the Company exercisable at $0.20 per share
until April 11, 2019. The relative fair value of the warrants
issued were recorded as a debt discount to be amortized over the
life of the loan. During the three month periods ended March 31,
2018 and 2017, the Company expensed $1,670 and $nil, respectively,
in interest expense related to the amortization of the debt
discount (note 16(gg)). During the three month period ended March
31, 2018, the Company accrued $9,387 in interest on the promissory
note which has been recorded in accrued liabilities (March 31, 2017
– $nil). At March 31, 2018, the value of the promissory note
was $225,330 inclusive of a debt discount of $7,351 (December 31,
2017 – $230,109 inclusive of a debt discount of $9,021). As
at the date of these financial statements, this note is currently
in default.
(ii)
On August 18, 2017, the Company issued an unsecured promissory note
in the principal amount of CAD 300,000. The promissory note matures
on February 18, 2019 and bears interest at a rate of 15% per annum,
paid monthly in arrears with interest payments beginning on March
18, 2018. The interest accrued for the initial seven (7) months
shall be due at maturity. In connection to the promissory note, the
Company issued warrants for the purchase of 150,000 Common Shares
of the Company exercisable at $0.20 per share until February 18,
2019. The relative fair value of the warrants issued were recorded
as a debt discount to be amortized over the life of the loan.
During the three month periods ended March 31, 2018 and 2017, the
Company expensed $3,813 and $nil, respectively, in interest expense
related to the amortization of the debt discount (note 16(ee)).
During the three month period ended March 31, 2018, the Company
accrued $9,489 in interest on the promissory note which has been
recorded in accrued liabilities (March 31, 2017 – $nil). At
March 31, 2018, the value of the promissory note was $231,398
inclusive of a debt discount of $1,283 (December 31, 2017 –
$234,034 inclusive of a debt discount of $5,096).
(iii)
On June 30, 2017, the Company issued an unsecured promissory note
in the principal amount of $60,000. The principal together with
interest at a rate of 18% per annum is payable in monthly
instalments of $3,400 with the first payment due on July 19, 2017
and the final payment due on June 19, 2019. In the event of
default, by way of any missed payment under the promissory note and
not cured for a period of 15 days, at the option of the holder, the
entire unpaid principal amount outstanding would become due and
payable. During the three month period ended March 31, 2018, the
Company expensed and paid $2,700 in interest on the promissory note
(March 31, 2017 – $nil). At March 31, 2018, $30,000 in
principal on the promissory note has been classified as a current
liability and $7,500 has been classified as a long term liability
on the Company’s consolidated balance sheet.
(iv)
On
July 18, 2016, VBI entered into a revolving credit facility with
The Royal Bank of Canada (“RBC”) for CAD $50,000. The
facility is secured by the assets of VBI, due on demand and bears
interest at a rate of RBC Prime (“RBP”) + 2%. Interest
is payable monthly in arrears. During the three month period ended
March 31, 2018, the Company expensed and paid $520 in interest on
the facility (March 31, 2017 – $nil). At March 31, 2018,
$38,778 (December 31, 2017 - $39,855) in principal remains owing on
the facility.
(v)
On
July 18, 2016, VBI entered into a credit facility with RBC for CAD
$106,000. The facility is secured by the assets of VBI, due on
demand and bears interest at the rate of RBP + 3%, maturing on July
18, 2021. Interest is payable monthly in arrears and the Company is
required to make monthly principal payments of CAD $1,416. During
the three month period ended March 31, 2018, the Company paid $987
in interest and made principal repayments of $4,112 on the facility
(March 31, 2017 – $nil and $nil, respectively). At March 31,
2018, $58,912 (December 31, 2017 - $64,774) in principal remains
owing on the facility.
19
(vi) On
October 13, 2016, VBI entered into a capital lease agreement with
RBC for the lease of manufacturing equipment in the amount of CAD
$175,132. Under the lease agreement, the Company is required to
make monthly payments of interest and principal to RBC in the
amount of CAD $2,451, the lease matures on October 13, 2023. During
the three month period ended March 31, 2018, the Company paid
$1,357 in interest and made principal repayments of $4,371 on the
facility (March 31, 2017 – $nil and $nil, respectively). At
March 31, 2018, a total of $110,351 (December 31, 2017 - $117,909)
in principal remains payable under the lease with $22,809 (December
31, 2017 – $23,441) being allocated to current liabilities
and $87,542 (December 31, 2017 – $94,468) being allocated to
long term liabilities on the consolidated balance
sheet.
(vii) On
closing of the VBI acquisition, VBI had an amount owing to a vendor
of VBI in the principal amount of CAD $20,000. Pursuant to the
share purchase agreement, the Company agreed to repay the loan to
the vendor with two (2) payments of CAD $5,000, payable thirty (30)
and sixty (60) days after the closing and a final payment of CAD
$10,000 due ninety (90) days after the closing. The loan is
unsecured and interest free. At December 31, 2017, the loan was in
default and CAD $10,000 (USD $7,971) in principal remained
outstanding which the Company repaid in January 2018.
(viii)
On December 7, 2017, the Company entered into a revolving credit
facility (the “Revolving Facility”) in the aggregate
principal amount of CAD $200,000. The Revolving Facility is secured
by certain inventory and receivables of the Company, due March 6,
2018 with an option to extend and bears interest at a rate of 24%
per annum payable monthly in arrears. The Revolving Facility is
also subject to a standby fee with respect to the unused portion of
the facility, calculated on a daily basis as being the difference
between the CAD $200,000 revolving limit and the then outstanding
advances, multiplied by 3% and divided by 365 and payable in
arrears on the last day of each month. During the year ended
December 31, 2017, the Company received $100,000 in advances under
the Revolving Facility. During the three month period ended March
31, 2018, the Company accrued $6,227 in interest and $419 in
standby fees on the Revolving Facility (March 31, 2017 – $nil
and $nil, respectively). At March 31, 2018, $99,610 in principal
remains owing on the Revolving Facility.
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 at a fixed conversion
rate of $0.07 per share at any time prior to the maturity date. Of
the $178,000 in face value of Convertible Debentures Series A
issued on February 11, 2014, $3,000 were issued in settlement of
loans from shareholders and $50,000 were issued in settlement of
loans from related parties.
Convertible Debentures Series B
On
December 31, 2015, the Company issued 650 unsecured subordinated
convertible debenture units (“Convertible Debentures Series
B”) for proceeds of $650,000. Each Convertible Debentures
Series B consisted of an unsecured subordinated convertible
debenture having a principal amount of $1,000 and warrants for the
purchase of 5,000 Common Shares at a price of $0.20 per share for a
period of twenty-four months from the date of issuance (note
16(c)). The Convertible Debentures Series B matured on January 31,
2018 and charged interest at a rate of 8% per annum, payable
quarterly in arrears. The face value of the Convertible Debentures
Series B, together with all accrued and unpaid interest thereon,
are convertible into Common Shares at a fixed conversion rate of
$0.10 per share at any time prior to maturity. The Company also has
the option to force conversion of any outstanding Convertible
Debentures Series B at any time after six months from issuance and
prior to maturity. Of the $650,000 in face value of Convertible
Debentures Series B issued on December 31, 2015, $276,000 were
issued in settlement of loans from related parties, $10,000 were
issued in settlement of related party consulting fees $20,000 were
issued in settlement of consulting fees owing to an unrelated party
and $227,000 were issued in settlement of loans from
shareholders.
Convertible Debentures Series C
On May
20, 2016, the Company issued 375 unsecured subordinated convertible
debenture units (the “Convertible Debentures Series C”)
for proceeds of $375,000. Each Convertible Debentures Series C
consisted of an unsecured subordinated convertible debenture having
a principal amount of $1,000 and warrants for the purchase of
10,000 Common Shares at a price of $0.20 per share for a period of
twenty-four months from the date of issuance (note 16(i)). The
Convertible Debentures Series C matured on January 31, 2018 and
charged interest at a rate of 8% per annum, accrued quarterly in
arrears. The face value of the Convertible Debentures Series C,
together with all accrued and unpaid interest thereon, are
convertible into Common Shares at a fixed conversion rate of $0.10
per share at any time prior to maturity. The Company also has the
option to force conversion of any outstanding Convertible
Debentures Series C at any time after six months from issuance and
prior to maturity. For Canadian holders, the Company may only force
conversion of any outstanding Convertible Debentures Series C at
such time that the Company is a reporting issuer within the
jurisdiction of Canada. Of the $375,000 in face value of
Convertible Debentures Series C issued on May 20, 2016
(“Convertible Debentures Series C-1”), $55,000 were
issued in settlement of amounts owing to related parties (note
19(c)) and $10,000 were issued in settlement of amounts owing to an
employee. The Company incurred costs of $22,725 as a result of the
issuance of Convertible Debentures Series C-1 on May 20,
2016.
20
On
December 31, 2016, the Company issued an additional 275 units of
Convertible Debentures Series C (“Convertible Debentures
Series C-2”) for proceeds of $275,000 which were fully issued
in exchange for cash.
On
January 20, 2017, the Company issued an additional 75 units of
Convertible Debentures Series C (“Convertible Debentures
Series C-3”) in settlement of $65,000 owing to a related
party (note 19(c)) and $10,000 owing in shareholder loans (note
11(ii)).
The
Company evaluated the terms and conditions of the Convertible
Debentures Series A, Convertible Debentures Series B and each
tranche of Convertible Debentures Series C (together, the
“Convertible Debentures”) under the guidance of ASC No.
815, Derivatives and
Hedging (“ASC 815”). The conversion feature met
the definition of conventional convertible for purposes of applying
the conventional convertible exemption. The definition of
conventional contemplates a limitation on the number of shares
issuable under the arrangement. The instrument was convertible into
a fixed number of shares and there were no down round protection
features contained in the contracts.
Since a
portion of the Convertible Debentures were issued in exchange for
nonconvertible instruments at the original instrument’s
maturity date, the guidance of ASC 470-20-30-19 & 20 were
applied. The fair value of the newly issued Convertible Debentures
were equal to the redemption amounts owed at the maturity date of
the original instruments. Therefore, there was no gain or loss on
extinguishment of debt recorded. After the exchange occurred, the
Company was required to consider whether the new hybrid contracts
embodied a beneficial conversion feature
(“BCF”).
For the
face value $425,000 of Convertible Debentures Series A issued on
September 3, 2013, the calculation of the effective conversion
amount did not result in a BCF because the effective conversion
price was greater than the Company’s stock price on the date
of issuance, therefore no BCF was recorded. However, for the face
value $797,000 of Convertible Debentures Series A that were issued
on December 23, 2013 and the face value $178,000 of Convertible
Debentures Series A that were issued on February 11, 2014, the
calculation of the effective conversion amount resulted in a BCF
because the effective conversion price was less than the
Company’s stock price on the date of issuance and a BCF in
the amount of $797,000 and $178,000, respectively, were recorded in
additional paid-in capital.
For the
face value $650,000 of Convertible Debentures Series B issued on
December 31, 2015, the relative fair value of the warrants included
in the issuance totaling $287,757 was calculated using the
Black-Scholes option pricing model. The resulting fair value of
such Convertible Debentures Series B issuance was calculated to be
$362,243. The calculation of the effective conversion amount
resulted in a BCF because the effective conversion price was less
than the Company’s stock price on the date of issuance and a
BCF in the amount of $133,657 was recorded in additional paid-in
capital.
For the
face value $375,000 of Convertible Debentures Series C-1 issued on
May 20, 2016, the relative fair value of the warrants included in
the issuance totaling $234,737 (note 16(i)) was calculated using
the Black-Scholes option pricing model. The resulting fair value of
such Convertible Debentures Series C-1 was calculated to be
$140,263. The calculation of the effective conversion amount
resulted in a BCF because the effective conversion price was less
than the Company’s stock price on the date of issuance and a
BCF in the amount of $117,538, net of transaction costs, was
recorded in additional paid-in capital.
For the
face value $275,000 of Convertible Debentures Series C-2 issued on
December 31, 2016, the relative fair value of the warrants included
in the issuance totaling $143,871 (note 16(m)) was calculated using
the Black-Scholes option pricing model. The resulting fair value of
such Convertible Debentures Series C-2 was calculated to be
$131,129. The calculation of the effective conversion amount
resulted in a BCF because the effective conversion price was less
than the Company’s stock price on the date of issuance and a
BCF in the amount of $131,129, was recorded in additional paid-in
capital.
For the
face value $75,000 of Convertible Debentures Series C-3 issued on
January 20, 2017, the relative fair value of the warrants included
in the issuance totaling $43,737 (note 16(o)) was calculated using
the Black-Scholes option pricing model. The resulting fair value of
such Convertible Debentures Series C-3 was calculated to be
$31,263. The calculation of the effective conversion amount
resulted in a BCF because the effective conversion price was less
than the Company’s stock price on the date of issuance and a
BCF in the amount of $31,263, was recorded in additional paid-in
capital.
The BCF
and the fair value of the warrants, which represents debt discount,
is accreted over the life of the Convertible Debentures using the
effective interest rate. Amortization of debt discount was recorded
as follows:
|
March
31,
2018
|
March
31,
2017
|
Convertible
Debentures Series B
|
$38,190
|
$43,737
|
Convertible
Debentures Series C-1
|
21,661
|
20,172
|
Convertible
Debentures Series C-2
|
-
|
5,209
|
Convertible
Debentures Series C-3
|
-
|
2,171
|
|
$59,851
|
$71,289
|
21
Convertible
Debentures as of March 31, 2018 and December 31, 2017, are as
follows:
|
|
Balance,
December 31, 2016
|
$83,704
|
Face Value
Convertible Debentures Series C-3
|
75,000
|
Relative fair value
of detachable warrants
|
(43,737)
|
BCF
|
(31,263)
|
Conversion of
Convertible Debentures Series B
|
(423,000)
|
Conversion of
Convertible Debenture Series C-1
|
(265,000)
|
Conversion of
Convertible Debenture Series C-2
|
(275,000)
|
Conversion of
Convertible Debenture Series C-3
|
(75,000)
|
Amortization of
debt discount
|
1,231,445
|
Balance,
December 31, 2017
|
$277,149
|
Amortization of
debt discount
|
59,851
|
Balance,
March 31, 2018
|
$337,000
|
Conversions and Repayments of Convertible Debentures Series
A
The
Company received forms of election whereby holders of the
Convertible Debentures Series A elected to convert the face value
of the debentures into Common Shares at $0.07 per share pursuant to
the terms of the Convertible Debentures Series A. As at March 31,
2018, the Company received the following forms of elections from
holders of the Convertible Debentures:
Date Form of
Election
Received
|
Face Value of
Convertible Debentures Series A Converted
|
Number
of
Common Shares
Issued on Conversion
|
April 15,
2014
|
$50,000
|
714,286
|
September 30,
2014
|
800,000
|
11,428,572
|
November 10,
2014
|
275,000
|
3,928,571
|
March 9,
2015(1)
|
52,000
|
742,857
|
July 15,
2015
|
105,000
|
1,500,000
|
September 1,
2015
|
20,000
|
285,714
|
|
$1,302,000
|
18,600,000
|
(1)
On March 9, 2015,
the Company settled interest payable on the Convertible Debentures
Series A in the amount of $1,096 with the issuance of Common Shares
at a price of $0.15 per share, of which, $358 of interest payable
on the Convertible Debentures Series A was settled with a Director
of the Company.
On
January 25, 2016, the Company received a form of election to
convert face value $23,000 of Convertible Debentures Series A, such
328,571 Common Shares remain unissued. On March 10, 2016, the
Company settled face value $25,000 of Convertible Debentures Series
A with a cash payment. On July 6, 2016, the Company settled face
value $50,000 of Convertible Debentures Series A and agreed to pay
to the holders such face value in monthly payments ending on
November 1, 2016. As at December 31, 2016, the $50,000 was fully
paid.
As at
March 31, 2018, all Convertible Debentures Series A had been fully
settled and only the 328,571 Common Shares valued at $23,000 remain
unissued (note 18).
Conversions and Repayments of Convertible Debentures Series B &
C
On
April 30, 2017 and pursuant to the terms of the Convertible
Debentures Series B, the Company sent notices of its election to
convert $423,000 in face value and $45,058 in accrued interest to
holders of Convertible Debentures Series B at $0.10 per share for a
total of 4,680,581 Common Shares of the Company. As a result of
these conversions, the Company recorded a debt discount in the
amount of $342,399. The above amount included the conversion of
$286,000 in face value and $30,465 in accrued interest held by
related parties of the Company (note 19(c)).
On
April 30, 2017 and pursuant to the terms of the Convertible
Debentures Series C, the Company sent notices of its election to
convert $190,000 in face value and $14,367 in accrued interest to
holders of Convertible Debentures Series C at $0.10 per share for a
total of 2,043,670 Common Shares of the Company. As a result of
these conversions, the Company recorded a debt discount in the
amount of $168,798. The above amount included the conversion of
$5,000 in face value and $378 in accrued interest held by related
parties of the Company (note 19(c)).
22
On
December 29, 2017 and pursuant to the terms of the Convertible
Debentures Series C, the Company converted $425,000 in face value
and $37,184 in accrued interest to holders of Convertible
Debentures Series C at $0.10 per share for a total of 4,621,836
Common Shares of the Company. As a result of these conversions, the
Company recorded a debt discount in the amount of $119,172. The
above amount included the conversion of $130,000 in face value and
$13,264 in accrued interest held by related parties of the Company
(note 19(c)).
As at
March 31, 2018, face value $227,000 of Convertible Debentures
Series B and face value $110,000 of Convertible Debentures Series C
remain owing to their respective debenture holders.
Interest on Convertible Debentures
During
the three month period ended March 31, 2018, the Company recorded
interest expense in the amount of $6,648 on the Convertible
Debentures (March 31, 2017 – $26,794). The interest owing on
the convertible debentures is included in accrued liabilities on
the Company’s consolidated balance sheet.
15. COMMON STOCK
During the three month period ended March 31, 2018, the
Company:
|
●
|
Issued 50,000 Common Shares on the exercise of warrants, at a price
of $0.20 per common share, for cash proceeds of
$10,000;
|
|
●
|
Issued 3,486,362 Common Shares on a private placement basis, at a
price of $0.11 per common share for cash proceeds of
$383,500;
|
|
●
|
Issued 190,909 Common Shares on a private placement basis, at a
price of $0.11 per common share for payment of consulting fees in
the amount of $21,000 owing to an unrelated party; and
|
|
●
|
Issued 4,621,836 Common Shares at a price of $0.10 per share, for
conversion of $425,000 in face value and $37,184 in accrued
interest to holders of Convertible Debentures, including the
conversion of $130,000 in face value and $13,264 in accrued
interest held by related parties of the Company.
|
23
16. WARRANTS
The
following schedule summarizes the outstanding warrants for the
purchase of Common Shares of the Company:
|
March
31,
2018
|
December
31,
2017
|
||||
|
Warrants
Outstanding
|
Weighted
Average Exercise Price
|
Weighted
Average Life Remaining (yrs)
|
Warrants
Outstanding
|
Weighted Average
Exercise Price
|
Weighted Average
Life Remaining (yrs)
|
Beginning of
period
|
28,237,782
|
$0.23
|
0.84
|
17,560,000
|
$0.23
|
1.21
|
Issued
|
250,000
|
0.20
|
1.84
|
18,927,782
|
0.21
|
1.61
|
Cancelled
|
-
|
-
|
-
|
(1,750,000)
|
0.25
|
-
|
Expired
|
(1,725,000)
|
0.22
|
-
|
(6,500,000)
|
0.27
|
-
|
End of
period
|
26,762,782
|
$0.20
|
0.63
|
28,237,782
|
$0.23
|
0.84
|
24
The
Company has issued warrants for the purchase of Common Shares of
the Company as follows:
Issuance
Date
|
|
Number of
Warrants
|
|
Expected Life
in Years
|
|
Exercise Price
($)
|
|
Risk Free
Rate
|
|
Dividend
Yield
|
|
Expected
Volatility
|
|
Fair Value
($)
|
May 29,
2015
|
(a)
|
250,000
|
|
2.00
|
|
0.40
|
|
0.85%
|
|
Nil
|
|
298%
|
|
35,362
|
May 29,
2015
|
(a)
|
250,000
|
|
2.00
|
|
0.50
|
|
0.85%
|
|
Nil
|
|
298%
|
|
35,134
|
May 29,
2015
|
(a)
|
250,000
|
|
2.00
|
|
0.60
|
|
0.85%
|
|
Nil
|
|
298%
|
|
34,934
|
May 29,
2015
|
(a)
|
250,000
|
|
2.00
|
|
0.70
|
|
0.85%
|
|
Nil
|
|
298%
|
|
34,755
|
December
31, 2015
|
(b)
|
3,250,000
|
|
2.00
|
|
0.20
|
|
1.19%
|
|
Nil
|
|
265%
|
|
516,343
|
January
18, 2016
|
(c)
|
250,000
|
|
2.46
|
|
0.20
|
|
0.91%
|
|
Nil
|
|
263%
|
|
51,598
|
March
2, 2016
|
(d)
|
1,000,000
|
|
2.00
|
|
0.20
|
|
0.91%
|
|
Nil
|
|
271%
|
|
158,995
|
May 20,
2016
|
(e)
|
3,750,000
|
|
2.00
|
|
0.20
|
|
1.03%
|
|
Nil
|
|
259%
|
|
234,737
|
May 20,
2016
|
(f)
|
85,000
|
|
2.00
|
|
0.20
|
|
1.03%
|
|
Nil
|
|
259%
|
|
14,225
|
July
15, 2016
|
(g)
|
300,000
|
|
2.46
|
|
0.20
|
|
0.91%
|
|
Nil
|
|
263%
|
|
45,799
|
December
22, 2016
|
(h)
|
250,000
|
|
1.50
|
|
0.20
|
|
0.87%
|
|
Nil
|
|
180%
|
|
18,840
|
December
31, 2016
|
(i)
|
2,750,000
|
|
2.00
|
|
0.20
|
|
1.20%
|
|
Nil
|
|
259%
|
|
143,871
|
January
12, 2017
|
(j)
|
50,000
|
|
1.00
|
|
0.20
|
|
0.81%
|
|
Nil
|
|
191%
|
|
4,988
|
January
20, 2017
|
(k)
|
750,000
|
|
2.00
|
|
0.20
|
|
1.20%
|
|
Nil
|
|
267%
|
|
43,737
|
January
31, 2017
|
(l)
|
3,773,006
|
|
1.00
|
|
0.20
|
|
0.84%
|
|
Nil
|
|
173%
|
|
224,479
|
January
31, 2017
|
(m)
|
411,361
|
|
1.00
|
|
0.20
|
|
0.84%
|
|
Nil
|
|
173%
|
|
24,474
|
February
17, 2017
|
(n)
|
907,948
|
|
1.00
|
|
0.20
|
|
0.82%
|
|
Nil
|
|
167%
|
|
63,641
|
February
17, 2017
|
(o)
|
108,954
|
|
1.00
|
|
0.20
|
|
0.82%
|
|
Nil
|
|
167%
|
|
7,615
|
March
8, 2017
|
(p)
|
1,500,000
|
|
2.00
|
|
0.25
|
|
1.36%
|
|
Nil
|
|
266%
|
|
193,438
|
March
21, 2017
|
(q)
|
3,270,045
|
|
1.00
|
|
0.20
|
|
1.00%
|
|
Nil
|
|
165%
|
|
236,773
|
March
21, 2017
|
(r)
|
27,623
|
|
1.00
|
|
0.20
|
|
1.00%
|
|
Nil
|
|
165%
|
|
2,000
|
April
4, 2017
|
(s)
|
250,000
|
|
1.00
|
|
0.20
|
|
1.03%
|
|
Nil
|
|
163%
|
|
19,703
|
April
6, 2017
|
(t)
|
500,000
|
|
2.00
|
|
0.25
|
|
1.24%
|
|
Nil
|
|
167%
|
|
52,643
|
June 2,
2017
|
(u)
|
1,634,615
|
|
1.00
|
|
0.20
|
|
1,16%
|
|
Nil
|
|
171%
|
|
110,602
|
June
16, 2017
|
(v)
|
769,230
|
|
1.00
|
|
0.20
|
|
1.21%
|
|
Nil
|
|
171%
|
|
57,765
|
June
28, 2017
|
(w)
|
300,000
|
|
1.00
|
|
0.20
|
|
1.21%
|
|
Nil
|
|
159%
|
|
23,020
|
July 1,
2017
|
(x)
|
75,000
|
|
1.50
|
|
0.20
|
|
1.24%
|
|
Nil
|
|
158%
|
|
7,000
|
July
31, 2017
|
(y)
|
2,000,000
|
|
2.00
|
|
0.20
|
|
1.34%
|
|
Nil
|
|
245%
|
|
252,631
|
July
31, 2017
|
(z)
|
1,000,000
|
|
2.00
|
|
0.20
|
|
1.34%
|
|
Nil
|
|
245%
|
|
21,930
|
August
18, 2017
|
(aa)
|
150,000
|
|
1.50
|
|
0.20
|
|
1.24%
|
|
Nil
|
|
159%
|
|
11,233
|
October
1, 2017
|
(bb)
|
350,000
|
|
1.50
|
|
0.20
|
|
1.31%
|
|
Nil
|
|
161%
|
|
36,925
|
October
12, 2017
|
(cc)
|
100,000
|
|
1.50
|
|
0.20
|
|
1.41%
|
|
Nil
|
|
159%
|
|
8,860
|
November
15, 2017
|
(dd)
|
1,000,000
|
|
1.50
|
|
0.20
|
|
1.55%
|
|
Nil
|
|
137%
|
|
89,053
|
February
1, 2018
|
(ee)
|
250,000
|
|
2.00
|
|
0.20
|
|
1.26%
|
|
Nil
|
|
206%
|
|
33,681
|
|
|
31,812,782
|
|
|
|
|
|
|
|
|
|
|
|
2,850,784
|
25
(a)
Issued in
connection to a commission agreement. The warrants vest in four
tranches of 250,000 warrants each. The first tranche has an
exercise price of $0.40 per share and vested upon execution of the
agreement. The second tranche has an exercise price of $0.50 per
share and will vest upon the sales agent delivering $500,001 in
sales revenue to Gilla Worldwide. The third tranche has an exercise
price of $0.60 per share and will vest upon the sales agent
delivering $1,000,001 in sales revenue to Gilla Worldwide. The
fourth tranche has an exercise price of $0.70 per share and will
vest upon the sales agent delivering $1,500,001 in sales revenue
Gilla Worldwide. During the year ended December 31, 2015, the
Company booked the fair value of the vested warrants in the amount
of $35,362 as a prepaid to be expensed over the two year life of
the commission agreement. During the three month periods ended
March 31, 2018 and 2017, the Company expensed $nil and $4,420,
respectively, in stock based compensation which has been recorded
as an administrative expense. No portion of the value of the
unvested warrants has been expensed as the sales agent had not yet
delivered any sales revenue to Gilla Worldwide.
(b)
Issued in
connection to the issuance of Convertible Debentures Series B (note
14). The relative fair value of the warrants in the amount of
$516,343, along with the BCF, represents debt discount on the
Convertible Debentures Series B and is accreted over the life of
the convertible debentures using the effective interest rate.
During the three month periods ended March 31, 2018 and 2017, the
Company recorded interest expense in the amount of $38,190 and
$43,737, respectively, related to debt discount which includes the
accretion of the BCF of the Convertible Debentures Series
B.
(c)
Issued in
connection to the Term Loan (note 12). On July 15, 2016, the
Company extended the expiration date of the warrants, previously
issued with the credit facility to December 31, 2018, with all
other terms of the warrants remaining the same. During the year
ended December 31, 2016, the Company booked the fair value of the
warrants and the extension in the amount of $51,598 as a debt
issuance cost to be expensed over the life of the Term Loan. On
July 15, 2016 and in connection to the Term Loan Amendment, the
Company also extended the expiration date of the warrants for the
purchase of 250,000 Common Shares that were issued on August 1,
2014 in connection to the Credit Facility (note 12) and extended on
January 18, 2016 in connection to the Term Loan (note 12) until
December 31, 2018, with all other terms of the warrants remaining
the same. During the year ended December 31, 2016, the Company
booked the fair value of the extensions in the amount of $42,325 as
debt discount to be amortized over the life of the
loan.
(d)
Issued in
connection to the Loan Agreement (note 11(v)). The warrants shall
vest in two equal tranches, with 500,000 warrants to vest upon the
close of Loan Tranche A and the remaining 500,000 warrants to vest
upon the close of Loan Tranche B. On March 3, 2016 and April 14,
2016, the Company closed Loan Tranche A and Loan Tranche B,
respectively, at which dates the warrants became fully vested and
exercisable. During the year ended December 31, 2016, the Company
booked the fair value of the warrants in the amount of $158,995 the
fair value of the warrants issued were recorded as debt discount to
be amortized over the life of the Shareholder Loan.
(e)
Issued in
connection to the issuance of Convertible Debentures Series C-1
(note 14). The relative fair value of the warrants in the amount of
$234,737, along with the BCF, represents debt discount on the
Convertible Debentures Series C-1 and is accreted over the life of
the convertible debentures using the effective interest rate.
During the three month periods ended March 31, 2018 and 2017, the
Company recorded interest expense in the amount of $21,661 and
$20,172, respectively, related to debt discount which includes the
accretion of the BCF of the Convertible Debentures Series
C-1.
(f)
Issued as a
commission payment related to the issuance of the Convertible
Debentures Series C-1. The fair value of the warrants in the amount
of $14,225 was recorded as a reduction to the proceeds received
from the Convertible Debentures Series C-1 (note 14).
(g)
Issued in
connection to the Term Loan Amendment (note 12). During the year
ended December 31, 2016, the Company booked the fair value of the
warrants in the amount of $45,799 were recorded as debt discount to
be amortized over the life of the Term Loan.
(h)
Issued in
connection to the Secured Notes (note 11(iii and iv)). During the
year ended December 31, 2016, the Company booked the fair value of
the warrants in the amount of $18,840 were recorded as debt
discount to be amortized over the life of the Secured
Notes.
(i)
Issued in
connection to the issuance of Convertible Debentures Series C-2
(note 14). The relative fair value of the warrants in the amount of
$143,871, along with the BCF, represents debt discount on the
Convertible Debentures Series C-2 and is accreted over the life of
the convertible debentures using the effective interest rate.
During the three month periods ended March 31, 2018 and 2017, the
Company recorded interest expense in the amount of $nil and $5,209,
respectively, related to debt discount which includes the accretion
of the BCF of the Convertible Debentures Series C-2.
26
(j)
Issued in
connection to the Bridge Loan Agreement (note 11(vi)). During the
years ended During the three month periods ended March 31, 2018 and
2017, the Company expensed the fair value of the warrants in the
amount of $nil and $4,988, respectively, as financing fees which
has been recorded as interest expense.
(k)
Issued in
connection to the issuance of Convertible Debentures Series C-3
(note 14). The relative fair value of the warrants in the amount of
$43,737, along with the BCF, represents debt discount on the
Convertible Debentures Series C-3 and is accreted over the life of
the convertible debentures using the effective interest rate.
During the three month periods ended March 31, 2018 and 2017, the
Company recorded interest expense in the amount of $nil and $2,171,
respectively, related to debt discount which includes the accretion
of the BCF of the Convertible Debentures Series C-3.
(l)
Issued in
connection to private placement units. No stock based compensation
expense was recorded since the warrants were issued as part of a
private placement of Common Shares. The fair value of the warrants
were calculated and recorded in additional paid in
capital.
(m)
Issued as a
commission payment related to the issuance of private placement
units. The fair value of the warrants in the amount of $24,474 was
recorded as a reduction to the proceeds received from the private
placement issuance.
(n)
Issued in
connection to private placement units. No stock based compensation
expense was recorded since the warrants were issued as part of a
private placement of Common Shares. The fair value of the warrants
were calculated and recorded in additional paid in
capital.
(o)
Issued as a
commission payment related to the issuance of private placement
units. The fair value of the warrants in the amount of $7,615 was
recorded as a reduction to the proceeds received from the private
placement issuance.
(p)
Issued in
connection to an employment agreement. The warrants will vest in
three equal tranches, with the first tranche vesting upon the
employee generating over $25,000 in sales of new business for two
consecutive months, the second tranche vesting upon the employee
generating cumulative sales of over $500,000 and the third tranche
vesting upon the employee generating cumulative sales of over
$1,000,000 of new business. At March 31, 2018, no stock based
compensation has been recorded as the employee has not yet begun to
generate new business sales.
(q)
Issued in
connection to private placement units. No stock based compensation
expense was recorded since the warrants were issued as part of a
private placement of Common Shares. The fair value of the warrants
were calculated and recorded in additional paid in
capital.
(r)
Issued as a
commission payment related to the issuance of the private placement
units. The fair value of the warrants in the amount of $2,000 was
recorded as a reduction to the proceeds received from the private
placement issuance.
(s)
Issued in
connection to private placement units. No stock based compensation
expense was recorded since the warrants were issued as part of a
private placement of Common Shares. The fair value of the warrants
were calculated and recorded in additional paid in
capital.
(t)
Issued in
connection to an employment agreement, the warrants shall vest in
two equal tranches, with the first tranche vesting upon the
commercial sale of a new product to be developed by the employee
and the second tranche vesting upon the commercial sale of a total
of two new products developed by the employee. Both tranches have
vested, the Company has recorded $nil in stock based compensation
during the three month periods ended March 31, 2018 and 2017
related to these warrants.
(u)
Issued in
connection to private placement units. No stock based compensation
expense was recorded since the warrants were issued as part of a
private placement of Common Shares. The fair value of the warrants
were calculated and recorded in additional paid in
capital.
(v)
Issued in
connection to private placement units. No stock based compensation
expense was recorded since the warrants were issued as part of a
private placement of Common Shares. The fair value of the warrants
were calculated and recorded in additional paid in
capital.
(w)
Issued in
connection to private placement units. No stock based compensation
expense was recorded since the warrants were issued as part of a
private placement of Common Shares. The fair value of the warrants
were calculated and recorded in additional paid in
capital.
27
(x)
Issued in
connection with a consulting agreement. During the three month
periods ended March 31, 2018 and 2017, the Company expensed $nil,
as stock-based compensation which was recorded as an administrative
expense.
(y)
Issued in
connection with the acquisition of a subsidiary (note
4(c)).
(z)
Issued in
connection to an employment agreement, the warrants shall vest in
four equal tranches every six months following the date of
issuance. During the three month periods ended March 31, 2018 and
2017, the Company expensed $22,367 and $nil, respectively, as
stock-based compensation which was recorded as an administrative
expense.
(aa)
Issued in
connection with a promissory note (note (13)). During the year
ended December 31, 2017, the Company booked the relative fair value
of the warrants in the amount of $11,233 were recorded as debt
discount to be amortized over the life of the promissory
note.
(bb)
Issued in
connection to a consulting agreement, the warrants shall vest in
two equal tranches, with the first tranche vesting upon the Company
entering into a definitive agreement for the licensing of any of
the Company’s cannabis products or intellectual property to a
Canadian based license producer that is introduced by the
consultant. Company has not yet recorded any expense related to the
issuance of these warrants.
(cc)
Issued in
connection with a promissory note (note 13). During the year ended
December 31, 2017, the Company booked the relative fair value of
the warrants in the amount of $8,860 were recorded as debt discount
to be amortized over the life of the promissory note.
(dd)
Issued in
connection with the extension of the Shareholder Loans (note
11(iii, iv, vii, and vii)). During the year ended December 31,
2017, the Company booked the relative fair value of the warrants in
the amount of $89,053 were recorded as debt discount to be
amortized over the life of the Shareholder Loans.
(ee)
Issued in
connection to a consulting agreement. The warrants vest in eight
tranches of 31,250 warrants each. The first tranche vested upon
execution of the agreement and the remaining tranches vest every
three months thereafter. During the three month periods ended March
31, 2018 and 2017, the Company expensed $11,488 and $nil,
respectively, in stock based compensation which has been recorded
as an administrative expense.
17. STOCK BASED COMPENSATION
The
Company recorded stock based compensation as follows:
|
March
31,
2018
|
March
31,
2017
|
Warrants
Issued as Stock Based Compensation
|
|
|
Warrants issued in
connection to the Bridge Loan Agreement (note 11(vi))
|
$-
|
$4,988
|
Warrants issued as
commission related to private placements units
|
-
|
34,089
|
Warrants issued in
relation to consulting agreements
|
33,855
|
-
|
Total
Warrants Issued as Stock Based Compensation
|
$33,855
|
$39,077
|
|
|
|
Shares
issued for consulting fees
|
21,000
|
-
|
Total
Stock Based Compensation
|
$54,855
|
$39,077
|
18. SHARES TO BE ISSUED
As at
March 31, 2018, the Company has $23,000 in Common Shares to be
issued, consisting of the following:
●
328,571 Common
Shares, valued at $0.07 per share, to be issued due to the
conversion of $23,000 of Convertible Debentures Series A (note
14).
As at
December 31, 2017, the Company has $485,184 in Common Shares to be
issued, consisting of the following:
●
328,571 Common
Shares, valued at $0.07 per share, to be issued due to the
conversion of $23,000 of Convertible Debentures Series A (note
14);
28
●
1,300,000 Common
Shares, valued at $0.10 per share, to be issued due to the
conversion of $130,000 of Convertible Debenture Series C by related
parties (note 14). Such Common Shares were issued on March 29,
2018;
●
132,637 Common
Shares, valued at $0.10 per share, to be issued due to the
settlement of $13,264 of interest owing to related parties on
Convertible Debenture Series C (note 14). Such Common Shares were
issued on March 29, 2018;
●
2,950,000 Common
Shares, valued at $0.10 per share, to be issued due to the
conversion of $295,000 of Convertible Debenture Series C by
unrelated parties (note 14). Such Common Shares were issued on
March 29, 2018; and
●
239,199 Common
Shares, valued at $0.10 per share, to be issued due to the
settlement of $23,920 of interest owing to unrelated parties on
Convertible Debenture Series C (note 14). Such Common Shares were
issued on March 29, 2018.
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.
|
Advances
from related parties due over the next 12 months are as
follows:
|
March
31,
2018
|
December
31,
2017
|
Advances by and
amounts payable to Officers of the Company, two of which are also
Directors
|
$150,471
|
$169,666
|
Advances by and
consulting fees payable to a corporation owned by two Officers of
the Company, one of which is also a Director
|
13,800
|
-
|
Consulting fees
owing to persons related to Officers who are also Directors of the
Company
|
22,838
|
485
|
Amounts payable to
a corporation related by virtue of a common Officer of the
Company
|
99,973
|
-
|
Directors fees
payable to Directors of the Company
|
13,500
|
-
|
Incentive fee
bonus
|
104,023
|
82,690
|
|
$404,605
|
$252,841
|
During
the year ended December 31, 2017, the following related parties
agreed to defer amounts payable to them until April 30,
2019:
|
March
31,
2018
|
December
31,
2017
|
Advances by and
amounts payable to Officers of the Company, two of which are also
Directors
|
$856,369
|
$856,975
|
Advances by and
consulting fees payable to a corporation owned by two Officers of
the Company, one of which is also a Director
|
670,225
|
682,360
|
Consulting fees
owing to persons related to Officers who are also Directors of the
Company
|
76,348
|
76,348
|
Advances by
Officers of the Company, one of which is also a Director, bears
interest at 1.5% per month
|
530,662
|
552,590
|
Consulting fees and
directors fees payable to Directors of the Company
|
113,500
|
113,500
|
|
$2,247,104
|
$2,281,773
|
During
the year ended December 31, 2017, the Company settled $87,100 of
fees payable, deferred and otherwise, to two former Directors of
the Company with the issuance of 871,000 Common Shares at a price
of $0.10 per share. The amount allocated to Shareholders’
Deficiency, based on their fair value, amounted to $121,940. The
balance of $34,840 has been recorded as a loss on settlement of
debt (note 15).
29
During
the year ended December 31, 2017, the Company settled $30,000 of
amounts payable to a Director of the Company with the issuance of
300,000 Common Shares at a price of $0.10 per share. The amount
allocated to Shareholders’ Deficiency, based on their fair
value, amounted to $33,000. The balance of $3,000 has been recorded
as a loss on settlement of debt (note 15).
During
the year ended December 31, 2016, the Company deferred amounts
payable to a number of related parties. The amounts were
non-interest bearing and payable on April 1, 2018, in exchange for
agreeing to defer the fees, the Directors and Officers would
receive an incentive bonus equal to 10% of the amount deferred and
payable on April 1, 2018. The incentive bonus would be expensed
over the term of the deferrals. During the three month period ended
March 31, 2018 and 2017, the Company expensed $21,333 and $21,793,
respectively, in interest expense related to the incentive
bonus.
(b)
|
Interest
accrued to related parties were as follows:
|
|
March
31,
2018
|
December
31,
2017
|
|
|
|
Interest accrued on
advances by Officers of the Company, one of which is also a
Director
|
$445,613
|
$413,477
|
Advances by and
consulting fees payable to a corporation owned by two Officers of
the Company, one of which is also a Director
|
66,063
|
55,348
|
|
$511,676
|
$468,825
|
During
the year ended December 31, 2017, the Company deferred the interest
owing to related parties until April 30, 2019.
(c)
|
Transactions
with related parties were as follows:
|
During
the three month period ended March 31, 2018, the Company expensed
$14,095 (March 31, 2017 – $4,985) in costs related to
vehicles for the benefit of three Officers, two of which are also
Directors of the Company, and for the benefit of a person related
to an Officer and Director of the Company. The Company also
expensed $7,592 (March 31, 2017 – $26,411) in travel and
entertainment expenses incurred by Officers and Directors of the
Company. During the three month period ended March 31, 2018, the
Company received $144,537 from a related corporation for accounting
and administrative services provided, $99,973 of this amount is an
advance on services to be provided.
On
March 29, 2018, the Company issued 1,432,637 Common Shares, at a
price of $0.10 per share, to related parties, on the conversion of
$130,000 in face value of the Convertible Debentures Series C and
the settlement of $13,264 in interest accrued on the Convertible
Debentures Series C (note 14).
On June
30, 2017, the Company issued 3,042,931 Common Shares, at a price of
$0.10 per share, to an Officer who is also a Director of the
Company, on the conversion of $275,000 in face value of the
Convertible Debentures Series B and the settlement of $29,293 in
interest accrued on the Convertible Debentures Series B (note
14).
On June
30, 2017, the Company issued 121,717 Common Shares, at a price of
$0.10 per share, to a person related to an Officer who is also a
Director of the Company, on the conversion of $11,000 in face value
of the Convertible Debentures Series B and the settlement of $1,171
in interest accrued on the Convertible Debentures Series B (note
14).
On June
30, 2017, the Company issued 53,781 Common Shares, at a price of
$0.10 per share, to a Director of the Company, on the conversion of
$5,000 in face value of the Convertible Debentures Series C-1 and
the settlement of $378 in interest accrued on Convertible
Debentures Series C-1 (note 14).
On
March 21, 2017, the Company issued 1,998,950 Common Shares as part
of private placement units, at a price of $0.10 per private
placement unit, for settlement of $199,895 in amounts owing to
related parties.
On
January 20, 2017, the Company issued 65 units of Convertible
Debentures Series C-3 in settlement of $65,000 owing to a related
party (note 14).
30
The
Company expensed consulting fees payable to related parties as
follows:
|
March 31,
2018
|
March
31,
2017
|
Officers
|
$92,931
|
$82,680
|
Persons
related to a Director
|
38,044
|
36,779
|
|
$130,975
|
$119,459
|
The
Company’s Chief Executive Officer and Chief Financial Officer
are both participants of the consortium of Lenders of the Credit
Facility and the Term Loan, each committed to provide a total of
CAD $150,000 of the Term Loan (notes 12 and 13).
On
February 27, 2017 and in connection to the Term Loan Amendment
No.2, the Company agreed to issue 500,000 private placement units,
at a price of $0.10 per unit, for settlement of $50,000 in
financing fees. The Company’s Chief Executive Officer and its
Chief Financial Officer received a total of 93,622 units which
included 93,622 Common Shares and warrants for the purchase of
46,811 Common Shares.
20. STOCK OPTION PLAN
On June
16, 2017, the Company adopted a stock option plan (the
“Option Plan”), under which the Board of Directors may
from time to time, in its discretion, grant to directors, officers,
employees and consultants of the Company non-transferable options
to purchase Common Shares.
Pursuant
to the Option Plan, the Company may issue options for such period
and exercise price as may be determined by the Board of Directors,
and in any case not exceeding ten years from the date of grant and
equal to not more than 10% of the then issued and outstanding
Common Shares. The minimum exercise price of an option granted
under the Option Plan must not be less than 100% of the market
value of the Common Shares on the date such option is granted, and
if the option is issued to a 10% shareholder of the Company, the
exercise price will not be less than 110% of the market value of
the Common Shares on the date such option is granted.
Outstanding
options at March 31, 2018 are as follows:
|
Options
Outstanding
|
Exercise
Price
|
Executive
Officers
|
4,500,000
|
$0.20
|
Directors
|
1,250,000
|
$0.20
|
Employees
|
3,422,500
|
$0.20
|
|
9,172,500
|
|
Grant
Date
|
|
Expiry
Date
|
Options
Outstanding
|
Options
Exercisable
|
Exercise
Price
|
Fair Value
Expense
|
June 16,
2017
|
|
June 15,
2020
|
8,750,000
|
8,750,000
|
$0.20
|
$1,213,605
|
The
options were granted to Officers, Directors and employees of the
Company which were fully vested on issuance. The fair value of
$1,213,605 was determined using the Black Scholes option-pricing
model with the following weighted average assumptions:
Stock
price
|
|
$0.14
|
Risk-free
interest rate
|
|
1.49%
|
Expected
life
|
|
3
years
|
Estimated
volatility in the market price of the Common Shares
|
|
306%
|
31
Grant
Date
|
|
Expiry
Date
|
Options
Outstanding
|
Options
Exercisable
|
Exercise
Price
|
Fair Value
Expense
|
December 12,
2017
|
|
December 11,
2020
|
422,500
|
422,500
|
$0.20
|
$54,262
|
The
options were granted to employees of the Company which were fully
vested on issuance. The fair value of $54,262 was determined using
the Black Scholes option-pricing model with the following weighted
average assumptions:
Stock
price
|
$0.13
|
Risk-free interest
rate
|
1.95%
|
Expected
life
|
3
years
|
Estimated
volatility in the market price of the Common Shares
|
297%
|
During
the three month periods ended March 31, 2018 and 2017 the Company
expensed $nil, as a stock option expense.
21. COMMITMENTS AND CONTINGENCIES
a)
Premises Leases – Mississauga, Ontario
Effective
April 1, 2016, a subsidiary of the Company entered into a lease
agreement for a rental premises in Mississauga, Ontario, Canada.
The terms of the lease agreement are to be for a period of 3 years
and ending on June 30, 2019 with payments made monthly. Minimum
annual lease payments are as follows and denominated in
CAD:
2018
|
$58,594
|
2019
|
39,063
|
|
$97,657
|
b)
Royalty Agreement
On June
14, 2016, the Company entered into a royalty agreement related to
an E-liquid recipe purchased from an unrelated party in which the
Company agreed to pay to the recipe developer, a royalty of $0.25
per 60 ml of E-liquid sold that contains the recipe, up to a
maximum of $100,000. Although the Company has the ability to sell
the E-liquid globally, the royalty was only paid on E-liquid sold
within the United States. The Company is no longer selling the
original recipe and, as of December 31, 2017, had stopped accruing
royalty payments under this agreement. During the three month
periods ended March 31, 2018 and 2017 the Company paid $nil and
$649, respectively, in relation to the royalty
agreement.
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 receivables. Cash accounts are maintained with
major international financial institutions of reputable credit and
therefore bear minimal credit risk. In the normal course of
business, the Company is exposed to credit risk from its customers
and the related trade receivables which are subject to normal
commercial credit risks. A substantial portion of the
Company’s trade receivables are concentrated with a limited
number of large customers, all of which the Company believes are
subject to normal industry credit risks. At March 31, 2018, the
Company recorded an allowance of $283,011 (December 31, 2017
– $190,543) in regards to customers with past due amounts. At
March 31, 2018, 22% (December 31, 2017 – 34%) of the
Company’s trade receivables are due from one customer and 68%
(December 31, 2017 – 68%) of the trade receivables are due
from six customers. During the three month period ended March 31,
2018, 8% (March 31, 2017 – 13%) of the Company’s sales
were to one customer.
32
(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 March 31, 2018, the Company had liabilities due to
unrelated parties through its financial obligations over the next
six years in the aggregate principal amount of $8,578,064. Of such
amount, the Company has obligations to repay $6,440,823 over the
next twelve months with the remaining $2,137,241 becoming due
within the following five years.
(iii) Foreign
Currency Risk
Currency
risk is the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in foreign
exchange rates. The risks and fluctuations are related to cash,
accounts payable and trade receivables that are denominated in CAD,
HUF and EUR.
Analysis
by currency in CAD, HUF and EUR equivalents is as
follows:
March 31,
2018
|
Accounts
Payable
|
Trade
Receivables
|
Cash
|
CAD
|
$1,078,036
|
$89,801
|
$(9,996)
|
HUF
|
$135,968
|
$-
|
$992
|
EUR
|
$249,293
|
$47,529
|
$11,871
|
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 $99,823, $13,498 and
$20,042, respectively. A 10% weakening in the exchange rate would,
on the same basis, have decreased profit and decreased net assets
by $99,823, $13,498 and $20,042, respectively.
The Company purchases some of its inventory in a foreign currency,
at March 31, 2018, the Company included $105,823 (December 31, 2017
– $99,518) in inventory that was purchased in a foreign
currency on its condensed consolidated interim 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 the majority 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 vaping products in
North America and Europe. Total long lived assets by
geographic location are as follows:
|
March 31,
2018
|
December
31,
2017
|
Canada
|
$1,804,202
|
$1,830,696
|
United
States
|
1,474,286
|
1,522,641
|
Europe
|
4,976
|
5,977
|
|
$3,283,464
|
$3,359,314
|
33
Total
sales by geographic location are as follows:
|
March
31,
2018
|
March
31,
2017
|
Canada
|
$755,392
|
$19,463
|
United
States
|
276,338
|
175,095
|
Europe
|
234,509
|
1,048,981
|
|
$1,266,239
|
$1,243,539
|
24. SUBSEQUENT EVENTS
On April 3, 2018, the Company issued an unsecured promissory note
in the principal amount of CAD $65,000. The promissory note matured
on April 20, 2018 and bears interest at a rate of 15% per annum,
accrued monthly but subject to a minimum interest payment of CAD
$750. The Company is currently in default on this promissory
note.
On April 2, 2018, the Company entered into an equipment financing
facility (the “Equipment Facility”) in the aggregate
principal amount of CAD $340,850. The Equipment Facility is secured
by certain equipment of the Company, due April 1, 2020 and bears
interest at a rate of 15% per annum. The Company shall be required
to make principal and interest payments of CAD $16,527, monthly in
arrears. On April 2, 2018 and in connection with the Equipment
Facility, the Revolving Facility entered into on December 7, 2017
was terminated and retired and all amounts due under the Revolving
Facility were rolled into the Equipment Facility. On April 11,
2018, the Company received the balance of the aggregate principal
amount made available to the Company under the Equipment
Facility.
On May 7, 2018, the Company entered into a consulting agreement and
agreed to issue 600,000 Common Shares of the Company. Such Common
Shares were issued on June 21, 2018.
34
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTSOF OPERATION
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the
financial statements and the related notes thereto included
elsewhere in this Quarterly Report on Form 10-Q (this
“Report”). This Report contains certain forward-looking
statements and the Company's future operating results could differ
materially from those discussed herein. Our disclosure and analysis
included in this Report concerning our operations, cash flows and
financial position include forward-looking statements. Statements
that are predictive in nature, that depend upon or refer to future
events or conditions, or that include words such as
“expect”, “anticipate”,
“intend”, “plan”, “believe”,
“estimate”, “may”, “project”,
“will likely result”, and similar expressions are
intended to identify forward-looking statements. Such
forward-looking statements include (i) the ability to raise
additional capital; and (ii) expectations regarding anticipated
growth. Such forward-looking statements are subject to certain
risks, uncertainties and assumptions, and are more fully described
under “Part I, Item 1A - Risk Factors” of our Annual
Report on Form 10-K for the year ended December 31, 2017. New risks
and uncertainties arise from time to time, and it is impossible for
us to predict these events or how they may affect us. In any event,
these and other important factors, including those set forth in
Item 1A – “Risk Factors” of our Annual Report on
Form 10-K for the year ended December 31, 2017 may cause actual
results to differ materially from those indicated by our
forward-looking statements. The Company assumes no obligation to
update or revise any forward-looking statements made in this
Report, except as required by applicable securities
laws.
Except as otherwise stated or required by the context, references
in this document to “Gilla” the
“Registrant”, the “Company,”
“we,” and “our” refer to Gilla
Inc.
Overview
Gilla
Inc. (the “Company”, the “Registrant” or
“Gilla”) was incorporated under the laws of the State
of Nevada on March 28, 1995 under the name of Truco, Inc. The
Company later changed its name to Web Tech, Inc., and then to
Cynergy, Inc., Mercantile Factoring Credit Online Corp.,
Incitations, Inc., Osprey Gold Corp. and to its present name. The
Company adopted the present name, Gilla Inc., on February 27, 2007.
The Company’s registered address is 475 Fentress Blvd., Unit
L, Daytona Beach, Florida 32114.
The
current business of the Company consists of the manufacturing,
marketing and distribution of E-liquid (“E-liquid”),
which is the liquid used in vaporizers and electronic cigarettes
(“E-cigarettes”), and developer of turn-key vapor and
cannabis concentrate solutions for high-terpene vape oils, pure
crystalline, high-performance vape pens and other targeted
products.
Recent Developments
On May
10, 2016, the U.S. Federal Food & Drug Administration
(“FDA”) finalized a new rule, captioned, the
“Deeming Tobacco Products To Be Subject to the Federal Food,
Drug, and Cosmetic Act”, which extends the FDA’s
authority to include the regulation of electronic nicotine delivery
systems (such as e-cigarettes and vape pens), all cigars, hookah
(waterpipe) tobacco, pipe tobacco and nicotine gels, among others.
Going forward, the FDA will be able to review new nicotine products
not yet on the market; regulate claims by nicotine product
manufacturers and distributers; require evaluation and reporting of
the ingredients of nicotine products and how they are made; and
require disclosures regarding risks of nicotine products. The final
rule went into effect on August 8, 2016. The Company is assessing
the impact of the new FDA rule. Prospective investors are directed
to the “Risk Factors” contained in the Company’s
Annual Report filed with the U.S. Securities and Exchange
Commission (the “SEC”) for the fiscal year ended
December 31, 2017.
On
January 26, 2018 and in accordance with the terms of a warrant
agreement, the Company received a form of election to purchase
50,000 Common Shares of the Company at a price of $0.20 per share
for total gross proceeds of $10,000. Such Common Shares were issued
on March 15, 2018.
On
February 1, 2018 and in connection to a consulting agreement, the
Company issued warrants for the purchase of 250,000 Common Shares
exercisable until January 31, 2020 at an exercise price of $0.20
per Common Share. The warrants shall vest in eight equal tranches,
with the first tranche vested upon issuance and the remaining seven
tranches to vest equally every three months
thereafter.
On
March 23, 2018, the Company issued and sold on a private placement
basis, 3,677,271 Common Shares of the Company at a price of $0.11
per share for total gross proceeds of $404,500.
35
Subsequent Events
On
April 3, 2018, the Company issued an unsecured promissory note in
the principal amount of CAD $65,000. The promissory note matures on
April 20, 2018 and bears interest at a rate of 15% per annum,
accrued monthly but subject to a minimum interest payment of CAD
$750.
On
April 2, 2018, the Company entered into an equipment financing
facility (the “Equipment Facility”) in the aggregate
principal amount of CAD $340,850. The Equipment Facility is secured
by certain equipment of the Company, due April 1, 2020 and bears
interest at a rate of 15% per annum. The Company shall be required
to make principal and interest payments of CAD $16,527, monthly in
arrears. On April 2, 2018 and in connection with the Equipment
Facility, the Revolving Facility entered into on December 7, 2017
was terminated and retired and all amounts due under the Revolving
Facility were rolled into the Equipment Facility. On April 11,
2018, the Company received the balance of the aggregate principal
amount made available to the Company under the Equipment
Facility.
On May
7, 2018, the Company entered into a consulting agreement and agreed
to issue 600,000 Common Shares of the Company. Such Common Shares
were issued on June 21, 2018.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND
2017
Revenue
For the
three month period ended March 31, 2018, the Company generated
$1,266,239 in sales from E-liquids, vaporizers, E-cigarettes and
accessories as compared to $1,243,539 in sales for the three month
period ended March 31, 2017. Of the $1,266,239 in revenue generated
for the three month period ended March 31, 2018, $755,392 (60% of
total sales) was generated in Canada, $276,338 (22% of total sales)
was generated in the United States and $234,509 (19% of total
sales) was generated in Europe. Of the $1,243,539 in revenue
generated for the three month period ended March 31, 2017,
$1,048,981 (84% of total sales) was generated in Europe, $175,095
(14% of total sales) was generated in the United States and $19,463
(2% of total sales) was generated in Canada.
The
Company’s cost of goods sold for the three month period ended
March 31, 2018 was $528,900 which represents E-liquid, bottles,
hardware and related packaging as compared to $546,733 for the three month period ended
March 31, 2017. Gross profit for the three month period ended March
31, 2018 was $737,339 with margins of 58% as compared to $696,806
with margins of 56% for the comparative period in
2017.
Operating Expenses
For the
three month period ended March 31, 2018, the Company incurred an
administrative expense of $1,453,336, consulting fees due to
related parties of $130,975, depreciation expense of $30,761,
amortization expense of $39,892 and a bad debt expense of $93,030.
For the three month period ended March 31, 2017, the Company
incurred an administrative expense of $997,350, consulting fees due
to related parties of $119,459, depreciation expense of $9,656,
amortization expense of $11,650 and a bad debt expense of $161,340.
Total operating expenses for the three month period ended March 31,
2018 were $1,747,994 as compared to $1,299,455 for the three month
period ended March 31, 2017.
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 $455,986 between
the three month period ended March 31, 2018 and the three month
period ended March 31, 2017 is attributable to the Company’s
increased operations in Canada. The increase in consulting fees due
to related parties of $11,516 between the three month period ended
March 31, 2018 and the three month period ended March 31, 2017 is
attributable to new consulting agreements entered into with related
parties. The bad debt expense for the three month periods ended
March 31, 2018 and 2017 is attributable to an allowance for
doubtful accounts receivable.
Loss from Operations
For the
three month period ended March 31, 2018, the Company incurred a
loss from operations of $1,010,655 as compared to a loss from
operations of $602,649 for the three month period ended March 31,
2017 due to the reasons discussed above.
36
Other Expenses
For the
three month period ended March 31, 2018, the Company incurred a
foreign exchange loss of $81,247, amortization of debt discount
expense of $59,851 and interest expense of $309,549. For the three
month period ended March 31, 2017, the Company incurred a foreign
exchange gain of $4,947, amortization of debt discount expense of
$71,289 and interest expense of $229,277. For the three month
period ended March 31, 2018, the Company incurred total other
expenses of $450,647 as compared to $295,619 for the three month
period ended March 31, 2017. The increase in interest expense of
$80,272 between the three month period ended March 31, 2018 and the
three month period ended March 31, 2017 is attributable to
increased interest expenses associated with the Company’s
debt instruments.
Net Loss and Comprehensive Loss
Net
loss amounted to $1,461,302 for the three month period ended March
31, 2018 as compared to a net loss of $898,268 for the three month
period ended March 31, 2017 due to the reasons discussed
above.
Comprehensive
loss amounted to $1,256,109 for the three month period ended March
31, 2018 as compared to a comprehensive loss of $965,550 for the
three month period ended March 31, 2017. The change in
comprehensive loss as compared to net loss was due to foreign
currency translation adjustments resulting from the Company’s
translation of financial statements from Canadian Dollars, Euros
and Hungarian Forints to U.S. Dollars.
Liquidity and Capital Resources
As at
March 31, 2018, the Company had total assets of $4,378,508
(compared to total assets of $4,428,858 at December 31, 2017)
consisting of cash and cash equivalents of $3,647, trade
receivables of $210,553, inventory of $527,415, other current
assets of $353,429, property and equipment of $249,860, website
development of $4,583, intangibles of $652,416 and goodwill of
$2,376,605. The assets of the Company are primarily the result of
the Company’s business operations and its acquisitions
including Vape Brands International, Inc. (see “Acquisition of
VBI”).
As at
March 31, 2018, the Company had total liabilities of $11,741,465
(compared to total liabilities of $10,984,061 at December 31, 2017)
consisting of accounts payable of $2,633,269, accrued liabilities
of $720,658, customer deposits of $50,456, loans from shareholders
of $284,999, due to related parties of $404,605, promissory notes
of $706,837, amounts owing on acquisition of $653,627, Convertible
Debentures of $337,000, Term Loan of $1,053,993, long term
promissory notes of $95,042, long term amounts owing on
acquisitions of $1,254,003, long term loans from shareholders of
$788,196, long term due to related parties of $2,247,104 and long
term accrued interest due to related parties of $511,676. For more
information regarding the liabilities of the Company, see
“Shareholder
Loans”, “Term
Loan”, “Promissory Notes” and
“Convertible
Debentures”.
At
March 31, 2018, the Company had negative working capital of
$5,750,400 and an accumulated deficit of $21,360,143.
As at
December 31, 2017, the Company had total assets of $4,428,858
consisting of cash and cash equivalents of $62,292, trade
receivables of $232,386, inventory of $451,318, other current
assets of $323,548, property and equipment of $285,817, website
development of $5,083, intangibles of $691,809 and goodwill of
$2,376,605.
As at
December 31, 2017, the Company had total liabilities of $10,984,061
consisting of accounts payable of $2,335,615, accrued liabilities
of $419,436, customer deposits of $97,400, loans from shareholders
of $257,303, due to related parties of $252,841, promissory notes
of $498,522, amounts owing on acquisition of $538,952, Convertible
Debentures of $277,149, Term Loan of $1,051,334, long term
promissory notes of $346,002, long term amounts owing on
acquisitions of $1,364,274, long term loans from shareholders of
$794,635, long term due to related parties of $2,281,773 and long
term accrued interest due to related parties of
$468,825.
At
December 31, 2017, the Company had negative working capital of
$4,659,008 and an accumulated deficit of $19,898,841.
Net cash used in operating activities
For the
three month period ended March 31, 2018, the Company used net cash
of $441,844 (as compared to $917,269 during the three month period
ended March 31, 2017) in operating activities to fund
administrative, marketing and sales. The decrease is attributable
to the results of operations and changes in the operating assets
and liabilities as discussed above.
37
Net cash used in investing activities
For the
three month period ended March 31, 2018, the Company used net cash
of $590 (as compared to $11,673 during the three month period ended
March 31, 2017) in investing activities relating to the addition of
capital assets.
Net cash flow from financing activities
For the
three month period ended March 31, 2018, net cash provided by
financing activities was $317,449 (see “Shareholder Loans”,
“Term Loan”,
“Promissory
Notes”, “Convertible Debentures” and
“Common
Shares”) as compared to net cash provided by financing
activities of $1,109,201 for the three month period ended March 31,
2017.
VBI
Acquisition
On July 31,
2017, the Company’s wholly owned subsidiary, Gilla
Enterprises, acquired all of the issued and outstanding shares of
VBI, a Canada-based E-liquid manufacturer and
distributor.
The
following summarizes the fair value of the assets acquired,
liabilities assumed and the consideration transferred at the
acquisition date:
|
Allocation
|
Assets
acquired:
|
|
Cash
|
$1,377
|
Receivables
|
5,576
|
Other current
assets
|
74,598
|
Inventory
|
83,820
|
Fixed
assets
|
214,765
|
Intangible
assets
|
704,846
|
Goodwill
|
1,596,553
|
Total
assets acquired
|
$2,681,535
|
|
|
Liabilities
assumed:
|
|
Bank
indebtedness
|
$5,597
|
Accounts
payable
|
218,028
|
Customer
deposits
|
33,008
|
Loans
payable
|
112,218
|
Capital
lease
|
125,893
|
Due to related
parties
|
15,707
|
Deferred tax
liability
|
186,793
|
Total
liabilities assumed
|
$697,244
|
|
|
Consideration:
|
|
Issuance of Common
Shares
|
$350,000
|
Issuance of
warrants
|
252,631
|
Vendor Take
Back
|
356,443
|
Earn
out
|
1,025,217
|
Total
consideration
|
$1,984,291
|
In
consideration for the acquisition, the Company paid to the vendors
of VBI the following consideration: (i) 2,500,000 Common Shares of
the Company valued at $0.14 per share for a total value of
$350,000; (ii) warrants for the purchase of 2,000,000 Common Shares
of the Company exercisable over twenty-four (24) months at an
exercise price of $0.20 per share from the closing date, such
warrants vesting in five (5) equal tranches every four (4) months
following the closing date; (iii) a total of CAD $550,000 in
non-interest bearing, unsecured vendor-take-back loans (the
“VTB”) due over twenty-four (24) months, with principal
repayments beginning five (5) months from the closing date until
maturity of up to CAD $25,000 per month; and (iv) an earn-out (the
“Earn-Out”) capped at: (a) the total cumulative amount
of CAD $2,000,000; or (b) five (5) years from the closing date. The
Earn-Out shall be calculated as: 15% of the gross profit generated
in Canada by VBI’s co-pack and distribution business; 10% of
the revenue generated in Canada by Gilla’s existing E-liquid
brands; and 15% of the revenue generated globally on VBI’s
existing E-liquid brands. Furthermore, the Earn-Out shall be
calculated and paid to the vendors of VBI quarterly in arrears and
only as 50% of the aforementioned amounts on incremental revenue
between CAD $300,000 and CAD $600,000 per quarter and 100% of the
aforementioned amounts on incremental revenue above CAD $600,000
per quarter with the Earn-Out payable to the vendors in the fifth
year repeated and paid to the vendors in four (4) quarterly
payments after the end of the Earn-Out period, subject to the
cumulative limit of the Earn-Out. No Earn-Out shall be payable to
the vendors of VBI if total revenue for the Earn-Out calculation
period is less than CAD $300,000 per quarter. A 15% discount rate
has been used to calculate the present value of the Earn-Out on the
Company’s estimate of cost of financing for comparable
instruments with similar term and risk profiles. Over the term of
the respective Earn-Out, interest will be accrued at 15% per annum
to accrete the Earn-Out to maximum payable amount.
38
|
Total
|
Present value of
Earn-Out at the acquisition date
|
$1,025,217
|
Interest expense
related to accretion
|
59,110
|
Exchange rate
differences
|
(3,015)
|
Present
value at December 31, 2017
|
$1,081,312
|
Interest expense
related to accretion
|
37,733
|
Exchange rate
differences
|
(29,958)
|
Less: Current
amount owing
|
(296,374)
|
Long
term portion at March 31, 2018
|
$792,713
|
A 15%
discount rate has been used to calculate the present value of the
VTB based on the Company’s estimate of cost of financing for
comparable instruments with similar term and risk profiles. Over
the term of the VTB, interest will be accrued at 15% per annum to
accrete the VTB to its respective principal amount.
|
Total
|
Present value of
the VTB at the acquisition date
|
$356,443
|
Interest expense
related to accretion
|
26,681
|
Exchange rate
differences
|
(7,177)
|
Present
value at December 31, 2017
|
$375,947
|
Interest expense
related to accretion
|
12,566
|
Exchange rate
differences
|
(10,406)
|
Less: Current
amount owing
|
(182,253)
|
Long
term portion at March 31, 2018
|
$195,854
|
The
results of operations of VBI 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
VBI as if the companies had been combined as of January1, 2016. The
unaudited condensed combined pro forma 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.
|
March 31,
2018
|
March
31,
2017
|
Pro
forma revenue
|
$1,266,239
|
$1,691,581
|
Pro
forma loss from operations
|
$1,010,655
|
$649,633
|
Pro
forma net loss
|
$1,461,302
|
$943,349
|
Shareholder
Loans
The
Company has outstanding current loans from shareholders as
follows:
|
March
31,
2018
|
December
31,
2017
|
Bears interest of
1.5% per month on a cumulative basis, unsecured, no specific terms
of repayment(i)
|
$12,763
|
$13,116
|
Bears interest of
6% per annum on a cumulative basis, secured by the assets of the
Company, matured on March 2, 2018(iv)
|
248,192
|
244,187
|
Bears interest of
1.5% per month on a cumulative basis, unsecured, no specific terms
of repayment(vii)
|
24,044
|
-
|
|
$284,999
|
$257,303
|
39
The
Company has outstanding long term loans from shareholders as
follows:
|
March 31,
2018
|
December
31,
2017
|
Bears interest of 10% per annum on a cumulative
basis, secured by the assets of the Company, matures on April 30,
2019(ii)
|
$348,424
|
$351,679
|
Bears interest of 10% per annum on a cumulative
basis, secured by the assets of the Company, matures on April 30,
2019(iii)
|
92,296
|
90,828
|
Bears interest of 10% per annum on a cumulative
basis, secured by the assets of the Company, matures on April 30,
2019(v)
|
142,701
|
144,611
|
Bears interest of 10% per annum on a cumulative
basis, secured by the assets of the Company, matures on April 30,
2019(vi)
|
204,775
|
207,517
|
|
$788,196
|
$794,635
|
(i)
During the three month period ended March 31, 2018, the Company
accrued interest of $1,471 on this shareholder loan (March 31, 2017
– $1,399). Total accrued interest owing on such shareholder
loan at March 31, 2018 was $20,262 (December 31, 2017 –
$19,341) 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 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 years ended December 31, 2016 and 2017, the Company and
the shareholder extended the maturity date of the Secured Note to
July 1, 2018 and April 30, 2019, respectively. In connection to the maturity date extensions, the
Company issued warrants for the purchase of Common Shares (note
16(l and hh)). The relative fair value of the warrants issued were
recorded as debt discount to be amortized over the life of the
loan. At March 31, 2018, the value of the Secured Note was $348,424
(December 31, 2017 – $351,679) including a debt discount of
$39,376 (December 31, 2017 - $46,871). During the three month
periods ended March 31, 2018 and 2017, the Company expensed $7,495
and $2,386, respectively, in interest expense related to the
amortization of the debt discount. The amendments to the Secured
Note were accounted for as a modification of debt and no gain or
loss was recognized on the amendments.
During
the three month period ended March 31, 2018, the Company accrued
interest of $13,769 on the Secured Note (March 31, 2017 –
$11,914). Total accrued interest owing on the Secured Note at March
31, 2018 was $161,352 (December 31, 2017 – $151,948) which is
included in accrued liabilities.
(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 andJuly 1, 2017, respectively.
During the years ended December 31, 2016 and 2017, the Company and
the shareholder extended the maturity date of the Secured Note No.2
to July 1, 2018 and April 30, 2019, respectively. In connection to
the maturity date extensions, the Company issued warrants for the
purchase of Common Shares (note 15(l and hh)). The relative fair
value of the warrants issued were recorded as debt discount to be
amortized over the life of the loan. At March 31, 2018, the value
of the Secured Note No.2 was $92,296 (December 31, 2017 - $90,828)
including a debt discount of $7,704 (December 31, 2017 –
$9,172). During the three month periods ended March 31, 2018 and
2017, the Company expensed $1,468 and $629, respectively, in
interest expense related to the amortization of the debt discount.
The amendments to the Secured Note were accounted for as a
modification of debt and no gain or loss was recognized on the
amendments.
During
the three month period ended March 31, 2018, the Company accrued
interest of $3,485 on the Secured Note No.2 (March 31, 2017 –
$3,155). Total accrued interest owing on the Secured Note No.2 at
March 31, 2018 was $41,742 (December 31, 2017 – $38,257)
which is included in accrued liabilities.
40
(iv)
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 (the “Shareholder
Loan”) for capital expenditures, marketing expenditures and
working capital. Under the terms of the Loan Agreement, the
Shareholder Loan was made available to the Company in two equal
tranches of CAD $335,000, for a total loan amount of CAD $670,000,
with the first tranche (“Loan Tranche A”) received on
March 3, 2016 and the second tranche (“Loan Tranche B”)
received on April 14, 2016. The Shareholder Loan bears interest at
a rate of 6% per annum, on the outstanding principal, and matured
on March 2, 2018, whereby the outstanding principal together with
all accrued and unpaid interest thereon became due and payable. The
Company was also to 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.
TheCompany could elect to repay the outstanding principal of the
Shareholder Loan together with all accrued and unpaid interest
thereon prior to maturity without premium or penalty. The Company
also agreed to service the Shareholder Loan during the term prior
to making any payments to the Company’s Chief Executive
Officer, Chief Financial Officer and Board of Directors. The
Shareholder Loan is secured by a general security agreement
granting a general security interest over all the assets of the
Company. On March 2, 2016 and in connection to the Loan Agreement,
the Company issued warrants for the purchase of 1,000,000 Common
Shares exercisable until March 2, 2018 at an exercise price of
$0.20 per share. The warrants shall vest in two equal tranches,
with 500,000 warrants to vest upon the close of Loan Tranche A and
the remaining 500,000 warrants to vest upon the close of Loan
Tranche B. On March 3, 2016 and April 14, 2016, the Company closed
Loan Tranche A and Loan Tranche B, respectively, at which dates the
warrants became fully vested and exercisable (note 16(g)). The
relative fair value of the warrants issued were recorded as debt
discount to be amortized over the life of the loan. At March 31,
2018, the value of the Shareholder Loan was $248,192 (December 31,
2017 – $244,187), at March 31, 2018 the debt discount on this
loan had fully accreted. During the three month periods ended March
31, 2018 and 2017, the Company expensed $10,885 and $11,234,
respectively, in interest expense related to the amortization of
the debt discount. During the year ended December 31, 2017, CAD
$350,000 of the Shareholder Loan was assumed by a separate
shareholder (see (vii) below).
During
the three month period ended March 31, 2018, the Company accrued
interest of $4,622 on the Shareholder Loan (March 31, 2017 –
$7,994). Total accrued interest owing on the Shareholder Loan at
March 31, 2018 was $64,401 (December 31, 2017 – $61,523)
which is included in accrued liabilities. At March 31, 2018, the
Shareholder Loan was in default.
(v) On January 12, 2017, the Company
entered into a bridge loan agreement (the “Bridge Loan
Agreement”) with a shareholder, whereby the shareholder would
make available to the Company the aggregate principal amount of CAD
$200,000 (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 was to mature on March 12, 2017.
Pursuant to the terms of the Bridge Loan Agreement, the shareholder
received a 5% upfront fee upon the closing of Bridge Loan Note A
and a 5% upfront fee upon the closing of Bridge Loan Note B. The
Bridge Loan is secured by the general security agreement issued in
connection to the Secured Note. On January 12, 2017 and in
connection to the Bridge Loan Agreement, the Company issued
warrants for the purchase of 50,000 Common Shares exercisable until
January 11, 2018 at an exercise priceof $0.20 per share, with
25,000 warrants to vest upon the closing of Bridge Loan Note A and
the remaining 25,000 warrants vest upon the closing of Bridge Loan
Note B. On January 12, 2017 and January 18, 2017, the Company
closed Bridge Loan Note A and Bridge Loan Note B, respectively, at
which dates the warrants became fully vested and exercisable (note
16(n)). During the year ended December 31, 2017, the Company and
the shareholder extended the maturity date of Bridge Loan to April
30, 2019 and, commencingon November 15, 2017, the Company began
accruing interest at a rate of 10% per annum. In connection to the
amendment, the Company issued warrants for the purchase of Common
Shares (note 16(hh)). The relative fair value of the warrants
issued were recorded as debt discount to be amortized over the life
of the loan. At March 31, 2018, the value of the Bridge Loan was
$142,701 (December 31, 2017 - $144,611) including a debt discount
of $12,419 (December 31, 2017 – $14,809). During the three
month periods ended March 31, 2018 and 2017, the Company expensed
$2,390 and $nil, respectively, in interest expense related to the
amortization of the debt discount. The amendment to the Bridge Loan
was accounted for as a modification of debt and no gain or loss was
recognized on the amendments.
During
the three month period ended March 31, 2018, the Company accrued
interest of $4,037 on the Bridge Loan (March 31, 2017 –
$nil). Total accrued interest owing on the Bridge Loan at March 31,
2018 was $5,904 (December 31, 2017 – $1,998) which is
included in accrued liabilities.
41
(vi) On November 15, 2017, CAD
$350,000 of the Shareholder Loan was assumed by a separate
shareholder (the “Shareholder Loan No.2”). Upon
assumption of the Shareholder Loan No.2, CAD $52,000 (USD $41,449)
was offset by the amount held in trust by the shareholder under the
Shareholder Loan (see (v) above) and CAD $11,000 (USD $8,769) was
forgiven by the shareholder. During the year ended December 31,
2017 and as a result of the loan forgiveness, the Company recorded
a gain on loan settlement in the amount of $8,221 and the principal
amount due under the Shareholder Loan No.2 was CAD $287,000. The
Company agreed to repay the unpaid principal amount of the
Shareholder LoanNo.2 on or before April 30, 2019, bearing interest
at a rate of 10% per annum, such interest to accrue monthly and due
at maturity. In connection to the amendment, the Company issued
warrants for the purchase of Common Shares (note 16(hh)). The
relative fair value of the warrants issued were recorded as debt
discount to be amortized over the life of the loan. At March 31,
2018, the value of the Shareholder Loan No.2 was $204,775 (December
31, 2017 - $207,517) including a debt discount of $17,822 (December
31, 2017 – $16,939). During the three month periods ended
March 31, 2018 and 2017, the Company expensed $3,429 and $nil,
respectively, in interest expense related to the amortization of
the debt discount.
During
the three month period ended March 31, 2018, the Company accrued
interest of $5,865 on the Shareholder Loan No.2 (March 31, 2017
– $nil). Total accrued interest owing on the Shareholder Loan
No.2 at March 31, 2018 was $11,299 (December 31, 2017 –
$5,701) which is included in accrued liabilities.
(vii) On March 21, 2018, the Company received CAD
$31,000 (USD $24,044) from a Shareholder of the Company. The loan
bears interest of 1.5% per month on a cumulative basis is unsecured
and has no specific terms of repayment. During the three month
period ended March 31, 2018, the Company accrued interest of $105
on this shareholder loan (March 31, 2017 – $nil). Total
accrued interest owing on such shareholder loan at March 31, 2018
was $105 (December 31, 2017 – $nil) which is included in
accrued liabilities.
Term
Loan
On
January 18, 2016, the Company entered into a term loan (the
“Term Loan”) with an unrelated party acting as an agent
to a consortium of participants (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 was to mature on July 3, 2017, whereby any outstanding
principal together with all accrued and unpaid interest thereon
shall be due and payable. The Term Loan is secured by a
intercreditor and subordination agreement as well as a security
agreement. The Term Loan is subject to a monthly cash sweep,
calculated as the total of (i) CAD $0.50 for every E-liquid bottle,
smaller than 15 ml, sold by the Company within a monthly period;
and (ii) CAD $1.00 for every E-liquid bottle, greater than 15 ml,
sold by the Company within a monthly period (the “Cash
Sweep”). The Cash Sweep will be disbursed to the Lenders in
the following priority: first, to pay the monthly interest due on
the Term Loan; and second, to repay any remaining principal
outstanding on the Term Loan. The Company may elect to repay the
outstanding principal of the Term Loan together with all accrued
and unpaid interest thereon prior to the maturity, subject to an
early repayment penalty of the maximum of (i) 3 months interest on
the outstanding principal; or (ii) 50% of the interest payable on
the outstanding principal until maturity (the “Early
Repayment Penalty”). The Term Loan shall be immediately due
and payable at the option of the Lenders if there is a change in
key personnel meaning the Company’s current Chief Executive
Officer and Chief Financial Officer. On January 18, 2016 and in
connection to the Term Loan, the Company issued warrants for the
purchase of 250,000 Common Shares (note 16(d)) exercisable until
December 31, 2017 at an exercise price of $0.20 per share. In
addition, the Company also extended the expiration date of the
250,000 warrants (note 16(d)) issued on August 1, 2014 in
connection with the Credit Facility until December 31, 2017, with
all other terms of the warrants remaining the same. The relative
fair value of the warrants issued were recorded as debt discount to
be amortized over the life of the loan.
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 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.
42
On July
15, 2016 and in connection to the Term Loan Amendment, the Company
issued warrants for the purchase of 300,000 Common Shares (note
16(k)) exercisable until December 31, 2018 at an exercise price of
$0.20 per share. The Company also extended the expiration dates of:
(i) the warrants for the purchase of 250,000 Common Shares (note
16(d)) issued on January 18, 2016 in connection to the Term Loan;
and (ii) the warrants for the purchase of 250,000 Common Shares
(note 16(d)) issued on August 1, 2014 and extended on January 18,
2016 in connection to the Term Loan, both until December 31, 2018,
with all other terms of the warrants remaining the same. The
relative fair value of the warrants issued were recorded as debt
discount to be amortized over the life of the loan.
During
the year ended December 31, 2016, the Company was advanced CAD
$1,600,000 from the Term Loan including the CAD $294,000 and CAD
$3,093 rolled in from a revolving credit facility the Company
previously entered into with the Lenders as well as CAD $240,581 of
advances from the Company’s Chief Executive Officer and Chief
Financial Officer.
On
February 27, 2017, the Company and the Lenders of the Term Loan
entered into a term loan amendment (the “Term Loan Amendment
No.2”) to amend certain terms and conditions of the Term
Loan. Pursuant to the Term Loan Amendment No.2, the parties agreed
to modify the Cash Sweep to be calculated as the total of CAD
$0.01667 per ml of E-liquid sold by the Company within a monthly
period, such modification to be retroactively applied as of January
1, 2017. The Lenders also agreed to cancel the Early Repayment
Penalty and waive any interest payment penalties due under the Term
Loan. On February 27, 2017 and in connection to the Term Loan
Amendment No.2, the Company agreed to issue 500,000 private
placement units at a price of $0.10 per unit as a settlement of
financing fees with a relative fair value of $48,485. Each unit
consisted of one Common Share and a half Common Share purchase
warrant exercisable over twelve months at an exercise price of
$0.20 per share. On April 4, 2017, the Company issued the 500,000
units. The Company’s Chief Executive Officer and its Chief
Financial Officer received a total of 93,622 units which included
93,622 Common Shares and warrants for the purchase of 46,811 Common
Shares. The Term Loan Amendment No.2 was accounted for as a
modification of debt and no gain or loss was recognized on the
amendment.
The
relative fair value of the warrants issued in relation to the Term
Loan and Term Loan amendments were recorded as debt discount to be
amortized over the life of the loan. At March 31, 2018, the value
of the Term Loan was $1,053,993 including a debt discount of
$33,609 (December 31, 2017 – $1,051,334 including a debt
discount of $54,815). During the three month periods ended March
31, 2018 and 2017, the Company expensed $25,435 and $14,300,
respectively, in interest expense related to the amortization of
the debt discount. 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 three month period ended March 31, 2018, the Company expensed
$42,577 in interest on the Term Loan (March 31, 2017 –
$42,563). Pursuant to the Cash Sweep, during the three month period
ended March 31, 2018, the Company paid a total of $44,651 to the
Lenders consisting of $42,394 in interest and $2,257 in principal
repayments. During the three month period ended March 31, 2017, the
Company paid a total of $110,809 to the Lenders consisting of
$57,514 in interest and $53,295 in principal payments.
The
amount owing on the Term Loan is as follows:
|
March 31,
2018
|
December
31,
2017
|
Opening
balance/amount advanced
|
$1,051,334
|
$1,061,269
|
Accretion
of debt discount
|
25,435
|
14,300
|
Exchange
loss (gain) during the period/year
|
(20,702)
|
86,143
|
Principal
payments made
|
(2,257)
|
(88,066)
|
Interest
accrued
|
42,577
|
173,035
|
Interest
payments made
|
(42,394)
|
(195,347)
|
Ending
balance
|
$1,053,993
|
$1,051,334
|
43
Promissory
Notes
The
Company has outstanding current promissory notes as
follows:
|
March 31,
2018
|
December
31,
2017
|
|
|
|
Unsecured, bears interest at 15% per annum,
matures April 12, 2018(i)
|
$225,330
|
$230,109
|
Unsecured, bears interest at 15% per annum,
matures February 18, 2019(ii)
|
231,398
|
-
|
Unsecured, bears interest at 18% per annum,
matures June 19, 2019(iii)
|
30,000
|
30,000
|
Secured, bears interest at RBP + 2% per annum, due
on demand(iv)
|
38,778
|
39,855
|
Secured, bears interest at RBP + 3% per annum, due
on demand(v)
|
58,912
|
64,774
|
Lease agreement, bears interest at 4.7% per annum,
matures October 13, 2023(vi)
|
22,809
|
23,441
|
Unsecured, interest free, matured October 29,
2017(vii)
|
-
|
7,971
|
Secured, bears interest at 24%, matured March 6,
2018 (viii)
|
99,610
|
102,372
|
|
$706,837
|
$498,522
|
The
Company has outstanding long term promissory notes as
follows:
|
March
31,
2018
|
December
31,
2017
|
Unsecured, bears
interest at 15% per annum, matures February 18, 2019(ii)
|
$-
|
$234,034
|
Unsecured, bears
interest at 18% per annum, matures June 19, 2019(iii)
|
7,500
|
17,500
|
Lease agreement,
bears interest at 4.7% per annum, matures October 13,
2023(vi)
|
87,542
|
94,468
|
|
$95,042
|
$346,002
|
(i) On October 12, 2017, the Company issued
an unsecured promissory note in the principal amount of CAD
$300,000. The promissory note matured on April 12, 2018 and bears
interest at a rate of 15% per annum, accrued monthly and due at
maturity. In connection to the promissory note, the Company issued
warrants for the purchase of 100,000 Common Shares of the Company
exercisable at $0.20 per share until April 11, 2019. The relative
fair value of the warrants issued were recorded as a debt discount
to be amortizedover the life of the loan. During the three month
periods ended March 31, 2018 and 2017, the Company expensed $1,670
and $nil, respectively, in interest expense related to the
amortization of the debt discount (note 16(gg)). During the three
month period ended March 31, 2018, the Company accrued $9,387 in
interest on the promissory note which has been recorded in accrued
liabilities (March 31, 2017 – $nil). At March 31, 2018, the
value of the promissory note was $225,330 inclusive of a debt
discount of $7,351 (December 31, 2017 – $230,109 inclusive of
a debt discount of $9,021). As at the date of these financial
statements, this note is currently in default.
(ii) On August 18, 2017, the Company issued an
unsecured promissory note in the principal amount of CAD 300,000.
The promissory note matures on February 18, 2019 and bears interest
at a rate of 15% per annum, paid monthly in arrears with interest
payments beginning on March 18, 2018. The interest accrued for the
initial seven (7) months shall be dueat maturity. In connection to
the promissory note, the Company issued warrants for the purchase
of 150,000 Common Shares of the Company exercisable at $0.20 per
share until February 18, 2019. The relative fair value of the
warrants issued were recorded asa debt discount to be amortized
over the life of the loan. During the three month periods ended
March 31, 2018 and 2017, the Company expensed $3,813 and $nil,
respectively, in interest expense related to the amortization of
the debt discount (note 16(ee)). During the three month period
ended March 31, 2018, the Company accrued $9,489 in interest on the
promissory note which has been recorded in accrued liabilities
(March 31, 2017 – $nil). At March 31, 2018, the value of the
promissory note was $231,398 inclusive of a debt discount of $1,283
(December 31, 2017 – $234,034 inclusive of a debt discount of
$5,096).
(iii) On June 30, 2017, the Company issued an unsecured
promissory note in the principal amount of $60,000. The principal
together with interest at a rate of 18% per annum is payable in
monthly instalments of $3,400 with the first payment due on July
19, 2017 and the final payment due on June 19, 2019. In the event
of default, by way of any missed payment under the promissory note
and not cured fora period of 15 days, at the option of the holder,
the entire unpaid principal amount outstanding would become due and
payable. During the three month period ended March 31, 2018, the
Company expensed and paid $2,700 in interest on the promissory note
(March 31, 2017 – $nil). At March 31, 2018, $30,000 in
principal on the promissory note has been classified as a current
liability and $7,500 has been classified as a long term liability
on the Company’s consolidated balance sheet.
44
(iv) On July 18, 2016, VBI entered
into a revolving credit facility with The Royal Bank of Canada
(“RBC”) for CAD $50,000. The facility is secured by the
assets of VBI, due on demand and bears interest at a rate of RBC
Prime (“RBP”) + 2%. Interest is payable monthly in
arrears. During the three month period ended March 31, 2018, the
Company expensed and paid $520 in interest on the facility (March
31, 2017 – $nil). At March 31, 2018, $38,778 (December 31,
2017 - $39,855) in principal remains owing on the
facility.
(v) On July 18, 2016, VBI entered
into a credit facility with RBC for CAD $106,000. The facility is
secured by the assets of VBI, due on demand and bears interest at
the rate of RBP + 3%, maturing on July 18, 2021. Interest is
payable monthly in arrears and the Company is required to make
monthly principal payments of CAD $1,416. During the three month
period ended March 31, 2018, the Company paid $987 in interest and
made principal repayments of $4,112 on the facility (March 31, 2017
– $nil and $nil, respectively). At March 31, 2018, $58,912
(December 31, 2017 - $64,774) in principal remains owing on the
facility.
(vi) On October 13, 2016, VBI entered
into a capital lease agreement with RBC for the lease of
manufacturing equipment in the amount of CAD $175,132. Under the
lease agreement, the Company is required to make monthly payments
of interest and principal to RBC in the amount of CAD $2,451, the
lease matures on October 13, 2023. During the three month period
ended March 31, 2018, the Company paid $1,357 in interest and made
principal repayments of $4,371 on the facility (March 31, 2017
– $nil and $nil, respectively). At March 31, 2018, a total of
$110,351 (December 31, 2017 - $117,909) in principal remains
payable under the lease with $22,809 (December 31, 2017 –
$23,441) being allocated to current liabilities and $87,542
(December 31, 2017 – $94,468) being allocated to long term
liabilities on the consolidated balance sheet.
(vii) On closing of the VBI
acquisition, VBI had an amount owing to a vendor of VBI in the
principal amount of CAD $20,000. Pursuant to the share purchase
agreement, the Company agreed to repay the loan to the vendor with
two (2) payments of CAD $5,000, payable thirty (30) and sixty (60)
days after the closing and a final payment of CAD $10,000 due
ninety (90) days after the closing. The loan is unsecured and
interest free. At December 31, 2017, the loan was in default and
CAD $10,000 (USD $7,971) in principal remained outstanding which
the Company repaid in January 2018.
(viii) On December 7, 2017, the Company entered
into a revolving credit facility (the “Revolving
Facility”) in the aggregate principal amount of CAD $200,000.
The Revolving Facility is secured by certain inventory and
receivables of the Company, due March 6, 2018 with an option to
extend and bears interest at a rate of 24% per annum payable
monthly in arrears. The Revolving Facility is also subject to a
standby fee with respect to the unused portion of the facility,
calculated on a daily basis as being the difference between the CAD
$200,000 revolving limit and the then outstanding advances,
multiplied by 3% and divided by 365 and payable in arrears on the
last day of each month. During the year ended December 31, 2017,
the Company received $100,000 in advances under the Revolving
Facility. During the three month period ended March 31, 2018, the
Company accrued $6,227 in interest and $419 in standby fees on the
Revolving Facility (March 31, 2017 – $nil and $nil,
respectively). At March 31, 2018, $99,610 in principal remains
owing on the Revolving Facility.
Convertible
Debentures
On
April 30, 2017 and pursuant to the terms of the Convertible
Debentures Series B, the Company sent notices of its election to
convert $423,000 in face value and $45,058 in accrued interest to
holders of Convertible Debentures Series B at $0.10 per sharefor a
total of 4,680,581 Common Shares of the Company. As a result of
these conversions, the Company recorded a debt discount in the
amount of $342,399. The above amount included the conversion of
$286,000 in face value and $30,465 in accrued interest held by
related parties of the Company (note 19(c)).
On
April 30, 2017 and pursuant to the terms of the Convertible
Debentures Series C, the Company sent notices of its election to
convert $190,000 in face value and $14,367 in accrued interest to
holders of Convertible Debentures Series C at $0.10 per share for a
total of 2,043,670 Common Shares of the Company. As a result of
these conversions, the Company recorded a debt discount in the
amount of $168,798. The above amount included the conversion of
$5,000 in face value and $378 in accrued interest held by related
parties of the Company (note 19(c)).
On
December 29, 2017 and pursuant to the terms of the Convertible
Debentures Series C, the Company converted $425,000 in face value
and $37,184 in accrued interest to holders of Convertible
Debentures Series C at $0.10 per share for a total of 4,621,836
Common Shares of the Company. As a result of these conversions, the
Company recorded a debt discount in the amount of $119,172. The
above amount included the conversion of $130,000 in face value and
$13,264 in accrued interest held by related parties of the Company
(note 19(c)).
45
As at
March 31, 2018, face value $227,000 of Convertible Debentures
Series B and face value $110,000 of Convertible Debentures Series C
remain owing to their respective debenture holders.
During
the three month period ended March 31, 2018, the Company recorded
interest expense in the amount of $6,648 on the Convertible
Debentures (March 31, 2017 – $26,794). The interest owing on
the convertible debentures is included in accrued liabilities on
the Company’s consolidated balance sheet.
Common
Shares
During
the three months ended March 31, 2018, the Company:
|
●
|
Issued
50,000 Common Shares on the exercise of warrants, at a price of
$0.20 per common share, for cash proceeds of $10,000;
|
|
●
|
Issued
3,486,362 Common Shares on a private placement basis, at a price of
$0.11 per common share for cash proceeds of $383,500;
|
|
●
|
Issued
190,909 Common Shares on a private placement basis, at a price of
$0.11 per common share for payment of consulting fees in the amount
of $21,000 owing to an unrelated party; and
|
|
●
|
Issued
4,621,836 Common Shares at a price of $0.10 per share, for
conversion of $425,000 in face value and $37,184 in accrued
interest to holders of Convertible Debentures, including the
conversion of $130,000 in face value and $13,264 in accrued
interest held by related parties of the Company.
|
Satisfaction of Our Cash Obligations for the Next 12
Months
These
unaudited condensed consolidated interim financial statements have
been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the
normal course of business. As shown in these unaudited condensed
consolidated interim financial statements, at March 31, 2018, the
Company has an accumulated deficit of $21,360,143 (December 31,
2017 – $19,898,841) and a working capital deficiency of
$5,750,400 (December 31, 2017 – $4,659,008) as well as
negative cash flows from operating activities of $441,844 (March
31, 2017 – $917,269) for the three months ended March 31,
2018. 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 to expand the
range and scope of its business. However, there are no assurances
that any such financing can be obtained on acceptable terms and in
a timely manner, if at all. Failure to obtain the necessary working
capital would have a material adverse effect on the business
prospects and, depending upon the shortfall, the Company may have
to curtail or cease its operations.
These
unaudited condensed consolidated interim financial statements do
not include any adjustments to the recorded assets or liabilities,
that might be material, should the Company have to curtail
operations or be unable to continue in existence.
Off-Balance Sheet Arrangements
The
Company has no off-balance sheet arrangements.
Recently Adopted Accounting Pronouncements
In May
2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic
606) (“ASU 2014-09”), requiring an entity to
recognize revenue when it transfers promised goods or services to
customers in an amount that reflects the consideration to which the
entity expects to be entitled to in exchange for those goods or
services. ASU 2014-09 will supersede nearly all existing revenue
recognition guidance under U.S. GAAP when it becomes
effective. ASU 2014-09 as amended by ASU No. 2015-14, ASU No.
2016-08, ASU No. 2016-10, ASU No. 2016-12 and ASU No. 2016-20, is
effective for interim and annual periods beginning after
December 15, 2017 and is applied on either a modified
retrospective or full retrospective basis. Adoption of ASU No.
2014-09 did not have an impact on the Company’s consolidated
financial statements.
46
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.
Adoption of ASU No. 2016-10 did not have an impact on the
Company’s consolidated financial statements.
In May
2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic
606): Narrow-Scope
Improvements and Practical Expedients (“ASU
2016-12”). The core principal of ASU 2016-12 is the
recognition of revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those
goods or services. The provisions of this update are effective
for annual and interim periods beginning after December 15,
2017, with early application permitted. Adoption of ASU No. 2016-12
did not have an impact on the Company’s 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. Adoption of ASU No. 2016-15
did not have an impact on the Company’s consolidated
financial statements.
In October 2016, the FASB issued ASU
No. 2016-16, Income Taxes (Topic
740): Intra-Entity Transfers of Assets Other Than Inventory
("ASU 2016-16"). ASU 2016-16 prohibits the recognition of current
and deferred income taxes for an intra-entity transfer until the
asset has been sold to an outside party. The amendment in ASU
2016-16 is effective for annual reporting periods beginning after
December 15, 2017, including interim reporting periods within those
annual reporting periods. Adoption of ASU No. 2016-16 did not have
an impact on the Company’s consolidated financial
statements.
In May
2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718):
Scope of Modification Accounting (“ASU
2017-09”). ASU 2017-09 clarifies which changes to the terms
or conditions of a share-based payment award require an entity to
apply modification accounting in Topic 718. The standard is
effective for interim and annual reporting periods beginning after
December 15, 2017, with early adoption permitted. Adoption of ASU
No. 2017-09 did not have an impact on the Company’s
consolidated financial statements.
Effective
January 1, 2018, the Company adopted ASU No. 2016-01, Recognition and Measurement of Financial
Assets and Financial Liabilities (“ASU 2016-01”)
which revises the classification and measurement of investments in
equity securities. ASU 2016-01 requires that equity investments,
except those accounted for under the equity method of accounting,
be measured at fair value and changes in fair value are recognized
in net income. ASU 2016-01 also provides a new measurement
alternative for equity investments that do not have a readily
determinable fair value (cost method investments). These
investments are measured at cost, less any impairment, adjusted for
observable price changes. Adoption of ASU 2016-01 did not have an
impact on the Company’s consolidated financial
statements.
Recent Accounting Pronouncements
The
Company has reviewed all recently issued, but not yet effective,
accounting pronouncements and other than the below, does not expect
the future adoption of any such pronouncements to have a
significant impact on its results of operations, financial
condition or cash flow.
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU
2016-02”). ASU 2016-02 requires lessees to recognize all
leases with terms in excess of one year on their balance sheet as a
right-of-use asset and a lease liability at the commencement date.
The new standard also simplifies the accounting for sale and
leaseback transactions. The amendments in this update are effective
for annual periods beginning after December 15, 2018, and interim
periods therein and must be adopted using a modified retrospective
method for leases existing at, or entered into after, the beginning
of the earliest comparative period presented in the financial
statements. Early adoption is permitted. The Company is evaluating
the guidance and has not yet determined the impact on its
consolidated financial statements.
47
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
January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment (“ASU
2017-04”). The new guidance eliminates the requirement to
calculate the implied fair value of goodwill (Step 2 of the current
two-step goodwill impairment test under ASC 350). Instead, entities
will record an impairment charge based on the excess of a reporting
unit’s carrying amount over its fair value (Step 1 of the
current two-step goodwill impairment test). ASU 2017-04 is
effective prospectively for reporting periods beginning after
December 15, 2019, with early adoption permitted for annual and
interim goodwill impairment testing dates after January 1, 2017.
The Company is evaluating the guidance and has not yet determined
the impact on its consolidated financial statements.
In July
2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260) Distinguishing
Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic
815): I. Accounting for Certain Financial Instruments with Down
Round Features; II. Replacement of the Indefinite Deferral for
Mandatorily Redeemable Financial Instruments of Certain Nonpublic
Entities and Certain Mandatorily Redeemable Noncontrolling
Interests with a Scope Exception (“ASU
2017-11”). ASU 2017-11 allows a financial instrument with a
down-round feature to no longer automatically be classified as a
liability solely based on the existence of the down-round
provision. The update also means the instrument would not have to
be accounted for as a derivative and be subject to an updated fair
value measurement at each reporting period. The standard is
effective for interim and annual reporting periods beginning after
December 15, 2018, with early adoption permitted. The Company is
evaluating the guidance and has not yet determined the impact on
its consolidated financial statements.
In
February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive
Income: Reclassification of Certain Tax effects from Accumulated
Other Comprehensive Income (“ASU 2018-02”) which
allows for the reclassification from accumulated other
comprehensive income to retained earnings for the stranded tax
effects arising from the change in the reduction of the U.S.
federal statutory income tax rate to 21% from 35%. The tax effects
of items included in accumulated comprehensive income at December
31, 2017 do not reflect the appropriate tax rate. ASU 2018-02 is
effective for interim and annual periods beginning after December
15, 2018. The Company is evaluating the guidance and has not yet
determined the impact on its consolidated financial
statements.
CRITICAL ACCOUNTING POLICIES
The
accompanying unaudited condensed consolidated interim financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States of America for
interim financial information and with the instructions to Form
10-Q. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in
the United States of America for complete consolidated financial
statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Interim results are not
necessarily indicative of the results that may be expected for a
full year. These condensed consolidated interim financial
statements shouldbe read in conjunction with the audited
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2017, as filed with the U.S. Securities and Exchange
Commission. Certain comparative figures have been reclassified to
conform with the current year’s presentation.
The
accounting policies of the Company are in accordance with
accounting principles generally accepted in the United States of
America. Outlined below are those policies considered particularly
significant:
Basis of Consolidation
These
unaudited condensed consolidated interim financial statements
include the accounts of the Company and its wholly owned
subsidiaries: Gilla Operations, LLC; E Vapor Labs Inc. (“E
Vapor Labs”); Gilla Enterprises Inc. (“Gilla
Enterprises”) and its wholly owned subsidiaries Gilla Europe
Kft., Gilla Operations Europe s.r.o. and Vape Brands International
Inc. (“VBI”); HyStyle Brands Inc.; E-Liq World, LLC;
Charlie’s Club, Inc.; Gilla Operations Worldwide Limited
(“Gilla Worldwide”); Gilla Franchises, LLC and its
wholly owned subsidiary Legion of Vape, LLC; and Snoke Distribution
Canada Ltd. and its wholly owned subsidiary Snoke Distribution USA,
LLC. All inter-company accounts and transactions have been
eliminated in preparing these unaudited condensed consolidated
interim financial statements.
48
Advertising Costs
In
accordance with the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification
(“ASC”) No. 720, Other
Expenses (“ASC 720”), Company expenses all
advertising costs as incurred. During the three month period ended
March 31, 2018, the Company expensed $15,702 (March 31, 2017
– $52,534) as corporate promotions which have been recorded
as an administrative expense.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
This
item is not applicable to smaller reporting companies.
ITEM 4.
DISCLOSURE CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
The
Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in its
filings with the SEC is recorded, processed, summarized and
reported within the time period specified in the SEC’s rules
and forms, and that such information is accumulated and
communicated to management, including the Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure based on the definition of
“disclosure controls and procedures” as defined in Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”).
As of
the end of the period covered by this Report, and under the
supervision and with the participation of management, including the
Company’s Chief Executive Officer (Principal Executive
Officer) and Chief Financial Officer (Principal Financial Officer),
the Company has evaluated the effectiveness of the design and
operation of the Company’s disclosure controls and
procedures. Based on this evaluation, the Company believes that
disclosure controls and procedures were not effective as of March
31, 2018, due to the Company’s limited resources and
staff.
Limitations
on Effectiveness of Controls and Procedures
The
Company’s management, including its Chief Executive Officer
and Chief Financial Officer, does not expect that disclosure
controls and procedures or its internal controls will prevent all
errors and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met.
Furthermore, the design of a control system must reflect the fact
that there are resource constraints and the benefits of controls
must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of
fraud, if any, within the Company have been detected. These
inherent limitations include, but are not limited to, the realities
that judgments in decision-making can be faulty and that breakdowns
can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also
is based in part upon certain assumptions about the likelihood of
future events and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions. Over time, controls may become inadequate because of
changes in conditions, or the degree of compliance with the
policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due
to error or fraud may occur and not be detected.
Changes
in Internal Controls
During
the quarter ended March 31, 2018, there have been no changes in the
Company’s internal control over financial reporting that have
materially affected or are reasonably likely to materially affect
its internal controls over financial reporting.
PART II - OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
The
Company is not currently a party in any material legal proceeding
or governmental regulatory proceeding nor is the Company aware of
any pending or potential legal proceeding or governmental
regulatory proceeding proposed to be initiated against the
Company.
49
ITEM
1A. RISK FACTORS
There
have been no material changes in the Company’s risk factors
from those disclosed in Part I, Item 1A of the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31,
2017.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
During
the period covered by this Report, the Company did not have any
sales of securities in transactions that were not registered under
the Securities Act that have not been previously reported in a Form
8-K, Form 10-Q or Form 10-K, except for the following:
On
March 15, 2018, the Company issued and sold 50,000 Common Shares of
the Company at a price of $0.20 per Common Share as a result of the
exercise of warrants, pursuant to exemptions from the registration
requirements of the Securities Act available under Rule 903 of
Regulations S promulgated thereunder.
On
March 23, 2018, the Company issued and sold, on a private placement
basis, 3,677,271 Common Shares of the Company at a price of $0.11
per Common Share, pursuant to exemptions from the registration
requirements of the Securities Act available under Section 4(a)(2)
and Rule 506 of Regulation D promulgated thereunder.
On
March 29, 2018, the Company issued 4,621,836 Common Shares of the
Company at a price of $0.10 per Common Share as a result of the
conversion of debentures, pursuant to exemptions from the
registration requirements of the Securities Act available under
Section 4(a)(2) and Rule 506 of Regulation D and Rule 903 of
Regulations S promulgated thereunder.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. MINE SAFETY DISCLOSURES
Not
applicable.
ITEM
5. OTHER INFORMATION
None.
50
ITEM
6.
EXHIBITS
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Incorporated by Reference
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Exhibit
Number
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Exhibit Description
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Filed
Herewith
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Form
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Exhibit
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Filing Date
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Certification
of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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X
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Certification
of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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X
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Certification
of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
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X
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Certifications
of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
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X
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101.INS
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XBRL
Instance Document
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X
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101.SCH
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XBRL
Taxonomy Extension Schema
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X
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101.CAL
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XBRL
Taxonomy Extension Calculation Linkbase
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X
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101.DEF
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XBRL
Taxonomy Definition Linkbase
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X
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101.LAB
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XBRL
Taxonomy Extension label Linkbase
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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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* 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.
51
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
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GILLA
INC.
(Registrant)
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June 29,
2018
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By:
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/s/
Graham
Simmonds
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Graham
Simmonds
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Chief Executive
Officer and
Principal Executive
Officer
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June 29,
2018
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By:
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/s/
Ashish
Kapoor
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Ashish
Kapoor
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Chief
Financial Officer and
Principal
Accounting Officer |
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52