8. WEBSITE DEVELOPMENT
Website
development consists of the following:
|
|
|
|
|
|
|
|
|
$
10,000
|
$
5,917
|
$
4,083
|
$
5,083
|
Amortization
expense on website development for the three and six month periods
ended June 30, 2018 amounted to $500 and $1,000, respectively.
Amortization expense on website development for the three and six
months ended June 30, 2017 amounted to $500 and $1,000,
respectively. 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:
|
|
|
|
|
|
|
|
Brands
|
$
394,413
|
$
91,142
|
$
303,271
|
$
342,712
|
Customer
relationships
|
393,433
|
83,679
|
309,754
|
349,097
|
|
$
787,846
|
$
174,821
|
$
613,025
|
$
691,809
|
Amortization
expense on intangible assets for the three and six month periods
ended June 30, 2018, amounted to $39,393 and $78,785, respectively.
Amortization expense on intangible assets for the three and six
month periods ended June 30, 2017, amounted to $11,150 and $22,300,
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.
10. GOODWILL
|
|
|
Opening
balance
|
$
2,376,605
|
$
889,496
|
Acquisition of VBI
(Note 4)
|
-
|
1,596,553
|
Impairment
|
-
|
(109,444
)
|
|
$
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 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:
|
|
|
Bears interest of
1.5% per month on a cumulative basis, unsecured, no specific terms
of repayment
(i)
|
$
12,496
|
$
13,116
|
Bears interest of
10% per annum on a cumulative basis, secured by the assets of the
Company, matures on April 30, 2019
(ii)
|
350,225
|
-
|
Bears interest of
10% per annum on a cumulative basis, secured by the assets of the
Company, matures on April 30, 2019
(iii)
|
94,234
|
-
|
Bears interest of
6% per annum on a cumulative basis, secured by the assets of the
Company, matured on March 2, 2018
(iv)
|
243,008
|
244,187
|
Bears interest of
10% per annum on a cumulative basis, secured by the assets of the
Company, matures on April 30, 2019
(v)
|
142,605
|
-
|
Bears interest of
10% per annum on a cumulative basis, secured by the assets of the
Company, matures on April 30, 2019
(vi)
|
204,638
|
-
|
Bears interest of
1.5% per month on a cumulative basis, unsecured, no specific terms
of repayment
(vii)
|
97,842
|
-
|
|
$
1,145,048
|
$
257,303
|
The
Company has outstanding long term loans from shareholders as
follows:
|
|
|
Bears interest of
10% per annum on a cumulative basis, secured by the assets of the
Company, matures on April 30, 2019
(ii)
|
$
-
|
$
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)
|
-
|
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)
|
-
|
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)
|
-
|
207,517
|
|
$
-
|
$
794,635
|
(i)
During the three
and six month periods ended June 30, 2018, the Company accrued
interest of $1,523 and $2,890, respectively, on this shareholder
loan (June 30, 2017 – $1,327 and $2,726). Total accrued
interest owing on such shareholder loan at June 30, 2018 was
$21,316 (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(h and dd)). The relative fair
value of the warrants issued were recorded as debt discount to be
amortized over the life of the loan. At June 30, 2018, the value of
the Secured Note was $350,225 (December 31, 2017 – $351,679)
including a debt discount of $29,475 (December 31, 2017 - $46,871).
During the three and six month periods ended June 30, 2018, the
Company expensed $9,901 and $17,396, 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 and six month periods ended June 30, 2018, the Company
accrued interest of $13,972 and $26,775, respectively, on the
Secured Note (June 30, 2017 – $12,114 and $24,028). Total
accrued interest owing on the Secured Note at June 30, 2018 was
$171,537 (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(h and dd)). The relative fair value of the
warrants issued were recorded as debt discount to be amortized over
the life of the loan. At June 30, 2018, the value of the Secured
Note No.2 was $94,234 (December 31, 2017 - $90,828) including a
debt discount of $5,766 (December 31, 2017 – $9,172). During
the three and six month periods ended June 30, 2018, the Company
expensed $1,938 and $3,406, 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 and six month periods ended June 30, 2018, the Company
accrued interest of $3,573 and $7,058, respectively, on the Secured
Note No.2 (June 30, 2017 – $3,234 and $6,389). Total accrued
interest owing on the Secured Note No.2 at June 30, 2018 was
$45,315 (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(d)). The relative fair value of the warrants
issued were recorded as debt discount to be amortized over the life
of the loan. At June 30, 2018, the value of the Shareholder Loan
was $243,008 (December 31, 2017 – $244,187 including a debt
discount of $10,885 and the debt discount on this loan had fully
accreted. During the three and six month periods ended June 30,
2018, the Company expensed $nil and $10,885 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 and six month periods ended June 30, 2018, the Company
accrued interest of $4,643 and $8,943, respectively, on the
Shareholder Loan (June 30, 2017 – $8,048 and $16,042). Total
accrued interest owing on the Shareholder Loan at June 30, 2018 was
$69,760 (December 31, 2017 – $61,523) which is included in
accrued liabilities. At June 30, 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 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(j)). 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(dd)). The relative fair value of
the warrants issued were recorded as debt discount to be amortized
over the life of the loan. At June 30, 2018, the value of the
Bridge Loan was $142,605 (December 31, 2017 - $144,611) including a
debt discount of $9,275 (December 31, 2017 – $14,809). During
the three and six month periods ended June 30, 2018, the Company
expensed $3,144 and $5,534, 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 and six month periods ended June 30, 2018, the Company
accrued interest of $4,097 and $8,093, respectively, on the Bridge
Loan (June 30, 2017 – $nil and $nil). Total accrued interest
owing on the Bridge Loan at June 30, 2018 was $9,755 (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(dd)). The relative fair value of the warrants issued were
recorded as debt discount to be amortized over the life of the
loan. At June 30, 2018, the value of the Shareholder Loan No.2 was
$204,638 (December 31, 2017 - $207,517) including a debt discount
of $13,310 (December 31, 2017 – $16,939). During the three
and six month periods ended June 30, 2018, the Company expensed
$4,512 and $7,940, respectively, in interest expense related to the
amortization of the debt discount.
During
the three and six month periods ended June 30, 2018, the Company
accrued interest of $5,951 and $11,756, respectively, on the
Shareholder Loan No.2 (June 30, 2017 – $nil and $nil). Total
accrued interest owing on the Shareholder Loan No.2 at June 30,
2018 was $16,836 (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. On May 4, 2018 and May 7, 2018, the Company
received a further USD $50,000 and CAD $32,000 (USD $24,301) from
the Shareholder. The loan bears interest of 1.5% per month on a
cumulative basis is unsecured and has no specific terms of
repayment. As at June 30, 2018, the value of this shareholder loan
was $97,842 (December 31, 2017 - $nil).
During
the three and six month periods ended June 30, 2018, the Company
accrued interest of $4,442 and $4,547, respectively on this
shareholder loan (June 30, 2017 – $nil and $nil). Total
accrued interest owing on such shareholder loan at June 30, 2018
was $4,477 (December 31, 2017 – $nil) which is included in
accrued liabilities.
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 an
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(c)) 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(c)) 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(g)) 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(c)) 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(c)) 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 June 30, 2018, the value of
the Term Loan was $1,078,702 including a debt discount of $nil
(December 31, 2017 – $1,051,334 including a debt discount of
$54,815). During the three and six month periods ended June 30,
2018, the Company expensed $43,333 and $68,768, 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 and six month periods ended June 30, 2018, the Company
expensed $40,811 and $83,388 in interest on the Term Loan (June 30,
2017 – $42,120 and $86,673). Pursuant to the Cash Sweep,
during the six month period ended June 30, 2018, the Company paid a
total of $71,812 to the Lenders consisting of $69,602 in interest
and $2,210 in principal repayments. During the six month period
ended June 30, 2017, the Company paid a total of $171,976 to the
Lenders consisting of $101,511 in interest and $70,465 in principal
payments.
The
amount owing on the Term Loan is as follows:
|
|
|
Opening
balance/amount advanced
|
$
1,051,334
|
$
1,061,269
|
Accretion of debt
discount
|
68,768
|
14,300
|
Exchange loss
(gain) during the period/year
|
(52,976
)
|
86,143
|
Principal payments
made
|
(2,210
)
|
(88,066
)
|
Interest
accrued
|
83,388
|
173,035
|
Interest payments
made
|
(69,602
)
|
(195,347
)
|
|
$
1,078,702
|
$
1,051,334
|
13. PROMISSORY NOTES
The
Company has outstanding current promissory notes as
follows:
|
|
|
|
|
|
Unsecured, bears
interest at 15% per annum, matures April 12, 2018
(i)
|
$
222,775
|
$
230,109
|
Unsecured, bears
interest at 15% per annum, matures February 18, 2019
(ii)
|
227,820
|
-
|
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)
|
37,970
|
39,855
|
Secured, bears
interest at RBP + 3% per annum, due on demand
(v)
|
53,659
|
64,774
|
Lease agreement,
bears interest at 4.7% per annum, matures October 13,
2023
(vi)
|
19,364
|
23,441
|
Unsecured, interest
free, matured October 29, 2017
(vii)
|
-
|
7,971
|
Secured, bears
interest at 24%, matured March 6, 2018
(viii)
|
-
|
102,372
|
Unsecured, bears
interest at 15% per annum, matured April 20, 2018
(ix)
|
49,361
|
-
|
Equipment Facility,
secured, bears interest at 15% per annum, matures April 1, 2020
(x)
|
149,441
|
-
|
|
$
790,390
|
$
498,522
|
The
Company has outstanding long term promissory notes as
follows:
|
|
|
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)
|
-
|
17,500
|
Lease agreement,
bears interest at 4.7% per annum, matures October 13,
2023
(vi)
|
84,358
|
94,468
|
Equipment Facility,
secured, bears interest at 15% per annum, matures April 1, 2020
(x)
|
106,206
|
-
|
|
$
190,564
|
$
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 and six month periods ended June
30, 2018, the Company expensed $2,306 and $3,976, respectively, in
interest expense related to the amortization of the debt discount
(note 16(cc)).
During
the three and six month periods ended June 30, 2018, the Company
accrued $9,679 and $19,066, respectively, in interest on the
promissory note which has been recorded in accrued liabilities
(June 30, 2017 – $nil and $nil). At June 30, 2018, the value
of the promissory note was $222,775 inclusive of a debt discount of
$5,045 (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 and six month periods ended June 30, 2018, the Company
expensed $1,283 and $5,096, respectively, in interest expense
related to the amortization of the debt discount (note
16(aa)).
During
the three and six month periods ended June 30, 2018, the Company
accrued $9,473 and $18,962, respectively, in interest on the
promissory note which has been recorded in accrued liabilities
(June 30, 2017 – $nil and $nil). At June 30, 2018, the value
of the promissory note was $227,820 inclusive of a debt discount of
$nil (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 and six month periods ended June 30, 2018, the Company
expensed and paid $2,700 and $5,400, respectively, in interest on
the promissory note (June 30, 2017 – $nil and $nil). At June
30, 2018 the value of the promissory note was $30,000 (December 31,
2017 - $47,500).
(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 and six month periods ended June 30, 2018, the Company
expensed and paid $538 and $1,052, respectively, in interest on the
facility (June 30, 2017 – $nil and $nil). At June 30, 2018,
$37,970 (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 and six month periods ended June 30, 2018, the Company
paid $945
and $1,922,
respectively, in interest (June 30, 2017 – $nil and $nil) and
made principal repayments of $8,051 on the facility. At June 30,
2018, $53,659 (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 and six month periods ended June 30, 2018, the Company
paid $1,277 and $2,634, respectively, in interest (June 30, 2017
– $nil and $nil) and made principal repayments of $8,611 on
the facility. At June 30, 2018, a total of $103,722 (December 31,
2017 - $117,909) in principal remains payable under the lease with
$19,364 (December 31, 2017 – $23,441) being allocated to
current liabilities and $84,358 (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 was unsecured,
interest free as was repaid at March 31, 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 and six month periods ended June 30, 2018, the Company
accrued $nil and $6,227, respectively, in interest (June 30, 2017
– $nil and $nil) and $nil and $419, respectively, in standby
fees (June 30, 2017 – $nil and $nil) on the Revolving
Facility. On April 2, 2018 and in connection with the Equipment
Facility (note 13(x)), the Revolving Facility was terminated and
retired and all amounts due under the Revolving Facility were
rolled into the Equipment Facility.
(ix)
On April 3, 2018,
the Company issued an unsecured promissory note in the principal
amount of CAD $65,000 (USD $49,361). 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. During the three and six months ended June 30, 2018, the
Company expensed $1,932 in interest as a result of this promissory
note (June 30, 2017 - $nil). The Company is currently in default on
this promissory note.
(x)
On April 2, 2018,
the Company entered into an equipment financing facility (the
“Equipment Facility”) in the aggregate principal amount
of CAD $340,850 (USD $258,841). 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 full balance of the aggregate
principal amount made available to the Company under the Equipment
Facility.
During
the three and six months ended June 30, 2018, the Company expensed
$12,320 in interest as a result of the Equipment Facility. During
the six month period ended June 30, 2018, the Company made a
payment of $12,550 including $9,315 in principal and $3,236 in
interest. At June 30, 2018, a total of $255,647 (December 31, 2017
- $nil) in principal remains payable under the facility with
$149,441 (December 31, 2017 – $nil) being allocated to
current liabilities and $106,206 (December 31, 2017 – $nil)
being allocated to long term liabilities on the consolidated
balance sheet.
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(e)). 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.
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(e)) 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(i)) 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(k)) was calculated using
the Black-Scholes option pricing model. The resulting fair value of
such Convertible Debentures Series C-3 was calculated to be
$31,263. The calculation of the effective conversion amount
resulted in a BCF because the effective conversion price was less
than the Company’s stock price on the date of issuance and a
BCF in the amount of $31,263, was recorded in additional paid-in
capital.
The BCF
and the fair value of the warrants, which represents debt discount,
is accreted over the life of the Convertible Debentures using the
effective interest rate. Amortization of debt discount was recorded
as follows:
|
For the Three
Months Ended
June 30,
2018
|
For the
Three
Months
Ended
June 30,
2017
|
For the
Six
Months
Ended
June 30,
2018
|
For the
Six
Months
Ended
June 30,
2017
|
Convertible
Debentures Series B
|
$
38,190
|
$
40,104
|
$
38,190
|
$
83,841
|
Conversion of
Convertible Debentures Series B
|
-
|
342,399
|
-
|
342,399
|
Convertible
Debentures Series C-1
|
21,661
|
24,412
|
21,661
|
44,584
|
Conversion of
Convertible Debentures Series C-1
|
-
|
163,599
|
-
|
163,599
|
Convertible
Debentures Series C-2
|
-
|
15,077
|
-
|
20,286
|
Convertible
Debentures Series C-3
|
-
|
4,112
|
-
|
6,283
|
|
$
59,851
|
$
589,703
|
$
59,851
|
$
660,992
|
Convertible
Debentures as of June 30, 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
|
|
$
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 June 30,
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
June 30, 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)).
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
June 30, 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 and six month periods ended June 30, 2018, the Company
recorded interest expense in the amount of $6,721 and $13,369,
respectively, on the Convertible Debentures (June 30, 2017 –
$19,229 and $46,023). The interest owing on the convertible
debentures is included in accrued liabilities on the
Company’s consolidated balance sheet.
Convertible Debentures to be Issued in Hystyle
During the three months and six months ended June 30, 2018, the
Company’s wholly-owned subsidiary, Hystyle, received $189,850
(CAD $250,000) in subscriptions for 250 unsecured subordinated
convertible debenture units (“Convertible Debentures Series
H-1”),
$6,835 (CAD
$9,000) of which from a director of the Company. Each unit of
Convertible Debentures Series H-1 shall be comprised of CAD $1,000
in principal of 5% unsecured subordinated convertible debentures
and 1,333 common share purchase warrants. The principal amount and
accrued interest thereon shall be due twenty-four (24) months from
closing and shall be convertible into common shares of Hystyle
anytime after ninety (90) days from closing until maturity at a
conversion price of CAD $0.375 per share. Hystyle shall also have
the option to force conversion of the principal and interest of the
Convertible Debentures Series H-1 at any time prior to maturity if
Hystyle is listed on a recognized stock exchange. The warrants
shall be exercisable for a period of eighteen (18) months from
closing at an exercise price of CAD $0.50 per share. The
Convertible Debentures Series H-1 remain
unissued.
During the three and six months ended June 30, 2018, the
Company’s wholly-owned subsidiary, Hystyle, received $18,985
(CAD $25,000) in subscriptions for 25 unsecured subordinated
convertible debenture units (“Convertible Debentures Series
H-2”). Each unit of Convertible Debentures Series H-2 shall
be comprised of CAD $1,000 in principal of 8% unsecured
subordinated convertible debentures and 1,000 common share purchase
warrants. The principal amount and accrued interest thereon shall
be due twenty-four (24) months from closing and shall be
convertible into common shares of Hystyle anytime after ninety (90)
days from closing until maturity at a conversion price of CAD $0.50
per share. Hystyle shall also have the option to force conversion
of the principal and interest of the Convertible Debentures Series
H-2 at any time prior to maturity if Hystyle is listed on a
recognized stock exchange. The warrants shall be exercisable for a
period of eighteen (18) months from closing at an exercise price of
CAD $0.80 per share. The Convertible Debentures Series H-2 remain
unissued.
15. COMMON STOCK
During
the six month period ended June 30, 2018, the Company:
|
●
|
Issued
600,000 Common Shares at a price of $0.10 per share, for a fair
value of $60,000 related to a six month consulting agreement; the
$60,000 was booked as a prepaid to be expensed over the life of the
agreement. During the six months ended June 30, 2018, the Company
expensed $20,000 from the prepaid as stock based
compensation;
|
|
●
|
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.
|
16. WARRANTS
The
following schedule summarizes the outstanding warrants for the
purchase of Common Shares of the Company:
|
|
|
|
|
Weighted Average
Exercise Price
|
Weighted Average
Life Remaining (yrs)
|
|
Weighted Average
Exercise Price
|
Weighted Average
Life Remaining (yrs)
|
Beginning of
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
|
(5,560,000
)
|
0.21
|
-
|
(6,500,000
)
|
0.27
|
-
|
|
22,927,782
|
$
0.21
|
0.47
|
28,237,782
|
$
0.23
|
0.84
|
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
|
(a)
Issued in
connection to a commission agreement. The warrants vest in four
tranches of 250,000 warrants each. The first tranche has an
exercise price of $0.40 per share and vested upon execution of the
agreement. The second tranche has an exercise price of $0.50 per
share and will vest upon the sales agent delivering $500,001 in
sales revenue to Gilla Worldwide. The third tranche has an exercise
price of $0.60 per share and will vest upon the sales agent
delivering $1,000,001 in sales revenue to Gilla Worldwide. The
fourth tranche has an exercise price of $0.70 per share and will
vest upon the sales agent delivering $1,500,001 in sales revenue
Gilla Worldwide. During the year ended December 31, 2015, the
Company booked the fair value of the vested warrants in the amount
of $35,362 as a prepaid to be expensed over the two year life of
the commission agreement. During the six month period ended June
30, 2018, the Company expensed $nil in stock based compensation
which has been recorded as an administrative expense (June 30, 2017
– $7,367). 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 six month periods ended June 30, 2018 and 2017, the
Company recorded interest expense in the amount of $38,190 and
$83,841, 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(iv)). 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 June 30, 2018 and 2017, the
Company recorded interest expense in the amount of $21,661 and
$38,385, 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(ii and iii)). 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 six month periods ended June 30, 2018 and 2017, the
Company recorded interest expense in the amount of $nil and
$11,022, respectively, related to debt discount which includes the
accretion of the BCF of the Convertible Debentures Series
C-2.
(j)
Issued in
connection to the Bridge Loan Agreement (note 11(v)). During the
years ended During the six month periods ended June 30, 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 June 30, 2018 and 2017, the
Company recorded interest expense in the amount of $nil and
$20,286, 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 June 30, 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
fully vested, the Company has recorded $nil in stock based
compensation during the six month periods ended June 30, 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.
(x)
Issued in
connection with a consulting agreement. During the six month
periods ended June 30, 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 six month periods ended June 30, 2018 and
2017, the Company expensed $39,474 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(ii,
iii vi, and vi)). 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 June
30, 2018 and 2017, the Company expensed $19,597 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:
|
Three Months
Ended
June 30,
2018
|
Three Months
Ended
June 30,
2017
|
For the
Six
Months
Ended
June 30,
2018
|
For the
Six
Months
Ended
June 30,
2017
|
Warrants
Issued as Stock Based Compensation
|
|
|
|
|
Warrants issued in
connection to the Bridge Loan Agreement (note 11(v))
|
$
-
|
$
-
|
$
-
|
$
4,988
|
Warrants issued as
commission related to private placements units
|
-
|
-
|
-
|
34,089
|
Warrants issued in
relation to consulting agreements
|
25,216
|
35,094
|
59,071
|
35,094
|
Total
Warrants Issued as Stock Based Compensation
|
25,216
|
35,094
|
59,071
|
74,171
|
|
|
|
|
|
Issuance of stock
options
|
-
|
1,213,605
|
-
|
1,213,605
|
Shares issued for
consulting fees
|
21,000
|
6,000
|
41,000
|
6,000
|
Total
Stock Based Compensation
|
$
46,216
|
$
1,254,699
|
$
100,071
|
$
1,293,776
|
18. SHARES TO BE ISSUED
As at
June 30, 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);
●
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:
|
|
|
Advances by and
amounts payable to Officers of the Company, two of which are also
Directors
|
$
918,577
|
$
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
|
668,638
|
-
|
Consulting fees
owing to persons related to Officers who are also Directors of the
Company
|
144,892
|
485
|
Advances by
Officers of the Company, one of which is also a Director, bears
interest at 1.5% per month
|
517,851
|
-
|
Amounts payable to
a corporation related by virtue of a common Officer of the
Company
|
69,824
|
-
|
Directors fees
payable to Directors of the Company
|
140,500
|
-
|
Incentive fee
bonus
|
104,023
|
82,690
|
|
$
2,564,305
|
$
252,841
|
During
the year ended December 31, 2017, the following related parties
agreed to defer amounts payable to them until April 30,
2019:
|
|
|
Advances by and
amounts payable to Officers of the Company, two of which are also
Directors
|
$
-
|
$
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
|
-
|
682,360
|
Consulting fees
owing to persons related to Officers who are also Directors of the
Company
|
-
|
76,348
|
Advances by
Officers of the Company, one of which is also a Director, bears
interest at 1.5% per month
|
-
|
552,590
|
Consulting fees and
directors fees payable to Directors of the Company
|
-
|
113,500
|
|
$
-
|
$
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).
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 six month period ended
June 30, 2018 and 2017, the Company expensed $21,333 and $47,307,
respectively, in interest expense related to the incentive
bonus.
(b)
|
Interest
accrued to related parties were as follows:
|
|
|
|
|
|
|
Interest accrued on
advances by Officers of the Company, one of which is also a
Director
|
$
477,631
|
$
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
|
74,883
|
55,348
|
|
$
552,514
|
$
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 six month period ended June 30, 2018, the Company
expensed $21,715 (June 30, 2017 – $20,689) 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 $12,933 (June 30, 2017 – $48,532) in travel and
entertainment expenses incurred by Officers and Directors of the
Company. During the six month period ended June 30, 2018, the
Company received $162,334 from a related corporation for accounting
and administrative services provided, $69,824 of this amount is an
advance on services to be provided.
During the six month period ended June 30, 2018, the
Company’s wholly-owned subsidiary, Hystyle, received $6,835
(CAD $9,000) from a director of the Company in subscriptions for 9
units of the Convertible Debentures Series H-1 (note
14).
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).
The
Company expensed consulting fees payable to related parties as
follows:
|
|
|
Officers
|
$
183,958
|
$
170,595
|
Persons related to
a Director
|
81,390
|
73,109
|
|
$
265,348
|
$
243,704
|
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 June 30, 2018 are as follows:
|
|
|
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%
|
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 six month periods ended June 30, 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
|
$
39,056
|
2019
|
39,063
|
|
$
78,119
|
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 six month periods
ended June 30, 2018 and 2017 the Company paid $nil and $649,
respectively, in relation to the royalty agreement.
c) Litigation
On August 16 2018, Axis Employment Agency Inc. filed a statement of
claim against the Company’s subsidiary, Vape Brands
International Inc., in the Ontario Superior Court of Justice
seeking payment for unpaid services in the amount of $181,380 up to
the date of the claim. $156,532 of the claim pertains to services
provided before June 30, 2018 which has already been recorded on
the Company's records as at June 30, 2018.
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 June 30, 2018, the
Company recorded an allowance of $433,227 (December 31, 2017
– $190,543) in regards to customers with past due amounts. At
June 30, 2018, 42% (December 31, 2017 – 34%) of the
Company’s trade receivables are due from one customer and 94%
(December 31, 2017 – 68%) of the trade receivables are due
from six customers. During the six month period ended June 30,
2018, 6% (June 30, 2017 – 13%) of the Company’s sales
were to one customer.
(ii)
Liquidity Risk
Liquidity
risk is the risk that the Company will not be able to meet its
financial obligations as they fall due. The Company’s
approach to managing liquidity risk is to ensure, as far as
possible, that it will have sufficient liquidity to meet its
liabilities when due, under both normal and stressed conditions,
without incurring unacceptable losses or risking damage to the
Company’s reputation. The Company manages liquidity risk by
closely monitoring changing conditions in its investees,
participating in the day to day management and by forecasting cash
flows from operations and anticipated investing and financing
activities. At June 30, 2018, the Company had liabilities due to
unrelated parties through its financial obligations over the next
six years in the aggregate principal amount of $9,515,954. Of such
amount, the Company has obligations to repay $9,116,555 over the
next twelve months with the remaining $399,399 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:
June 30,
2018
|
|
|
|
CAD
|
$
1,404,591
|
$
38,358
|
$
24,854
|
HUF
|
$
125,998
|
$
-
|
$
868
|
EUR
|
$
214,561
|
$
46,089
|
$
13,586
|
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 $134,138, $12,513 and
$15,489, respectively. A 10% weakening in the exchange rate would,
on the same basis, have decreased profit and decreased net assets
by $134,138, $12,513 and $15,489, respectively.
The
Company purchases some of its inventory in a foreign currency, at
June 30, 2018, the Company included $151,476 (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:
|
|
|
Canada
|
$
1,779,565
|
$
1,830,696
|
United
States
|
1,444,685
|
1,522,641
|
Europe
|
3,630
|
5,977
|
|
$
3,227,880
|
$
3,359,314
|
Total
sales by geographic location are as follows:
|
|
|
Canada
|
$
1,167,778
|
$
55,163
|
United
States
|
576,235
|
470,360
|
Europe
|
362,985
|
1,984,042
|
|
$
2,106,998
|
$
2,509,565
|
24. SUBSEQUENT EVENTS
On
September 7, 2018 and in connection to a consulting agreement, the
Company issued warrants for the purchase of 1,000,000 Common Shares
exercisable until September 6, 2020 at an exercise price of $0.20
per Common Share, such warrants vesting upon the consultant meeting
certain deliverables as set forth in the consulting
agreement.
Subsequent to June 30, 2018, Hystyle received CAD $441,000 in
subscriptions for 441 units of Convertible Debentures Series H-2,
such units remain unissued.
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
“Quarterly Report” or 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 (“ENDS”) (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.
In a
press release dated July 28, 2017, the FDA also stated that
“the FDA plans to issue foundational rules to make the
product review process more efficient, predictable, and transparent
for manufacturers, while upholding the agency’s public health
mission. Among other things, the FDA intends to issue regulations
outlining what information the agency expects to be included in
Premarket Tobacco Applications (PMTAs), Modified Risk Tobacco
Product (MRTP) applications and reports to demonstrate Substantial
Equivalence (SE). The FDA also plans to finalize guidance on how it
intends to review PMTAs for ENDS. The agency also will continue
efforts to assist industry in complying with federal tobacco
regulations through online information, meetings, webinars and
guidance documents”.
As at
the date of this Report, the Company continues to evaluate the
requirements of PMTA submissions on its Products, and given the
expected cost associated with each application in the hundreds of
thousands of dollars, the Company intends to evaluate the potential
returns associated with the preparation and submission of PMTAs
during the remainder of the six (6) year grace period. 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
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, a 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
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 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.
During
the three months and six months ended June 30, 2018, the
Company’s wholly-owned subsidiary, Hystyle, received $189,850
(CAD $250,000) in subscriptions for 250 unsecured subordinated
convertible debenture units (“Convertible Debentures Series
H-1”), $6,835 (CAD $9,000) of which from a director of the
Company. Each unit of Convertible Debentures Series H-1 shall be
comprised of CAD $1,000 in principal of 5% unsecured subordinated
convertible debentures and 1,333 common share purchase warrants.
The principal amount and accrued interest thereon shall be due
twenty-four (24) months from closing and shall be convertible into
common shares of Hystyle anytime after ninety (90) days from
closing until maturity at a conversion price of CAD $0.375 per
share. Hystyle shall also have the option to force conversion of
the principal and interest of the Convertible Debentures Series H-1
at any time prior to maturity if Hystyle is listed on a recognized
stock exchange. The warrants shall be exercisable for a period of
eighteen (18) months from closing at an exercise price of CAD $0.50
per share. The Convertible Debentures Series H-1 remain
unissued.
During
the three and six months ended June 30, 2018, the Company’s
wholly-owned subsidiary, Hystyle, received $18,985 (CAD $25,0000 in
subscriptions for 25 unsecured subordinated convertible debenture
units (“Convertible Debentures Series H-2”). Each unit
of Convertible Debentures Series H-2 shall be comprised of CAD
$1,000 in principal of 8% unsecured subordinated convertible
debentures and 1,000 common share purchase warrants. The principal
amount and accrued interest thereon shall be due twenty-four (24)
months from closing and shall be convertible into common shares of
Hystyle anytime after ninety (90) days from closinguntil maturity
at a conversion price of CAD $0.50 per share. Hystyle shall also
have the option to force conversion of the principal and interest
of the Convertible Debentures Series H-2 at any time prior to
maturity if Hystyle is listed on a recognized stock exchange. The
warrants shall be exercisable for a period of eighteen (18) months
from closing at an exercise price of CAD $0.80 per share. The
Convertible Debentures Series H-2 remain unissued.
Subsequent Events
On
September 7, 2018 and in connection to a consulting agreement, the
Company issued warrants for the purchase of 1,000,000 Common Shares
exercisable until September 6, 2020 at an exercise price of $0.20
per Common Share, such warrants vesting upon the consultant meeting
certain deliverables as set forth in the consulting
agreement.
Subsequent
to June 30, 2018, Hystyle received CAD $441,000 in subscriptions
for 441 units of Convertible Debentures Series H-2, such units
remain unissued.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30,
2018 AND 2017
Revenue
For the
three month period ended June 30, 2018, the Company generated
$840,759 in sales from E-liquids, vaporizers, E-cigarettes and
accessories as compared to $
1,266,026
in sales for the three month
period ended June 30, 2017. Of the $840,759 in revenue generated
for the three month period ended June 30, 2018, $412,386 (49% of
total sales) was generated in Canada, $299,897 (36% of total sales)
was generated in the United States and $128,476 (15% of total
sales) was generated in Europe. Of the $1,266,026 in revenue
generated for the three month period ended June 30, 2017, $935,061
(74% of total sales) was generated in Europe, $295,265 (23% of
total sales) was generated in the United States and $35,700 (3% of
total sales) was generated in Canada.
For the
six month period ended June 30, 2018, the Company generated
$2,106,998 in sales from E-liquids, vaporizers, E-cigarettes and
accessories as compared to $
2,509,565
in sales for the six month period
ended June 30, 2017. Of the $2,106,998 in revenue generated for the
six month period ended June 30, 2018, $1,167,778 (55% of total
sales) was generated in Canada, $576,235 (27% of total sales) was
generated in the United States and $362,985 (17% of total sales)
was generated in Europe. Of the $2,509,565 in revenue generated for
the six month period ended June 30, 2017, $1,984,042 (79% of total
sales) was generated in Europe, $470,360 (19% of total sales) was
generated in the United States and $55,163 (2% of total sales) was
generated in Canada.
The
Company’s cost of goods sold for the three month period ended
June 30, 2018 was $308,902 which represents E-liquid, bottles,
hardware and related packaging as compared to
$493,987
for the three month period ended
June 30, 2017. Gross profit for the three month period ended June
30, 2018 was $531,857 with margins of 63% as compared to
$
772,039
with margins of
61
% for the comparative period
in 2017.
The Company’s cost of goods sold for the six month period
ended June 30, 2018 was $
837,802
which represents E-liquid, bottles, hardware and
related packaging as compared to $
1,040,720
for the six month period ended June
30, 2017. Gross profit for the six month period ended June 30, 2018
was $
1,269,196
with margins of
60% as compared to $
1,468,845
with margins of 58% for the comparative period in
2017.
Operating Expenses
For the
three month period ended June 30, 2018, the Company incurred an
administrative expense of $1,023,552, consulting fees due to
related parties of $134,373, depreciation expense of $30,830,
amortization expense of $39,893 and a bad debt expense of $152,019.
For the three month period ended June 30, 2017, the Company
incurred an
administrative expense of
$1,146,710, consulting fees due to related parties of $124,245,
depreciation expense of $10,045, amortization expense of $11,650,
stock option expense of $1,213,605 and a loss on settlement of
$23,840
. Total operating expenses for the three month period
ended June 30, 2018 were $1,380,667 as compared to $2,530,095 for
the three month period ended June 30, 2017.
Administrative
costs were primarily comprised of rent, legal and audit fees,
marketing fees, travel expenses, consulting fees and employee
wages. The decrease in administrative expenses of $123,158 between
the three month period ended June 30, 2018 and the three month
period ended June 30, 2017 is attributable to
cost cutting measures by management
. The
increase in consulting fees due to related parties of $10,128
between the three month period ended June 30, 2018 and the three
month period ended June 30, 2017 is attributable to new consulting
agreements entered into with related parties and the effects of
foreign exchange translation. The bad debt expense for the three
month period ended June 30, 2018 is attributable to an allowance
for doubtful accounts receivable. The stock option expense incurred
in the three month period ended June 30, 2017 of $1,213,605 is
attributable to the adoption of a stock option plan and issuance
thereunder to the Company’s directors, officers and
employees. The loss on settlement of $23,840 for the three month
period ended June 30, 2017 is attributable to losses associated
with the settlement of debt.
For the six month period ended June 30, 2018, the Company incurred
an administrative expense of $
2,476,888
, consulting fees due to related parties of
$265,348, depreciation expense of $61,591, amortization expense of
$79,785 and a bad debt expense of $245,049. For the six month
period ended June 30, 2017, the Company incurred an administrative
expense of $2,144,060, consulting fees due to related parties of
$243,704, depreciation expense of $19,701, amortization expense of
$23,300, bad debt expense of $161,340, stock option expense of
$1,213,605 and a loss on settlement of $23,840. Total operating
expenses for the six month period ended June 30, 2018 were
$
3,128,661
as compared to
$3,829,550 for the six month period ended June 30,
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 $332,828
between the six month period ended June 30, 2018 and the three
month period ended June 30, 2017 is attributable to the
Company’s increased operations in Canada. The increase in
consulting fees due to related parties of $21,644 between the six
month period ended June 30, 2018 and the six month period ended
June 30, 2017
is attributable to new consulting agreements
entered into with related parties and the effects of foreign
exchange translation
. The bad debt
expense for the six month period ended June 30, 2018 and 2017 is
attributable to an allowance for doubtful accounts
receivable.
The stock option expense incurred in the six
month period ended June 30, 2017 of $1,213,605 is attributable to
the adoption of a stock option plan and issuance thereunder to the
Company’s directors, officers and employees. The loss on
settlement of $23,840 for the six month period ended June 30, 2017
is attributable to losses associated with the settlement of
debt.
Loss from Operations
For the
three month period ended June 30, 2018, the Company incurred a loss
from operations of $848,810 as compared to a loss from operations
of $1,758,056 for the three month period ended June 30, 2017 due to
the reasons discussed above.
For the six month period ended June 30, 2018, the Company incurred
a loss from operations of $
1,859,465
as compared to a loss from operations of
$2,360,705 for the six month period ended June 30, 2017 due to the
reasons discussed above.
Other Expenses
For the
three month period ended June 30, 2018, the Company incurred a
foreign exchange loss of $26,995 and interest expense of $307,443.
For the three month period ended June 30, 2017, the Company
incurred a foreign exchange loss of $64,839, amortization of debt
discount expense of $589,703 and interest expense of $220,371. For
the three month period ended June 30, 2018, the Company incurred
total other expenses of $334,438 as compared to $874,913 for the
three month period ended June 30, 2017. The amortization of debt
discount expense during the six month period ended June 30, 2017 is
attributable to accretion of the beneficial conversion feature and
fair value of the warrants associated with the Company’s
convertible debentures resulting from the cumulative effects of the
issuance of new convertible debentures in fiscal 2016 and 2017 and
the conversion of convertible debentures in 2017.The increase in
interest expense of $87,072 between the three month period ended
June 30, 2018 and the three month period ended June 30, 2017 is
attributable to increased interest expenses associated with the
Company’s debt instruments.
For the six month period ended June 30, 2018, the Company incurred
a foreign exchange loss of $108,242, amortization of debt discount
expense of $59,851 and interest expense of $616,992. For the six
month period ended June 30, 2017, the Company incurred a foreign
exchange loss of $59,894, amortization of debt discount expense of
$660,992 and interest expense of $449,648. For the six month period
ended June 30, 2018, the Company incurred total other expenses of
$785,085 as compared to $1,170,534 for the six month period ended
June 30, 2017. The decrease in amortization of debt discount
expense of $601,141 between the six month period ended June 30,
2018 and the six month period ended June 30, 2017 is attributable
to an increase in accretion of the beneficial conversion feature
and fair value of the warrants associated with the Company’s
convertible debentures resulting from the cumulative effects of the
issuance of new convertible debentures in fiscal 2016 and 2017 and
the conversion of convertible debentures in 2017. The increase in
interest expense of $167,344 between the six month period ended
June 30, 2018 and the six month period ended June 30, 2017 is
attributable to increased interest expenses associated with the
Company’s debt instruments.
Net Loss and Comprehensive Loss
Net
loss amounted to $1,183,248 for the three month period ended June
30, 2018 as compared to a net loss of $2,632,969 for the three
month period ended June 30, 2017 due to the reasons discussed
above.
Net loss amounted to $
2,644,550
for the six month period ended June 30, 2018 as
compared to a net loss of $
3,531,239
for the six month period ended June 30, 2017 due
to the reasons discussed above.
Comprehensive
loss amounted to $989,964 for the three month period ended June 30,
2018 as compared to a comprehensive loss of $2,732,954 for the
three month period ended June 30, 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.
Comprehensive loss amounted to $
2,246,073
for the six month period ended June 30, 2018 as
compared to a comprehensive loss of $
3,698,506
for the six month period ended June 30, 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
June 30, 2018, the Company had total assets of $4,302,575 (compared
to total assets of $4,428,858 at December 31, 2017) consisting of
cash and cash equivalents of $42,359, trade receivables of
$173,996, inventory of $600,742, other current assets of $257,598,
property and equipment of $234,167, website development of $4,083,
intangibles of $613,025 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
June 30, 2018, the Company had total liabilities of $12,570,280
(compared to total liabilities of $10,984,061 at December 31, 2017)
consisting of accounts payable of $3,012,397, accrued liabilities
of $692,656, customer deposits of $90,332, loans from shareholders
of $1,145,048, due to related parties of $2,564,305, accrued
interest due to related parties of $552,514, promissory notes of
$790,390, amounts owing on acquisition of $740,248, convertible
debentures of $337,000, term loan of $1,078,702, long term
promissory notes of $190,564, long term amounts owing on
acquisitions of $1,167,289,
and long
term debentures to be issued of $
208,835. For more
information regarding the liabilities of the Company, see
“
Shareholder
Loans
”, “
Term
Loan
”, “
Promissory Notes
” and
“
Convertible
Debentures
”.
At June
30, 2018, the Company had negative working capital of $9,928,897
and an accumulated deficit of $22,543,391.
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
six month period ended June 30, 2018, the Company used net cash of
$837,202 (as compared to $1,250,358 during the six month period
ended June 30, 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.
Net cash used in investing activities
For the
six month period ended June 30, 2018, the Company used net cash of
$19,873 (as compared to $11,673 during the six month period ended
June 30, 2017) in investing activities relating to the addition of
capital assets.
Net cash flow from financing activities
For the
six month period ended June 30, 2018, net cash provided by
financing activities was $693,436 (see “
Shareholder Loans
”,
“
Term Loan
”,
“
Promissory
Notes
”, “
Convertible Debentures
” and
“
Common
Shares
”) as compared to net cash provided by financing
activities of $1,487,349 for the six month period ended June 30,
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:
|
|
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
|
|
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.
|
|
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
|
74,859
|
Exchange rate
differences
|
(53,754
)
|
Less: Current
amount owing
|
(356,324
)
|
Long
term portion at June 30, 2018
|
$
746,093
|
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.
|
|
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
|
23,337
|
Exchange rate
differences
|
(18,479
)
|
Less: Current
amount owing
|
(208,924
)
|
Long
term portion at June 30, 2018
|
$
171,881
|
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.
|
|
|
Pro forma
revenue
|
$
2,106,998
|
$
3,385,834
|
Pro forma loss from
operations
|
$
2,004,737
|
$
2,406,685
|
Pro forma net
loss
|
$
2,789,822
|
$
3,574,312
|
Shareholder Loans
The
Company has outstanding current loans from shareholders as
follows:
|
|
|
Bears interest of
1.5% per month on a cumulative basis, unsecured, no specific terms
of repayment
(i)
|
$
12,496
|
$
13,116
|
Bears interest of
10% per annum on a cumulative basis, secured by the assets of the
Company, matures on April 30, 2019
(ii)
|
350,225
|
-
|
Bears interest of
10% per annum on a cumulative basis, secured by the assets of the
Company, matures on April 30, 2019
(iii)
|
94,234
|
-
|
Bears interest of
6% per annum on a cumulative basis, secured by the assets of the
Company, matured on March 2, 2018
(iv)
|
243,008
|
244,187
|
Bears interest of
10% per annum on a cumulative basis, secured by the assets of the
Company, matures on April 30, 2019
(v)
|
142,605
|
-
|
Bears interest of
10% per annum on a cumulative basis, secured by the assets of the
Company, matures on April 30, 2019
(vi)
|
204,638
|
-
|
Bears interest of
1.5% per month on a cumulative basis, unsecured, no specific terms
of repayment
(vii)
|
97,842
|
-
|
|
$
1,145,048
|
$
257,303
|
The
Company has outstanding long term loans from shareholders as
follows:
|
|
|
Bears interest of
10% per annum on a cumulative basis, secured by the assets of the
Company, matures on April 30, 2019
(ii)
|
$
-
|
$
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)
|
-
|
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)
|
-
|
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)
|
-
|
207,517
|
|
$
-
|
$
794,635
|
(i)
During the three
and six month periods ended June 30, 2018, the Company accrued
interest of $1,523 and $2,890, respectively, on this shareholder
loan (June 30, 2017 – $1,327 and $2,726). Total accrued
interest owing on such shareholder loan at June 30, 2018 was
$21,316 (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(h and dd)). The relative fair
value of the warrants issued were recorded as debt discount to be
amortized over the life of the loan. At June 30, 2018, the value of
the Secured Note was $350,225 (December 31, 2017 – $351,679)
including a debt discount of $29,475 (December 31, 2017 - $46,871).
During the three and six month periods ended June 30, 2018, the
Company expensed $9,901 and $17,396, 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 and six month periods ended June 30, 2018, the Company
accrued interest of $13,972 and $26,775, respectively, on the
Secured Note (June 30, 2017 – $12,114 and $24,028). Total
accrued interest owing on the Secured Note at June 30, 2018 was
$171,537 (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(h and dd)). The relative fair value of the
warrants issued were recorded as debt discount to be amortized over
the life of the loan. At June 30, 2018, the value of the Secured
Note No.2 was $94,234 (December 31, 2017 - $90,828) including a
debt discount of $5,766 (December 31, 2017 – $9,172). During
the three and six month periods ended June 30, 2018, the Company
expensed $1,938 and $3,406, 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 and six month periods ended June 30, 2018, the Company
accrued interest of $3,573 and $7,058, respectively, on the Secured
Note No.2 (June 30, 2017 – $3,234 and $6,389). Total accrued
interest owing on the Secured Note No.2 at June 30, 2018 was
$45,315 (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(d)). The relative fair value of the warrants
issued were recorded as debt discount to be amortized over the life
of the loan. At June 30, 2018, the value of the Shareholder Loan
was $243,008 (December 31, 2017 – $244,187 including a debt
discount of $10,885 and the debt discount on this loan had fully
accreted. During the three and six month periods ended June 30,
2018, the Company expensed $nil and $10,885 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 and six month periods ended June 30, 2018, the Company
accrued interest of $4,643 and $8,943, respectively, on the
Shareholder Loan (June 30, 2017 – $8,048 and $16,042). Total
accrued interest owing on the Shareholder Loan at June 30, 2018 was
$69,760 (December 31, 2017 – $61,523) which is included in
accrued liabilities. At June 30, 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 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(j)). 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(dd)). The relative fair value of
the warrants issued were recorded as debt discount to be amortized
over the life of the loan. At June 30, 2018, the value of the
Bridge Loan was $142,605 (December 31, 2017 - $144,611) including a
debt discount of $9,275 (December 31, 2017 – $14,809). During
the three and six month periods ended June 30, 2018, the Company
expensed $3,144 and $5,534, 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 and six month periods ended June 30, 2018, the Company
accrued interest of $4,097 and $8,093, respectively, on the Bridge
Loan (June 30, 2017 – $nil and $nil). Total accrued interest
owing on the Bridge Loan at June 30, 2018 was $9,755 (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(dd)). The relative fair value of the warrants issued were
recorded as debt discount to be amortized over the life of the
loan. At June 30, 2018, the value of the Shareholder Loan No.2 was
$204,638 (December 31, 2017 - $207,517) including a debt discount
of $13,310 (December 31, 2017 – $16,939). During the three
and six month periods ended June 30, 2018, the Company expensed
$4,512 and $7,940, respectively, in interest expense related to the
amortization of the debt discount.
During
the three and six month periods ended June 30, 2018, the Company
accrued interest of $5,951 and $11,756, respectively, on the
Shareholder Loan No.2 (June 30, 2017 – $nil and $nil). Total
accrued interest owing on the Shareholder Loan No.2 at June 30,
2018 was $16,836 (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. On May 4, 2018 and May 7, 2018, the Company
received a further USD $50,000 and CAD $32,000 (USD $24,301) from
the Shareholder. The loan bears interest of 1.5% per month on a
cumulative basis is unsecured and has no specific terms of
repayment. As at June 30, 2018, the value of this shareholder loan
was $97,842 (December 31, 2017 - $nil).
During
the three and six month periods ended June 30, 2018, the Company
accrued interest of $4,442 and $4,547, respectively on this
shareholder loan (June 30, 2017 – $nil and $nil). Total
accrued interest owing on such shareholder loan at June 30, 2018
was $4,477 (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 an
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(c)) 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(c)) 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(g)) 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(c)) 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(c)) 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 June 30, 2018, the value of
the Term Loan was $1,078,702 including a debt discount of $nil
(December 31, 2017 – $1,051,334 including a debt discount of
$54,815). During the three and six month periods ended June 30,
2018, the Company expensed $43,333 and $68,768, 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 and six month periods ended June 30, 2018, the Company
expensed $40,811 and $83,388 in interest on the Term Loan (June 30,
2017 – $42,120 and $86,673). Pursuant to the Cash Sweep,
during the six month period ended June 30, 2018, the Company paid a
total of $71,812 to the Lenders consisting of $69,602 in interest
and $2,210 in principal repayments. During the six month period
ended June 30, 2017, the Company paid a total of $171,976 to the
Lenders consisting of $101,511 in interest and $70,465 in principal
payments.
The
amount owing on the Term Loan is as follows:
|
|
|
Opening
balance/amount advanced
|
$
1,051,334
|
$
1,061,269
|
Accretion of debt
discount
|
68,768
|
14,300
|
Exchange loss
(gain) during the period/year
|
(52,976
)
|
86,143
|
Principal payments
made
|
(2,210
)
|
(88,066
)
|
Interest
accrued
|
83,388
|
173,035
|
Interest payments
made
|
(69,602
)
|
(195,347
)
|
|
$
1,078,702
|
$
1,051,334
|
Promissory Notes
The
Company has outstanding current promissory notes as
follows:
|
|
|
|
|
|
Unsecured, bears
interest at 15% per annum, matures April 12, 2018
(i)
|
$
222,775
|
$
230,109
|
Unsecured, bears
interest at 15% per annum, matures February 18, 2019
(ii)
|
227,820
|
-
|
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)
|
37,970
|
39,855
|
Secured, bears
interest at RBP + 3% per annum, due on demand
(v)
|
53,659
|
64,774
|
Lease agreement,
bears interest at 4.7% per annum, matures October 13,
2023
(vi)
|
19,364
|
23,441
|
Unsecured, interest
free, matured October 29, 2017
(vii)
|
-
|
7,971
|
Secured, bears
interest at 24%, matured March 6, 2018
(viii)
|
-
|
102,372
|
Unsecured, bears
interest at 15% per annum, matured April 20, 2018
(ix)
|
49,361
|
-
|
Equipment Facility,
secured, bears interest at 15% per annum, matures April 1, 2020
(x)
|
149,441
|
-
|
|
$
790,390
|
$
498,522
|
The
Company has outstanding long term promissory notes as
follows:
|
|
|
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)
|
-
|
17,500
|
Lease agreement,
bears interest at 4.7% per annum, matures October 13,
2023
(vi)
|
84,358
|
94,468
|
Equipment Facility,
secured, bears interest at 15% per annum, matures April 1, 2020
(x)
|
106,206
|
-
|
|
$
190,564
|
$
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 and six month periods ended June
30, 2018, the Company expensed $2,306 and $3,976, respectively, in
interest expense related to the amortization of the debt discount
(note 16(cc)).
During
the three and six month periods ended June 30, 2018, the Company
accrued $9,679 and $19,066, respectively, in interest on the
promissory note which has been recorded in accrued liabilities
(June 30, 2017 – $nil and $nil). At June 30, 2018, the value
of the promissory note was $222,775 inclusive of a debt discount of
$5,045 (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 and six month periods ended June 30, 2018, the Company
expensed $1,283 and $5,096, respectively, in interest expense
related to the amortization of the debt discount (note
16(aa)).
During
the three and six month periods ended June 30, 2018, the Company
accrued $9,473 and $18,962, respectively, in interest on the
promissory note which has been recorded in accrued liabilities
(June 30, 2017 – $nil and $nil). At June 30, 2018, the value
of the promissory note was $227,820 inclusive of a debt discount of
$nil (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 and six month periods ended June 30, 2018, the Company
expensed and paid $2,700 and $5,400, respectively, in interest on
the promissory note (June 30, 2017 – $nil and $nil). At June
30, 2018 the value of the promissory note was $30,000 (December 31,
2017 - $47,500).
(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 and six month periods ended June 30, 2018, the Company
expensed and paid $538 and $1,052, respectively, in interest on the
facility (June 30, 2017 – $nil and $nil). At June 30, 2018,
$37,970 (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 and six month periods ended June 30, 2018, the Company
paid $945
and $1,922,
respectively, in interest (June 30, 2017 – $nil and $nil) and
made principal repayments of $8,051 on the facility. At June 30,
2018, $53,659 (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 and six month periods ended June 30, 2018, the Company
paid $1,277 and $2,634, respectively, in interest (June 30, 2017
– $nil and $nil) and made principal repayments of $8,611 on
the facility. At June 30, 2018, a total of $103,722 (December 31,
2017 - $117,909) in principal remains payable under the lease with
$19,364 (December 31, 2017 – $23,441) being allocated to
current liabilities and $84,358 (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 was unsecured,
interest free as was repaid at March 31, 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 and six month periods ended June 30, 2018, the Company
accrued $nil and $6,227, respectively, in interest (June 30, 2017
– $nil and $nil) and $nil and $419, respectively, in standby
fees (June 30, 2017 – $nil and $nil) on the Revolving
Facility. On April 2, 2018 and in connection with the Equipment
Facility (note 13(x)), the Revolving Facility was terminated and
retired and all amounts due under the Revolving Facility were
rolled into the Equipment Facility.
(ix)
On April 3, 2018,
the Company issued an unsecured promissory note in the principal
amount of CAD $65,000 (USD $49,361). 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. During the three and six months ended June 30, 2018, the
Company expensed $1,932 in interest as a result of this promissory
note (June 30, 2017 - $nil). The Company is currently in default on
this promissory note.
(x)
On April 2, 2018,
the Company entered into an equipment financing facility (the
“Equipment Facility”) in the aggregate principal amount
of CAD $340,850 (USD $258,841). 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 full balance of the aggregate
principal amount made available to the Company under the Equipment
Facility.
During
the three and six months ended June 30, 2018, the Company expensed
$12,320 in interest as a result of the Equipment Facility. During
the six month period ended June 30, 2018, the Company made a
payment of $12,550 including $9,315 in principal and $3,236 in
interest. At June 30, 2018, a total of $255,647 (December 31, 2017
- $nil) in principal remains payable under the facility with
$149,441 (December 31, 2017 – $nil) being allocated to
current liabilities and $106,206 (December 31, 2017 – $nil)
being allocated to long term liabilities on the consolidated
balance sheet.
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 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)).
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
June 30, 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 and six month periods ended June 30, 2018, the Company
recorded interest expense in the amount of $6,721 and $13,369,
respectively, on the Convertible Debentures (June 30, 2017 –
$19,229 and $46,023). The interest owing on the convertible
debentures is included in accrued liabilities on the
Company’s consolidated balance sheet.
During
the three months and six months ended June 30, 2018, the
Company’s wholly-owned subsidiary, Hystyle, received $189,850
(CAD $250,000) in subscriptions for 250 unsecured subordinated
convertible debenture units (“Convertible Debentures Series
H-1”), $6,835 (CAD $9,000) of which from a director of the
Company. Each unit of Convertible Debentures Series H-1 shall be
comprised of CAD $1,000 in principal of 5% unsecured subordinated
convertible debentures and 1,333 common share purchase warrants.
The principal amount and accrued interest thereon shall be due
twenty-four (24) months from closing and shall be convertible into
common shares of Hystyle anytime after ninety (90) days from
closing until maturity at a conversion price of CAD $0.375 per
share. Hystyle shall also have the option to force conversion of
the principal and interest of the Convertible Debentures Series H-1
at any time prior to maturity if Hystyle is listed on a recognized
stock exchange. The warrants shall be exercisable for a period of
eighteen (18) months from closing at an exercise price of CAD $0.50
per share. The Convertible Debentures Series H-1 remain
unissued.
During
the three and six months ended June 30, 2018, the Company’s
wholly-owned subsidiary, Hystyle, received $18,985 (CAD $25,000) in
subscriptions for 25 unsecured subordinated convertible debenture
units (“Convertible Debentures Series H-2”). Each unit
of Convertible Debentures Series H-2 shall be comprised of CAD
$1,000 in principal of 8% unsecured subordinated convertible
debentures and 1,000 common share purchase warrants. The principal
amount and accrued interest thereon shall be due twenty-four (24)
months from closing and shall be convertible into common shares of
Hystyle anytime after ninety (90) days from closing until maturity
at a conversion price of CAD $0.50 per share. Hystyle shall also
have the option to forceconversion of the principal and interest of
the Convertible Debentures Series H-2 at any time prior to maturity
if Hystyle is listed on a recognized stock exchange. The warrants
shall be exercisable for a period of eighteen (18) months from
closing at an exercise price of CAD $0.80 per share. The
Convertible Debentures Series H-2 remain unissued.
Common Shares
During
the six month period ended June 30, 2018, the Company:
●
|
Issued
600,000 Common Shares at a price of $0.10 per share, for a fair
value of $60,000 related to a six month consulting agreement; the
$60,000 was booked as a prepaid to be expensed over the life of the
agreement. During the six months ended June 30, 2018, the Company
expensed $20,000 from the prepaid as stock based
compensation;
|
|
|
●
|
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 June 30, 2018, the
Company has an accumulated deficit of $22,543,391 (December 31,
2017 – $19,898,841) and a working capital deficiency of
$9,928,897 (December 31, 2017 – $4,659,008) as well as
negative cash flows from operating activities of $837,202 (June 30,
2017 – $1,250,358) for the six months ended June 30, 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.
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.
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 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:
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.
(“Hystyle”); 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.
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 and six month
periods ended June 30, 2018, the Company expensed $92,839 (June 30,
2017 – $91,847) 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 to ensure that such information is accumulated and
communicated to management, including the Company’s chief
executive officer (principal executive officer) and chief financial
officer (principal accounting 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”).
With
the participation of the Company’s chief executive officer
(principal executive officer) and chief financial officer
(principal accounting officer), management conducted an evaluation
of the effectiveness of the Company’s internal control over
financial reporting as at June 30, 2018 based on the 2013 framework
in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
("2013 COSO"). Based on the Company’s evaluation and the
material weaknesses described below, management concluded that the
Company did not maintain effective internal control over financial
reporting as at June 30, 2018 based on the 2013 COSO framework
criteria. Management has identified control deficiencies regarding
the lack of segregation of duties and the need for a stronger
internal control environment. Management of the Company believes
that these material weaknesses are due to the small size of the
Company’s accounting staff. The small size of the
Company’s accounting staff may prevent adequate controls in
the future, such as segregation of duties, due to the cost/benefit
of such remediation. To mitigate the current limited resources and
limited employees, the Company relies heavily on direct management
oversight of transactions, along with the use of legal and
accounting professionals. As the Company grows, the number of
employees is expected to increase, which will enable the Company to
implement adequate segregation of duties within the internal
control framework.
Limitations
on Effectiveness of Controls and Procedures
The
Company’s management, including its chief executive officer
(principal executive officer) and chief financial officer
(principal accounting officer), does not expect that the
Company’s disclosure controls and procedures or internal
controls will prevent all errors and all fraud. A control system,
no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the
control system are met. Further, the design of a control system
must reflect the fact that there are resource constraints and the
benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company
have been detected. These inherent limitations include, but are not
limited to, the realities that judgments in decision-making can be
faulty and that breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more
people, or by management override of the control. The design of any
system of controls also is based in part upon certain assumptions
about the likelihood of future events and there can be no assurance
that any design will succeed in achieving its stated goals under
all potential future conditions. Over time, controls may become
inadequate because of changes in conditions, or the degree of
compliance with the policies or procedures may deteriorate. Because
of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be
detected.
Changes
in Internal Controls
During
the quarter ended June 30, 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
On
August 16 2018, Axis Employment Agency Inc. filed a statement of
claim against the Company’s subsidiary, Vape Brands
International Inc., in the Ontario Superior Court of Justice
seeking payment for unpaid services in the amount of $181,380
up
to the date of the claim. $156,532 of the claim pertains to
services provided before June 30, 2018 which
has already
been recorded on the Company's records as of June 30, 2018. The
proceeding has been brought in the Ontario Superior Court of
Justice under the following caption: Axis Employment Agency Inc. v.
Vape Brands International Inc., Court File No. CV-18-00008047-0000,
filed August 16, 2018.
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 June
21, 2018, the Company issued 600,000 Common Shares of the Company
at a price of $0.10 per Common Shares as settlement of $60,000 in
consulting fees owing to an unrelated party, pursuant to exemptions
from the registration requirements of the Securities Act available
under Section 4(a)(2) and Rule 506 of Regulation D promulgated
thereunder.
ITEM
3.
DEFAULTS
UPON SENIOR SECURITIES
None.
ITEM
4.
MINE
SAFETY DISCLOSURES
Not
applicable.
ITEM
5.
OTHER
INFORMATION
None.
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Incorporated by
Reference
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Exhibit
Number
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Exhibit
Description
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Filed
Herewith
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Form
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Exhibit
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Filing Date
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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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101.SCH
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XBRL
Taxonomy Extension Schema
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101.CAL
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XBRL
Taxonomy Extension Calculation Linkbase
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101.DEF
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XBRL
Taxonomy Definition Linkbase
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101.LAB
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XBRL
Taxonomy Extension label Linkbase
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101.PRE
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XBRL
Taxonomy Extension Presentation Linkbase
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* This
certification is deemed not filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”), or otherwise subject to the liability of that section,
nor shall it be deemed incorporated by reference into any filing
under the Securities Act or the Exchange Act.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
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GILLA INC.
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(Registrant)
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Date:
September 28, 2018
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By:
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/s/
Graham Simmonds
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Name:
Graham Simmonds
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Title:
Chief Executive Officer and
Principal
Executive Officer
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By:
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/s/
Ashish Kapoor
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Name:
Ashish Kapoor
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Title:
Chief Financial Officer and
Principal
Accounting Officer
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