Notes to Consolidated Financial Statements
December 31, 2017 and 2016
(Amounts expressed in US Dollars)
1. NATURE OF OPERATIONS
Gilla
Inc. (“Gilla”, the “Company” or the
“Registrant”) was incorporated under the laws of the
state of Nevada on March 28, 1995 under the name of Truco, Inc. The
Company’s registered address is 475 Fentress Blvd., Unit L,
Daytona Beach, Florida 32114.
The current business of the Company consists of the manufacturing,
marketing and distribution of E-liquid (“E-liquid”),
which is the liquid used in vaporizers and electronic cigarettes
(“E-cigarettes”), and developer of turn-key vapor and
cannabis concentrate solutions for high-terpene vape oils, pure
crystalline, high-performance vape pens and other targeted
products.
2. GOING CONCERN
These consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of
business. As shown in these consolidated financial statements, at
December 31, 2017, the Company has an accumulated deficit of
$19,898,841 (December 31, 2016 – $13,250,894) and a working
capital deficiency of $4,659,008 (December 31, 2016 –
$5,199,697 as well as negative cash flows from operating activities
of $1,898,335 (December 31, 2016 – $1,939,969) for the year
ended December 31, 2017. 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 consolidated financial statements do not include any
adjustments to the recorded assets or liabilities, that might be
material, should the Company have to curtail operations or be
unable to continue in existence.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
Company's consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”) for annual
financial statements and with Form 10-K and article 8 of the
Regulation S-X of the United States Securities and Exchange
Commission (“SEC”).
(b)
Basis of
Consolidation
These
consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries: Gilla Operations, LLC; 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”); 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 consolidated financial
statements.
(c)
Foreign Currency
Translation
The
Company’s Canadian subsidiaries maintain their books and
records in Canadian Dollars (CAD) which is also their functional
currency. The Company’s Irish and Slovakian subsidiaries
maintain their books and records in Euros (EUR) which is also their
functional currency. The Company’s Hungarian subsidiary
maintains its books and records in Hungarian Forint (HUF) which is
also its functional currency. The Company and its U.S. subsidiaries
maintain their books and records in United States Dollars (USD)
which is both the Company’s functional currency and reporting
currency. The accounts of the Company are translated into United
States Dollars in accordance with provisions of Financial
Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) No. 830,
Foreign Currency Matters
(“ASC
830”). Transactions denominated in currencies other than the
functional currency are translated into the functional currency at
the exchange rates prevailing at the dates of the transaction.
Monetary assets and liabilities denominated in foreign currencies
are translated using the exchange rate prevailing at the balance
sheet date. Non-monetary assets and liabilities are translated
using the historical rate on the date of the transaction. Revenue
and expenses are translated at average rates in effect during the
reporting periods. All exchange gains or losses arising from
translation of these foreign currency transactions are included in
net income (loss) for the period. In translating the financial
statements of the Company's foreign subsidiaries from their
functional currencies into the Company's reporting currency of
United States Dollars, balance sheet accounts are translated using
the closing exchange rate in effect at the balance sheet date and
income and expense accounts are translated using an average
exchange rate prevailing during the reporting period. Adjustments
resulting from the translation, if any, are included in accumulated
other comprehensive income in stockholders' equity. The Company has
not, as at the date of these consolidated financial statements,
entered into derivative instruments to offset the impact of foreign
currency fluctuations.
(d)
Earnings (Loss) Per
Share
Basic
earnings (loss) per share is computed by dividing net income (loss)
by the weighted average number of Common Shares outstanding for the
period, computed under the provisions of ASC No. 260-10,
Earnings per Share
(“ASC 260-10”). Diluted earnings (loss) per share is
computed by dividing net income (loss) by the weighted average
number of Common Shares outstanding plus common stock equivalents
(if dilutive) related to convertible preferred stock, stock options
and warrants for each period. There were no common stock equivalent
shares outstanding at December 31, 2017 and 2016 that have been
included in the diluted loss per share calculation as the effects
would have been anti-dilutive.
(e)
Cash and Cash
Equivalents
The
Company considers all highly liquid investments with original
maturities of three months or less to be cash
equivalents.
(f)
Financial
Instruments
Financial assets
and financial liabilities are recognized in the balance sheet when
the Company has become party to the contractual provisions of the
instruments.
The
Company’s financial instruments consist of cash and cash
equivalents, trade receivables, accounts payable, accrued interest,
due to related parties, accrued liabilities, customer deposits,
promissory notes, convertible debentures, loans from shareholders,
amounts owing on acquisitions and term loans. The fair values of
these financial instruments approximate their carrying value, due
to their short term nature. Fair value of a financial instrument is
defined as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The Company’s
financial instruments recorded at fair value in the consolidated
balance sheets are categorized based upon the level of judgment
associated with the inputs used to measure their fair value.
Hierarchical levels, defined by ASC No. 820,
Fair Value Measurement and Disclosure
(“ASC 820”)
,
with the related amount of subjectivity associated with the inputs
to value these assets and liabilities at fair value for each level,
are as follows:
Level
1:
|
-
|
Unadjusted quoted
prices in active markets for identical assets or
liabilities;
|
Level
2:
|
-
|
Observable inputs
other than Level 1 prices such as quoted prices for
similar assets or liabilities; quoted prices in markets with
insufficient volume or infrequent transactions (less active
markets); or model-derived valuations in which all significant
inputs are observable or can be derived principally from or
corroborated by observable market data for substantially the full
term of the assets or liabilities; and
|
Level
3:
|
-
|
Inputs
that are not based on observable market data.
|
Cash
and cash equivalents are reflected on the consolidated balance
sheets at fair value and classified as Level 1 hierarchy because
measurements are determined using quoted prices in active markets
for identical assets.
In
accordance with ASC No. 720,
Other
Expenses
(“ASC 720”), Company expenses all
advertising costs as incurred. During the year ended December 31,
2017, the Company expensed $261,974 (December 31, 2016 –
$315,174) as corporate promotions which have been recorded as an
administrative expense.
The
Company records revenue when the following criteria are met:
persuasive evidence of an arrangement exists; delivery has
occurred; the selling price to the customer is fixed and
determinable; and collectability is reasonably assured. Customers
take delivery at the time of shipment for terms designated free on
board shipping point. For sales designated free on board
destination, customers take delivery when the product is delivered
to the customer's delivery site. Provisions for sales incentives,
product returns, and discounts to customers are recorded as an
offset to revenue in the same period the related revenue is
recorded.
(i)
Property and
Equipment
Property and
Equipment is measured at cost less accumulated depreciation and
accumulated impairment losses. Costs include expenditures that are
directly attributable to the acquisition of the asset. Gains and
losses on disposal of an item of property and equipment is
determined by comparing the proceeds from disposal with the
carrying amount of the property and equipment which is recognized
in the statement of operations.
Depreciation is
recognized in the statement of operations on a straight-line basis
over the estimated useful lives of each part of an item of property
and equipment, since this most closely reflects the expected
pattern of consumption of the future economic benefits embodied in
the asset.
The
estimated useful lives of the respective assets are as
follows:
Furniture
and equipment:
|
3
years
|
Computer
hardware:
|
3
years
|
Manufacturing
equipment:
|
3
years
|
Depreciation
methods, useful lives and residual values are reviewed at each
financial year-end and adjusted if appropriate.
Inventory consists
of finished E-liquid bottles, E-liquid components, bottles,
E-cigarettes and accessories as well as related packaging.
Inventory is stated at the lower of cost as determined by the
first-in, first-out (FIFO) cost method, or market value. The
Company measures inventory write-downs as the difference between
the cost of inventory and market value. At the point of any
inventory write-downs to market, the Company establishes a new,
lower cost basis for that inventory, and any subsequent changes in
facts and circumstances do not result in the restoration of the
former cost basis or increase in that newly established cost
basis.
The
Company reviews sales and returns from the preceding 12 months as
well as future demand forecasts and writes off any excess or
obsolete inventory. The Company also assesses inventory for
obsolescence by testing inventory to ensure they have been properly
stored and maintained so that they will perform according to
specifications. In addition, the Company assesses the market for
competing products to determine if existing inventory will be
competitive in the marketplace.
If
there were to be a sudden and significant decrease in future demand
for the Company’s products, or if there were a higher
incidence of inventory obsolescence because of rapidly changing
technology or customer demands, the Company could be required to
write down inventory, and accordingly, gross margin could be
adversely affected.
(k)
Shipping and
Handling Costs
The
Company does not record any shipping income. When the Company
charges its customers a cost associated with shipping and handling,
it records that cost in administrative expenses as an offset to the
Company’s shipping expense. During the year ended December
31, 2017, the Company expensed $462,716 (December 31, 2016 –
$341,749) as shipping expense which have been recorded as an
administrative expense.
The
Company follows ASC No. 740-10,
Income Taxes
(“ASC
740-10”), which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of
events that have been included in the consolidated financial
statements or tax returns. Under this method, deferred tax assets
and liabilities are determined based on the difference between
financial statements and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences
are expected to reverse. Temporary differences between taxable
income reported for financial reporting purposes and income tax
purposes include, but are not limited to, accounting for
intangibles, debt discounts associated with convertible debt,
equity based compensation and depreciation and amortization. A
valuation allowance is provided to reduce the deferred tax assets
reported if, based on the weight of available evidence, it is more
likely than not that some portion or all of the deferred tax assets
will not be realized.
(m)
Impairment of Long
Lived Assets
Long-lived assets
to be held and used by the Company are periodically reviewed to
determine whether any events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. For
long-lived assets to be held and used, the Company bases its
evaluation on impairment indicators such as the nature of the
assets, the future economic benefit of the assets, any historical
or future profitability measurements, as well as other external
market conditions or factors that may be present. In the event that
facts and circumstances indicate that the carrying amount of an
asset or asset group may not be recoverable and an estimate of
future undiscounted cash flows is less than the carrying amount of
the asset, an impairment loss will be recognized for the difference
between the carrying value and the fair value.
Goodwill represents
the excess purchase price over the estimated fair value of net
assets acquired by the Company in business combinations. The
Company accounts for goodwill and intangible assets in accordance
with ASC No. 350,
Intangibles-Goodwill and Other
(“ASC 350”). ASC 350 requires that goodwill and other
intangibles with indefinite lives be tested for impairment annually
or on an interim basis if events or circumstances indicate that the
fair value of an asset has decreased below its carrying value. In
addition, ASC 350 requires that goodwill be tested for impairment
at the reporting unit level (operating segment or one level below
an operating segment) on an annual basis and between annual tests
when circumstances indicate that the recoverability of the carrying
amount of goodwill may be in doubt. Application of the goodwill
impairment test requires judgment, including the identification of
reporting units, assigning of assets and liabilities to reporting
units, assigning of goodwill to reporting units, and determining
the fair value. Significant judgments required to estimate the fair
value of reporting units include estimating future cash flows,
determining appropriate discount rates and other assumptions.
Changes in these estimates and assumptions or the occurrence of one
or more confirming events in future periods could cause the actual
results or outcomes to materially differ from such estimates and
could also affect the determination of fair value and/or goodwill
impairment at future reporting dates.
(o)
Comprehensive
Income or Loss
The
Company reports comprehensive income or loss in its consolidated
financial statements. In addition to items included in net income
or loss, comprehensive income or loss includes items charged or
credited directly to stockholders’ equity, such as foreign
currency translation adjustments and unrealized gains or losses on
available for sale marketable securities.
The
preparation of consolidated financial statements in conformity with
U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of
revenue and expenses during the period. Actual results could differ
from these estimates, and such differences could be
material. The key sources of estimation uncertainty at the
balance sheet date, which have a significant risk of causing a
material adjustment to the carrying amounts of assets within the
next financial year, include reserves and write downs of
receivables and inventory, useful lives and impairment of property
and equipment, impairment of goodwill, accruals, valuing stock
based compensation, valuing equity securities, valuing options or
convertible debentures and deferred taxes and related valuation
allowances. Certain of the Company’s estimates could be
affected by external conditions, including those unique to the
Company’s industry and general economic conditions. It
is possible that these external factors could have an effect on the
Company’s estimates that could cause actual results to differ
from its estimates. The Company re-evaluates all of its
accounting estimates at least quarterly based on the conditions and
records adjustments when necessary.
(q)
Website Development
Costs
Under the provisions of ASC No.
350,
Intangibles –
Goodwill and Other
(“ASC 350”), the Company
capitalizes costs incurred in the website application and
infrastructure development stage. Capitalized costs are amortized
over the estimated useful life of websites which the Company
considers to be five years. Ongoing website post-implementation
cost of operations, including training and application, will be
expensed as incurred.
(r)
Convertible Debt Instruments
The
Company accounts for convertible debt instruments when the Company
has determined that the embedded conversion options should not be
bifurcated from their host instruments in accordance with ASC No.
470-20,
Debt with Conversion and
Other Options
(“ASC 470-20”). The Company
records, when necessary, discounts to convertible notes for the
intrinsic value of conversion options embedded in debt instruments
based upon the differences between the fair value of the underlying
common stock at the commitment date of the note transaction and the
effective conversion price embedded in the note. The Company
amortizes the respective debt discount over the term of the notes,
using the straight-line method, which approximates the effective
interest method. The Company records, when necessary, induced
conversion expense, at the time of conversion for the difference
between the reduced conversion price per share and the original
conversion price per share.
The
Company accounts for common stock purchase warrants at fair value
in accordance with ASC No. 815-40,
Derivatives and Hedging
(“ASC
815-40”). The Black-Scholes option pricing valuation method
is used to determine the fair value of warrants consistent with ASC
No. 718,
Compensation –
Stock Compensation
(“ASC 718”). Use of this
method requires that the Company make assumptions regarding stock
value, dividend yields, expected term of the warrants and risk free
interest rates.
(t)
Stock Issued in
Exchange for Services
The
valuation of the Company’s common stock issued in exchange
for services is valued at an estimated fair market value as
determined by the most readily determinable value of either the
stock or services exchanged.
On
acquisition, intangible assets, other than goodwill, are initially
recorded at their fair value. Following initial recognition,
intangible assets with a finite life are amortized on a straight
line basis over their useful lives. Useful lives are assessed at
year end.
The
following useful lives are used in the calculation of
amortization:
Brands:
|
|
5
years
|
Customer
relationships:
|
|
5
years
|
(v)
Recently Adopted
Accounting Pronouncements
In
November 2015, the FASB issued Accounting Standards Update
(“ASU”) No. 2015-17,
Income Taxes (Topic 740): Balance Sheet
Classification of Deferred Taxes
(“ASU
2015-17”). ASU 2015-17 simplifies the presentation of
deferred income taxes by eliminating the separate classification of
deferred income tax liabilities and assets into current and
noncurrent amounts in the consolidated balance sheet statement of
financial position. The amendments in the update require that all
deferred tax liabilities and assets be classified as noncurrent in
the consolidated balance sheet. The amendments in this update are
effective for annual periods beginning after December 15, 2016, and
interim periods therein and may be applied either prospectively or
retrospectively to all periods presented. Adoption of ASU 2015-17
did not have an impact on the Company’s consolidated
financial statements.
In
March 2016, the FASB issued ASU No. 2016-09,
Compensation – Stock Compensation
(Topic 718): Improvements to
Employee Share-Based Payment Accounting
(“ASU
2016-09”)
.
This
update requires that all excess tax benefits and tax deficiencies
arising from share-based payment awards should be recognized as
income tax expense or benefit on the income statement. The
amendment also states that excess tax benefits should be classified
along with other income tax cash flows as an operating activity. In
addition, an entity can make an entity-wide accounting policy
election to either estimate the number of awards expected to vest
or account for forfeitures as they occur. The provisions of this
update are effective for annual and interim periods beginning
after December 15, 2016. Adoption of ASU 2016-09 did not have
an impact on the Company’s consolidated financial
statements.
In
October 2016, the FASB issued ASU No. 2016-17,
Consolidation (Topic 810): Interests Held
through Related Parties That Are under Common Control
(“ASU 2016-17”). The new guidance changed how a
reporting entity that is a single decision maker for a variable
interest entity (“VIE”) will consider its indirect
interests in that VIE when determining whether the reporting entity
is the primary beneficiary and should consolidate the VIE. Under
previous U.S. GAAP, a single decision maker in a VIE is required to
consider an indirect interest held by a related party under common
control in its entirety. Under ASU 2016-17, the single decision
maker will consider the indirect interest on a proportionate basis.
Adoption of ASU 2016-17 did not have an impact on the
Company’s consolidated financial statements.
(d)
Recent Accounting
Pronouncements
The
Company has reviewed all recently issued, but not yet effective,
accounting pronouncements and other than the below, does not expect
the future adoption of any such pronouncements to have a
significant impact on its results of operations, financial
condition or cash flow.
In 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. The Company has
evaluated the guidance and has determined that it will have no
impact on its consolidated financial statements.
’
In
February 2016, the FASB issued ASU No. 2016-02,
Leases
(Topic 842)
(“ASU 2016-02”). ASU
2016-02 requires lessees to recognize all leases with terms in
excess of one year on their balance sheet as a right-of-use asset
and a lease liability at the commencement date. The new standard
also simplifies the accounting for sale and leaseback transactions.
The amendments in this update are effective for annual periods
beginning after December 15, 2018, and interim periods therein and
must be adopted using a modified retrospective method for leases
existing at, or entered into after, the beginning of the earliest
comparative period presented in the financial statements. Early
adoption is permitted. The Company is evaluating the guidance and
has not yet determined the impact on its 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. The
Company has evaluated the guidance and has determined that it will
have no impact on its 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. The
Company has evaluated the guidance and has determined that it will
have no 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 August 2016, the FASB issued ASU No.
2016-15,
Statement of Cash Flows (Topic
230): Classification of Certain Cash Receipts and Cash Payments (a
consensus of the Emerging Issues Task Force)
(“ASU 2016-15”), which clarifies how
certain cash receipts and cash payments are presented and
classified in the statement of cash flows. Among other
clarifications, the guidance requires that cash proceeds received
from the settlement of corporate-owned life insurance (COLI)
policies be classified as cash inflows from investing activities
and that cash payments for premiums on COLI policies may be
classified as cash outflows for investing activities, operating
activities or a combination of both. The guidance is effective for
fiscal years beginning after December 15, 2017, with early
adoption permitted. Retrospective application is required. The
Company has evaluated the guidance and has determined that it will
have no impact on its 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.
The Company has evaluated the guidance and has determined that it
will have no 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 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. The Company has evaluated the guidance
and has determined that it will have no 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.
4. AMOUNTS OWING ON ACQUISITIONS
The
Company has outstanding current amounts owing on acquisitions as
follows:
|
|
|
Unsecured
Promissory Notes
(a)
|
$
-
|
$
783,317
|
Promissory Note
Settlement
(a)
|
120,000
|
-
|
Due to TMA
Vendors
(b)
|
55,000
|
55,000
|
Earn-Out on VBI
acquisition
(c)
|
209,487
|
-
|
VTB on VBI
acquisition
(c)
|
154,465
|
-
|
|
$
538,952
|
$
838,317
|
The
Company has outstanding long term amounts owing on acquisitions as
follows:
|
|
|
Promissory Note
Settlement
(a)
|
$
270,967
|
$
-
|
Earn-Out on VBI
acquisition
(c)
|
871,825
|
-
|
VTB on VBI
acquisition
(c)
|
221,482
|
-
|
|
$
1,364,274
|
$
-
|
(a)
On July 1, 2015,
the Company acquired all of the issued and outstanding shares of E
Vapor Labs, a Florida based E-liquid manufacturer. The Company
acquired E Vapor Labs in order to procure an E-liquid manufacturing
platform allowing the Company to secure large private label
contracts as well as manufacture its own brands going
forward.
In
consideration for the acquisition, the Company paid to the vendors,
$225,000 in cash and issued $900,000 in unsecured promissory notes
on closing (collectively, the “Unsecured Promissory
Notes”). The Unsecured Promissory Notes were issued in three
equal tranches of $300,000 due four (4), nine (9) and eighteen (18)
months respectfully from closing (individually, “Promissory
Notes A”, “Promissory Notes B”, and
“Promissory Notes C”, respectively). The Unsecured
Promissory Notes were all unsecured and non-interest bearing. The
Unsecured Promissory Notes were all and each subject to adjustments
as outlined in the share purchase agreement (the
“SPA”), dated June 25, 2015.
At
December 31, 2015, the Company adjusted the Promissory Notes A for
$116,683 which was the known difference in the working capital
balance at closing of the acquisition from the amount specified in
the SPA. Furthermore, a 12% discount rate was used to calculate the
present value of the Unsecured Promissory Notes based on the
Company’s estimate of cost of financing for comparable
instruments with similar term and risk profiles. Over the term of
the respective Unsecured Promissory Notes, interest was accrued at
12% per annum to accrete the Unsecured Promissory Notes to their
respective principal amounts. During the year ended December 31,
2017, the Company recorded $nil in interest expense related to the
accretion of the Unsecured Promissory Notes (December 31, 2016 -
$39,772).
|
|
|
|
|
Present
value at December 31, 2015
|
$
203,573
|
$
291,620
|
$
267,857
|
$
763,050
|
Measurement period
adjustment
|
(19,505
)
|
-
|
-
|
(19,505
)
|
Interest expense
related to accretion
|
(751
)
|
8,380
|
32,143
|
39,772
|
Present
value at December 31, 2016
|
$
183,317
|
$
300,000
|
$
300,000
|
$
783,317
|
On
August 30, 2017, the Company entered into a settlement agreement
(the “Promissory Note Settlement”) with the holders of
the Unsecured Promissory Notes to settle all claims between them.
As a result of the Promissory Note Settlement, the Company agreed
to settle the Unsecured Promissory Notes with a total payment of
$600,000 payable as two (2) payments of $20,000 due September 21,
2017 and October 21, 2017 and $10,000 per month for the following
fifty-six (56) months beginning November 21, 2017. The Company may
prepay the balance of the Promissory Note Settlement at any time
and would receive a 10% discount on the outstanding balance upon
doing so. A 15% discount rate has been used to calculate the
present value of the Promissory Note Settlement based on the
Company’s estimate of cost of financing for comparable
instruments with similar term and risk profiles. The present value
of the Promissory Note Settlement was calculated to be $431,033,
and as a result, the Company has recorded a gain on settlement in
the amount of $352,284. Over the term of the Promissory Note
Settlement, interest will be accrued at 15% per annum to accrete
the Promissory Note Settlement to its respective principal amount.
During the year ended December 31, 2017, the Company recorded
$19,934 in interest expense related to the accretion of the
Promissory Note Settlement (December 31, 2016 - $nil).
|
|
Present value of
Promissory Note Settlement at the settlement date
|
$
431,033
|
Payments
made
|
(60,000
)
|
Interest expense
related to accretion
|
19,934
|
Less: Current
amount owing
|
(120,000
)
|
Present
value at December 31, 2017
|
$
270,967
|
|
|
(b)
On December
2, 2015, the
Company acquired all of the assets of The Mad Alchemist, LLC
(“TMA”), an E-liquid manufacturer, including the
assets, rights and title to own and operate The Mad
Alchemist™ and Replicant E-liquid brands (the “TMA
Brands”).
In
consideration for the acquisition, the Company issued 819,672
Common Shares valued at $0.122 per share for a total value of
$100,000; agreed to pay a total of $400,000 in deferred payments
(the “Amounts Owing on Acquisition”), payable in ten
(10) equal payments of $20,000 in cash and $20,000 in Common Shares
every three (3) months following the closing date; and agreed to a
quarterly earn-out based on the gross profit stream derived from
product sales of the TMA Brands. The earn-out commenced on the
closing date and payed up to a maximum of 25% of the gross profit
stream. Furthermore, a 12% discount rate had been used to calculate
the present value of the Amounts Owing on Acquisition. Over the
term of the respective deferred payments, interest was accrued at
12% per annum to accrete the payments to their respective principal
amounts. No earn-out had ever been achieved and the Company has
since retired the TMA Brands. During the year ended December 31,
2017, the Company recorded $nil in interest expense related to the
accretion of the Amounts Owing on Acquisition (December 31, 2016
– $9,582).
On
April 15, 2016, the Company entered into a settlement agreement
(the “TMA Settlement Agreement”) with TMA and the
vendors of TMA (collectively, the “TMA Vendors”).
Subject to the terms and conditions of the TMA Settlement
Agreement, the parties settled: (i) any and all compensation and
expenses owing by the Company to the TMA Vendors and (ii) the
$400,000 of Amounts Owing on Acquisition in exchange for the
Company paying to the TMA Vendors a total settlement consideration
of $133,163 payable as $100,000 in cash and $33,163 in the
Company’s assets as a payment-in-kind. Of the $100,000
payable in cash under the TMA Settlement Agreement, $45,000 was
paid upon execution of the settlement, $27,500 was payable thirty
(30) days following execution of the settlement and the remaining
$27,500 was payable at the later of: (i) sixty (60) days following
execution of the settlement or (ii) the completion of the
historical audit of TMA. As a result of the TMA Settlement
Agreement, the Company has recorded a gain on settlement in the
amount of $274,051. As at December 31, 2017, $55,000 (December 31,
2016 – $55,000) remains payable to the TMA Vendors. In
addition, the Company and the TMA Vendors mutually terminated all
employment agreements between the Company and the TMA Vendors,
entered into on the closing date of the acquisition by the Company,
and all amounts were fully settled pursuant to the TMA Settlement
Agreement. Due to the change in circumstances, during the year
ended December 31, 2016, the Company tested goodwill and
intangibles for impairment and as a result, the Company has fully
impaired goodwill and intangible assets related to the acquired
assets of TMA in the amount of $208,376 and $122,983, respectively,
which formerly represented the value of brands, customer
relationships, workforce and business acumen acquired.
(c)
On July 31, 2017,
the Company’s wholly owned subsidiary, Gilla Enterprises,
acquired all of the issued and outstanding shares of VBI, a
Canada-based E-liquid manufacturer and distributor.
The
following summarizes the preliminary fair value of the assets
acquired, liabilities assumed and the consideration transferred at
the acquisition date:
|
|
Cash
|
$
1,377
|
Receivables
|
5,576
|
|
74,598
|
Inventory
|
83,820
|
|
214,765
|
|
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
)
|
Less: Current
amount owing
|
(209,487
)
|
Present
value at December 31, 2017
|
$
871,825
|
|
|
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
)
|
Less: Current
amount owing
|
(154,465
)
|
Long term portion at December 31, 2017
|
$
221,482
|
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
|
$
5,564,473
|
$
5,984,345
|
Pro forma loss from
operations
|
$
4,539,534
|
$
3,816,691
|
Pro forma net
loss
|
$
7,034,982
|
$
4,522,221
|
5. OTHER CURRENT ASSETS
Other
current assets consist of the following:
|
|
|
Vendor
deposits
|
$
22,760
|
$
13,256
|
Prepaid
expenses
|
17,240
|
90,021
|
Trade
currency
|
23,550
|
45,000
|
Other
receivables
|
112,095
|
103,104
|
|
$
175,645
|
$
251,381
|
Other
receivables include VAT receivable, HST receivable and holdback
amounts related to the Company’s merchant services
accounts.
6. INVENTORY
Inventory
consists of the following:
|
|
|
Vaping hardware and
accessories
|
$
-
|
$
105,496
|
E-liquid bottles -
finished goods
|
104,092
|
181,392
|
E-liquid
components
|
113,620
|
158,050
|
Bottles and
packaging
|
233,606
|
100,197
|
|
$
451,318
|
$
545,135
|
During the year ended December 31, 2017, the Company wrote off
$245,430 in obsolete inventory consisting of $148,134 in obsolete
inventory held in the Company’s warehouse in Europe and
$97,296 of inventory held on consignment. During the year ended
December 31, 2016, the Company wrote off $39,124 in obsolete
inventory consisting of $14,671 in obsolete inventory held in the
Company’s warehouse in Europe and $24,453 in obsolete
inventory held in the United States. No provision has been recorded
against inventory.
During
the years ended December 31, 2017 and 2016, the Company expensed
$1,640,684 and $1,927,657, respectively, of inventory as cost of
goods sold. At December 31, 2017, the full amount of the
Company’s inventory serves as collateral for the
Company’s secured borrowings.
7. PROPERTY AND EQUIPMENT
Property
and equipment consist of the following:
|
|
|
|
|
|
|
|
Furniture and
equipment
|
$
79,061
|
$
37,305
|
$
41,756
|
$
45,917
|
Leasehold
improvements
|
75,064
|
13,160
|
61,904
|
-
|
Computer
hardware
|
39,298
|
20,392
|
18,906
|
15,985
|
Manufacturing
equipment
|
213,992
|
50,741
|
163,251
|
31,166
|
|
$
407,415
|
$
121,598
|
$
285,817
|
$
93,068
|
During
the year ended December 31, 2017, the Company closed its office in
Hungary, and as a result, wrote off the value of the fixed assets
located on the premises in the amount of $12,228. During the year
ended December 31, 2017, the Company sold manufacturing equipment
to a related party which resulted in loss on sale of fixed asset in
the amount of $1,537. During the year ended December 31, 2016, the
Company wrote off $70,142 of manufacturing equipment that was not
in working order and that the Company was unable to
sell.
During
the years ended December 31, 2017 and 2016, the Company expensed
$73,114 and $56,055, respectively, in depreciation. At December 31,
2017, the full amount of the Company’s property and equipment
serves as collateral for the Company’s secured
borrowings.
8. WEBSITE DEVELOPMENT
Website
development consists of the following:
|
|
|
|
|
|
|
|
VaporLiq
website
|
$
10,000
|
$
4,917
|
$
5,083
|
7,083
|
Amortization
expense on website development for the years ended December 31,
2017 and 2016 amounted to $2,000 for each year. 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
|
$
51,701
|
$
342,712
|
$
37,000
|
Customer
relationships
|
393,433
|
44,336
|
349,097
|
123,300
|
|
$
787,846
|
$
96,037
|
$
691,809
|
$
160,300
|
|
|
|
|
|
During the year ended December 31, 2017, the Company determined
that the customer relationships acquired through the acquisition of
E Vapor Labs were impaired due to changes in the marketplace that
caused the Company to move in a direction different from the
acquired E Vapor Labs business that serviced those customers. As a
result, the Company recorded an impairment of intangible assets in
the amount of $70,000.
During
the year ended December 31, 2016, the Company determined that the
intangible assets acquired through the acquisition of the assets of
TMA were impaired, and as a result, the Company recorded an
impairment of intangible assets in the amount of
$122,983.
Amortization expense on intangible assets for the years ended
December 31, 2017 and 2016 amounted to $103,337 and $92,000,
respectively. The estimated amortization expense for the years
ended December 31, 2018 and 2019 approximates $157,564 per year.
For the years ended 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
|
$
889,497
|
$
1,252,084
|
Measurement
period adjustment
|
-
|
(154,211
)
|
Acquisition
of VBI (Note 4)
|
1,596,553
|
-
|
Impairment
|
(109,444
)
|
(208,376
)
|
End of period
|
$
2,376,606
|
$
889,497
|
|
|
|
During the year ended December 31, 2017, the Company tested
goodwill for impairment, and as a result, the Company fully
impaired goodwill related to the acquisition of the assets of Vapor
Liq in the amount of $109,444 which formerly represented the value
of business acumen and access to key E-liquid brands acquired. The
goodwill has been impaired as
it is difficult to allocate value
to VaporLiq business acumen and new purchases of brands are not due
to business acumen acquired from the acquisition
.
During
the year ended December 31, 2016, the Company tested goodwill for
impairment, and as a result, the Company fully impaired goodwill
related to the acquisition of the assets of TMA in the amount of
$208,376 which formerly represented the value of workforce and
business acumen acquired.
11. LOANS FROM SHAREHOLDERS
The
Company has outstanding current loans from shareholders as
follows:
|
|
|
Non-interest
bearing, unsecured, no specific terms of repayment
(i)
|
$
-
|
$
5,000
|
Bears interest of
1.5% per month on a cumulative basis, unsecured, no specific terms
of repayment
(ii)
|
13,116
|
23,223
|
Bears interest of
6% per annum on a cumulative basis, secured by the assets of the
Company, matures on March 2, 2018
(v)
|
244,187
|
401,485
|
|
$
257,303
|
$
429,708
|
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
(iii)
|
$
351,679
|
$
350,962
|
Bears interest of
10% per annum on a cumulative basis, secured by the assets of the
Company, matures on April 30, 2019
(iv)
|
90,828
|
95,728
|
Bears interest of
10% per annum on a cumulative basis, secured by the assets of the
Company, matures on April 30, 2019
(vi)
|
144,611
|
-
|
Bears interest of
10% per annum on a cumulative basis, secured by the assets of the
Company, matures on April 30, 2019
(vii)
|
207,517
|
-
|
Bears interest of
6% per annum on a cumulative basis, secured by the assets of the
Company, matures on March 2, 2018
(v)
|
-
|
24,951
|
|
$
794,635
|
$
471,641
|
(i)
During the year
ended December 31, 2017, amounts owing to a shareholder increased
from $5,000 to $22,692 which was then fully settled through the
issuance of 226,920 private placement units at a price of $0.10 per
unit. 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.
(ii)
During the year
ended December 31, 2017, the Company accrued interest of $5,621 on
this shareholder loan (December 31, 2016 – $5,992). Total
accrued interest owing on such shareholder loan at December 31,
2017 was $19,341 (December 31, 2016 – $12,784) which is
included in accrued liabilities. During the year ended December 31,
2017, $10,000 of amounts owing on such shareholder loan was settled
with the issuance of face value $10,000 of Convertible Debentures
Series C-3 (note 15) and $3,512 was settled with cash.
(iii)
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 17(l and hh)). The
relative fair value of the warrants issued were recorded as debt
discount to be amortized over the life of the loan. At December 31,
2017, the value of the Secured Note was $351,679 (December 31, 2016
– $350,962) including a debt discount of $46,871. During the
years ended December 31, 2017 and 2016, the Company expensed
$15,531 and $15,178, 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 year ended December 31, 2017, the Company accrued interest of
$51,805 on the Secured Note (December 31, 2016 – $44,888).
Total accrued interest owing on the Secured Note at December 31,
2017 was $151,948 (December 31, 2016 – $93,221) which is
included in accrued liabilities.
(iv)
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 17(l and hh)). The relative fair value of the
warrants issued were recorded as debt discount to be amortized over
the life of the loan. At December 31, 2017, the value of the
Secured Note No.2 was $90,828 including a debt discount of $9,172
(December 31, 2016 – $95,728). During the years ended
December 31, 2017 and 2016, the Company expensed $3,292 and $3,052,
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 year ended December 31, 2017, the Company accrued interest of
$13,105 on the Secured Note No.2 (December 31, 2016 –
$11,863). Total accrued interest owing on the Secured Note No.2 at
December 31, 2017 was $38,257 (December 31, 2016 – $25,152)
which is included in accrued liabilities.
(v)
On March 2, 2016,
the Company entered into a loan agreement (the “Loan
Agreement”) with a shareholder, whereby the shareholder would
make available to the Company the aggregate principal amount of CAD
$670,000 (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. At December 31, 2016, CAD $52,000 of the Loan Tranche B was
being held in trust by the shareholder to be released on the
incurrence of specific expenses. The Shareholder Loan bears
interest at a rate of 6% per annum, on the outstanding principal,
and shall mature on March 2, 2018, whereby any outstanding
principal together with all accrued and unpaid interest thereon
shall be due and payable. The Company shall also repay 5% of the
initial principal amount of Loan Tranche A and 5% of Loan Tranche
B, monthly in arrears, with the first principal repayment beginning
on June 30, 2016. The Company may elect to repay the outstanding
principal of the Shareholder Loan together with all accrued and
unpaid interest thereon prior to maturity without premium or
penalty. The Company also agreed to service the Shareholder Loan
during the term prior to making any payments to the Company’s
Chief Executive Officer, Chief Financial Officer and Board of
Directors. The Shareholder Loan is secured by a general security
agreement granting a general security interest over all the assets
of the Company. 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
17(g)). The relative fair value of the warrants issued were
recorded as debt discount to be amortized over the life of the
loan. At December 31, 2017, the value of the Shareholder Loan was
$244,187 (December 31, 2016 – $401,485) including a debt
discount of $10,885. During the years ended December 31, 2017 and
2016, the Company expensed $61,695 and $55,920, respectively, in
interest expense related to the amortization of the debt discount.
During the year ended December 31, 2017, CAD $350,000 of the
Shareholder Loan was assumed by a separate shareholder (see (vii)
below).
During
the year ended December 31, 2017, the Company accrued interest of
$31,510 on the Shareholder Loan (December 31, 2016 –
$22,832). Total accrued interest owing on the Shareholder Loan at
December 31, 2017 was $53,941 (December 31, 2016 – $23,433)
which is included in accrued liabilities. At December 31, 2017, the
Company owes the shareholder $255,072 in principal payments
(December 31, 2016 - $174,656).
(vi)
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 matured 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 17(n)). During the year ended December 31, 2017,
the Company and the shareholder extended the maturity date of
Bridge Loan to April 30, 2019 and, commencing on November 15, 2017,
the Company began accruing interest at a rate of 10% per annum. In
connection to the amendment, the Company issued warrants for the
purchase of Common Shares (note 17(hh)). The relative fair value of
the warrants issued were recorded as debt discount to be amortized
over the life of the loan. At December 31, 2017, the value of the
Bridge Loan was $144,611 including a debt discount of $14,808
(December 31, 2016 – $nil). During the years ended December
31, 2017 and 2016, the Company expensed $1,576 and $nil,
respectively, in interest expense related to the amortization of
the debt discount. The amendment to the Bridge Loan was accounted
for as a modification of debt and no gain or loss was recognized on
the amendments.
During
the year ended December 31, 2017, the Company accrued interest of
$1,998 on the Bridge Loan (December 31, 2016 – $nil). Total
accrued interest owing on the Bridge Loan at December 31, 2017 was
$1,998 (December 31, 2016 – $nil) which is included in
accrued liabilities.
(vii)
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
17(hh)). The relative fair value of the warrants issued were
recorded as debt discount to be amortized over the life of the
loan. At December 31, 2017, the value of the Shareholder Loan No.2
was $207,517 including a debt discount of $21,251 (December 31,
2016 – $nil). During the years ended December 31, 2017 and
2016, the Company expensed $2,262 and $nil, respectively, in
interest expense related to the amortization of the debt
discount.
During
the year ended December 31, 2017, the Company accrued interest of
$2,868 on the Shareholder Loan No.2 (December 31, 2016 –
$nil). Total accrued interest owing on the Shareholder Loan No.2 at
December 31, 2017 was $2,868 (December 31, 2016 – $nil) which
is included in accrued liabilities.
12. CREDIT FACILITY
On
August 1, 2014, the Company entered into a revolving credit
facility (the “Credit Facility”) with an unrelated
party acting as an agent to a consortium of participants (the
“Lenders”), whereby the Lenders would make a revolving
credit facility in the aggregate principal amount of CAD $500,000
for the exclusive purpose of purchasing inventory for sale in the
Company’s ordinary course of business to approved customers.
The Credit Facility charged interest at a rate of 15% per annum on
all drawn advances and a standby fee of 3.5% per annum on the
undrawn portion of the Credit Facility. The Credit Facility matured
on August 1, 2015 whereby the outstanding advances together with
all accrued and unpaid interest thereon would be due and payable.
On August 1, 2014, and in connection to the Credit Facility, the
Company issued warrants for the purchase of 250,000 Common Shares
exercisable over two years at an exercise price of $0.30 per share.
The Company’s Chief Executive Officer and Chief Financial
Officer were both participants of the consortium of participants of
the Credit Facility, each having committed to provide ten percent
of the principal amount of the Credit Facility. The Credit Facility
was secured by all of the Company’s inventory and accounts
due relating to any inventory as granted in an intercreditor and
subordination agreement by and among the Company, the Secured Note
holder and the Lenders to establish the relative rights and
priorities of the secured parties against the Company and a
security agreement by and between the Company and the
Lenders.
During
the year ended December 31, 2014, the Company was advanced $387,110
(CAD $449,083) from the Credit Facility for the purchase of
inventory including $77,453 (CAD $89,852) of advances from the
Company’s Chief Executive Officer and Chief Financial Officer
as their participation in the Credit Facility.
On
April 24, 2015, the Company was advanced $89,590 (CAD $124,000)
from the Credit Facility including $17,918 (CAD $24,800) of
advances from the Company’s Chief Executive Officer and Chief
Financial Officer as their participation in the Credit
Facility.
On
September 1, 2015, the Company was advanced $122,825 (CAD $170,000)
from the Credit Facility including $24,565 (CAD $34,000) of
advances from the Company’s Chief Executive Officer and Chief
Financial Officer as their participation in the Credit
Facility.
On
January 18, 2016, and in connection to the Term Loan (note 13), the
Company and the Lenders entered into a loan termination agreement
whereby the Company and the Lenders terminated and retired the
Credit Facility. As a result, CAD $294,000 in amounts advanced from
the Credit Facility and CAD $3,093 in accrued interest owing on the
Credit Facility were rolled into the Term Loan.
During
the year ended December 31, 2017, the Company paid $nil of interest
and standby fees as a result of the Credit Facility (December 31,
2016 – $2,189).
13. TERM LOAN
On
January 18, 2016, the Company entered into a term loan (the
“Term Loan”) with the Lenders, whereby the Lenders
would loan the Company the aggregate principal amount of CAD
$1,000,000 for capital expenditures, marketing expenditures and
working capital. The agent who arranged the Term Loan was not a
related party of the Company. The Term Loan bears interest at a
rate of 16% per annum, on the outstanding principal, and 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 under the intercreditor and
subordination agreement as well as the security agreement issued in
connection to the Credit Facility. 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 17(d))
exercisable until December 31, 2017 at an exercise price of $0.20
per share. In addition, the Company also extended the expiration
date of the 250,000 warrants (note 17(d)) issued on August 1, 2014
in connection with the Credit Facility until December 31, 2017,
with all other terms of the warrants remaining the same. The
relative fair value of the warrants issued were recorded as debt
discount to be amortized over the life of the loan.
The
Company’s Chief Executive Officer and Chief Financial Officer
are both participants of the consortium of Lenders of the Term
Loan, each having committed to provide ten percent of the principal
amount of the Term Loan. Neither the Chief Executive Officer nor
the Chief Financial Officer participated in the warrants issued or
warrants extended in connection with the Term Loan and both parties
have appropriately abstained from voting on the Board of Directors
to approve the Term Loan, where applicable.
On July
15, 2016, the Company and the Lenders of the Term Loan entered into
a term loan amendment (the “Term Loan Amendment”) in
which the Lenders agreed to extend to the Company an additional CAD
$600,000 in principal to increase the Term Loan facility up to the
aggregate principal amount of CAD $1,600,000. The parties also
extended the maturity date of the Term Loan to July 2, 2018 with
all other terms of the Term Loan remaining the same. The
Company’s Chief Executive Officer and its Chief Financial
Officer are both participants in the consortium of Lenders having
each committed to provide a total of CAD $150,000 of the initial
principal of the Term Loan and the additional principal of the Term
Loan pursuant to the Term Loan Amendment.
On July
15, 2016 and in connection to the Term Loan Amendment, the Company
issued warrants for the purchase of 300,000 Common Shares (note
17(k)) exercisable until December 31, 2018 at an exercise price of
$0.20 per share. The Company also extended the expiration dates of:
(i) the warrants for the purchase of 250,000 Common Shares (note
17(d)) issued on January 18, 2016 in connection to the Term Loan;
and (ii) the warrants for the purchase of 250,000 Common Shares
(note 17(d)) issued on August 1, 2014 and extended on January 18,
2016 in connection to the Term Loan, both until December 31, 2018,
with all other terms of the warrants remaining the same. The
relative fair value of the warrants issued were recorded as debt
discount to be amortized over the life of the loan.
During
the year ended December 31, 2016, the Company was advanced CAD
$1,600,000 from the Term Loan including the CAD $294,000 and CAD
$3,093 rolled in from the Credit Facility (note 12) 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 December 31, 2017, the
value of the Term Loan was $1,051,334 including a debt discount of
$48,485 (December 31, 2016 – $1,031,300). During the years
ended December 31, 2017 and 2016, the Company expensed $92,754 and
$62,210, 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 year ended December 31, 2017, the Company expensed $173,035 in
interest on the Term Loan (December 31, 2016 – $140,540).
Pursuant to the Cash Sweep, during the year ended December 31,
2017, the Company paid a total of $281,413 to the Lenders
consisting of $195,347 in interest and $88,066 in principal
repayments. During the year ended December 31, 2016, the Company
paid a total of $187,898 to the Lenders consisting of $111,083 in
interest and $76,815 in principal payments. At December 31, 2017,
the Company owes the Lenders a payment of $18,840, consisting fully
of interest which was paid to the Lenders on January 24, 2018 as
per the terms of the Cash Sweep (December 31, 2016 - $81,060,
consisting of $29,471 in interest and $51,589 in principal
repayments).
The
amount owing on the Term Loan is as follows:
|
|
|
Opening
balance/amount advanced
|
$
1,144,337
|
$
1,219,840
|
Debt discount
(net)
|
(68,768
)
|
(113,037
)
|
Exchange loss
(gain) during the period/year
|
86,143
|
(28,159
)
|
Principal payments
made
|
(88,066
)
|
(76,815
)
|
Interest
accrued
|
173,035
|
140,540
|
Interest payments
made
|
(195,347
)
|
(111,069
)
|
Ending
balance
|
$
1,051,334
|
$
1,031,300
|
14. PROMISSORY NOTES
The
Company has outstanding current promissory notes as
follows:
|
|
|
|
|
|
Unsecured, bears
interest at 15% per annum, matures February 18, 2019
(i)
|
$
230,109
|
$
-
|
Unsecured, bears
interest at 18% per annum, matures June 19, 2019
(iii)
|
30,000
|
-
|
Unsecured, bears
interest at 10% per annum, matures September 28, 2017
(v)
|
-
|
17,750
|
Secured, bears
interest at RBP + 2% per annum, due on demand
(vi)
|
39,855
|
-
|
Secured, bears
interest at RBP + 3% per annum, due on demand
(vii)
|
64,774
|
-
|
Lease agreement,
bears interest at 4.7% per annum, matures October 13,
2023
(viii)
|
23,441
|
-
|
Unsecured, interest
free, matures October 29, 2017
(ix)
|
7,971
|
-
|
Secured, bears
interest at 24%, matures March 6, 2018
(x)
|
102,372
|
-
|
|
$
498,522
|
$
17,750
|
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
(viii)
|
94,468
|
-
|
|
$
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 matures 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 years ended
December 31, 2017 and 2016, the Company expensed $2,212 and $nil,
respectively, in interest expense related to the amortization of
the debt discount (note 17(gg)). During the year ended December 31,
2017, the Company accrued $7,689 in interest on the promissory note
which has been recorded in accrued liabilities (December 31, 2016
– $nil). At December 31, 2017, the value of the promissory
note was $230,109 inclusive of a debt discount of $9,021 (December
31, 2016 – $nil). As of the filing 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
years ended December 31, 2017 and 2016, the Company expensed $3,765
and $nil, respectively, in interest expense related to the
amortization of the debt discount (note 17(ee)). During the year
ended December 31, 2017, the Company accrued $13,264 in interest on
the promissory note which has been recorded in accrued liabilities
(December 31, 2016 – $nil). At December 31, 2017, the value
of the promissory note was $234,034 inclusive of a debt discount of
$5,096 (December 31, 2016 – $nil).
(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 year
ended December 31, 2017, the Company paid $4,500 in interest on the
promissory note (December 31, 2016 – $nil). At December 31,
2017, $30,000 in principal on the promissory note has been
classified as a current liability and $17,500 has been classified
as a long term liability on the Company’s consolidated
balance sheet.
(iv)
On April 20, 2017,
the Company issued an unsecured promissory note in the principal
amount of $20,000. The principal together with interest at a rate
of 10% over the term of the promissory note is payable in monthly
instalments of $2,750 with the first payment due on May 15, 2017
and the final payment due on December 15, 2017. 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 year ended December 31, 2017, the Company paid
$2,000 in interest on the promissory note (December 31, 2016
– $nil). The unsecured promissory note was fully settled and
repaid at December 31, 2017.
(v)
On September 28,
2016, the Company issued an unsecured promissory note in the
principal amount of $21,000. The principal together with interest
at a rate of 10% per annum is payable in monthly instalments of
$2,000 with the first payment due on October 28, 2016 and the final
payment due on September 28, 2017. 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 year ended December 31, 2017, the Company paid $1,350 in
interest on the promissory note (December 31, 2016 – $750).
The unsecured promissory note was fully settled and repaid at
December 31, 2017.
(vi)
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 year ended December 31, 2017, the Company paid
$835 in interest on the facility (December 31, 2016 – $nil).
At December 31, 2017, $39,855 in principal remains owing on the
facility.
(vii)
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 year ended December 31, 2017, the Company paid
$1,712 in interest and made principal repayments of $8,835 on the
facility (December 31, 2016 – $nil and $nil, respectively).
At December 31, 2017, $64,774 in principal remains owing on the
facility.
(viii)
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 year ended December 31, 2017, the Company paid $2,041 in
interest and made principal repayments of $7,725 on the facility
(December 31, 2016 – $nil and $nil, respectively). At
December 31, 2017, a total of $117,909 in principal remains payable
under the lease with $23,441 being allocated to current liabilities
and $94,468 being allocated to long term liabilities on the
consolidated balance sheet.
(ix)
On closing of the
VBI acquisition, VBI had an amount owing to a vendor of VBI in the
principal amount of CAD $20,000. Pursuant to the share purchase
agreement, the Company agreed to repay the loan to the vendor with
two (2) payments of CAD $5,000, payable thirty (30) and sixty (60)
days after the closing and a final payment of CAD $10,000 due
ninety (90) days after the closing. The loan is unsecured and
interest free. During the year ended December 31, 2017, the Company
repaid CAD $10,000 (USD $7,971) in principal on the loan (December
31, 2016 – $nil). At December 31, 2017, the loan was in
default and CAD $10,000 (USD $7,971) in principal remained
outstanding which subsequently repaid in January 2018.
(x)
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 year ended December 31, 2017,
the Company accrued $1,616 in interest and $113 in standby fees on
the Revolving Facility (December 31, 2016 – $nil and $nil,
respectively). At December 31, 2017, $102,372 in principal remains
owing on the Revolving Facility.
15. 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
17(c)). The Convertible Debentures Series B mature on January 31,
2018 and bear interest at a rate of 8% per annum, payable quarterly
in arrears. The face value of the Convertible Debentures Series B,
together with all accrued and unpaid interest thereon, are
convertible into Common Shares 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 17(i)). The Convertible Debentures Series C mature
on January 31, 2018 and bear interest at a rate of 8% per annum,
accrued quarterly in arrears. The face value of the Convertible
Debentures Series C, together with all accrued and unpaid interest
thereon, are convertible into Common Shares 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
20(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 20(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 17(i)) was calculated using
the Black-Scholes option pricing model. The resulting fair value of
such Convertible Debentures Series C-1 was calculated to be
$140,263. The calculation of the effective conversion amount
resulted in a BCF because the effective conversion price was less
than the Company’s stock price on the date of issuance and a
BCF in the amount of $117,538, net of transaction costs, was
recorded in additional paid-in capital.
For the
face value $275,000 of Convertible Debentures Series C-2 issued on
December 31, 2016, the relative fair value of the warrants included
in the issuance totaling $143,871 (note 17(m)) was calculated using
the Black-Scholes option pricing model. The resulting fair value of
such Convertible Debentures Series C-2 was calculated to be
$131,129. The calculation of the effective conversion amount
resulted in a BCF because the effective conversion price was less
than the Company’s stock price on the date of issuance and a
BCF in the amount of $131,129, was recorded in additional paid-in
capital.
For the
face value $75,000 of Convertible Debentures Series C-3 issued on
January 20, 2017, the relative fair value of the warrants included
in the issuance totaling $43,737 (note 17(o)) was calculated using
the Black-Scholes option pricing model. The resulting fair value of
such Convertible Debentures Series C-3 was calculated to be
$31,263. The calculation of the effective conversion amount
resulted in a BCF because the effective conversion price was less
than the Company’s stock price on the date of issuance and a
BCF in the amount of $31,263, was recorded in additional paid-in
capital.
The BCF
and the fair value of the warrants, which represents debt discount,
is accreted over the life of the Convertible Debentures using the
effective interest rate. Amortization of debt discount was recorded
as follows:
|
|
|
Convertible
Debentures Series A
|
$
-
|
$
17,341
|
Convertible
Debentures Series B
|
210,130
|
52,781
|
Conversion of
Convertible Debentures Series B
|
342,399
|
-
|
Convertible
Debentures Series C-1
|
148,099
|
21,674
|
Conversion of
Convertible Debentures Series C-1
|
183,567
|
-
|
Convertible
Debentures Series C-2
|
190,219
|
2,750
|
Conversion of
Convertible Debentures Series C-2
|
82,031
|
-
|
Convertible
Debentures Series C-3
|
52,628
|
-
|
Conversion of
Convertible Debentures Series C-3
|
22,372
|
-
|
|
$
1,231,445
|
$
94,546
|
Convertible
Debentures as of December 31, 2017 and December 31, 2016, are as
follows:
|
|
Balance,
December 31, 2015
|
$
87,158
|
Face value
Convertible Debentures Series C-1
|
375,000
|
Face value
Convertible Debentures Series C-2
|
275,000
|
Relative fair value
of detachable warrants
|
(378,608
)
|
BCF
|
(248,667
)
|
Transaction
costs
|
(22,725
)
|
Amortization of
debt discount
|
94,546
|
Conversion
|
(23,000
)
|
Cash
settlements
|
(75,000
)
|
Balance,
December 31, 2016
|
$
83,704
|
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
|
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 December
31, 2017, 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 December 31, 2017, all Convertible Debentures Series A had
been fully settled and only the 328,571 Common Shares valued at
$23,000 remain unissued., see note 19.
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 20(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 20(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 20(c)).
As at
December 31, 2017, 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 year ended December 31, 2017, the Company recorded interest
expense in the amount of $72,870 on the Convertible Debentures
(December 31, 2016 – $74,162). The interest owing on the
convertible debentures is included in accrued liabilities on the
Company’s consolidated balance sheet.
16. COMMON STOCK
During
the year ended December 31, 2017, the Company:
●
Issued
19,083,818 Common Shares on a private placement basis, at a price
of $0.10 per private placement unit, consisting of one common share
and one half warrant (a “Unit”), for cash proceeds, net
of issuance costs, of $1,818,672;
●
Issued 1,998,950
Common Shares on a private placement basis, at a price of $0.10
Unit, for settlement of $199,895 in amounts owing to related
parties (note 20(c));
●
Issued 226,920
Common Shares on a private placement basis, at a price of $0.10
Unit, for settlement of $22,692 in amounts owing to a shareholder
(note 11(i));
●
Issued 320,022
Common Shares, at an average price of $0.156 per share, for
settlement of $50,000 in consulting fees owing to a shareholder,
previously granted and recognized as Common Shares to be issued at
December 31, 2016;
●
Issued 143,715
Common Shares, at an average price of $0.129 per share, for
settlement of $18,550 in consulting fees owing to an unrelated
party, previously granted and recognized as Common Shares to be
issued as at December 31, 2016;
●
Issued 366,667
Common Shares, at a price of $0.15 per share, for settlement of
$55,000 in consulting fees owing to an unrelated party, previously
granted and recognized as Common Shares to be issued as at December
31, 2016;
●
Issued 300,000
Common Shares, at a price of $0.10 per share, for settlement of
$30,000 in amounts owing to a director of the Company (note 20(a)).
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;
●
Issued 300,000
Common Shares, at a price of $0.167 per share, for settlement of
$50,000 in charitable contributions owing to an unrelated party
(note 22(d)). The amount allocated to Shareholders’
Deficiency, based on their fair value, amounted to $36,000. The
balance of $14,000 has been recorded as a gain on settlement of
debt;
●
Issued 50,000
Common Shares, at a price of $0.12 per share, as $6,000 in
employment income to an unrelated party;
●
Issued 871,000
Common Shares, at a price of $0.10 per share, for settlement of
$87,100 in directors fees owing to former directors of the Company
(note 20(a)). 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;
●
Issued 500,000
Common Shares on a private placement basis, at a price of $0.10
Unit, as settlement of the relative fair value of $48,485 in
financing fees in connection to the Term Loan Amendment No.2 (note
13). Of the 500,000 Common Shares issued, 93,622 Common Shares were
issued to related parties (note 20(c));
●
Issued 6,130,000
Common Shares, at a price of $0.10 per share, on conversion of
$613,000 of Convertible Debentures (note 15). The above amount
included the conversion of $291,000 of Convertible Debentures held
by related parties of the Company (note 20(c));
●
Issued 594,251
Common Shares, at price of $0.10 per share, for settlement of
$59,425 in interest owing on Convertible Debentures (note 15). The
above amount included the settlement of $30,843 of interest owing
on Convertible Debentures held by related parties of the Company
(note 20(c));
●
Issued 2,500,000
Common Shares, at a price of $0.14, for the acquisition of a
subsidiary; and
●
Issued 730,280
Common Shares on a private placement basis, at a price of $0.10 per
Unit, for cash proceeds of $50,000 and settlement of amounts owing
to an unrelated party in the amount of $23,028.
During
the year ended December 31, 2016, the Company:
●
Issued 480,000
Common Shares, at a price of $0.10 per share, for settlement of
$48,000 in deferred fees owing to a related party (note 20(c)). The
amount allocated to Shareholders’ Deficiency, based on their
fair value, amounted to $76,800. The balance of $28,800 has been
recorded as a loss on settlement of debt;
●
Issued 562,715
Common Shares, at an average price of $0.141 per share, for
settlement of $79,154 in consulting fees owing to unrelated
parties. The amount allocated to Shareholders’ Deficiency,
based on their fair value, amounted to $78,780. The balance of $374
has been recorded as a gain on settlement of debt; and
●
Issued 150,000
Common Shares, at a price of $0.14 per share, as $21,000 in related
party employment income (note 20(c)).
17. 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
|
17,560,000
|
$
0.23
|
1.21
|
8,177,373
|
$
0.25
|
1.39
|
Issued
|
18,927,782
|
0.21
|
1.61
|
11,935,000
|
0.21
|
2.05
|
Cancelled
|
(1,750,000
)
|
0.25
|
-
|
(1,125,000
)
|
0.25
|
1.13
|
Expired
|
(6,500,000
)
|
0.27
|
-
|
(1,427,373
)
|
0.19
|
-
|
End of
period
|
28,237,782
|
$
0.23
|
0.84
|
17,560,000
|
$
0.23
|
1.21
|
|
|
|
|
|
|
|
The
Company has issued warrants for the purchase of Common Shares of
the Company as follows:
Issuance
Date
|
|
|
|
|
|
|
|
|
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 30,
2015
|
(b)
|
250,000
|
1.50
|
0.20
|
0.88
%
|
Nil
|
190
%
|
26,821
|
December 31,
2015
|
(c)
|
3,250,000
|
2.00
|
0.20
|
1.19
%
|
Nil
|
265
%
|
516,343
|
January 18,
2016
|
(d)
|
250,000
|
2.46
|
0.20
|
0.91
%
|
Nil
|
263
%
|
51,598
|
February 18,
2016
|
(e)
|
300,000
|
2.00
|
0.25
|
0.80
%
|
Nil
|
275
%
|
30,501
|
February 18,
2016
|
(f)
|
1,500,000
|
2.00
|
0.25
|
0.80
%
|
Nil
|
275
%
|
152,503
|
March 2,
2016
|
(g)
|
1,000,000
|
2.00
|
0.20
|
0.91
%
|
Nil
|
271
%
|
158,995
|
April 13,
2016
|
(h)
|
1,750,000
|
2.00
|
0.25
|
0.88
%
|
Nil
|
264
%
|
241,754
|
May 20,
2016
|
(i)
|
3,750,000
|
2.00
|
0.20
|
1.03
%
|
Nil
|
259
%
|
234,737
|
May 20,
2016
|
(j)
|
85,000
|
2.00
|
0.20
|
1.03
%
|
Nil
|
259
%
|
14,225
|
July 15,
2016
|
(k)
|
300,000
|
2.46
|
0.20
|
0.91
%
|
Nil
|
263
%
|
45,799
|
December 22,
2016
|
(l)
|
250,000
|
1.50
|
0.20
|
0.87
%
|
Nil
|
180
%
|
18,840
|
December 31,
2016
|
(m)
|
2,750,000
|
2.00
|
0.20
|
1.20
%
|
Nil
|
259
%
|
143,871
|
January 12,
2017
|
(n)
|
50,000
|
1.00
|
0.20
|
0.81
%
|
Nil
|
191
%
|
4,988
|
January 20,
2017
|
(o)
|
750,000
|
2.00
|
0.20
|
1.20
%
|
Nil
|
267
%
|
43,737
|
January 31,
2017
|
(p)
|
3,773,006
|
1.00
|
0.20
|
0.84
%
|
Nil
|
173
%
|
224,479
|
January 31,
2017
|
(q)
|
411,361
|
1.00
|
0.20
|
0.84
%
|
Nil
|
173
%
|
24,474
|
February 17,
2017
|
(r)
|
907,948
|
1.00
|
0.20
|
0.82
%
|
Nil
|
167
%
|
63,641
|
February 17,
2017
|
(s)
|
108,954
|
1.00
|
0.20
|
0.82
%
|
Nil
|
167
%
|
7,615
|
March 8,
2017
|
(t)
|
1,500,000
|
2.00
|
0.25
|
1.36
%
|
Nil
|
266
%
|
193,438
|
March 21,
2017
|
(u)
|
3,270,045
|
1.00
|
0.20
|
1.00
%
|
Nil
|
165
%
|
236,773
|
March 21,
2017
|
(v)
|
27,623
|
1.00
|
0.20
|
1.00
%
|
Nil
|
165
%
|
2,000
|
April 4,
2017
|
(w)
|
250,000
|
1.00
|
0.20
|
1.03
%
|
Nil
|
163
%
|
19,703
|
April 6,
2017
|
(x)
|
500,000
|
2.00
|
0.25
|
1.24
%
|
Nil
|
167
%
|
52,643
|
June 2,
2017
|
(y)
|
1,634,615
|
1.00
|
0.20
|
1,16
%
|
Nil
|
171
%
|
110,602
|
June 16,
2017
|
(z)
|
769,230
|
1.00
|
0.20
|
1.21
%
|
Nil
|
171
%
|
57,765
|
June 28,
2017
|
(aa)
|
300,000
|
1.00
|
0.20
|
1.21
%
|
Nil
|
159
%
|
23,020
|
July 1,
2017
|
(bb)
|
75,000
|
1.50
|
0.20
|
1.24
%
|
Nil
|
158
%
|
7,000
|
July 31,
2017
|
(cc)
|
2,000,000
|
2.00
|
0.20
|
1.34
%
|
Nil
|
245
%
|
252,631
|
July 31,
2017
|
(dd)
|
1,000,000
|
2.00
|
0.20
|
1.34
%
|
Nil
|
245
%
|
21,930
|
August 18,
2017
|
(ee)
|
150,000
|
1.50
|
0.20
|
1.24
%
|
Nil
|
159
%
|
11,233
|
October 1,
2017
|
(ff)
|
350,000
|
1.50
|
0.20
|
1.31
%
|
Nil
|
161
%
|
36,925
|
October 12,
2017
|
(gg)
|
100,000
|
1.50
|
0.20
|
1.41
%
|
Nil
|
159
%
|
8,860
|
November 15,
2017
|
(hh)
|
1,000,000
|
1.50
|
0.20
|
1.55
%
|
Nil
|
137
%
|
89,053
|
|
35,362,782
|
|
|
|
|
|
3,268,682
|
(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 years ended December 31, 2017
and 2016, the Company expensed $7,367 and $8,840, respectively, in
stock based compensation which has been recorded as an
administrative expense. No portion of the value of the unvested
warrants has been expensed as the sales agent had not yet delivered
any sales revenue to Gilla Worldwide.
(b)
Issued in
connection to the Secured Notes (note 11(iv)). During the year
ended December 31, 2015, the Company booked the fair value of the
warrants in the amount of $26,821 as a prepaid to be expensed over
the life of the Secured Notes. During the years ended December 31,
2017 and 2016, the Company expensed $8,843 and $8,892,
respectively, of the prepaid as financing fees which has been
recorded as an interest expense.
(c)
Issued in
connection to the issuance of Convertible Debentures Series B (note
15). 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 years ended December 31, 2017 and 2016, the Company
recorded interest expense in the amount of $552,529 and $52,781,
respectively, related to debt discount which includes the accretion
of the BCF of the Convertible Debentures Series B.
(d)
Issued
in connection to the Term Loan (note 13). 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. During
the years ended December 31, 2017 and 2016, the Company expensed
$26,267 and $22,888, respectively, as financing fees which has been
recorded as interest expense. 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 13) 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. During the years ended December 31, 2017 and
2016, the Company expensed $21,546 and $17,829, respectively, as
financing fees which has been recorded as interest
expense
.
(e)
Issued in relation
to a consulting agreement. The warrants shall vest quarterly in
eight equal tranches, with the first tranche vesting immediately
and the final tranche vesting on November 18, 2017. If the
consulting agreement was terminated prior to the expiration of the
warrants, any unexercised fully vested warrants would expire thirty
calendar days following the effective termination date and any
unvested warrants would be automatically canceled. On August 31,
2016, the Company terminated the consulting agreement and 187,500
of the unvested warrants have been cancelled and the remaining
112,500 vested warrants remain outstanding and exercisable until
February 17, 2018 as mutually agreed in the termination. During the
years ended December 31, 2017 and 2016, the Company expensed $nil
and $16,511, respectively, as stock based compensation which has
been recorded as an administrative expense.
(f)
Issued in relation
to a consulting agreement. The warrants shall vest quarterly in
eight equal tranches, with the first tranche vesting immediately
and the final tranche vesting on November 18, 2017. If the
consulting agreement was terminated prior to the expiration of the
warrants, any unexercised fully vested warrants would expire thirty
calendar days following the effective termination date and any
unvested warrants shall be automatically canceled. On October 25,
2016, the Company terminated the consulting agreement and 937,500
unvested warrants have been cancelled and the remaining 562,500
vested warrants remain outstanding and exercisable until June 30,
2018 as mutually agreed in the termination. During the years ended
December 31, 2017 and 2016, the Company expensed $nil and $108,656,
respectively, as stock based compensation which has been recorded
as an administrative expense.
(g)
Issued in
connection to the Loan Agreement (note 11(v)). The warrants shall
vest in two equal tranches, with 500,000 warrants to vest upon the
close of Loan Tranche A and the remaining 500,000 warrants to vest
upon the close of Loan Tranche B. On March 3, 2016 and April 14,
2016, the Company closed Loan Tranche A and Loan Tranche B,
respectively, at which dates the warrants became fully vested and
exercisable. During the year ended December 31, 2016, the Company
booked the fair value of the warrants in the amount of $995, the
fair value of the warrants issued were recorded as debt discount to
be amortized over the life of the Shareholder Loan. During the
years ended December 31, 2017 and 2016, the Company expensed
$61,695 and $63,156, respectively, of the prepaid as financing fees
which has been recorded as interest expense.
(h)
Issued in
connection to a consulting agreement. Forty percent of the warrants
vested immediately with the remaining sixty percent vesting in
equal tranches of fifteen percent on September 30, 2016, December
31 2016, September 30, 2017 and December 31, 2017. If the
consulting agreement is terminated prior to the expiration of the
warrants, any unexercised fully vested warrants shall expire ninety
calendar days following the effective termination date and any
unvested warrants shall be automatically canceled. During the year
ended December 31, 2017, the Company terminated the consulting
agreement for cause and all warrants issued in connection to the
consulting agreement were canceled. As a result of the termination,
the Company did not record any stock based compensation during the
year ended December 31, 2017. During the year ended December 31,
2016, the Company expensed $205,828 in stock based compensation in
relation to these warrants.
(i)
Issued in
connection to the issuance of Convertible Debentures Series C-1
(note 15). 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 years ended December 31, 2017 and 2016, the Company
recorded interest expense in the amount of $331,666 and $21,74,
respectively, related to debt discount which includes the accretion
of the BCF of the Convertible Debentures Series C-1.
(j)
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 15).
(k)
Issued in
connection to the Term Loan Amendment (note 13). 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. During the years ended
December 31, 2017 and 2016, the Company expensed $23,315 and
$10,732, respectively, of the debt discount which has been recorded
as interest expense.
(l)
Issued in
connection to the Secured Notes (note 11 iii and iv). During the
year ended December 31, 2016, the Company booked the fair value of
the warrants in the amount of $18,840 were recorded as debt
discount to be amortized over the life of the Secured Notes. During
the years ended December 31, 2017 and 2016, the Company expensed
$12,390 and $306, respectively, of the debt discount which has been
recorded as interest expense.
(m)
Issued in
connection to the issuance of Convertible Debentures Series C-2
(note 15). 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 years ended December 31, 2017 and 2016, the Company
recorded interest expense in the amount of $272,250 and $2,750,
respectively, related to debt discount which includes the accretion
of the BCF of the Convertible Debentures Series C-2.
(n)
Issued in
connection to the Bridge Loan Agreement (note 11(vi)). During the
years ended December 31, 2017 and 2016, the Company expensed the
fair value of the warrants in the amount of $4,988 and $nil,
respectively, as financing fees which has been recorded as interest
expense.
(o)
Issued in
connection to the issuance of Convertible Debentures Series C-3
(note 15). 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 years ended December 31, 2017 and 2016, the Company
recorded interest expense in the amount of $75,000 and $nil,
respectively, related to debt discount which includes the accretion
of the BCF of the Convertible Debentures Series C-3.
(p)
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.
(q)
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.
(r)
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.
(s)
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.
(t)
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 December 31, 2017, no stock based
compensation has been recorded as the employee has not yet begun to
generate new business sales.
(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 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.
(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 to an employment agreement, the warrants shall vest in
two equal tranches, with the first tranche vesting upon the
commercial sale of a new product to be developed by the employee
and the second tranche vesting upon the commercial sale of a total
of two new products developed by the employee. Both tranches have
vested and the Company has recorded $52,643 in stock based
compensation for the year ended December 31, 2017 (December 31,
2016 - $nil).
(y)
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.
(z)
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.
(aa)
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.
(bb)
Issued in
connection with a consulting agreement. During the years ended
December 31, 2017 and 2016, the Company $7,000 and $nil,
respectively, as stock based compensation which was recorded as an
administrative expense.
(cc)
Issued in
connection with the acquisition of a subsidiary (note
4(c)).
(dd)
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 years ended December 31, 2017 and 2016, the
Company expensed $54,825 and $nil, respectively, as stock based
compensation which was recorded as an administrative
expense.
(ee)
Issued in
connection with a promissory note (note (14)). 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.
During the years ended December 31, 2017 and 2016, the Company
expensed $2,212 and $nil, respectively, of debt discount which has
been recorded as an interest expense.
(ff)
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. The Company has not yet recorded any expense related to
the issuance of these warrants.
(gg)
Issued in
connection with a promissory note (note (14)). 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.
During the years ended December 31, 2017 and 2016, the Company
expensed $3,765 and $nil, respectively, of the debt discount which
has been recorded as an interest expense.
(hh)
Issued in
connection with the extension of the Shareholder Loans (note (11
iii, iv, vii and viii)). 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. During the years ended
December 31, 2017 and 2016, the Company expensed $10,483 and $nil,
respectively, of the debt discount which has been recorded as an
interest expense.
18. STOCK BASED COMPENSATION
The
Company recorded stock based compensation as follows:
|
|
|
Warrants Issued as Stock Based Compensation
|
|
|
Warrants
issued in connection to the Term Loan (note 16(i))
|
$
-
|
$
51,598
|
Warrants
issued in connection to the Term Loan (note 16(i))
|
-
|
42,325
|
Warrants
issued in connection to a consulting agreement (note
16(j))
|
-
|
16,511
|
Warrants
issued in connection to a consulting agreement (note
16(k))
|
-
|
108,656
|
Warrants
issued in connection the Shareholder Loan (note 16(l))
|
-
|
158,995
|
Warrants
issued in connection to a consulting agreement (note
16(m))
|
-
|
205,828
|
Warrants
issued as commission related to Convertible Debentures Series C-1
(note 16(o))
|
-
|
14,225
|
Warrants
issued in connection to the Term Loan (note 16(p))
|
-
|
45,799
|
Warrants
issued in connection to the Secured Notes (note 16(q))
|
-
|
18,840
|
Warrants
issued in connection to the Bridge Loan Agreement (note 11
vi)
|
4,988
|
-
|
Warrants
issued as commission related to private placements
units
|
34,089
|
-
|
Warrants
issued in relation to consulting agreements
|
59,643
|
-
|
Warrants
issued in connection to an employment agreement
|
54,825
|
-
|
Extension
of warrants issued with Private Placement units
|
353,670
|
-
|
Total Warrants Issued as Stock Based Compensation
|
507,215
|
662,777
|
|
|
|
Shares issued for consulting fees
|
6,000
|
59,154
|
Issuance of stock options (note 21)
|
1,267,867
|
-
|
Shares to be issued for consulting fees
|
-
|
68,550
|
Shares issued for employment income to a related party
|
-
|
21,000
|
Total Stock Based Compensation
|
$
1,781,082
|
$
811,481
|
19. SHARES TO BE ISSUED
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
15);
●
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 15). 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 15). 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 15). 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 15). Such Common Shares were
issued on March 29, 2018.
As at
December 31, 2016, the Company had $146,550 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
15);
●
320,022
Common Shares, valued at an average price of $0.156 per share, to
be issued due to the settlement of $50,000 in consulting fees owing
to a shareholder. Such Common Shares were issued on April 5,
2017;
●
143,715
Common Shares, valued at an average price of $0.129 per share, to
be issued due to the settlement of $18,550 in consulting fees owing
to an unrelated party. Such Common Shares were issued on April 5,
2017; and
●
366,667
Common Shares, valued at $0.15 per share, to be issued due to the
settlement of $55,000 in consulting fees owing to an unrelated
party. Such Common Shares were issued on April 5,
2017.
20. 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
|
$
169,666
|
$
95,759
|
Advances by and
consulting fees payable to a corporation owned by two Officers of
the Company, one of which is also a Director
|
-
|
313,745
|
Consulting fees
owing to persons related to Officers who are also Directors of the
Company
|
485
|
77,463
|
Advances by
Officers of the Company, one of which is also a Director, bears
interest at 1.5% per month
|
-
|
901,784
|
Amounts payable to
a corporation related by virtue of a common Officer and Director of
the Company
|
-
|
76,407
|
Consulting fees and
directors fees payable to Directors of the Company
|
-
|
13,725
|
Incentive fee
bonus
|
82,690
|
-
|
|
$
252,841
|
$
1,478,883
|
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
|
$
572,506
|
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
|
372,400
|
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
|
141,000
|
|
$
2,281,773
|
$
1,085,906
|
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 16).
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 16).
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 years ended December 31,
2017 and 2016, the Company expensed $84,343 and $nil, respectively,
in interest expense related to the incentive bonus. During the year
ended December 31, 2016, the Company settled $48,000 of deferred
amounts owing to an Officer and Director of the Company with the
issuance of 480,000 Common Shares at a price of $0.10 per share.
The amount allocated to Shareholders’ Deficiency, based on
their fair value, amounted to $76,800. The balance of $28,800 has
been recorded as a loss on settlement of debt.
(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
|
$
413,477
|
$
234,121
|
Advances by and
consulting fees payable to a corporation owned by two Officers of
the Company, one of which is also a Director
|
55,348
|
29,669
|
|
$
468,825
|
$
263,790
|
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 year ended December 31, 2017, the Company expensed $nil
(December 31, 2016 – $72,394) in rent expense payable to a
corporation related by virtue of a common Officer and a common
Director of the Company.
During
the year ended December 31, 2017, the Company expensed $20,345
(December 31, 2016 – $22,304) 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
$129,411 (December 31, 2016 – $206,445) in travel and
entertainment expenses incurred by Officers and Directors of the
Company.
On
December 29, 2017, the Company agreed to issue 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 15). Such Common Shares were
issued on March 29, 2018.
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
15).
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
15).
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 15).
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 15).
During
the year ended December 31, 2016, amounts owing to a former related
party in the amount of $9,263 were forgiven, as a result, the
Company recorded a gain on settlement in the amount of
$9,263.
On June
17, 2016, the Company issued 150,000 Common Shares, at a price of
$0.14 per share, to a person related to an Officer and Director of
the Company, on the signing of a new employment
agreement.
On May
20, 2016, the Company issued face value $55,000 of Convertible
Debentures Series C-1 to related parties consisting of $10,000 to a
person related to an Officer and Director for settlement of fees
payable, $10,000 to a Director of the Company for settlement of
directors fees payable and $35,000 to a corporation owned by two
Officers of the Company, one of which is also a Director, for
settlement of loans payable (note 15).
On May
20, 2016, the Company issued face value $15,000 of Convertible
Debentures Series C-1 to two Directors of the Company for cash
(note 15).
On
February 2, 2016, the Company settled $48,000 of deferred amounts
owing to an Officer and Director of the Company with the issuance
of 480,000 Common Shares at a price of $0.10 per share. Such Common
Shares were issued on May 19, 2016.
The
Company expensed consulting fees payable to related parties as
follows:
|
|
|
Officers
|
355,023
|
330,900
|
Persons related to
a Director
|
149,335
|
142,249
|
|
$
504,358
|
$
473,149
|
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.
21. 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 December 31, 2017 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
|
|
|
|
|
|
|
|
|
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%
|
|
|
|
|
|
|
|
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 year ended December 31, 2017, the Company expensed $1,267,867,
as a stock option expense (December 31, 2016 –
$nil).
22. INCOME TAXES
Under
ASC No. 740,
Income Taxes
(“ASC 740”), income taxes are recognized for the
following: a) amount of tax payable for the current year and b)
deferred tax liabilities and assets for future tax consequences of
events that have been recognized differently in the financial
statements than for tax purposes.
The Company has non-capital losses of $8,093,593 (2016 –
$7,512,930) in US non-capital losses, $3,584,969 (2016 –
$3,210,343) in Canadian non-capital losses, $408,510 (2016 –
$404,072) in Irish non-capital losses and $228,115 (2016 –
$202,920) in Hungarian non-capital losses and $nil (2016 –
$nil) in Slovakian non-capital gains.
|
|
|
|
|
|
|
2032
|
$
(248,582
)
|
$
(130,505
)
|
$
-
|
$
-
|
$
-
|
$
(379,087
)
|
2033
|
(1,001,027
)
|
(128,036
)
|
-
|
-
|
-
|
(1,129,063
)
|
2034
|
(1,737,512
)
|
(78,919
)
|
(372,764
)
|
-
|
-
|
(2,189,195
)
|
2035
|
(1,240,083
)
|
(281,663
)
|
(29,133
)
|
(65,163
)
|
-
|
(1,616,042
)
|
2036
|
(1,955,209
)
|
(1,168,163
)
|
(2,175
)
|
(137,757
)
|
-
|
(3,263,304
)
|
2037
|
(1,911,180
)
|
(1,797,683
)
|
4,438
|
(25,195
)
|
-
|
(3,738,496
)
|
|
$
(8,093,593
)
|
$
(3,584,969
)
|
$
(408,510
)
|
$
(228,115
)
|
$
-
|
$
(12,315,187
)
|
The
reconciliation of income taxes at the statutory income tax rates to
the income tax expense is as follows:
|
|
|
Loss
before income taxes
|
$
6,755,982
|
$
4,500,206
|
Applicable
tax rate ranges from 10% to 35%
|
|
|
Expected
income tax (recovery) at the statutory rates
|
(2,385,368
)
|
(1,439,417
)
|
Tax
rate changes and other adjustments
|
1,238,407
|
-
|
Share
based compensation and non-deductible expenses
|
428,333
|
200,042
|
|
906,828
|
-
|
Changes
in tax benefits not recognized
|
(296,235
)
|
1,239,375
|
Income
tax (recovery)
|
$
(108,035
)
|
$
-
|
The Company's income tax (recovery) is allocated as
follows:
|
|
|
Current
tax (recovery) expense
|
$
78,758
|
$
-
|
Deferred
tax (recovery) expense
|
(186,793
)
|
-
|
|
$
(108,035
)
|
$
-
|
The
components of the temporary differences and the country of origin
at December 31, 2017 and 2016 are as follows (applying the combined
Canadian federal and provincial statutory income tax rate of 26%,
the US income tax rate of 35%, the Irish income tax rate of 12.5%,
the Hungarian income tax rate of 10% and the Slovakian income tax
rate of 22% for both the years). No deferred tax assets are
recognized on these differences as it is not probable that
sufficient taxable profit will be available to realize such
assets.
|
|
|
|
|
|
|
|
Loss
before income taxes
|
$
4,887,023
|
$
3,103,756
|
$
2,102,912
|
$
1,291,477
|
Applicable
tax rate ranges from 10% to 35%
|
35
%
|
35
%
|
26.5
%
|
26.5
%
|
Expected
income tax (recovery) at the statutory rates
|
(1,894,371
)
|
(1,086,315
)
|
(557,272
)
|
(342,241
)
|
Tax
rate changes and other adjustments
|
1,219,458
|
-
|
2,547
|
-
|
Share
based compensation and non-deductible expenses
|
367,062
|
177,943
|
46,909
|
22,099
|
|
121,206
|
-
|
749,165
|
-
|
Changes
in tax benefits not recognized
|
186,645
|
908,372
|
(428,142
)
|
320,142
|
Income
tax (recovery)
|
$
-
|
$
-
|
$
(186,793
)
|
$
-
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
$
(21,557
)
|
$
(2,301
)
|
$
158,042
|
$
111,489
|
Applicable
tax rate ranges from 10% to 35%
|
12.5
%
|
12.5
%
|
10
%
|
10
%
|
Expected
income tax (recovery) at the statutory rates
|
2,695
|
288
|
(14,224
)
|
(11,149
)
|
Tax
rate changes and other adjustments
|
5,330
|
-
|
11,148
|
1
|
Share
based compensation and non-deductible expenses
|
|
|
13,332
|
-
|
|
(48,680
)
|
-
|
85,271
|
-
|
Changes
in tax benefits not recognized
|
40,655
|
(288
)
|
(95,527
)
|
11,148
|
Income
tax (recovery)
|
$
-
|
$
-
|
$
-
|
$
-
|
|
|
|
|
|
Loss
before income taxes
|
$
370,493
|
$
(4,216
)
|
Applicable
tax rate ranges from 10% to 35%
|
21
%
|
22
%
|
Expected
income tax (recovery) at the statutory rates
|
77,804
|
928
|
Tax
rate changes and other adjustments
|
(77
)
|
-
|
Share
based compensation and non-deductible expenses
|
1,031
|
-
|
|
(134
)
|
-
|
Changes
in tax benefits not recognized
|
134
|
(928
)
|
Income
tax (recovery)
|
$
78,758
|
$
-
|
Deferred tax asset components as of December 31, 2017 and 2016 are
as follows:
|
|
|
Operating
losses available to offset future income taxes
|
$
(12,315,187
)
|
$
(11,330,266
)
|
Expected
income tax recovery at a statutory rate of 35%
|
4,310,315
|
3,535,016
|
Valuation
allowance
|
(4,202,280
)
|
(3,535,016
)
|
Income
taxes – deferred
|
$
108,035
|
$
-
|
As the Company has not earned significant revenues, it has provided
a 100 percent valuation allowance on the net deferred tax asset as
of December 31, 2017 and 2016. Management believes the Company has
no uncertain tax position.
As the Company is delinquent in its historical tax filings it has
accrued $90,000 in penalties which the Company estimates it will be
assessed on filing of the delinquent returns. The accrued penalties
have been recorded as an administrative expense during the year
ended December 31, 2016.
23. 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
|
78,125
|
2019
|
39,063
|
|
$
117,188
|
b)
Charitable Sales Promotion
On January 21, 2016, the Company entered into an agreement with
Wounded Warriors Family Support Inc. in which the Company agreed to
make a donation of $1.00 for each sale of its “Vape
Warriors” E-liquid product during the period from January 1,
2016 to December 31, 2016, with a minimum donation of $50,000.
During the year ended December 31, 2016, the Company accrued the
full $50,000 in charitable contributions regarding this agreement.
During the year ended December 31, 2017, the Company settled the
full amount owing in exchange for 300,000 Common Shares at a fair
value of $36,000.
c)
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, has stopped accruing
royalty payments under this agreement. During the year ended
December 31, 2017, the Company paid $649 in relation to the royalty
agreement (December 31, 2016 – $9,683).
24. 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 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 December 31, 2017, the Company recorded
an allowance of $378,277 (December 31, 2016 – $256,280) in
regards to customers with past due amounts. At December 31, 2017,
34% (December 31, 2016 – 15%) of the Company’s trade
receivables are due from one customer and 68% (December 31, 2016
– 51%) of the trade receivables are due from six customers.
During the year ended December 31, 2017, 24% (December 31, 2016
– 31%) of the Company’s sales were to one
customer.
(ii)
Liquidity Risk
Liquidity
risk is the risk that the Company will not be able to meet its
financial obligations as they fall due. The Company’s
approach to managing liquidity risk is to ensure, as far as
possible, that it will have sufficient liquidity to meet its
liabilities when due, under both normal and stressed conditions,
without incurring unacceptable losses or risking damage to the
Company’s reputation. The Company manages liquidity risk by
closely monitoring changing conditions in its investees,
participating in the day to day management and by forecasting cash
flows from operations and anticipated investing and financing
activities. At December 31, 2017, the Company had liabilities due
to unrelated parties through its financial obligations over the
next six years in the aggregate principal amount of $7,834,134. Of
such amount, the Company has obligations to repay $5,170,843 over
the next twelve months with the remaining $2,663,292 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:
December 31,
2017
|
|
|
|
CAD
|
$
784,780
|
$
72,563
|
$
25,911
|
HUF
|
$
120,655
|
$
1,311
|
$
4,830
|
EUR
|
$
71,885
|
$
45,519
|
$
28,948
|
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 $68,630, $11,451 and $258,
respectively. A 10% weakening in the exchange rate would, on the
same basis, have decreased profit and decreased net assets by
$68,630, $11,451 and $258, respectively.
The
Company purchases some of its inventory in a foreign currency, at
December 31, 2017, the Company included $99,518 (December 31, 2016
– $238,888) in inventory that was purchased in a foreign
currency on its consolidated balance sheet. The Company does
not use derivative financial instruments to reduce its exposure to
this risk.
(iv)
Interest Rate Risk
Interest
rate risk is the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in market
interest rates. The Company is exposed to interest rate risk on its
fixed interest rate financial instruments. These fixed-rate
instruments subject the Company to a fair value risk. The interest
rates on 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.
25
.
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
|
$
1,830,694
|
$
826
|
United
States
|
1,522,641
|
1,125,704
|
Europe
|
5,979
|
23,418
|
|
$
3,359,314
|
$
1,149,948
|
Total
sales by geographic location are as follows:
|
|
|
Canada
|
$
698,972
|
$
49,732
|
United
States
|
1,067,261
|
2,596,172
|
Europe
|
2,834,353
|
1,904,889
|
|
$
4,600,586
|
$
4,550,793
|
26. SUBSEQUENT EVENTS
On
January 26, 2018 and in accordance with the terms of a warrant
agreement, the Company received a form of election to purchase
50,000 Common Shares of the Company at a price of $0.20 per share
for total gross proceeds of $10,000. Such Common Shares were issued
on March 15, 2018.
On
February 1, 2018 and in connection to a consulting agreement, the
Company issued warrants for the purchase of 250,000 Common Shares
exercisable until January 31, 2020 at an exercise price of $0.20
per Common Share. The warrants shall vest in eight equal tranches,
with the first tranche vested upon issuance and the remaining seven
tranches to vest equally every three months
thereafter.
On
March 23, 2018, the Company issued and sold on a private placement
basis, 3,677,271 Common Shares of the Company at a price of $0.11
per share for total gross proceeds of $404,500.
On
April 3, 2018, the Company issued an unsecured promissory note in
the principal amount of CAD $65,000. The promissory note matures on
April 20, 2018 and bears interest at a rate of 15% per annum,
accrued monthly but subject to a minimum interest payment of CAD
$750.
On
April 2, 2018, the Company entered into an equipment financing
facility (the “Equipment Facility”) in the aggregate
principal amount of CAD $340,850. The Equipment Facility is secured
by certain equipment of the Company, due April 1, 2020 and bears
interest at a rate of 15% per annum. The Company shall be required
to make principal and interest payments of CAD $16,527, monthly in
arrears. On April 2, 2018 and in connection with the Equipment
Facility, the Revolving Facility entered into on December 7, 2017
was terminated and retired and all amounts due under the Revolving
Facility were rolled into the Equipment Facility. On April 11,
2018, the Company received the balance of the aggregate principal
amount made available to the Company under the Equipment
Facility.