Notes to Consolidated Financial Statements
December 31, 2016 and 2015
(Amounts expressed in US Dollars)
1. NATURE OF OPERATIONS
Gilla
Inc. (“Gilla”, the “Company” or the
“Registrant”) was incorporated under the laws of the
state of Nevada on March 28, 1995 under the name of Truco,
Inc.
On July
1, 2015, the Company closed the acquisition of all the issued and
outstanding shares of E Vapor Labs Inc. (“E Vapor
Labs”), a Florida based E-liquid manufacturer. Pursuant to a
share purchase agreement, dated June 25, 2015, the Company acquired
E Vapor Labs for a total purchase price of $1,125,000 payable to
the vendors of E Vapor Labs on the following basis: (i) $225,000 in
cash on closing; and (ii) $900,000 in unsecured promissory notes
issued on closing. The unsecured promissory notes were issued in
three equal tranches of $300,000 due four (4), nine (9) and
eighteen (18) months respectfully from closing.
On July
14, 2015, the Company closed the acquisition of all the issued and
outstanding shares of E-Liq World, LLC (“VaporLiq”), an
E-liquid online retailer. Pursuant to a share purchase agreement,
dated July 14, 2015, the Company acquired VaporLiq for a total
purchase price of $126,975 payable to the vendors of VaporLiq on
the following basis: (i) 500,000 Common Shares of the Company
valued at $0.17 per share for a total value of $85,000; and (ii)
500,000 Common Share purchase warrants with a deemed value of
$41,975, which were exercisable to acquire 500,000 Common Shares at
an exercise price of $0.20 for a period of eighteen (18) months
from the date of issuance.
On
November 2, 2015, the Company closed the acquisition of all of the
assets of 901 Vaping Company LLC (“901 Vaping”), an
E-liquid manufacturer, including the assets, rights and title to
own and operate the Craft Vapes™, Craft Clouds and Miss
Pennysworth’s Elixirs E-liquid brands (the “Craft Vapes
Brands”). Pursuant to an asset purchase agreement, dated
October 21, 2015, the Company purchased the assets of 901 Vaping
for a total purchase price of $173,207 which included: (i) the
issuance of 1,000,000 Common Shares of the Company valued at $0.15
per share for an aggregate value of $150,000; (ii) cash
consideration equal to 901 Vaping’s inventory and equipment
of $23,207; and (iii) a quarterly-earn out based on the gross
profit stream derived from product sales of the Craft Vapes Brands
commencing on the closing date up to a maximum of 25% of the gross
profit stream. The Company did not assume any liabilities of 901
Vaping.
On
December 2, 2015, the Company closed the acquisition of all of the
assets of The Mad Alchemist, LLC (“TMA”), an E-liquid
manufacturer, including the assets, rights and title to own and
operate The Mad Alchemist™ and Replicant E-liquid brands (the
“The Mad Alchemist Brands”). Pursuant to an asset
purchase agreement (the “TMA Asset Purchase
Agreement”), dated November 30, 2015, the Company purchased
the assets of TMA for a total purchase price of $500,000 which
included: (i) the issuance of 819,672 Common Shares of the Company
valued at $0.122 per share for an aggregate value of $100,000; (ii)
$400,000 in cash payable in ten (10) equal payments of $20,000 in
cash and $20,000 in Common Shares every three (3) months following
the closing date; and (iii) a quarterly-earn out based on the gross
profit stream derived from product sales of The Mad Alchemist
Brands commencing on the closing date up to a maximum of 25% of the
gross profit stream. The Company did not assume any liabilities of
TMA.
The
current business of the Company consists of the manufacturing,
marketing and distribution of generic and premium branded E-liquid
(“E-liquid”), which is the liquid used in vaporizers,
electronic cigarettes (“E-cigarettes”), and other
vaping hardware and accessories. E-liquid is heated by the atomizer
to deliver the sensation of smoking and sometimes even mimic
traditional smoking implements, such as cigarettes or cigars, in
their use and/or appearance, but do not burn tobacco. The Company
provides consumers with choice and quality across various
categories and price points to deliver the most efficient and
effective vaping solutions for nicotine related products.
Gilla’s proprietary product portfolio includes the following
brands: Coil Glaze™, Siren, The Drip Factory, Craft
Vapes™, Craft Clouds, Surf Sauce, Vinto Vape, VaporLiq, Vape
Warriors, Vapor’s Dozen, Miss Pennysworth’s Elixirs,
The Mad Alchemist™, Replicant, Enriched CBD and Crown
E-liquid™.
2. GOING CONCERN
These
consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As
shown in these consolidated financial statements, at December 31,
2016, the Company has an accumulated deficit of $13,250,894 and a
working capital deficiency of $5,173,897 as well as negative cash
flows from operating activities of $1,939,969 for the year ended
December 31, 2016. These conditions represent material uncertainty
that cast significant doubts about the Company's ability to
continue as a going concern. The ability of the Company to continue
as a going concern is dependent upon achieving a profitable level
of operations or on the ability of the Company to obtain necessary
financing to fund ongoing operations. Management believes that the
Company will not be able to continue as a going concern for the
next twelve months without additional financing or increased
revenues.
To meet
these objectives, the Company continues to seek other sources of
financing in order to support existing operations and expand the
range and scope of its business. However, there are no assurances
that any such financing can be obtained on acceptable terms and in
a timely manner, if at all. Failure to obtain the necessary working
capital would have a material adverse effect on the business
prospects and, depending upon the shortfall, the Company may have
to curtail or cease its operations.
These
consolidated financial statements do not include any adjustments to
the recorded assets or liabilities that might be necessary should
the Company have to curtail operations or be unable to continue in
existence.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
Company's consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”) for annual
financial statements and with Form 10-K and article 8 of the
Regulation S-X of the United States Securities and Exchange
Commission (“SEC”).
(b)
Basis of
Consolidation
These
consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries; Gilla Operations, LLC
(“Gilla Operations”); E Vapor Labs Inc.; E-Liq World,
LLC; Charlie’s Club, Inc. (“Charlie’s
Club”); Gilla Enterprises Inc. and its wholly owned
subsidiaries Gilla Europe Kft. and Gilla Operations Europe s.r.o.;
Gilla Operations Worldwide Limited (“Gilla Worldwide”);
Gilla Franchises, LLC and its wholly owned subsidiary Legion of
Vape, LLC; and Snoke Distribution Canada Ltd. and its wholly owned
subsidiary Snoke Distribution USA, LLC. All inter-company accounts
and transactions have been eliminated in preparing these
consolidated financial statements.
(c)
Foreign Currency
Translation
The
Company’s Canadian subsidiaries maintain their books and
records in Canadian Dollars (CAD) which is also their functional
currency. The Company’s Irish and Slovakian subsidiaries
maintain their books and records in Euros (EUR) which is also their
functional currency. The Company’s Hungarian subsidiary
maintains its books and records in Hungarian Forint (HUF) which is
also its functional currency. The Company and its U.S. subsidiaries
maintain their books and records in United States Dollars (USD)
which is both the Company’s functional currency and reporting
currency. The accounts of the Company are translated into United
States Dollars in accordance with provisions of Financial
Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) No. 830,
Foreign Currency Matters
(“ASC
830”). Transactions denominated in currencies other than the
functional currency are translated into the functional currency at
the exchange rates prevailing at the dates of the transaction.
Monetary assets and liabilities denominated in foreign currencies
are translated using the exchange rate prevailing at the balance
sheet date. Non-monetary assets and liabilities are translated
using the historical rate on the date of the transaction. Revenue
and expenses are translated at average rates in effect during the
reporting periods. All exchange gains or losses arising from
translation of these foreign currency transactions are included in
net income (loss) for the period. In translating the financial
statements of the Company's foreign subsidiaries from their
functional currencies into the Company's reporting currency of
United States Dollars, balance sheet accounts are translated using
the closing exchange rate in effect at the balance sheet date and
income and expense accounts are translated using an average
exchange rate prevailing during the reporting period. Adjustments
resulting from the translation, if any, are included in accumulated
other comprehensive income in stockholders' equity. The Company has
not, as at the date of these consolidated financial statements,
entered into derivative instruments to offset the impact of foreign
currency fluctuations.
(d)
Earnings (Loss) Per
Share
Basic
earnings (loss) per share are computed by dividing net income
(loss) by the weighted average number of Common Shares outstanding
for the period, computed under the provisions of ASC No. 260-10,
Earnings per Share
(“ASC 260-10”). Diluted earnings (loss) per share is
computed by dividing net income (loss) by the weighted average
number of Common Shares outstanding plus common stock equivalents
(if dilutive) related to convertible preferred stock, stock options
and warrants for each period. There were no common stock equivalent
shares outstanding at December 31, 2016 and 2015 that have been
included in the diluted loss per share calculation as the effects
would have been anti-dilutive.
(e)
Cash and Cash
Equivalents
The
Company considers all highly liquid investments with original
maturities of three months or less to be cash
equivalents.
(f)
Financial
Instruments
Financial assets
and financial liabilities are recognized in the balance sheet when
the Company has become party to the contractual provisions of the
instruments.
The
Company’s financial instruments consist of cash and cash
equivalents, trade receivables, accounts payable, accrued interest,
due to related parties, accrued liabilities, customer deposits,
promissory notes, convertible debentures, loans from shareholders,
amounts owing on acquisitions, credit facility and term loan. The
fair values of these financial instruments approximate their
carrying value, due to their short term nature. Fair value of a
financial instrument is defined as the price that would be received
to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
The Company’s financial instruments recorded at fair value in
the consolidated balance sheets are categorized based upon the
level of judgment associated with the inputs used to measure their
fair value. Hierarchical levels, defined by ASC No. 820,
Fair Value Measurement and
Disclosure
(“ASC 820”)
,
with the related amount of
subjectivity associated with the inputs to value these assets and
liabilities at fair value for each level, are as
follows:
Level
1:
|
|
Unadjusted quoted
prices in active markets for identical assets or
liabilities;
|
Level
2:
|
|
Observable inputs
other than Level 1 prices such as quoted prices for
similar assets or liabilities; quoted prices in markets with
insufficient volume or infrequent transactions (less active
markets); or model-derived valuations in which all significant
inputs are observable or can be derived principally from or
corroborated by observable market data for substantially the full
term of the assets or liabilities; and
|
Level
3:
|
|
Inputs
that are not based on observable market data.
|
Cash
and cash equivalents is reflected on the consolidated balance
sheets at fair value and classified as Level 1 hierarchy because
measurements are determined using quoted prices in active markets
for identical assets.
In
accordance with ASC No. 720,
Other
Expenses
(“ASC 720”), the Company expenses the
production costs of advertising the first time the advertising
takes place. The Company expenses all advertising costs as
incurred. During the years ended December 31, 2016 and 2015, the
Company expensed $nil (December 31, 2015: $90,800) in production
costs. During the year ended December 31, 2016, the Company
expensed $315,174 (December 31, 2015: $159,125) as corporate
promotions, these amounts have been recorded as administrative
expense.
The
Company records revenue when the following criteria are met:
persuasive evidence of an arrangement exists, delivery has
occurred, the selling price to the customer is fixed and
determinable, and collectability is reasonably assured. Customers
take delivery at the time of shipment for terms designated free on
board shipping point. For sales designated free on board
destination, customers take delivery when the product is delivered
to the customer's delivery site. Provisions for sales incentives,
product returns, and discounts to customers are recorded as an
offset to revenue in the same period the related revenue is
recorded.
(i)
Property and
Equipment
Property and
Equipment are measured at cost less accumulated depreciation and
accumulated impairment losses. Costs include expenditures that are
directly attributable to the acquisition of the asset. Gains and
losses on disposal of an item of property and equipment are
determined by comparing the proceeds from disposal with the
carrying amount of property and equipment, and are recognized in
the statement of operations.
Depreciation is
recognized in the statement of operations on a straight-line basis
over the estimated useful lives of each part of an item of property
and equipment, since this most closely reflects the expected
pattern of consumption of the future economic benefits embodied in
the asset.
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 product sales and returns from the previous 12
months and future demand forecasts and writes off any excess or
obsolete inventory. The Company also assesses inventory for
obsolescence by testing the products to ensure they have been
properly stored and maintained so that they will perform according
to specifications. In addition, the Company assesses the market for
competing products to determine that the existing inventory will be
competitive in the marketplace.
If
there were to be a sudden and significant decrease in future demand
for the Company’s products, or if there were a higher
incidence of inventory obsolescence because of rapidly changing
technology and customer requirements, the Company could be required
to write down inventory and accordingly gross margin could be
adversely affected.
(k)
Shipping and
Handling Costs
The
Company does not record shipping income. When the Company charges
its customers, a cost associated with shipping and handling it
records that cost in administrative expenses as an offset to the
Company’s shipping expense.
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 assets and liabilities to reporting
units, assigning goodwill to reporting units, and determining the
fair value. Significant judgments required to estimate the fair
value of reporting units include estimating future cash flows,
determining appropriate discount rates and other assumptions.
Changes in these estimates and assumptions or the occurrence of one
or more confirming events in future periods could cause the actual
results or outcomes to materially differ from such estimates and
could also affect the determination of fair value and/or goodwill
impairment at future reporting dates.
(o)
Comprehensive
Income or Loss
The
Company reports comprehensive income or loss in its consolidated
financial statements. In addition to items included in net income
or loss, comprehensive income or loss includes items charged or
credited directly to stockholders’ equity, such as foreign
currency translation adjustments and unrealized gains or losses on
available for sale marketable securities.
The
preparation of consolidated financial statements in conformity with
U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of
revenue and expenses during the period. Actual results could differ
from these estimates, and such differences could be
material. The key sources of estimation uncertainty at the
balance sheet date, which have a significant risk of causing a
material adjustment to the carrying amounts of assets within the
next financial year, include reserves and write downs of
receivables and inventory, useful lives and impairment of property
and equipment, impairment of goodwill, accruals, valuing stock
based compensation, valuing equity securities, valuation of
convertible debenture conversion options and deferred taxes and
related valuation allowances. Certain of the Company’s
estimates could be affected by external conditions, including those
unique to the Company’s industry and general economic
conditions. It is possible that these external factors could
have an effect on the Company’s estimates that could cause
actual results to differ from its estimates. The Company
re-evaluates all of its accounting estimates at least quarterly
based on the conditions and records adjustments when
necessary.
(q)
Website Development
Costs
Under the provisions of ASC No.
350,
Intangibles –
Goodwill and Other
(“ASC 350”), the Company
capitalizes costs incurred in the website application and
infrastructure development stage. Capitalized costs are amortized
over the estimated useful life of the website which the Company
considers to be five years. Ongoing website post-implementation
cost of operations, including training and application, will be
expensed as incurred.
(r)
Convertible Debt Instruments
The
Company accounts for convertible debt instruments when the Company
has determined that the embedded conversion options should not be
bifurcated from their host instruments in accordance with ASC No.
470-20,
Debt with Conversion and
Other Options
(“ASC 470-20”). The Company
records, when necessary, discounts to convertible notes for the
intrinsic value of conversion options embedded in debt instruments
based upon the differences between the fair value of the underlying
common stock at the commitment date of the note transaction and the
effective conversion price embedded in the note. The Company
amortizes the respective debt discount over the term of the notes,
using the straight-line method, which approximates the effective
interest method. The Company records, when necessary, induced
conversion expense, at the time of conversion for the difference
between the reduced conversion price per share and the original
conversion price per share.
The
Company accounts for common stock purchase warrants at fair value
in accordance with ASC No. 815-40,
Derivatives and Hedging
(“ASC
815-40”). The Black-Scholes option pricing valuation method
is used to determine fair value of these warrants consistent with
ASC No. 718,
Compensation –
Stock Compensation
(“ASC 718”). Use of this
method requires that the Company make assumptions regarding stock
value, dividend yields, expected term of the warrants and risk free
interest rates.
(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 life. Useful lives are assessed at
year end.
The
following useful lives are used in the calculation of
amortization:
Brands:
|
|
5
years
|
Customer
relationships:
|
|
5
years
|
(v)
Recent Accounting
Pronouncements
The
Company has reviewed all recently issued, but not yet effective,
accounting pronouncements and other than the below, does not expect
the future adoption of any such pronouncements to have a
significant impact on its results of operations, financial
condition or cash flow.
In May
2014, the FASB issued Accounting Standards Update
(“ASU”) No. 2014-09,
Revenue from Contracts with Customers
(“ASU 2014-09”), requiring an entity to recognize
revenue when it transfers promised goods or services to customers
in an amount that reflects the consideration to which the entity
expects to be entitled to in exchange for those goods or services.
ASU 2014-09 will supersede nearly all existing revenue recognition
guidance under U.S. GAAP when it becomes effective. In August 2015,
the FASB issued ASU No. 2015-14,
Revenue from Contracts with Customers
(“ASU 2015-14”), deferring the effective date for ASU
2014-09 by one year, and thus, the new standard will be effective
for us beginning on January 1, 2017. This standard may be adopted
using either the full or modified retrospective methods. Management
of the Company is currently evaluating adoption methods and the
impact of this standard on the consolidated financial
statements.
In
November 2015, the FASB issued ASU No. 2015-17,
Income Taxes (Topic 740): Balance Sheet
Classification of Deferred Taxes
(“ASU
2015-17”). ASU 2015-17 simplifies the presentation of
deferred income taxes by eliminating the separate classification of
deferred income tax liabilities and assets into current and
noncurrent amounts in the consolidated balance sheet statement of
financial position. The amendments in the update require that all
deferred tax liabilities and assets be classified as noncurrent in
the consolidated balance sheet. The amendments in this update are
effective for annual periods beginning after December 15, 2016, and
interim periods therein and may be applied either prospectively or
retrospectively to all periods presented. Early adoption is
permitted. Management of the Company is currently evaluating
adoption methods and the impact of this standard on the
consolidated financial statements.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases
(Topic 842) (“ASU
2016-02”). ASU 2016-02 requires lessees to recognize all
leases with terms in excess of one year on their balance sheet as a
right-of-use asset and a lease liability at the commencement date.
The new standard also simplifies the accounting for sale and
leaseback transactions. The amendments in this update are effective
for annual periods beginning after December 15, 2018, and interim
periods therein and must be adopted using a modified retrospective
method for leases existing at, or entered into after, the beginning
of the earliest comparative period presented in the financial
statements. Early adoption is permitted. Management of the Company
is currently evaluating adoption methods and the impact of this
standard on the consolidated financial statements.
On
March 30, 2016, the FASB issued ASU No. 2016-09,
Compensation – Stock Compensation
(Topic 718)
(“ASU
2016-09”)
.
This
update requires that all excess tax benefits and tax deficiencies
arising from share-based payment awards should be recognized as
income tax expense or benefit on the income statement. The
amendment also states that excess tax benefits should be classified
along with other income tax cash flows as an operating activity. In
addition, an entity can make an entity-wide accounting policy
election to either estimate the number of awards expected to vest
or account for forfeitures as they occur. The provisions of this
update are effective for annual and interim periods beginning
after December 15, 2016. The Company is currently evaluating
the impact the adoption of this standard will have on its financial
statements.
In
April 2016, the FASB issued ASU No. 2016-10,
Revenue from Contracts with Customers
(Topic 606),
Identifying Performance Obligations and
Licensing
(“ASU 2016-10”). ASU 2016-10 clarifies
the following two aspects of Topic 606: identifying performance
obligations and the licensing implementation guidance, while
retaining the related principles for those areas. The provisions of
this update are effective for annual and interim periods beginning
after December 15, 2017, with early application permitted. The
Company is currently evaluating the impact the adoption of this
standard will have on its financial statements.
In May
2016, the FASB issued ASU No. 2016-12,
Revenue from Contracts with Customers (Topic
606)
,
Narrow-Scope
Improvements and Practical Expedients
(“ASU
2016-12”). The core principal of ASU 2016-12 is the
recognition of revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those
goods or services. The provisions of this update are
effective for annual and interim periods beginning
after December 15, 2017, with early application permitted. The
Company is currently evaluating the impact the adoption of this
standard will have on its financial statements.
In June
2016, the FASB issued ASU No. 2016-13,
Financial Instruments – Credit Losses
(Topic 326), Measurement of Credit Losses on Financial
Instruments
(“ASU 2016-13”), which requires
financial assets measured at amortized cost be presented at the net
amount expected to be collected. The allowance for credit losses is
a valuation account that is deducted from the amortized cost basis.
The measurement of expected losses is based upon historical
experience, current conditions, and reasonable and supportable
forecasts that affect the collectability of the reported amount.
This guidance is effective for fiscal years beginning
after December 15, 2019, with early adoption permitted. The
Company is evaluating the guidance and has not yet determined the
impact on its consolidated financial statements.
In
August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230),
Classification of Certain Cash Receipts and Cash Payments (a
consensus of the Emerging Issues Task Force)
(“ASU
2016-15”), which clarifies how certain cash receipts and cash
payments are presented and classified in the statement of cash
flows. Among other clarifications, the guidance requires that cash
proceeds received from the settlement of corporate-owned life
insurance (COLI) policies be classified as cash inflows from
investing activities and that cash payments for premiums on COLI
policies may be classified as cash outflows for investing
activities, operating activities or a combination of both. The
guidance is effective for fiscal years beginning
after December 15, 2017, with early adoption permitted.
Retrospective application is required. The Company is evaluating
the guidance and has not yet determined the impact on its
consolidated financial statements.
4. BUSINESS COMBINATIONS
(a) On
July 1, 2015, the Company closed the acquisition of all the issued
and outstanding shares of E Vapor Labs, a Florida based E-liquid
manufacturer. The Company purchased E Vapor Labs in order to
procure an E-liquid manufacturing platform allowing the Company to
secure large private label contracts as well as manufacture its own
brands going forward. The following summarizes the fair value of
the assets acquired, liabilities assumed and the consideration
transferred at the acquisition date:
Assets
acquired:
|
|
Measurement
Period Adjustments
|
|
Cash
|
$
22,942
|
-
|
$
22,942
|
Receivables
|
48,356
|
(1,705
)
|
46,651
|
Other current
assets
|
21,195
|
(24
)
|
21,171
|
Inventory
|
122,309
|
4,428
|
126,737
|
Fixed
assets
|
118,867
|
7
|
118,874
|
Intangible
assets
|
-
|
160,000
|
160,000
|
Goodwill
|
847,265
|
(154,211
)
|
693,054
|
Total
assets acquired
|
$
1,180,934
|
|
$
1,189,429
|
|
|
|
|
Liabilities
assumed:
|
|
|
|
Accounts
payable
|
$
206,252
|
-
|
$
206,252
|
Accrued
liabilities
|
-
|
28,000
|
28,000
|
Loan
payable
|
25,000
|
-
|
25,000
|
Total
liabilities assumed
|
$
231,252
|
|
$
259,252
|
|
|
|
|
Consideration:
|
|
|
|
Cash
|
$
225,000
|
-
|
$
225,000
|
Promissory Notes A,
unsecured and non-interest bearing, due November 1,
2015
|
196,026
|
(19,505
)
|
176,521
|
Promissory Notes B,
unsecured and non-interest bearing, due April 1, 2016
|
275,555
|
-
|
275,555
|
Promissory Notes C,
unsecured and non-interest bearing, due January 1,
2017
|
253,101
|
-
|
253,101
|
Total
consideration
|
$
949,682
|
|
$
930,177
|
In
consideration for the acquisition, the Company paid to the vendors,
$225,000 in cash on closing and issued $900,000 in unsecured
promissory notes on closing (collectively, the “Unsecured
Promissory Notes”). The Unsecured Promissory Notes were
issued in three equal tranches of $300,000 due four (4), nine (9)
and eighteen (18) months respectfully from closing (individually,
“Promissory Notes A”, “Promissory Notes B”,
and “Promissory Notes C” respectively). The Unsecured
Promissory Notes are all unsecured, non-interest bearing, and on
the maturity date, at the option of the vendors, up to one-third of
each tranche of the Unsecured Promissory Notes can be repaid in
Common Shares of the Company, calculated using the 5 day weighted
average closing market price prior to the maturity of the Unsecured
Promissory Notes. The Unsecured Promissory Notes, are all and each
subject to adjustments as outlined in the share purchase agreement
(the “SPA”), dated June 25, 2015.
At
December 31, 2015, the Company adjusted the Promissory Notes A for
$116,683 which is the known difference in the working capital
balance at closing of the acquisition from the amount specified in
the SPA. Further, a 12% discount rate has been used to calculate
the present value of the Unsecured Promissory Notes based on the
Company’s estimate of cost of financing for comparable notes
with similar term and risk profiles. Over the term of the
respective Unsecured Promissory Notes, interest will be accrued at
12% per annum to accrete the Unsecured Promissory Notes to their
respective principal amounts.
|
|
|
|
|
Present value at
acquisition date
|
$
293,204
|
$
275,555
|
$
253,101
|
$
821,860
|
Working capital
adjustment
|
(97,178
)
|
-
|
-
|
(97,178
)
|
Interest expense
related to accretion
|
7,547
|
16,065
|
14,756
|
38,368
|
Present
value at December 31, 2015
|
$
203,573
|
$
291,620
|
$
267,857
|
$
763,050
|
|
|
|
|
|
Measurement period
adjustment
|
(19,505
)
|
-
|
-
|
(19,505
)
|
Interest expense
related to accretion
|
(751
)
|
8,380
|
32,143
|
39,772
|
Present
value at December 31, 2016
|
$
183,317
|
$
300,000
|
$
300,000
|
$
783,317
|
Intangible
assets consist primarily of customer relationships and brands.
Brand intangibles represents the estimated fair value of the trade
names acquired. Customer relationship intangibles relates to the
ability to sell existing and future products to E Vapor Lab’s
existing and potential customers. The estimated useful life and
fair values of the identifiable intangible assets are as
follows:
|
Estimated
Useful
Life (in
years)
|
|
Brands
|
5
|
$
20,000
|
|
5
|
140,000
|
|
|
$
160,000
|
The
results of operations of E Vapor Labs have been included in the
consolidated statements of operations from the acquisition date.
The following table presents pro forma results of operations of the
Company and E Vapor Labs as if the companies had been combined as
of January 1, 2015. The pro forma condensed combined financial
information is presented for informational purposes only. The
unaudited pro forma results of operations are not necessarily
indicative of results that would have occurred had the acquisition
taken place at the beginning of the earliest period presented, or
of future results.
|
|
|
Pro forma
revenue
|
$
4,572,332
|
$
1,679,867
|
Pro forma loss from
operations
|
$
(3,590,177
)
|
$
(2,738,649
)
|
Pro forma net
loss
|
$
(4,362,320
)
|
$
(3,216,321
)
|
(b) On
July 14, 2015, the Company closed the acquisition of all the issued
and outstanding shares of VaporLiq, an E-liquid online retailer.
The Company purchased VaporLiq mainly to access industry
relationships and knowhow of various E-liquid brands that VaporLiq
transacts with. The following summarizes the fair value of the
assets acquired, liabilities assumed and the consideration
transferred at the acquisition date:
Assets
acquired:
|
|
Cash
|
$
5,381
|
Website
|
10,000
|
Inventory
|
2,150
|
Goodwill
|
109,444
|
Total
assets acquired
|
$
126,975
|
|
|
Total
liabilities assumed
|
$
-
|
|
|
Consideration:
|
|
500,000 Common
Shares at $0.17 per share
|
$
85,000
|
500,000
warrants
|
41,975
|
Total
consideration
|
$
126,975
|
The
warrants were exercisable over eighteen (18) months with an
exercise price of $0.20 per Common Share.
The
goodwill is attributable to business acumen and access to key
E-liquid brands that the Company may leverage for further
acquisitions.
The
results of operations of VaporLiq have been included in the
consolidated statements of operations from the acquisition date,
though revenue and net income from VaporLiq were not material for
the year ended December 31, 2016. Pro forma results of operations
have not been presented because the acquisition was not material to
the results of operations.
(
c) On November 2, 2015, the Company closed the acquisition
of all of the assets of 901 Vaping, an E-liquid manufacturer,
including all of the assets, rights and title to own and operate
the Craft Vapes Brands. The following summarizes the fair value of
the assets acquired and the consideration transferred at the
acquisition date:
Assets
acquired:
|
|
Inventory
|
$
11,335
|
Equipment
|
11,872
|
Intangibles
|
63,000
|
Goodwill
|
87,000
|
Total
assets acquired
|
$
173,207
|
|
|
Consideration:
|
|
Cash
|
$
23,207
|
1,000,000 Common
Shares at $0.15 per share
|
150,000
|
Total
consideration
|
$
173,207
|
In
consideration for the acquisition, the Company issued 1,000,000
Common Shares valued at $0.15 per share for a total value of
$150,000, paid cash consideration of $23,207 and agreed to a
quarterly earn-out based on the gross profit stream derived from
product sales of the Craft Vapes Brands. The earn-out commences on
the closing date and pays up to a maximum of 25% of the gross
profit
stream. As of
December 31, 2016, no amounts have been accrued or paid in relation
to the quarterly earn-out.
Intangible
assets consist primarily of customer relationships and brands.
Brand intangibles represents the estimated fair value of the trade
names acquired. Customer relationship intangibles relates to the
ability to sell existing and future products to 901 Vaping’s
existing and potential customers. The estimated useful life and
fair values of the identifiable intangible assets are as
follows:
|
Estimated
Useful
Life (in
years)
|
|
Brands
|
5
|
$
30,000
|
Customer
relationships
|
5
|
33,000
|
|
|
$
63,000
|
|
|
|
The
results of operations resulting from the acquired assets from 901
Vaping have been included in the consolidated statements of
operations from the acquisition date, though revenue and net income
from the acquired assets were not material for the year ended
December 31, 2016. Pro forma results of operations have not been
presented because the acquisition was not material to the results
of operations.
(d) On December
2, 2015, the
Company closed the acquisition of all of the assets of TMA, an
E-liquid manufacturer, including the assets, rights and title to
own and operate The Mad Alchemist Brands.
The following
summarizes the fair value of the assets acquired and the
consideration transferred at the acquisition date:
Assets
acquired:
|
|
Inventory
|
$
41,462
|
Equipment
|
36,579
|
Intangibles
|
157,000
|
Goodwill
|
208,376
|
Total
assets acquired
|
$
443,417
|
|
|
Consideration:
|
|
819,672 Common
Shares at $0.122 per share
|
$
100,000
|
Deferred payments
short term
|
149,134
|
Deferred payments
long term
|
194,283
|
Total
consideration
|
$
443,417
|
In
consideration for the acquisition, the Company issued 819,672
Common Shares valued at $0.122 per share for a total value of
$100,000; agreed to pay a total of $400,000 in deferred payments
(the “Amounts Owing on Acquisition”), payable in ten
(10) equal payments of $20,000 in cash and $20,000 in Common Shares
every three (3) months following the closing date; and agreed to a
quarterly earn-out based on the gross profit stream derived from
product sales of The Mad Alchemist Brands. The earn-out commences
on the closing date and pays up to a maximum of 25% of the gross
profit stream. The number of Common Shares issuable will be
calculated and priced using the 5 day weighted average closing
market price prior to each issuance date. Further, a 12% discount
rate has been used to calculate the present value of the Amounts
Owing on Acquisition. Over the term of the respective deferred
payments, interest will be accrued at 12% per annum to accrete the
payments to their respective principal amounts. During the year
ended December 31, 2016, the Company recorded $9,583 in interest
expense related to the accretion of the Amounts Owing on
Acquisition.
Intangible
assets consist primarily of customer relationships and brands.
Brand intangibles represents the estimated fair value of the trade
names acquired. Customer relationship intangibles relates to the
ability to sell existing and future products to TMA’s
existing and potential customers. The estimated useful life and
fair values of the identifiable intangible assets are as
follows:
|
Estimated
Useful
Life (in
years)
|
|
Brands
|
5
|
$
60,000
|
Customer
relationships
|
5
|
97,000
|
|
|
$
157,000
|
|
|
|
The
results of operations resulting from the acquired assets from TMA
have been included in the consolidated statements of operations
from the acquisition date, though revenue and net income from the
acquired assets were not material for the year ended December 31,
2016. Pro forma results of operations have not been presented
because the acquisition was not material to the results of
operations.
On
April 15, 2016, the Company entered into a settlement agreement
(the “TMA Settlement Agreement”) with
TMA
and the vendors of TMA (collectively,
the “TMA Vendors”). Subject to the terms and conditions
of the TMA Settlement Agreement, the parties settled: (i) any and
all compensation and expenses owing by the Company to the TMA
Vendors and (ii) the $400,000 of Amounts Owing on Acquisition
payable by the Company to TMA Vendors pursuant to the TMA Asset
Purchase Agreement in exchange for the Company paying to the TMA
Vendors a total settlement consideration of $133,163 payable as
$100,000 in cash and $33,163 in the Company’s assets as a
payment-in-kind. Of the $100,000 payable in cash under the TMA
Settlement Agreement, $45,000 was paid upon execution of the
settlement, $27,500 was payable thirty days following the signing
of the settlement and the remaining $27,500 was payable at the
later of (i) sixty days following the signing of the TMA Settlement
Agreement, or (ii) the completion of the historical audit of TMA.
As a result of the TMA Settlement Agreement, the Company has
recorded a gain on settlement in the amount of $274,051. As at
December 31, 2016, $55,000 (December 31, 2015: $346,676) remains
payable to the TMA Vendors. In addition, the Company and the TMA
Vendors mutually terminated all employment agreements between the
Company and the TMA vendors, entered into on closing of the TMA
Asset Purchase Agreement, and all amounts were fully settled
pursuant to the TMA Settlement Agreement. Due to this change in
circumstances, the Company tested goodwill and intangibles for
impairment and as a result, the Company has fully impaired goodwill
and intangible assets related to the acquired assets of TMA in the
amount of $208,376 and $122,983, respectively, which formerly
represented the value of brands, customer relationships, workforce
and business acumen acquired.
5. OTHER CURRENT ASSETS
Other
current assets consist of the following:
|
|
|
Vendor deposits
|
$
13,256
|
$
175,700
|
Prepaid
expenses
|
301,348
|
88,274
|
Trade currency
|
45,000
|
45,000
|
Other
receivables
|
103,104
|
13,352
|
|
$
462,708
|
$
322,326
|
Other
receivables include VAT receivable, HST receivable and holdback
amounts related to the Company’s merchant services
account.
6. INVENTORY
Inventory
consists of the following:
|
|
|
Vaping hardware and
accessories
|
$
105,496
|
$
-
|
E-liquid bottles -
finished goods
|
181,392
|
65,247
|
E-liquid
components
|
158,050
|
57,988
|
Bottles and
packaging
|
100,197
|
31,465
|
|
$
545,135
|
$
154,700
|
During
the year ended December 31, 2016, the Company wrote off $14,671 in
obsolete inventory recorded in Gilla Europe Kft., the
Company’s Hungarian subsidiary and $24,453 in obsolete
inventory recorded in E Vapor Labs Inc., the Company’s U.S.
subsidiary, that it was unable to sell. During the year ended
December 31, 2015, the Company wrote off $75,964 in obsolete
inventory recorded in Charlie’s Club, an e-commerce website
of the Company, and Gilla Operations, the Company’s primary
operating subsidiary in the United States.
During
the year ended December 31, 2016 and 2015, the Company expensed
$1,927,657 and $908,887 of inventory as cost of goods sold,
respectively. At December 31, 2016, the full amount of the
Company’s inventory serves as collateral for the
Company’s secured borrowings.
7. PROPERTY AND EQUIPMENT
Property
and equipment consists of the following:
|
|
|
|
|
|
|
|
Furniture and
equipment
|
$
63,947
|
$
18,030
|
$
45,917
|
$
1,156
|
Computer
hardware
|
29,722
|
13,737
|
15,985
|
5,525
|
Manufacturing
equipment
|
52,856
|
21,690
|
31,166
|
143,668
|
|
$
146,525
|
$
53,457
|
$
93,068
|
$
150,349
|
Depreciation
expense for the years ended December 31, 2016 and 2015 amounted to
$56,055 and $20,986 respectively. During the year ended December
31, 2016, the Company wrote off manufacturing equipment with a net
book value of $70,142 that was not in working order and that the
Company has not been able to sell. As a result of the write off,
the Company recorded an impairment of fixed asset expense in the
amount of $70,142.
At
December 31, 2016, the full amount of the Company’s property
and equipment serves as collateral for the Company’s secured
borrowings.
8. WEBSITE DEVELOPMENT
Website
development consists of the following:
|
|
|
|
|
|
|
|
VaporLiq
website
|
$
10,000
|
$
2,917
|
$
7,083
|
$
9,083
|
|
|
|
|
|
Amortization
expense on website development for the years ended December 31,
2016 and 2015 amounted to $2,000 and $20,915 respectively. During
the year ended December 31, 2015, the Company impaired the
Charlie’s Club website as it was determined to be obsolete
due to the shift in direction the Company has pursued from the sale
of E-cigarettes to the manufacturing and sale of E-liquid. As a
result, the Company recorded an impairment in the amount of
$73,325.
The
estimated amortization expense for the next 3 years ending December
31, 2017, 2018 and 2019 approximates $2,000 per year. For the year
ending December 31, 2020 it approximates $1,083.
9. INTANGIBLE ASSETS
Intangible
assets consist of the following:
|
|
|
|
|
|
|
|
Brands
|
$
50,000
|
$
13,000
|
$
37,000
|
$
88,000
|
Customer
relationships
|
173,000
|
49,700
|
123,300
|
127,283
|
|
$
223,000
|
$
62,700
|
$
160,300
|
$
215,283
|
|
|
|
|
|
During
the year ended December 31, 2016, the Company determined that the
intangible assets acquired in the acquisition of the assets of TMA
were impaired and as a result recorded an impairment of intangible
assets in the amount of $122,983.
Amortization
expense on intangible assets for the years ended December 31, 2016
and 2015 amounted to $92,000 and $4,717 respectively. The estimated
amortization expense for the next 4 years ending December 31, 2017,
2018 and 2019 approximates $44,600 per year. For the year ending
December 31, 2020 it approximates $26,500.
10. GOODWILL
|
|
|
|
$
1,252,084
|
$
-
|
Acquisitions (note
4)
|
-
|
1,252,084
|
Measurement period
adjustment (note 4)
|
(154,211
)
|
-
|
Impairment
|
(208,376
)
|
-
|
As
at December 31
|
$
889,497
|
$
1,252,084
|
|
|
|
During
the year ended December 31, 2016, the Company tested the goodwill
for impairment and as a result the Company fully impaired the
goodwill related to the acquisition of the assets of TMA in the
amount of $208,376 which formerly represented the value of
workforce and business acumen acquired.
11. LOANS FROM SHAREHOLDERS
The
Company has outstanding current loans from shareholders as
follows:
|
|
|
Non-interest
bearing, unsecured, no specific terms of repayment
|
$
5,000
|
$
5,000
|
Bears interest of
1.5% per month on a cumulative basis, unsecured, no specific terms
of repayment
(i)
|
23,223
|
22,528
|
Bears interest of
6% per annum on a cumulative basis, secured by the assets of the
Company, matures on March 2, 2018
(v)
|
474,065
|
-
|
|
$
502,288
|
$
27,528
|
The
Company has outstanding long term loans from shareholders as
follows:
|
|
|
Bears interest of
10% per annum on a cumulative basis, secured by the assets of the
Company, matures on July 1, 2018
(ii)
|
$
372,400
|
$
361,250
|
Bears interest of
10% per annum on a cumulative basis, secured by the assets of the
Company, matures on July 1, 2018
(iii)
|
100,000
|
100,000
|
Bears interest of
6% per annum on a cumulative basis, secured by the assets of the
Company, matures on March 2, 2018
(v)
|
24,951
|
-
|
|
$
497,351
|
$
461,250
|
(i)
During the year
ended December 31, 2016, the Company accrued interest of $5,992 on
this shareholder loan (December 31, 2015: $6,327). Total accrued
interest owing on the shareholder loan at December 31, 2016 is
$12,784 (December 31, 2015: $6,686) which is included in accrued
liabilities.
(ii)
On February 13,
2014, the Company entered into a secured promissory note (the
“Secured Note”) with a shareholder, whereby the Company
agreed to pay the party the aggregate unpaid principal amount of
CAD $500,000 (USD $372,400) (December 31, 2015: CAD $500,000; USD
$361,250) on or before August 13, 2014, bearing interest at a rate
of 10% per annum, such interest to accrue monthly and added to the
principal. The Secured Note is secured by a general security
agreement granting a general security interest over all the assets
of the Company. During the years ended December 31, 2014 and 2015,
the Company and the shareholder extended the maturity date of the
Secured Note to January 1, 2016 and July 1, 2017 respectively.
During the year ended December 31, 2016, the Company and the
shareholder extended the maturity date of the Secured Note to July
1, 2018.
The
Company accrued interest of $44,888 during the year ended December
31, 2016 (December 31, 2015: $40,412) on the Secured Note. Accrued
interest owing on the Secured Note at December 31, 2016 is $93,221
(December 31, 2015: $47,617) which is included in accrued
liabilities.
(iii)
On July 15, 2014,
the Company entered into a secured promissory note (the
“Secured Note No.2”) with a shareholder, whereby the
Company agreed to pay the party the aggregate unpaid principal
amount of $100,000 on or before July 18, 2014, bearing interest at
a rate of 10% per annum, such interest to accrue monthly and added
to the principal. The Secured Note No.2 is secured by the general
security agreement issued with the Secured Note. During the years
ended December 31, 2014 and 2015, the Company and the shareholder
extended the maturity date of the Secured Note No.2 to January 1,
2016 and July 1, 2017, respectively. During the year ended December
31, 2016, the Company and the shareholder extended the maturity
date of the Secured Note No.2 to July 1, 2018.
The
Company accrued interest of $11,863 during the year ended December
31, 2016 (December 31, 2015: $10,738) on the Secured Note No.2.
Accrued interest owing on the Secured Note No.2 at December 31,
2016 is $25,152 (December 31, 2015: $13,289) which is included in
accrued liabilities.
In
connection to the maturity date extension of Secured Note and
Secured Note No.2 (together, the “Secured Notes”), the
Company issued 250,000 warrants to purchase Common Shares of the
Company exercisable until July 1, 2018 with an exercise price of
$0.20 per Common Share, see note 16(g).
(iv)
On June 29, 2015,
the Company entered into a secured promissory note (the
“Secured Note No.3”) with a shareholder, whereby the
Company agreed to pay the party the aggregate unpaid principal
amount of CAD $300,000 (USD $240,180) on or before January 1, 2016,
bearing interest at a rate of 10% per annum, such interest to
accrue monthly and added to the principal. The Secured Note No.3
was secured by the general security agreement issued with the
Secured Note. In connection to the Secured Note No.3, the Company
issued 500,000 warrants to purchase Common Shares of the Company
exercisable over one year with an exercise price of $0.15 per
Common Share, see note 14(c).
The
Company accrued interest of $11,994 on the Secured Note No.3 during
the year ended December 31, 2015. On December 31, 2015, the Secured
Note No.3 and all accrued interest owing was settled with the
issuance of face value $227,000 of Convertible Debentures Series
B.
(v)
On March 2, 2016,
the Company entered into a loan agreement (the “Loan
Agreement”) with a shareholder, whereby the shareholder would
make available to the Company the aggregate principal amount of CAD
$670,000 (USD $518,714) (the “Shareholder Loan”) for
capital expenditures, marketing expenditures and working capital.
Under the terms of the Loan Agreement, the Shareholder Loan was
made available to the Company in two equal tranches of CAD $335,000
(USD $259,357), for a total loan amount of CAD $670,000 (USD
$518,714), with the first tranche (“Loan Tranche A”)
received on the closing date and the second tranche (“Loan
Tranche B”) received on April 14, 2016. At December 31, 2016,
CAD $52,000 (USD $38,730) of the Loan Tranche B was being held in
trust by the shareholder to be released on the incurrence of
specific expenses. The Shareholder Loan bears interest at a rate of
6% per annum, on the outstanding principal, and shall mature on
March 2, 2018, whereby any outstanding principal together with all
accrued and unpaid interest thereon shall be due and payable. The
Company shall also repay 5% of the initial principal amount of Loan
Tranche A and 5% of Loan Tranche B, monthly in arrears, with the
first principal repayment beginning on June 30, 2016. At December
31, 2016, $474,065 of the amounts owing on the Loan Agreement have
been recorded as current liabilities to reflect the monthly
principal payments due over the next year. The Company may elect to
repay the outstanding principal of the Shareholder Loan together
with all accrued and unpaid interest thereon prior to maturity
without premium or penalty. The Company also agreed to service the
Shareholder Loan during the term prior to making any payments to
the Company’s Chief Executive Officer, Chief Financial
Officer and Board of Directors. The Shareholder Loan is secured by
a general security agreement granting a general security interest
over all the assets of the Company.
The
Company accrued interest of $22,832 during the year ended December
31, 2016 (December 31, 2015: $nil) on the Shareholder Loan. Accrued
interest owing on the Shareholder Loan at December 31, 2016 is
$23,433 (December 31, 2015: $nil) which is included in accrued
liabilities. At December 31, 2016, the Company owes the lender
$174,656 in principal payments.
12. CREDIT FACILITY
On
August 1, 2014, the Company entered into a revolving credit
facility (the “Credit Facility”) with an unrelated
party acting as an agent to a consortium of participants (the
“Lenders”), whereby the Lenders would make a revolving
credit facility in the aggregate principal amount of CAD $500,000
for the exclusive purpose of purchasing inventory for sale in the
Company’s ordinary course of business to approved customers.
The Credit Facility charged interest at a rate of 15% per annum on
all drawn advances and a standby fee of 3.5% per annum on the
undrawn portion of the Credit Facility. The Credit Facility matured
on August 1, 2015 whereby the outstanding advances together with
all accrued and unpaid interest thereon would be due and payable.
On August 1, 2014, and in connection to the Credit Facility, the
Company issued 250,000 warrants to purchase Common Shares of the
Company exercisable over two years with an exercise price of $0.30
per Common Share. The Company’s Chief Executive Officer and
Chief Financial Officer were both participants of the consortium of
participants of the Credit Facility, each having committed to
provide ten percent of the principal amount of the Credit Facility.
The Credit Facility was secured by all of the Company’s
inventory and accounts due relating to any inventory as granted in
an intercreditor and subordination agreement by and among the
Company, the Secured Note holder and the Lenders to establish the
relative rights and priorities of the secured parties against the
Company and a security agreement by and between the Company and the
Lenders.
During
the year ended December 31, 2014, the Company was advanced $387,110
(CAD $449,083) from the Credit Facility for the purchase of
inventory including $77,453 (CAD $89,852) of advances from the
Company’s Chief Executive Officer and Chief Financial Officer
as their participation in the Credit Facility.
On
February 11, 2015, the Company fully repaid the amounts advanced
from the Credit Facility.
On
April 24, 2015, the Company was advanced $89,590 (CAD $124,000)
from the Credit Facility including $17,918 (CAD $24,800) of
advances from the Company’s Chief Executive Officer and Chief
Financial Officer as their participation in the Credit
Facility.
On
September 1, 2015, the Company was advanced $122,825 (CAD $170,000)
from the Credit Facility including $24,565 (CAD $34,000) of
advances from the Company’s Chief Executive Officer and Chief
Financial Officer as their participation in the Credit
Facility.
During
the year ended December 31, 2016, the Company paid $2,189 (December
31, 2015: $30,670) of interest and standby fees as a result of the
Credit Facility.
On
January 18, 2016, and in connection to the Term Loan (note 13), the
Company and the Lenders entered into a loan termination agreement
whereby the Company and the Lenders terminated and retired the
Credit Facility. As a result, the CAD $294,000 in amounts advanced
from the Credit Facility and the CAD $3,093 in accrued interest
owing on the Credit facility were rolled into the Term
Loan.
13. TERM LOAN
On
January 18, 2016, the Company entered into a term loan (the
“Term Loan”) with the Lenders, whereby the Lenders
would loan the Company the aggregate principal amount of CAD
$1,000,000 for capital expenditures, marketing expenditures and
working capital. The agent who arranged the Term Loan was not a
related party of the Company. The Term Loan bears interest at a
rate of 16% per annum, on the outstanding principal, and shall
mature on July 3, 2017, whereby any outstanding principal together
with all accrued and unpaid interest thereon shall be due and
payable. The Term Loan is subject to a monthly cash sweep,
calculated as the total of (i) CAD $0.50 for every E-liquid bottle,
smaller than 15ml, sold by the Company within a monthly period; and
(ii) CAD $1.00 for every E-liquid bottle, greater than 15ml, sold
by the Company within a monthly period (the “Cash
Sweep”). The Cash Sweep will be disbursed to the Lenders in
the following priority: first, to pay the monthly interest due on
the Term Loan; and second, to repay any remaining principal
outstanding on the Term Loan. The Company may elect to repay the
outstanding principal of the Term Loan together with all accrued
and unpaid interest thereon prior to the maturity, subject to an
early repayment penalty of the maximum of (i) 3 months interest on
the outstanding principal; or (ii) 50% of the interest payable on
the outstanding principal until maturity (the “Early
Repayment Penalty”). The Term Loan shall be immediately due
and payable at the option of the Lenders if there is a change in
key personnel meaning the Company’s current Chief Executive
Officer and Chief Financial Officer. On January 18, 2016 and in
connection to the Term Loan, the Company issued warrants for the
purchase of 250,000 Common Shares of the Company exercisable until
December 31, 2017 with an exercise price of $0.20 per Common Share.
In addition, the Company also extended the expiration date of the
250,000 warrants (note 16 (i) issued on August 1, 2014 in
connection with the Credit Facility until December 31, 2017, with
all other terms of the warrants remaining the same.
The
Company’s Chief Executive Officer and Chief Financial Officer
are both participants of the consortium of Lenders of the Term
Loan, each having committed to provide ten percent of the principal
amount of the Term Loan. Neither the Chief Executive Officer nor
the Chief Financial Officer participated in the warrants issued or
warrants extended in connection with the Term Loan and both parties
have been appropriately abstained from voting on the Board of
Directors to approve the Term Loan, where applicable.
On July
15, 2016, the Company and the Lenders of the Term Loan entered into
a Term Loan Amendment (the “Term Loan Amendment”) in
which the Lenders agreed to extend to the Company an additional CAD
$600,000 in principal to increase the Term Loan facility up to the
aggregate principal amount of CAD $1,600,000. The parties also
extended the maturity date of the Term Loan to July 2, 2018 with
all other terms of the Term Loan remaining the same. The
Company’s Chief Executive Officer and its Chief Financial
Officer are both participants in the consortium of Lenders having
each committed to provide a total of CAD $150,000 of the initial
principal of the Term Loan and the additional principal of the Term
Loan pursuant to the Term Loan Amendment. Neither the Chief
Executive Officer nor the Chief Financial Officer participated in
the warrants issued or warrants extended in connection with the
Term Loan Amendment.
On July
15, 2016 and in connection to the Term Loan Amendment, the Company
issued warrants for the purchase of 300,000 Common Shares of the
Company (note 16 (p)) at an exercise price of $0.20 per Common
Share, such purchase warrants expiring on December 31, 2018. The
Company also extended the expiration dates of i) the 250,000
purchase warrants (note 16 (i) issued on January 18, 2016 in
connection to the Term Loan and ii) the 250,000 purchase warrants
(note 16(i)) issued on August 1, 2014 and extended on January 18,
2016 in connection to the Term Loan both until December 31, 2018,
with all other terms of the warrants remaining the
same.
During
the year ended December 31, 2016, the Company was advanced
$1,219,840 (CAD $1,600,000) from the Term Loan including the CAD
$294,000 and CAD $3,093 rolled in from the Credit Facility (note
12) as well as CAD $240,581 of advances from the Company’s
Chief Executive Officer and Chief Financial Officer.
During
the year ended December 31, 2016, the Company expensed $140,540
(December 31, 2015: $nil) in interest as a result of the Term Loan.
Pursuant to the Cash Sweep, during the year ended December 31,
2016, the Company paid $187,898 to the Lenders consisting of
$111,083 in interest and $76,815 in principal payments and at
December 31, 2016, the Company owes the Lenders $81,060 in arrears
consisting of $29,471 in interest and $51,589 in principal
payments.
At
December 31, 2016, the amount owing on the Term Loan is as
follows:
|
|
|
Amount
advanced
|
$
1,219,840
|
$
-
|
Exchange gains
during the year
|
(28,159
)
|
-
|
Principal payments
made
|
(76,815
)
|
-
|
Interest
accrued
|
140,540
|
-
|
Interest payments
made
|
(111,069
)
|
-
|
Amount owing at end
of year
|
$
1,144,337
|
$
-
|
14. CONVERTIBLE DEBENTURES
Convertible Debentures Series A
On
September 3, 2013, December 23, 2013 and February 11, 2014, the
Company issued $425,000, $797,000 and $178,000, respectively, of
unsecured subordinated convertible debentures (“Convertible
Debentures Series A”). The Convertible Debentures Series A
matured on January 31, 2016 and charged interest at a rate of 12%
per annum, payable quarterly in arrears. The Convertible Debentures
Series A were convertible into Common Shares of the Company at a
fixed conversion rate of $0.07 per Common Share at any time prior
to the maturity date. Of the $178,000 in face value of Convertible
Debentures Series A issued on February 11, 2014, $3,000 were issued
in settlement of loans from shareholders and $50,000 were issued in
settlement of loans from related parties.
Convertible Debentures Series B
On
December 31, 2015, the Company issued 650 unsecured subordinated
convertible debenture units (“Convertible Debentures Series
B”) for proceeds of $650,000. Each Convertible Debentures
Series B consisted of an unsecured subordinated convertible
debenture having a principal amount of $1,000 and warrants
exercisable for the purchase of 5,000 Common Shares of the Company
at a price of $0.20 per Common Share for a period of twenty-four
months from the date of issuance (note 16). The Convertible
Debentures Series B mature on January 31, 2018 and bear interest at
a rate of 8% per annum, payable quarterly in arrears. The face
value of the Convertible Debentures Series B, together with all
accrued and unpaid interest thereon, are convertible into Common
Shares of the Company at a fixed conversion rate of $0.10 per
Common Share at any time prior to maturity. The Company also has
the option to force conversion of any outstanding Convertible
Debentures Series B at any time after six months from issuance and
prior to maturity. Of the $650,000 in face value of Convertible
Debentures Series B issued on December 31, 2015, $276,000 were
issued in settlement of loans from related parties (note 19),
$10,000 were issued in settlement of related party consulting fees
(note 19), $20,000 were issued in settlement of consulting fees
owing to an unrelated party and $227,000 were issued in settlement
of loans from shareholders.
Convertible Debentures Series C
On May
20, 2016, the Company issued 375 unsecured subordinated convertible
debenture units (the “Convertible Debentures Series C”)
for proceeds of $375,000. Each Convertible Debentures Series C
consisted of an unsecured subordinated convertible debenture having
a principal amount of $1,000 and warrants exercisable for the
purchase of 10,000 Common Shares of the Company at a price of $0.20
per Common Share for a period of twenty-four months from the date
of issuance (note 16 (n). The Convertible Debentures Series C
mature on January 31, 2018 and bear interest at a rate of 8% per
annum, accrued quarterly in arrears. The face value of the
Convertible Debentures Series C, together with all accrued and
unpaid interest thereon, are convertible into Common Shares of the
Company at a fixed conversion rate of $0.10 per Common Share at any
time prior to maturity. The Company also has the option to force
conversion of any outstanding Convertible Debentures Series C at
any time after six months from issuance and prior to maturity. For
Canadian holders, the Company may only force conversion of any
outstanding Convertible Debentures Series C at such time that the
Company is a reporting issuer within the jurisdiction of Canada. Of
the $375,000 in face value of Convertible Debentures Series C
issued on May 20, 2016, $55,000 were issued in settlement of
amounts owing to related parties (note 19) and $10,000 were issued
in settlement of amounts owing to an employee. The Company incurred
costs of $22,725 as a result of the issuance of Convertible
Debentures Series C on May 20, 2016.
On
December 31, 2016, the Company issued an additional 275 units of
Convertible Debentures Series C for proceeds of $275,000 which were
fully issued in exchange for cash.
The
Company evaluated the terms and conditions of the Convertible
Debentures Series A, Convertible Debentures Series B and each
tranche of Convertible Debentures Series C (together, the
“Convertible Debentures”) under the guidance of ASC No.
815,
Derivatives and
Hedging
(“ASC 815”). The conversion feature met
the definition of conventional convertible for purposes of applying
the conventional convertible exemption. The definition of
conventional contemplates a limitation on the number of shares
issuable under the arrangement. The instrument was convertible into
a fixed number of shares and there were no down round protection
features contained in the contracts.
Since a
portion of the Convertible Debentures were issued in exchange for
nonconvertible instruments at the original instrument’s
maturity date, the guidance of ASC 470-20-30-19 & 20 were
applied. The fair value of the newly issued Convertible Debentures
were equal to the redemption amounts owed at the maturity date of
the original instruments. Therefore, there was no gain or loss on
extinguishment of debt recorded. After the exchange occurred, the
Company was required to consider whether the new hybrid contracts
embodied a beneficial conversion feature
(“BCF”).
For the
face value $425,000 of Convertible Debentures Series A issued on
September 3, 2013, the calculation of the effective conversion
amount did not result in a BCF because the effective conversion
price was greater than the Company’s stock price on the date
of issuance, therefore no BCF was recorded. However, for the face
value $797,000 of Convertible Debentures Series A that were issued
on December 23, 2013 and the face value $178,000 of Convertible
Debentures Series A that were issued on February 11, 2014, the
calculation of the effective conversion amount resulted in a BCF
because the effective conversion price was less than the
Company’s stock price on the date of issuance and a BCF in
the amount of $797,000 and $178,000, respectively, were recorded in
additional paid-in capital.
For the
face value $650,000 of Convertible Debenture Series B issued on
December 31, 2015, the relative fair value of the purchase warrants
included in the issuance totaling $287,757 was calculated using the
Black-Scholes option pricing model. The resulting fair value of
such Convertible Debentures Series B issuance was calculated to be
$362,243. The calculation of the effective conversion amount
resulted in a BCF because the effective conversion price was less
than the Company’s stock price on the date of issuance and a
BCF in the amount of $133,657 was recorded in additional paid-in
capital.
For the
face value $375,000 of Convertible Debentures Series C issued on
May 20, 2016 (“Convertible Debentures Series C-1”), the
relative fair value of the purchase warrants included in the
issuance totaling $234,737 (note 16 (n)) was calculated using the
Black-Scholes option pricing model. The resulting fair value of
such Convertible Debentures Series C-1 was calculated to be
$140,263. The calculation of the effective conversion amount
resulted in a BCF because the effective conversion price was less
than the Company’s stock price on the date of issuance and a
BCF in the amount of $117,538, net of transaction costs, was
recorded in additional paid-in capital.
For the
face value $275,000 of Convertible Debentures Series C issued on
December 31, 2016 (“Convertible Debentures Series
C-2”), the relative fair value of the purchase warrants
included in the issuance totaling $143,871 (note 16(r)) was
calculated using the Black-Scholes option pricing model. The
resulting fair value of such Convertible Debentures Series C-2 was
calculated to be $131,129. The calculation of the effective
conversion amount resulted in a BCF because the effective
conversion price was less than the Company’s stock price on
the date of issuance and a BCF in the amount of $131,129, was
recorded in additional paid-in capital.
The BCF
and the fair value of the purchase warrants, which represents debt
discount, is accreted over the life of the Convertible Debentures
using the effective interest rate. Interest expense related to debt
discount was recorded as follows:
|
|
|
Convertible
Debentures Series A
|
$
17,341
|
$
232,830
|
Convertible
Debentures Series B
|
52,781
|
6,500
|
Convertible
Debentures Series C-1
|
21,674
|
-
|
Convertible
Debentures Series C-2
|
2,750
|
-
|
|
$
94,546
|
$
239,330
|
Convertible
Debentures as of December 31, 2016 and 2015, are as
follows:
Balance,
December 31, 2014
|
$
24,828
|
Face value
Convertible Debentures Series B
|
650,000
|
Relative fair value
of detachable warrants
|
(287,757
)
|
BCF
|
(362,243
)
|
Amortization of
debt discount
|
239,330
|
Conversions
|
(177,000
)
|
Balance,
December 31, 2015
|
87,158
(1)
|
Face value
Convertible Debentures Series C-1
|
375,000
|
Face value
Convertible Debentures Series C-2
|
275,000
|
Relative fair value
of detachable warrants
|
(378,608
)
|
BCF
|
(248,667
)
|
Transaction
costs
|
(22,725
)
|
Amortization of
debt discount
|
94,546
|
Conversion
|
(23,000
)
|
Cash
settlements
|
(75,000
)
|
Balance,
December 31, 2016
|
$
83,704
|
(1)
At December 31,
2015, $80,658 of Convertible Debentures were classified as current
liabilities and $6,500 of Convertible Debentures were classified as
long term liabilities on the balance sheet.
Conversions and Repayments of Convertible Debentures Series
A
The
Company received forms of election whereby holders of the
Convertible Debentures Series A elected to convert the face value
of the debentures into Common Shares of the Company at $0.07 per
share pursuant to the terms of the Convertible Debentures Series A.
As at December 31, 2016, the Company received the following forms
of elections from holders of the Convertible
Debentures:
Date Form
of
Election
Received
|
Face Value of
Convertible Debentures Series A Converted
|
Number
of
Common
Shares Issued on Conversion
|
April 15,
2014
|
$
50,000
|
714,286
|
September 30,
2014
|
800,000
|
11,428,572
|
November 10,
2014
|
275,000
|
3,928,571
|
March 9,
2015
(1)
|
52,000
|
742,857
|
July 15,
2015
|
105,000
|
1,500,000
|
September 1,
2015
|
20,000
|
285,714
|
|
$
1,302,000
|
18,600,000
|
(1)
On March 9, 2015,
the Company settled interest payable on the Convertible Debentures
Series A in the amount of $1,096 with the issuance of Common Shares
at a price of $0.15 per Common Share, of which, $358 of interest
payable on the Convertible Debentures Series A was settled with a
Director of the Company (note 19).
On
January 25, 2016, the Company received a form of election to
convert face value $23,000 of Convertible Debentures Series A, such
328,571 Common Shares remain unissued. On March 10, 2016, the
Company settled face value $25,000 of Convertible Debentures Series
A with a cash payment. On July 6, 2016, the Company settled face
value $50,000 of Convertible Debentures Series A and agreed to pay
to the holders such face value in monthly payments ending on
November 1, 2016. As at December 31, 2016, the $50,000 was fully
paid.
As at
December 31, 2016, all Convertible Debentures Series A had been
fully settled and no amounts remain owing.
Conversions and Repayments of Convertible Debentures Series B &
C
As at
December 31, 2016, face value $650,000 of Convertible Debentures
Series B and face value $650,000 of Convertible Debentures Series C
remain owing to their respective debenture holders.
Interest on Convertible Debentures
During
the year ended December 31, 2016, the Company recorded interest
expense in the amount of $74,162 (December 31, 2015: $21,845) on
the Convertible Debentures.
15. COMMON STOCK
During
the year ended December 31, 2016, the Company:
|
●
|
Issued
480,000 Common Shares at $0.10 per share for settlement of $48,000
in deferred fees owing to a related party (note 19). The amount
allocated to Shareholders’ Deficiency, based on the fair
value, amounted to $76,800. The balance of $28,800 has been
recorded as a loss on settlement of debt;
|
|
●
|
Issued
562,715 Common Shares at an average price of $0.141 per share for
settlement of $79,154 in consulting fees. The amount allocated to
Shareholders’ Deficiency, based on the fair value, amounted
to $78,780. The balance of $374 has been recorded as a gain on
settlement of debt; and
|
|
●
|
Issued
150,000 Common Shares at $0.14 per share for $21,000 in related
party employment income (note 19).
|
During
the year ended December 31, 2015, the Company:
|
●
|
Issued
100,000 Common Shares at a fair value of $0.11 per share for
settlement of $10,000 in prepaid consulting fees to an unrelated
party. The amount allocated to Shareholders’ Deficiency,
based on the fair value, amounted to $11,000. The balance of $1,000
has been recorded as a loss on settlement of debt in the statement
of operations and comprehensive loss;
|
|
●
|
Issued
819,672 Common Shares at $0.122 per share for a total value of
$100,000 in part consideration for an acquisition of a
business;
|
|
●
|
Issued
225,428 Common Shares at $0.10 per share for cash proceeds of
$22,543;
|
|
●
|
Issued 500,000 Common Shares at $0.10 per share for settlement of
$50,000 of related party loans;
|
|
●
|
Issued
211,389 Common Shares at a fair value of $0.15 per share for
settlement of $25,000 in consulting fees to unrelated parties. The
amount allocated to Shareholders’ Deficiency, based on the
fair value, amounted to $31,708. The balance of $6,708 has been
recorded as a loss on settlement of debt in the statement of
operations and comprehensive loss;
|
|
●
|
Issued 1,000,000 Common Shares of the Company valued at $0.15 per
share for a total value of $150,000 in part consideration for an
acquisition of a business;
|
|
●
|
Issued
201,945 Common Shares at a fair value of $0.11 per share for
settlement of $20,194 in interest payable on a Convertible
Debenture Series A to an unrelated party. The amount allocated to
Shareholders’ Deficiency, based on the fair value, amounted
to $33,261 and includes the value of the purchase warrants issued.
The balance of $13,067 has been recorded as a loss on settlement of
debt in the statement of operations and comprehensive
loss;
|
|
●
|
Issued
60,000 Common Shares at $0.19 per share for settlement of $11,400
in consulting fees to an unrelated party;
|
|
●
|
Issued
500,000 Common Shares at $0.17 per share for consideration paid in
the amount of $85,000 for the acquisition of a
subsidiary;
|
|
●
|
Issued
4,918 Common Shares at $0.15 per share for settlement of $738 in
interest payable on Convertible Debentures Series A to unrelated
parties;
|
|
●
|
Issued
2,385 Common Shares at $0.15 per share for settlement of $358 in
interest payable on Convertible Debentures Series A to a Director
of the Company;
|
|
●
|
Issued
2,299,999 Common Shares at $0.07 per share as a result of the
conversion of $161,000 of Convertible Debentures Series
A;
|
|
●
|
Issued
228,572 Common Shares at $0.07 per share to a Director of the
Company as a result of the conversion of $16,000 of Convertible
Debentures Series A;
|
|
●
|
Issued
300,000 Common Shares at $0.11 per share as compensation for
$33,000 in consulting fees to an unrelated party; and
|
|
●
|
Issued
408,597 Common Shares valued at a fair value of $0.11 per share for
settlement of $61,290 in marketing costs owing to an unrelated
party. The amount allocated to Shareholders’ Deficiency,
based on the fair value, amounted to $44,946. The balance of
$16,344 has been recorded as a gain on settlement of debt in the
statement of operations and comprehensive loss.
|
16. WARRANTS
The
following schedule summarizes the outstanding Common Share purchase
warrants of the Company:
|
|
|
|
|
Weighted Average
Exercise Price
|
Weighted Average
Life Remaining (yrs)
|
|
Weighted Average
Exercise Price
|
Weighted Average
Life Remaining (yrs)
|
Beginning of
year
|
8,177,373
|
$
0.25
|
1.39
|
1,510,640
|
$
0.25
|
1.87
|
Issued
|
11,935,000
|
0.21
|
2.05
|
6,677,373
|
0.25
|
1.73
|
Cancelled
|
(1,125,000
)
|
0.25
|
1.13
|
-
|
-
|
-
|
Expired
|
(1,427,373
)
|
0.19
|
-
|
(10,640
)
|
0.15
|
-
|
End of
year
|
17,560,000
|
$
0.23
|
1.21
|
8,177,373
|
$
0.25
|
1.39
|
|
|
|
|
|
|
|
During
the years ended December 31, 2016 and 2015 the Company has issued
warrants to purchase Common Shares of the Company as
follows:
|
|
|
|
|
|
|
|
|
January 30,
2015
|
(a)
|
250,000
|
2
|
0.30
|
0.71
%
|
Nil
|
320
%
|
38,719
|
May 29,
2015
|
(b)
|
250,000
|
2
|
0.40
|
0.85
%
|
Nil
|
298
%
|
35,362
|
May 29,
2015
|
(b)
|
250,000
|
2
|
0.50
|
0.85
%
|
Nil
|
298
%
|
35,134
|
May 29,
2015
|
(b)
|
250,000
|
2
|
0.60
|
0.85
%
|
Nil
|
298
%
|
34,934
|
May 29,
2015
|
(b)
|
250,000
|
2
|
0.70
|
0.85
%
|
Nil
|
298
%
|
34,755
|
June 29,
2015
|
(c)
|
500,000
|
1
|
0.15
|
0.51
%
|
Nil
|
166
%
|
40,643
|
July 14,
2015
|
(d)
|
500,000
|
1.5
|
0.20
|
0.51
%
|
Nil
|
219
%
|
41,975
|
July 15,
2015
|
(e)
|
201,945
|
1
|
0.20
|
0.52
%
|
Nil
|
174
%
|
11,047
|
November 5,
2015
|
(f)
|
725,428
|
1
|
0.20
|
0.60
%
|
Nil
|
186
%
|
48,398
|
December 30,
2015
|
(g)
|
250,000
|
1.5
|
0.20
|
0.88
%
|
Nil
|
190
%
|
26,821
|
December 31,
2015
|
(h)
|
3,250,000
|
2
|
0.20
|
1.19
%
|
Nil
|
265
%
|
516,343
|
January 18,
2016
|
(i)
|
250,000
|
2.46
|
0.20
|
0.91
%
|
Nil
|
263
%
|
51,598
|
February 18,
2016
|
(j)
|
300,000
|
2
|
0.25
|
0.80
%
|
Nil
|
275
%
|
30,501
|
February 18,
2016
|
(k)
|
1,500,000
|
2
|
0.25
|
0.80
%
|
Nil
|
275
%
|
152,503
|
March 2,
2016
|
(l)
|
1,000,000
|
2
|
0.20
|
0.91
%
|
Nil
|
271
%
|
158,995
|
April 13,
2016
|
(m)
|
1,750,000
|
2
|
0.25
|
0.88
%
|
Nil
|
264
%
|
241,754
|
May 20,
2016
|
(n)
|
3,750,000
|
2
|
0.20
|
1.03
%
|
Nil
|
259
%
|
234,737
|
May 20,
2016
|
(o)
|
85,000
|
2
|
0.20
|
1.03
%
|
Nil
|
259
%
|
14,225
|
July 15,
2016
|
(p)
|
300,000
|
2.46
|
0.20
|
0.91
%
|
Nil
|
263
%
|
45,799
|
December 22,
2016
|
(q)
|
250,000
|
1.5
|
0.20
|
0.87
%
|
Nil
|
180
%
|
18,840
|
December 31,
2016
|
(r)
|
2,750,000
|
2
|
0.20
|
1.20
%
|
Nil
|
259
%
|
143,871
|
|
18,612,373
|
|
|
|
|
|
1,956,955
|
(a)
Issued in connection to a supply and distribution agreement. The
Company fully expensed the value of the purchase warrants in stock
based compensation which has been recorded as an administrative
expense.
(b)
Issued in connection to a commission agreement, the Company issued
warrants for the purchase of 1,000,000 Common Shares of the
Company. The warrants vest in four tranches of 250,000 purchase
warrants each. The first tranche has an exercise price of $0.40 per
Common Share and vested upon execution of the agreement. The Second
tranche has an exercise price of $0.50 per Common Share and will
vest upon the sales agent delivering $500,001 in sales revenue to
Gilla Worldwide. The third tranche has an exercise price of $0.60
per Common Share and will vest upon the sales agent delivering
$1,000,001 in sales revenue to Gilla Worldwide. The fourth tranche
has an exercise price of $0.70 per Common Share and will vest upon
the sales agent delivering $1,500,001 in sales revenue Gilla
Worldwide. The Company booked the value of the vested purchase
warrants in the amount of $35,362 as a prepaid to be expensed over
the two year life of the commission agreement. During the year
ended December 31, 2016, the Company expensed $17,681 in stock
based compensation which has been recorded as an administrative
expense. No portion of the value of the unvested purchase warrants
has been expensed as the sales agent had not yet delivered any
sales revenue to Gilla Worldwide.
(c)
Issued in connection to the Secured Note No.3. The Company booked
the value of the purchase warrants as prepaid to be expensed over
six months which is the life of the Secured Note No.3. No amounts
were expensed related to this prepaid during the years ended
December 31, 2016. During the year ended December 31, 2015, the
Company recorded $20,321 in interest expense related to these
purchase warrants.
(d)
Issued as part of the consideration for the acquisition of
VaporLiq.
(e)
Issued in connection with a private placement. No stock based
compensation expense was recorded since the purchase warrants were
issued as part of a private placement of Common
Shares.
(f)
Issued in connection with a private placement. No stock based
compensation expense was recorded since the purchase warrants were
issued as part of a private placement of Common
Shares.
(g)
Issued in connection to the Secured Notes, the Company booked
the value of the purchase warrants as prepaid to be expensed over
the life of the Secured Notes. During the year ended December 31,
2016, the Company expensed $17,881 of the prepaid as financing fees
which has been recorded as interest expense.
(h)
Issued in connection to the issuance of Convertible Debentures
Series B. The value of the purchase warrants along with the
BCF represents debt discount on the Convertible Debentures Series B
and is accreted over the life of the debenture using the effective
interest rate. For the year ended December 31, 2016, the Company
recorded interest expense in the amount of $52,781 related to debt
discount which includes the accretion of the BCF of the Convertible
Debentures Series B (note 14).
(i)
Issued in connection to the Term Loan (note 13). On July 15, 2016
and in connection to the Term Loan Amendment, the Company extended
the expiration date of these purchase warrants to December 31,
2018, with all other terms of the warrants remaining the same. The
Company booked the value of the purchase warrants of $51,598 as a
prepaid to be expensed over the life of the Term Loan. During the
year ended December 31, 2016, the Company expensed $22,888 of the
prepaid as financing fees which has been recorded as interest
expense. On January 18, 2016 and in connection to the Term Loan
(note 13), the Company extended the expiration date of the 250,000
purchase warrants issued on August 1, 2014 to be exercisable until
December 31, 2017. On July 15, 2016, the Company entered into the
Term Loan Amendment and extended the expiration date of these
purchase warrants to December 31, 2018, with all other terms of the
warrants remaining the same. The Company booked the value of the
purchase warrants in the amount of $42,325 as a prepaid to be
expensed over the life of the Term Loan. During the year ended
December 31, 2016, the Company expensed $17,829 of the prepaid as
financing fees which has been recorded as interest
expense.
(j)
Issued in relation to a consulting agreement. The purchase warrants
shall vest quarterly in eight equal tranches, with the first
tranche vesting immediately and the final tranche vesting on
November 18, 2017. If the consulting agreement was terminated prior
to the expiration of the purchase warrants, any unexercised fully
vested warrants would expire thirty calendar days following the
effective termination date and any unvested warrants would be
automatically canceled. During the year ended December 31, 2016,
the Company expensed $16,511 as stock based compensation in
relation to the above purchase warrants which has been recorded as
an administrative expense. On August 31, 2016, the Company
terminated the consulting agreement and 187,500 of the unvested
warrants have been cancelled and the remaining 112,500 vested
warrants remain outstanding and exercisable until February 17, 2018
as mutually agreed in the termination.
(k)
Issued in relation to a consulting agreement. The purchase warrants
shall vest quarterly in eight equal tranches, with the first
tranche vesting immediately and the final tranche vesting on
November 18, 2017. If the consulting agreement was terminated prior
to the expiration of the purchase warrants, any unexercised fully
vested warrants would expire thirty calendar days following the
effective termination date and any unvested warrants shall be
automatically canceled. During the year ended December 31, 2016,
the Company expensed $108,656 as stock based compensation in
relation to the above purchase warrants which has been recorded as
an administrative expense. On October 25, 2016, the Company
terminated the consulting agreement and 937,500 unvested warrants
have been cancelled and the remaining 562,500 vested warrants
remain outstanding and exercisable until March 31, 2018 as mutually
agreed in the termination.
(l)
Issued in connection to the Loan Agreement (note 11). The warrants
shall vest in two equal tranches, with 500,000 purchase warrants to
vest upon the close of Loan Tranche A and the remaining 500,000
purchase warrants to vest upon the close of Loan Tranche B. On
March 3, 2016 and April 14, 2016, the Company closed Loan Tranche A
and Loan Tranche B, respectively, at which dates the purchase
warrants became fully vested and exercisable. The Company booked
the value of the purchase warrants of $158,995 as a prepaid to be
expensed over the life of the Shareholder Loan. During the year
ended December 31, 2016, the Company expensed $63,156 of the
prepaid as financing fees which has been recorded as interest
expense.
(m)
Issued in connection to a consulting agreement. Forty percent of
the purchase warrants vested immediately with the remaining sixty
percent vesting in equal tranches of fifteen percent on September
30, 2016, December 31 2016, June 30, 2017 and December 31, 2017. If
the consulting agreement is terminated prior to the expiration of
the purchase warrants, any unexercised fully vested warrants shall
expire ninety calendar days following the effective termination
date and any unvested warrants shall be automatically cancelled.
During the year ended December 31, 2016, the Company expensed
$205,828 as stock based compensation in relation to the above
purchase warrants which has been recorded as an administrative
expense. Subsequent to the year ended December 31, 2016, the
Company terminated the consulting agreement for cause and all
Common Share purchase warrants issued in connection to the
consulting agreement were cancelled (note 24).
(n)
Issued in connection to the issuance of Convertible Debentures
Series C-1. The value of the purchase warrants along with the BCF
represents debt discount on the Convertible Debentures Series C-1
and is accreted over the life of the debenture using the effective
interest rate. For the year ended December 31, 2016, the Company
recorded interest expense in the amount of $21,674 related to debt
discount which includes the accretion of the BCF (note
14).
(o)
Issued as a commission payment related to the issuance of the
Convertible Debentures Series C-1. The value of the purchase
warrants in the amount of $14,225 were recorded as a reduction to
the proceeds received for the Convertible Debentures Series C-1
(note 14).
(p)
Issued in connection to the Term Loan Amendment (note 13). The
Company booked the value of the purchase warrants in the amount of
$45,799 as a prepaid financing fee to be expensed over the life of
the Term Loan. During the year ended December 31, 2016, the Company
expensed $10,732 of the prepaid as financing fees which has been
recorded as interest expense.
(q)
Issued in connection to the Secured Notes. The Company booked the
value of the purchase warrants in the amount of $18,840 was booked
as prepaid to be expensed over the life of the Secured Notes.
During the year ended December 31, 2016, the Company expensed $306
of the prepaid as financing fees which has been recorded as
interest expense.
(r)
Issued in connection to the issuance of Convertible Debentures
Series C-2. The value of the purchase warrants along with the BCF
represents debt discount on the Convertible Debentures Series C-2
and is accreted over the life of the debenture using the effective
interest rate. For the year ended December 31, 2016, the Company
recorded interest expense in the amount of $2,750 related to debt
discount which includes the accretion of the BCF of Convertible
Debentures Series C-2 (note 14).
17. 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
|
Total
Warrants Issued as Stock Based Compensation
|
662,777
|
|
|
Shares
issued for consulting fees
|
59,154
|
Shares
to be issued for consulting fees
|
68,550
|
Shares
issued for employment income to a related party
|
21,000
|
Total
Stock Based Compensation
|
$
811,481
|
|
|
Warrants
Issued as Stock Based Compensation
|
|
Warrants issued in
connection to a supply and distribution agreement (note
16(a))
|
$
38,719
|
Warrants issued in
connection to a commission agreement (note 16(b))
|
35,362
|
Warrants issued in
connection to the Secured Note No.3 (note 16(c))
|
40,643
|
Warrants issued in
connection to the Secured Notes (note 16(g))
|
26,821
|
Total
Warrants Issued as Stock Based Compensation
|
141,545
|
|
|
Shares
issued for consulting fees
|
79,400
|
Shares
to be issued for consulting fees
|
20,000
|
Total
Stock Based Compensation
|
$
240,945
|
18. SHARES TO BE ISSUED
As at
December 31, 2016, the Company had $146,550 in shares to be issued
consisting of the following:
●
328,571 Common
Shares, valued at $0.07 per share, to be issued due to a con
version of $23,000 of Convertible Debentures Series A;
●
320,022 Common
Shares, valued at an average of $0.156 per share, to be issued due
to the settlement of $50,000 in consulting fees owing to a
shareholder;
●
143,715 Common
Shares, valued at an average of $0.129 per share, to be issued due
to the settlement of $18,550 in consulting fees owing to unrelated
parties, and
●
366,667 Common
Shares, valued at $0.15 per share, to be issued due to the
settlement of $55,000 in consulting fees owing to an unrelated
party.
The
above Common Shares have not yet been issued.
As at
December 31, 2015, the Company had $20,000 in shares to be issued
consisting of the following:
●
151,745 Common
Shares, valued at $0.132 per share, to be issued due to the
settlement of consulting fees owing to unrelated
parties.
19. RELATED PARTY TRANSACTIONS
Transactions
with related parties are incurred in the normal course of business
and are as follows:
(a)
|
The
Company’s current and former officers and shareholders have
advanced funds on an unsecured, non-interest bearing basis to the
Company, unless stated otherwise below, for travel related and
working capital purposes. The Company has not entered into any
agreement on the repayment terms for these
advances.
|
Advances
from related parties were as follows:
|
|
|
Advances by and
amounts payable to Officers of the Company, two of which are also
Directors
|
$
95,759
|
$
242,758
|
Advances by and
consulting fees payable to a corporation owned by two Officers of
the Company, one of which is also a Director
|
313,745
|
196,581
|
Consulting fees
owing to persons related to Officers who are also Directors of the
Company
|
77,463
|
37,028
|
Advances by
Officers of the Company, one of which is also a Director, bears
interest at 1.5% per month
|
901,784
|
355,802
|
Amounts payable to
a corporation formerly related by virtue of a common Officer of the
Company
|
-
|
30,294
|
Amounts payable to
a corporation related by virtue of common Officers and a common
Director of the Company
|
76,407
|
50,976
|
Consulting fees and
director fees payable to Directors of the Company
|
13,725
|
83,500
|
|
$
1,478,883
|
$
996,939
|
At
December 31, 2016, the Company had deferred amounts of $1,085,906
(December 31, 2015: $662,140) owing to related parties. The
deferred amounts consist of $572,506 (December 31, 2015: $300,890)
owing to Officers of the Company, two of which are also Directors
for consulting fees payable, amounts of $141,000 owing to Directors
of the Company for Director fees payable and amounts of $372,400
(CAD $500,000) (December 31, 2015: $361,250; CAD $500,000) owing to
a corporation owned by two Officers of the Company, one of which is
also a Director for management service fees payable. The amounts
are non-interest bearing and payable on April 1, 2018, in exchange
for agreeing to defer the fees, the Directors and Officers will
receive an incentive bonus equal to 10% of the amount deferred and
payable on April 1, 2018. The bonus will be expensed over the term
of the deferrals, no amount of the bonus has been expensed for the
year ended December 31, 2016. During the year ended December 31,
2016, the Company settled $48,000 of the deferred amounts owing to
an Officer and Director of the Company with 480,000 Common Shares
of the Company (note 15).
(b)
|
Interest
accrued to related parties were as follows:
|
|
|
|
|
|
|
Interest accrued on
advances by Officers of the Company, one of which is also a
Director
|
$
234,121
|
$
129,729
|
Advances by and
consulting fees payable to a corporation owned by two Officers of
the Company, one of which is also a Director
|
29,669
|
2,026
|
|
$
263,790
|
$
131,755
|
(c)
|
Transactions
with related parties were as follows:
|
During
the year ended December 31, 2016, the Company expensed $72,394
(December 31, 2015: $49,977) in rent expense payable to a
corporation related by virtue of a common Officer and a common
Director of the Company.
During
the year ended December 31, 2016, the Company expensed $22,304
(December 31, 2015: $25,293) in costs related to a vehicle for the
benefit of two Officers who are also Directors of the Company and
for the benefit of a person related to an Officer and Director of
the Company. The Company also expensed $206,445 (December 31, 2015: $173,599 in
travel and entertainment expenses incurred by Officers and
Directors of the Company.
On
February 2, 2016, the Company settled $48,000 in consulting fees
payable to a related party and agreed to issue 480,000 Common
Shares at a price of $0.10 per Common Share. These Common Shares
were issued on May 19, 2016 (note 15).
On May
20, 2016, the Company issued face value $55,000 of Convertible
Debentures Series C to related parties consisting of $10,000 to a
person related to an Officer and Director for settled of fees
payable, $10,000 to a Director of the Company for settlement of
Director fees payable and $35,000 to a corporation owned by two
Officers of the Company, one of which is also a Director, for
settlement of loans payable.
On May
20, 2016, the Company issued face value $15,000 of Convertible
Debentures Series C to two Directors of the Company for
cash.
On June
17, 2016, the Company issued 150,000 Common Shares at a price of
$0.14 per Common Share to a person related to an Officer and
Director of the Company on the signing of a new employment
agreement.
During
the year ended December 31, 2015, the Company settled $358 of
interest payable on Convertible Debentures Series A with a Director
of the Company at $0.15 per Common Share, and the Common Shares
were issued on April 13, 2015.
During
the year ended December 31, 2016, amounts owing to a former related
party in the amount of $9,263 were forgiven, as a result the
Company recorded a gain on settlement in the amount of
$9,263.
During
the year ended December 31, 2015, the Company issued 228,572 Common
Shares at $0.07 per share to a Director of the Company as a result
of the conversion of face value $16,000 of Convertible Debentures
Series A, and the shares were issued on April 13,
2015.
The
Company expensed consulting fees payable to related parties as
follows:
|
|
|
Directors
|
$
-
|
$
92,750
|
Officers
|
330,900
|
273,974
|
Corporation
formerly related by virtue of common Officers and a common
Director
|
-
|
74,396
|
Corporation owned
by two Officers, one of which is also a Director
|
-
|
92,799
|
Persons related to
a Director
|
142,249
|
71,261
|
|
$
473,149
|
$
605,180
|
The
Company’s Chief Executive Officer and Chief Financial Officer
are both participants of the consortium of Lenders of the Credit
Facility and the Term Loan, each committed to provide a total of
CAD $150,000 of the Term Loan (notes 12 and 13).
20. INCOME TAXES
Under
ASC No. 740,
Income Taxes
(“ASC 740”), income taxes are recognized for the
following: a) amount of tax payable for the current year and b)
deferred tax liabilities and assets for future tax consequences of
events that have been recognized differently in the financial
statements than for tax purposes.
The
Company has non-capital losses of $7,512,930 (2015: $5,080,614) in
US non-capital losses, $3,210,343 (2015: $2,043,349) in Canadian
non-capital losses, $404,0732 (2015: $401,897) in Irish non-capital
losses and $202,920 (2015: $65,163) in Hungarian non-capital
losses.
|
|
|
|
|
|
|
2032
|
$
(434,283
)
|
$
(626,235
)
|
$
-
|
$
-
|
$
-
|
$
(1,060,518
)
|
2033
|
(1,016,051
)
|
(438,761
)
|
-
|
-
|
-
|
(1,454,812
)
|
2034
|
(2,159,772
)
|
(301,868
)
|
(372,764
)
|
-
|
-
|
(2,834,404
)
|
2035
|
(1,470,508
)
|
(676,485
)
|
(29,133
)
|
(65,163
)
|
-
|
(2,241,289
)
|
2036
|
(2,432,316
)
|
(1,166,994
)
|
(2,175
)
|
(137,757
)
|
-
|
(3,739,242
)
|
|
$
(7,512,930
)
|
$
(3,210,343
)
|
$
(404,072
)
|
$
(202,920
)
|
$
-
|
$
(11,330,266
)
|
The
reconciliation of income taxes at the statutory income tax rates to
the income tax expense is as follows:
|
|
|
Loss before income
taxes
|
$
4,500,206
|
$
3,048,336
|
Applicable tax rate
ranges from 10% to 35%
|
|
|
Expected income tax
(recovery) at the statutory rates
|
(1,439,417
)
|
(981,895
)
|
Permanent
differences
|
200,042
|
171,912
|
Tax benefits
not recognized
|
1,239,375
|
809,983
|
Provision for
income taxes
|
$
-
|
$
-
|
The
components of the temporary differences and the country of origin
at December 31, 2016 and 2015 are as follows (applying the combined
Canadian federal and provincial statutory income tax rate of 26%,
the US income tax rate of 35%, the Irish income tax rate of 12.5%,
the Hungarian income tax rate of 10% and the Slovakian income tax
rate of 22% for both the years). No deferred tax assets are
recognized on these differences as it is not probable that
sufficient taxable profit will be available to realize such
assets.
|
|
|
|
|
|
|
|
Loss before income
taxes
|
$
3,103,756
|
$
2,317,527
|
$
1,291,477
|
$
(578,775
)
|
Applicable tax rate
ranges from 10% to 35%
|
|
35
%
|
|
26.5
%
|
Expected income tax
(recovery) at the statutory rates
|
(1,086,315
)
|
(811,134
)
|
(342,241
)
|
(153,375
)
|
Permanent
differences
|
177,943
|
164,649
|
22,099
|
7,263
|
Tax benefits
not recognized
|
908,372
|
646,485
|
320,142
|
146,112
|
Income
taxes-current and deferred
|
$
-
|
$
-
|
$
-
|
$
-
|
|
|
|
|
|
|
|
|
Loss before income
taxes
|
$
(2,301
)
|
$
87,276
|
$
111,489
|
$
64,758
|
Applicable tax rate
ranges from 10% to 35%
|
12.5
%
|
12.5
%
|
10
%
|
10
%
|
Expected income tax
(recovery) at the statutory rates
|
288
|
(10,910
)
|
(11,149
)
|
(6,476
)
|
Permanent
differences
|
|
-
|
1
|
-
|
Tax benefits
not recognized
|
-
|
10,910
|
11,148
|
6,476
|
Income
taxes-current and deferred
|
$
288
|
$
-
|
$
-
|
$
-
|
|
|
|
|
|
Loss before income
taxes
|
$
(4,216
)
|
$
-
|
Applicable tax rate
ranges from 10% to 35%
|
22
%
|
22
%
|
Expected income tax
(recovery) at the statutory rates
|
928
|
-
|
Permanent
differences
|
-
|
-
|
Tax benefits
not recognized
|
-
|
-
|
Income
taxes-current and deferred
|
$
928
|
$
-
|
Deferred
tax asset components as of December 31, 2016 and 2015 are as
follows:
|
|
|
Operating losses
available to offset future income taxes
|
$
(11,330,266
)
|
$
(7,951,215
)
|
Expected
income tax recovery at a statutory rate of 35%
|
3,535,016
|
2,502,523
|
Valuation
allowance
|
(3,535,016
)
|
(2,502,523
)
|
Income taxes
– current and deferred
|
$
-
|
$
-
|
As the
Company has not earned significant revenues, it has provided a 100
percent valuation allowance on the net deferred tax asset as of
December 31, 2016 and 2015. Management believes the Company has no
uncertain tax position.
As the
Company is delinquent in its historical tax filings it has accrued
$90,000 in penalties which the Company estimates it will be
assessed on filing of the delinquent returns. The accrued penalties
have been recorded as an administrative expense during the year
ended December 31, 2016.
21. COMMITMENTS AND CONTINGENCIES
a)
Premises Lease – Florida, USA
Effective
January 1, 2015, a subsidiary of the Company entered into an
operating lease agreement for a rental premises in Daytona Beach,
Florida, USA. The terms of this agreement are to be for a period of
36 months and ending on December 31, 2017 with payments made
monthly. Minimum annual lease payments are as follows:
b)
Premises Leases – Budapest, Hungary
Effective
January 2, 2017, a subsidiary of the Company entered into a lease
agreement for a rental premises in Budapest, Hungary. The terms of
the agreement are to be for a period of one year ending on December
31, 2017 with payments made monthly. Minimum annual lease payments
are denominated in Euros and are as follows:
Effective
May 23, 2016, a subsidiary of the Company entered into a lease
agreement for office space in Budapest, Hungary. The terms of the
agreement are to be for a period of one year ending on July 8, 2017
with payments made monthly. Minimum annual lease payments are
denominated in Euros and are as follows:
c)
Litigation
The
Company is subject to certain legal proceedings and claims, which
arise in the ordinary course of its business. Although occasional
adverse decisions or settlements may occur, the Company believes
that the final disposition of such matters should not have a
material adverse effect on its financial position, results of
operations or liquidity.
On
January 6, 2016, Yaron Elkayam, Pinchas Mamane and Levent Dimen
filed a three count complaint against the Company in the Circuit
Court of Hillsborough County, Florida alleging (i) breach of
contract, (ii) breach of implied covenant of good faith and fair
dealing, and (iii) fraud in the inducement seeking damages in the
amount of approximately $900,000 of Unsecured Promissory Notes
issued on July 1, 2015 as a result of the acquisition of E Vapor
Labs. On February 23, 2016 the Company filed a motion to dismiss
the complaint on the basis of failure to allege sufficient
jurisdictional facts and failure to satisfy constitutional due
process requirements to exercise jurisdiction.
d)
Charitable Sales Promotion
On
January 21, 2016, the Company entered into an agreement with
Wounded Warriors Family Support Inc. in which the Company agreed to
make a donation of $1.00 for each sale of its “Vape
Warriors” E-liquid product during the period from January 1,
2016 to December 31, 2016, with a minimum donation of $50,000.
During the year ended December 31, 2016 the Company has accrued the
full $50,000 in charitable contributions regarding this
agreement.
e)
Royalty Agreement
On June
14, 2016, the Company entered into a royalty agreement related to
an E-liquid recipe purchased from an unrelated party in which the
Company agreed to pay to the recipe developer, a royalty of $0.25
per 60ml of E-liquid sold that contains the recipe, up to a maximum
of $100,000. Although the Company has the ability to sell the
E-liquid globally, the royalty is paid only on the E-liquid sold
within the United States. During the year ended December 31, 2016,
the Company has paid $8,275and owes $1,408 related to the royalty
agreement.
22. FINANCIAL INSTRUMENT
(i)
Credit Risk
Credit
risk is the risk of financial loss to the Company if a customer or
counterparty to a financial instrument fails to meet its
contractual obligations. The Company’s credit risk is
primarily attributable to fluctuations in the realizable values of
its cash and trade receivable. Cash accounts are maintained with
major international financial institutions of reputable credit and
therefore bear minimal credit risk. In the normal course of
business, the Company is exposed to credit risk from its customers
and the related accounts receivable are subject to normal
commercial credit risks. A substantial portion of the
Company’s accounts receivable are concentrated with a limited
number of large customers all of which the Company believes are
subject to normal industry credit risks. At December 31, 2016, the
Company recorded bad debt of $256,280 (2015: $20,370) in regards to
customers with past due amounts.
For
the year ended December 31, 2016, 15% (December 31, 2015: 38%) of
the Company’s trade receivables are due from one customer and
51% of the trade receivables are due from four customers. During
the year ended December 31, 2016, 31% of the Company’s sales
were to one customer.
(ii)
Liquidity Risk
Liquidity
risk is the risk that the Company will not be able to meet its
financial obligations as they fall due. The Company’s
approach to managing liquidity risk is to ensure, as far as
possible, that it will have sufficient liquidity to meet its
liabilities when due, under both normal and stressed conditions,
without incurring unacceptable losses or risking damage to the
Company’s reputation. The Company manages liquidity risk by
closely monitoring changing conditions in its investees,
participating in the day to day management and by forecasting cash
flows from operations and anticipated investing and financing
activities. At December 31, 2016, the Company had liabilities due
to unrelated parties through its financial obligations over the
next five years in the aggregate principal amount of $5,211,638. Of
such amount, the Company has obligations to repay $4,630,583 over
the next twelve months with the remaining $581,055 becoming due
within the following four year period.
(iii) Foreign
Currency Risk
Currency
risk is the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in foreign
exchange rates.
The risks and
fluctuations are related to cash and accounts payable and accrued
liabilities that are denominated in CAD, HUF and
EUR.
Analysis by currency in Canadian, Hungarian and Slovakian
equivalents is as follows:
December 31, 2016
|
|
|
|
CAD
|
$
204,350
|
$
219
|
$
3,166
|
HUF
|
$
334,698
|
$
46,138
|
$
127,788
|
EUR
|
$
18,672
|
$
-
|
$
10,328
|
The
effect of a 10% strengthening of the United States Dollar against
the Canadian Dollar, the Hungarian Forint and the Euro at the
reporting date on the CAD, HUF and EUR-denominated trade
receivables and payables carried at that date would, had all other
variables held constant, have resulted in an increase in profit for
the year and increase of net assets of $20,097, $16,077 and $934,
respectively. A 10% weakening in the exchange rate would, on the
same basis, have decreased profit and decreased net assets by
$20,097, $16,077 and $934 respectively.
The
Company purchases inventory in a foreign currency, at December 31,
2016, the Company included $238,888 (December 31, 2015: $146) in
inventory purchased in a foreign currency on its consolidated
balance sheet. The Company does not use derivative financial
instruments to reduce its exposure to this risk.
(iv)
Interest Rate Risk
Interest
rate risk is the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in market
interest rates. The Company is exposed to interest rate risk on its
fixed interest rate financial instruments. These fixed-rate
instruments subject the Company to a fair value risk. The interest
rates on all of the Company’s existing interest bearing debt
are fixed. Sensitivity to a plus or minus 25 basis points change in
rates would not significantly affect the fair value of this
debt.
23
.
SEGMENTED
INFORMATION
The
Company currently operates in only one business segment, namely,
manufacturing, marketing and distributing of E-liquid, vaporizers,
E-cigarettes, and vaping accessories in North America and
Europe. Total long lived assets by geographic location are as
follows:
|
|
|
Canada
|
$
826
|
$
-
|
United
States
|
1,125,704
|
1,624,669
|
Europe
|
23,418
|
2,130
|
|
$
1,149,948
|
$
1,626,799
|
Total
sales by geographic location are as follows:
|
|
|
Canada
|
$
49,732
|
$
-
|
United
States
|
2,596,172
|
1,163,096
|
Europe
|
1,904,889
|
-
|
|
$
4,550,793
|
$
1,163,096
|
24. SUBSEQUENT EVENTS
On
January 4, 2017, the Company terminated a consulting agreement
entered into as of April 13, 2016 for cause. As a result, the
1,000,000 Common Share purchase warrants issued in connection to
the consulting agreement were terminated, effective
immediately.
On
January 12, 2017, the Company entered into a bridge loan agreement
with a shareholder (the “Bridge Loan Agreement”),
whereby the shareholder would make available to the Company the
aggregate principal amount of CAD $200,000 (the “Bridge
Loan”) in two equal tranches of CAD $100,000. The Company
received the first tranche on January 12, 2017 (“Bridge Loan
Note A”) and the second tranche on January 18, 2017
(“Bridge Loan Note B”). The Bridge Loan is non-interest
bearing and matures on March 12, 2017. Pursuant to the terms of the
Bridge Loan Agreement, the shareholder received a 5% upfront fee
upon the closing of Bridge Loan Note A and a 5% upfront fee upon
the closing of Bridge Loan Note B. The Bridge Loan is secured by
the general security agreement issued in connection to the Secured
Note. On January 12, 2017 and in connection to the Bridge Loan
Agreement, the Company issued warrants for the purchase of 50,000
Common Shares of the Company exercisable until January 11, 2017 at
a price of $0.20 per Common Share, with 25,000 of such purchase
warrants vesting upon the closing of Bridge Loan Note A and the
remaining 25,000 purchase warrants vesting upon the closing of
Bridge Loan Note B. On January 12, 2017, the Company closed Bridge
Loan Note A and 25,000 of the purchase warrants became fully vested
and exercisable. On January 18, 2017, the Company closed Bridge
Loan Note B and 25,000 of the purchase warrants became fully vested
and exercisable.
On
January 20, 2017, the Company issued an additional 75 units of
Convertible Debentures Series C for proceeds of
$75,000.
On
January 31, 2017, the Company issued and sold on a private
placement basis, 7,546,012 private placement units at a price of
$0.10 per unit for total proceeds of $754,601. Each private
placement unit consisted of one Common Share of the Company and a
half Common Share purchase warrant. On January 31, 2017, the
Company issued 7,546,012 Common Shares and warrants for the
purchase of 3,773,006 Common Shares of the Company exercisable over
twelve months at an exercise price of $0.20 per Common Share. On
January 31, 2017 and in connection to the issuance of private
placement units, the Company issued warrants for the purchase of
411,361 Common Shares of the Company as a commission payment with
the purchase warrants having the same terms as the warrants issued
as part of the private placement units.
On
February 17, 2017, the Company issued and sold on a private
placement basis, 1,815,896 private placement units at a price of
$0.10 per unit for total proceeds of $181,590. Each private
placement unit consisted of one Common Share of the Company and a
half Common Share purchase warrant. On February 17, 2017, the
Company issued 1,815,896 Common Shares and warrants for the
purchase of 907,948 Common Shares of the Company exercisable over
twelve months at an exercise price of $0.20 per Common Share. On
February 17, 2017 and in connection to the issuance of private
placement units, the Company issued warrants for the purchase of
108,954 Common Shares of the Company as a commission payment with
the purchase warrants having same terms as the warrants issued as
part of the private placement units.
On
February 27, 2017, the Company and the Lenders of the Term Loan
entered into a term loan amendment (the “Term Loan Amendment
No.2”) to amend certain terms and conditions of the Term
Loan. Pursuant to the Term Loan Amendment No.2, the parties agreed
to modify the Cash Sweep to be calculated as the total of CAD
$0.01667 per ml of E-liquid sold by the Company within a monthly
period, such modification to be retroactively applied as of January
1, 2017. The Lenders also agreed to cancel the Early Repayment
Penalty and waive any interest payment penalties due under the Term
Loan. On February 27, 2017 and in connection to the Term Loan
Amendment No.2, the Company agreed to issue 500,000 private
placement units at a price of $0.10 per unit, such private
placement units remain unissued.
On
March 8, 2017 and in connection to an employment agreement, the
Company issued warrants for the purchase of 1,500,000 Common Shares
of the Company exercisable over twenty-four months at an exercise
price of $0.25 per Common Share. The purchase warrants will vest in
three equal tranches, with the first tranche vesting upon the
employee generating over $25,000 in sales of new business for two
consecutive months, the second tranche vesting upon the employee
generating cumulative sales of over $500,000 and the third tranche
vesting upon the employee generating cumulative sales of over
$1,000,000 of new business.
On
March 21, 2017, the Company issued and sold on a private placement
basis, 6,540,090 private placement units at a price of $0.10 per
unit for total proceeds of $654,009. Each private placement unit
consisted of one Common Share of the Company and a half Common
Share purchase warrant. On March 21, 2017, the Company issued
6,540,090 Common Shares and warrants for the purchase of 3,270,045
Common Shares of the Company exercisable over twelve months at an
exercise price of $0.20 per Common Share. On March 21, 2017 and in
connection to the issuance of private placement units, the Company
issued warrants for the purchase of 27,623 Common Shares of the
Company as a commission payment with the purchase warrants having
the same terms as the warrants issued as part of the private
placement units.