Company Quick10K Filing
Quick10K
Gilla
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.03 144 $4
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2018-06-22 Other Events, Exhibits
EDR Education Realty Trust 3,375
EPSN Epsilon Energy 101
SVBL Silver Bull Resources 24
MFST Medifirst Solutions 0
MCCCB Mediacom Broadband 0
RUHN Ruhnn Holding Ltd. 0
SFIV Sector 5 0
XCO Exco Resources 0
IGMB Igambit 0
INTV Intervoice 0
GLLA 2018-06-30
Part II - Other Information
Item 1. 
Item 1A.  
Item 2. 
Item 3. 
Item 4. 
Item 5. 
Item 6.   
EX-31.1 glla_ex311.htm
EX-31.2 glla_ex312.htm
EX-32.1 glla_ex321.htm
EX-32.2 glla_ex322.htm

Gilla Earnings 2018-06-30

GLLA 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 glla_10q.htm QUARTERLY REPORT Blueprint
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2018
 
OR
 
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______________ to _______________
 
Commission File Number: 000-28107
 
GILLA INC.
(Exact Name of Registrant as Specified in its Charter)
 
Nevada
 
88-0335710
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification Number)
 
 
 
475 Fentress Blvd., Unit L,
Daytona Beach, Florida
 
32114
(Address of Principal Executive Offices)
 
(Zip Code)
 
(416) 843-2881
Registrant’s telephone number, including area code
 
Not Applicable
(Former name, Former Address and Former Fiscal year, if changed since last report.)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑  Yes   ☐  No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☑  Yes   ☐  No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
Accelerated filer
Non-accelerated filer
☐ (Do not check if a smaller reporting company)
Smaller reporting company
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐  Yes  ☑  No
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
The Registrant had 143,818,368 shares of common stock (“Common Shares” or “Common Stock”), $0.0002 par value per share, issued and outstanding as of September 28, 2018.

 
 
 GILLA, INC.
 
INDEX TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

 
 
 Page
PART I - Financial Information      
 3
 
 
 
Item 1.
Interim Financial Statements (Unaudited)
 3
 
 
 
 
Condensed Consolidated Interim Balance Sheets as at June 30, 2018 (Unaudited) and December 31, 2017 (Audited)
3
 
 
 
 
Unaudited Condensed Consolidated Interim Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2018 and June 30, 2017
4
 
 
 
 
Unaudited Condensed Consolidated Interim Statement of Changes in Shareholders’ Deficiency for the Three and six Months Ended June 30, 2018
5
 
 
 
 
Unaudited Condensed Consolidated Interim Statements of Cash Flows for the Six Months Ended June 30, 2018 and June 30, 2017
6
 
 
 
 
Notes to Unaudited Condensed Consolidated Interim Financial Statements
7
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
34
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
50
 
 
 
Item 4.
Controls and Procedures
50
 
 
 
PART II - Other Information      
 51
 
 
 
Item 1.
Legal Proceedings
51
 
 
 
Item 1A.
Risk Factors
51
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
51
 
 
 
Item 3.
Defaults Upon Senior Securities
51
 
 
 
Item 4.
Mine Safety Disclosures
51
 
 
 
Item 5.
Other Information
51
 
 
 
Item 6.
Exhibits
51
 
 
 
SIGNATURES 
52
 
 
2
 
 
Gilla Inc.
Condensed Consolidated Interim Balance Sheets
 (Amounts expressed in US Dollars)
 
 
 
As at
June 30,
2018
 
 
As at
December 31,
2017
 
 
 
(unaudited)
 
 
(audited)
 
 
ASSETS
 
Current assets
 
 
 
 
 
 
Cash and cash equivalents
 $42,359 
 $62,292 
Trade receivables (net of allowance for doubtful accounts $433,227 (December 31, 2017 – $190,543)
  173,996 
  232,386 
Inventory (note 6)
  600,742 
  451,318 
Other current assets (note 5)
  257,598 
  323,548 
Total current assets
  1,074,695 
  1,069,544 
 
    
    
Long term assets
    
    
Property and equipment (note 7)
  234,167 
  285,817 
Website development (note 8)
  4,083 
  5,083 
Intangibles (note 9)
  613,025 
  691,809 
Goodwill (note 10)
  2,376,605 
  2,376,605 
Total long term assets
  3,227,880 
  3,359,314 
 
    
    
Total assets
 $4,302,575 
 $4,428,858 
                                                                        LIABILITIES
    
    
Current liabilities
    
    
Accounts payable
 $3,012,397 
 $2,335,615 
Accrued liabilities (note 11 and 13)
  692,656 
  419,436 
Customer deposits
  90,332 
  97,400 
Accrued interest - related parties (note 19)
  552,514 
  - 
Loans from shareholders (note 11)
  1,145,048 
  257,303 
Due to related parties (note 19)
  2,564,305 
  252,841 
Promissory notes (note 13)
  790,390 
  498,522 
Amounts owing on acquisition (note 4)
  740,248 
  538,952 
Convertible debentures (note 14)
  337,000 
  277,149 
Term loan (note 12)
  1,078,702 
  1,051,334 
Total current liabilities
  11,003,592 
  5,728,552 
 
    
    
Long term liabilities
    
    
Promissory notes (note 13)
  190,564 
  346,002 
Amounts owing on acquisitions (note 4)
  1,167,289 
  1,364,274 
Loans from shareholders (note 11)
  - 
  794,635 
Accrued interest - related parties (note 19)
  - 
  468,825 
Due to related parties (note 19)
  - 
  2,281,773 
Debentures to be issued (note 14)
  208,835 
  - 
Total long term liabilities
  1,566,688 
  5,255,509 
 
    
    
Total liabilities
  12,570,280 
  10,984,061 
 
    
    
Going concern (note 2)
    
    
Related party transactions (note 19)
    
    
Commitments and contingencies (note 21)
    
    
Subsequent events (note 24)
    
    
 
STOCKHOLDERS’ DEFICIENCY
 
Common stock: $0.0002 par value, 300,000,000 common shares authorized; 143,818,368 and 134,869,261 common shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively (note 15)
 $28,765 
 $26,976 
Additional paid-in capital
  13,752,666 
  12,758,700 
Common shares to be issued (note 18)
  23,000 
  485,184 
Accumulated deficit
  (22,543,391)
  (19,898,841)
Accumulated other comprehensive income
  471,255 
  72,778 
Total stockholders’ deficiency
  (8,267,705)
  (6,555,203)
 
    
    
Total liabilities and stockholders’ deficiency
 $4,302,575 
 $4,428,858 
 
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements
 
 
3
 
 
Gilla Inc.
Unaudited Condensed Consolidated Interim Statements of Operations and Comprehensive Loss
(Amounts expressed in US Dollars)
 
 
 
For the Three Months Ended
June 30, 2018
 
 
For the Three
Months Ended
June 30, 2017
 
 
For the Six
Months Ended
June 30, 2018
 
 
For the Six
Months Ended
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales revenue
 $840,759 
 $1,266,026 
 $2,106,998 
 $2,509,565 
Cost of goods sold (note 6)
  308,902 
  493,987 
  837,802 
  1,040,720 
Gross profit
  531,857 
  772,039 
  1,269,196 
  1,468,845 
 
    
    
    
    
Operating expenses:
    
    
    
    
Administrative
  1,023,552 
  1,146,710 
  2,476,888 
  2,144,060 
Consulting fees - related parties (note 19)
  134,373 
  124,245 
  265,348 
  243,704 
Depreciation (note 7)
  30,830 
  10,045 
  61,591 
  19,701 
Amortization (note 8 and 9)
  39,893 
  11,650 
  79,785 
  23,300 
Stock option expense
  - 
  1,213,605 
  - 
  1,213,605 
Loss on settlement
  - 
  23,840 
  - 
  23,840 
Bad debt expense
  152,019 
  - 
  245,049 
  161,340 
Total operating expenses
  1,380,667 
  2,530,095 
  3,128,661 
  3,829,550 
 
    
    
    
    
Loss from operations
  (848,810)
  (1,758,056)
  (1,859,465)
  (2,360,705)
 
    
    
    
    
Other income (expenses):
    
    
    
    
Foreign exchange gain (loss)
  (26,995)
  (64,839)
  (108,242)
  (59,894)
Amortization of debt discount on debentures
  - 
  (589,703)
  (59,851)
  (660,992)
Interest expense, net
  (307,443)
  (220,371)
  (616,992)
  (449,648)
 
    
    
    
    
Total other expenses
  (334,438)
  (874,913)
  (785,085)
  (1,170,534)
 
    
    
    
    
Net loss before income taxes
  (1,183,248)
  (2,632,969)
  (2,644,550)
  (3,531,239)
Income tax recovery
  - 
  - 
  - 
  - 
Net loss
 $(1,183,248)
 $(2,632,969)
 $(2,644,550)
 $(3,531,239)
 
    
    
    
    
Loss per share (basic and diluted)
 $(0.008)
 $(0.022)
 $(0.019)
 $(0.031)
 
    
    
    
    
Weighted average number of common shares outstanding (basic and diluted)
  141,703,880 
  118,942,199 
  138,569,600 
  113,244,746 
 
    
    
    
    
 
    
    
    
    
Comprehensive loss:
    
    
    
    
Net loss
 $(1,183,248)
 $(2,632,969)
 $(2,644,550)
 $(3,531,239)
 
    
    
    
    
Foreign exchange translation adjustment
  193,284 
  (99,985)
  398,477 
  (167,267)
 
    
    
    
    
Comprehensive loss
 $(989,964)
 $(2,732,954)
 $(2,246,073)
 $(3,698,506)
 
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements
 
 
4
 
 
Gilla Inc.
Unaudited Condensed Consolidated Interim Statement of Changes in Stockholders’ Deficiency
(Amounts expressed in US Dollars)
 
 
 
Common Stock
 
 
Additional
Paid-In
 
 
Shares To Be
 
 
Accumulated
 
 
Accumulated
Other Comprehensive
 
 
Total Stockholders’
 
 
 
Shares
 
 
Amount
 
 
Capital
 
 
Issued
 
 
Deficit
 
 
Income
 
 
Deficiency
 
Balance,
December 31, 2017
  134,869,261 
 $26,976 
 $12,758,700 
 $485,184 
 $(19,898,841)
 $72,778 
 $(6,555,203)
 
    
    
    
    
    
    
    
Private placement units issued for cash
(note 15)
  3,486,362 
  697 
  382,803 
  - 
  - 
  - 
  383,500 
 
    
    
    
    
    
    
    
Common shares issued for settlement of consulting fees owing to unrelated parties (note 15 and 17)
  790,909 
  158 
  80,842 
  - 
  - 
  - 
  81,000 
 
    
    
    
    
    
    
    
Common shares issued on exercise of warrants
(note 15)
  50,000 
  10 
  9,990 
  - 
  - 
  - 
  10,000 
 
    
    
    
    
    
    
    
Common shares issued on conversion of debentures and settlement of accrued interest on debentures
(note 15)
  4,621,836 
  924 
  461,260 
  (462,184)
  - 
  - 
  - 
 
    
    
    
    
    
    
    
Warrants issued as stock based compensation
(note 17)
  - 
  - 
  59,071 
  - 
  - 
  - 
  59,071 
 
    
    
    
    
    
    
    
Foreign currency translation gain
  - 
  - 
  - 
  - 
  - 
  398,477 
  398,477 
 
    
    
    
    
    
    
    
Net loss
  - 
  - 
  - 
  - 
  (2,644,550)
  - 
  (2,644,550)
 
    
    
    
    
    
    
    
Balance,
June 30, 2018
  143,818,368 
 $28,765 
 $13,752,666 
 $23,000 
 $(22,543,391)
 $471,255 
 $(8,267,705)
 
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements
 
 
5
 
 
Gilla Inc.
Unaudited Condensed Consolidated Interim Statements of Cash Flows
 (Amounts Expressed in US Dollars)
 
 
 
For the Six
 Months Ended
June 30, 2018
 
 
For the Six
Months Ended
June 30, 2017
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
Net loss
 $(2,644,550)
 $(3,531,239)
Items not requiring an outlay of cash
    
    
Depreciation
  61,591 
  19,701 
Amortization
  79,785 
  23,300 
Stock based compensation (note 17)
  100,071 
  80,171 
Amortization of debt discount on amounts owing on acquisition
  126,544 
  - 
Interest on equipment finance loan
  9,644 
  - 
Bad debt expense
  245,049 
  161,340 
Amortization of debt discount on term loan
  68,768 
  - 
Amortization of debt discount on shareholder loans
  45,160 
  - 
Amortization of debt discount on promissory notes
  9,072 
  - 
Amortization of debt discount on debentures
  59,851 
  660,992 
Interest accrued on related party fee deferrals
  21,333 
  47,307 
Stock option expense
  - 
  1,213,605 
Loss on settlement of debt
  - 
  23,840 
Interest on term loan
  83,388 
  86,673 
Changes in operating assets and liabilities
    
    
Trade receivable
  (204,952)
  (246,355)
Other current assets
  100,687 
  71,905 
Inventory
  (163,713)
  26,857 
Accounts payable
  753,380 
  (122,648)
Accrued liabilities
  273,292 
  13,930 
Customer deposits
  11,667 
  (19,680)
Due to related parties
  43,432 
  133,673 
Accrued interest-related parties
  83,688 
  106,270 
  Net cash used in operating activities
  (836,813)
  (1,250,358)
 
    
    
CASH FLOWS FROM INVESTING ACTIVITIES:
    
    
Additions of capital assets
  (19,873)
  (11,673)
  Net cash used in investing activities
  (19,873)
  (11,673)
 
    
    
CASH FLOWS FROM FINANCING ACTIVITIES:
    
    
Repayments to promissory notes
  (51,818)
  (13,000)
Proceeds from promissory notes
  199,361 
  80,000 
Payments of amounts owing on acquisitions
  (50,000)
  - 
Repayments to term loan
  (71,812)
  (171,976)
Repayments to shareholder loans
  - 
  (3,512)
Shareholder loans received
  99,315 
  150,380 
Repayments to related parties
  (9,358)
  (451,784)
Proceeds from related parties
  - 
  78,569 
Proceeds from sale of convertible debentures
  215,270 
  - 
Proceeds from share subscriptions
  - 
  60,000 
Proceeds from issuance of common shares
  393,500 
  1,758,672 
  Net cash provided by financing activities
  724,458 
  1,487,349 
Effect of exchange rate changes on cash
  112,295 
  (96,044)
 
    
    
Net (decrease) increase in cash
  (19,933)
  129,274  
 
    
    
Cash at beginning of year
  62,292 
  184,754 
 
    
    
Cash at end of year
 $42,359 
 $314,028 
 
    
    
Supplemental schedule of cash flow information:
    
    
Cash paid for interest
 $83,846 
 $101,511 
Cash paid for income taxes
 $- 
 $- 
 
    
    
Non cash financing activities:
    
    
Common shares issued in settlement of related party and shareholder loans
 $- 
 $222,587 
Common shares issued in settlement of related party fees
 $- 
 $154,940 
Common shares issued for settlement of interest payable
 $37,124 
 $- 
Common shares issued for settlement of consulting fees payable
 $81,000 
 $- 
Common shares issued/to be issued for settlement of accounts payable
 $- 
 $36,000 
Debentures issued for settlement of related party and shareholder loans
 $- 
 $75,000 
 
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements
 
 
6
 
 
  Gilla Inc.
Notes to Unaudited Condensed Consolidated Interim Financial Statements
 (Amounts expressed in US Dollars)
 
1. NATURE OF OPERATIONS
 
Gilla Inc. (“Gilla”, the “Company” or the “Registrant”) was incorporated under the laws of the state of Nevada on March 28, 1995 under the name of Truco, Inc. The Company’s registered address is 475 Fentress Blvd., Unit L, Daytona Beach, Florida 32114.
 
The current business of the Company consists of the manufacturing, marketing and distribution of E-liquid (“E-liquid”), which is the liquid used in vaporizers and electronic cigarettes (“E-cigarettes”), and developer of turn-key vapor and cannabis concentrate solutions for high-terpene vape oils, pure crystalline, high-performance vape pens and other targeted products.
 
2. GOING CONCERN
 
These unaudited condensed consolidated interim financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in these unaudited condensed consolidated interim financial statements, at June 30, 2018, the Company has an accumulated deficit of $22,543,391 (December 31, 2017 – $19,898,841) and a working capital deficiency of $9,928,897 (December 31, 2017 – $4,659,008) as well as negative cash flows from operating activities of $836,813 (June 30, 2017 – $1,250,358) for the six months ended June 30, 2018. These conditions represent material uncertainty that cast significant doubts about the Company's ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon achieving a profitable level of operations or on the ability of the Company to obtain necessary financing to fund ongoing operations. Management believes that the Company will not be able to continue as a going concern for the next twelve months without additional financing or increased revenues.
 
To meet these objectives, the Company continues to seek other sources of financing in order to support existing operations and to expand the range and scope of its business. However, there are no assurances that any such financing can be obtained on acceptable terms and in a timely manner, if at all. Failure to obtain the necessary working capital would have a material adverse effect on the business prospects and, depending upon the shortfall, the Company may have to curtail or cease its operations.
 
These unaudited condensed consolidated interim financial statements do not include any adjustments to the recorded assets or liabilities, that might be material, should the Company have to curtail operations or be unable to continue in existence.
 
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
The accompanying unaudited condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of the results that may be expected for a full year. These condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2017, as filed with the U.S. Securities and Exchange Commission. Certain comparative figures have been reclassified to conform with the current year’s presentation.
 
The accounting policies of the Company are in accordance with accounting principles generally accepted in the United States of America. Outlined below are those policies considered particularly significant:
 
(a) 
Basis of Consolidation
 
These unaudited condensed consolidated interim financial statements include the accounts of the Company and its wholly owned subsidiaries: Gilla Operations, LLC; E Vapor Labs Inc. (“E Vapor Labs”); Gilla Enterprises Inc. (“Gilla Enterprises”) and its wholly owned subsidiaries Gilla Europe Kft., Gilla Operations Europe s.r.o. and Vape Brands International Inc. (“VBI”); Hystyle Brands Inc. (“Hystyle”); E-Liq World, LLC; Charlie’s Club, Inc.; Gilla Operations Worldwide Limited (“Gilla Worldwide”); Gilla Franchises, LLC and its wholly owned subsidiary Legion of Vape, LLC; and Snoke Distribution Canada Ltd. and its wholly owned subsidiary Snoke Distribution USA, LLC. All inter-company accounts and transactions have been eliminated in preparing these unaudited condensed consolidated interim financial statements.
 
 
7
 
 
(b) 
Advertising Costs
 
In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 720, Other Expenses (“ASC 720”), Company expenses all advertising costs as incurred. During the three and six month periods ended June 30, 2018, the Company expensed $92,839 (June 30, 2017 – $91,847) as corporate promotions which have been recorded as an administrative expense.
 
(c) 
Recently Adopted Accounting Pronouncements
 
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), requiring an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 will supersede nearly all existing revenue recognition guidance under U.S. GAAP when it becomes effective. ASU 2014-09 as amended by ASU No. 2015-14, ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-12 and ASU No. 2016-20, is effective for interim and annual periods beginning after December 15, 2017 and is applied on either a modified retrospective or full retrospective basis. Adoption of ASU No. 2014-09 did not have an impact on the Company’s consolidated financial statements.
 
In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”). ASU 2016-10 clarifies the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. The provisions of this update are effective for annual and interim periods beginning after December 15, 2017, with early application permitted. Adoption of ASU No. 2016-10 did not have an impact on the Company’s consolidated financial statements.
 
In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”). The core principal of ASU 2016-12 is the recognition of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The provisions of this update are effective for annual and interim periods beginning after December 15, 2017, with early application permitted. Adoption of ASU No. 2016-12 did not have an impact on the Company’s consolidated financial statements.
 
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) (“ASU 2016-15”), which clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. Among other clarifications, the guidance requires that cash proceeds received from the settlement of corporate-owned life insurance (COLI) policies be classified as cash inflows from investing activities and that cash payments for premiums on COLI policies may be classified as cash outflows for investing activities, operating activities or a combination of both. The guidance is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. Retrospective application is required. Adoption of ASU No. 2016-15 did not have an impact on the Company’s consolidated financial statements.
 
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory ("ASU 2016-16"). ASU 2016-16 prohibits the recognition of current and deferred income taxes for an intra-entity transfer until the asset has been sold to an outside party. The amendment in ASU 2016-16 is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. Adoption of ASU No. 2016-16 did not have an impact on the Company’s consolidated financial statements.
 
In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”). ASU 2017-09 clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The standard is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. Adoption of ASU No. 2017-09 did not have an impact on the Company’s consolidated financial statements.
 
 
8
 
 
Effective January 1, 2018, the Company adopted ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”) which revises the classification and measurement of investments in equity securities. ASU 2016-01 requires that equity investments, except those accounted for under the equity method of accounting, be measured at fair value and changes in fair value are recognized in net income. ASU 2016-01 also provides a new measurement alternative for equity investments that do not have a readily determinable fair value (cost method investments). These investments are measured at cost, less any impairment, adjusted for observable price changes. Adoption of ASU 2016-01 did not have an impact on the Company’s consolidated financial statements.
 
(d) 
Recent Accounting Pronouncements
 
The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and other than the below, does not expect the future adoption of any such pronouncements to have a significant impact on its results of operations, financial condition or cash flow.
 
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires lessees to recognize all leases with terms in excess of one year on their balance sheet as a right-of-use asset and a lease liability at the commencement date. The new standard also simplifies the accounting for sale and leaseback transactions. The amendments in this update are effective for annual periods beginning after December 15, 2018, and interim periods therein and must be adopted using a modified retrospective method for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. The Company is evaluating the guidance and has not yet determined the impact on its consolidated financial statements.
 
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires financial assets measured at amortized cost be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis. The measurement of expected losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This guidance is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is evaluating the guidance and has not yet determined the impact on its consolidated financial statements.
 
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). The new guidance eliminates the requirement to calculate the implied fair value of goodwill (Step 2 of the current two-step goodwill impairment test under ASC 350). Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (Step 1 of the current two-step goodwill impairment test). ASU 2017-04 is effective prospectively for reporting periods beginning after December 15, 2019, with early adoption permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company is evaluating the guidance and has not yet determined the impact on its consolidated financial statements.
 
In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”). ASU 2017-11 allows a financial instrument with a down-round feature to no longer automatically be classified as a liability solely based on the existence of the down-round provision. The update also means the instrument would not have to be accounted for as a derivative and be subject to an updated fair value measurement at each reporting period. The standard is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is evaluating the guidance and has not yet determined the impact on its consolidated financial statements.
 
In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income: Reclassification of Certain Tax effects from Accumulated Other Comprehensive Income (“ASU 2018-02”) which allows for the reclassification from accumulated other comprehensive income to retained earnings for the stranded tax effects arising from the change in the reduction of the U.S. federal statutory income tax rate to 21% from 35%. The tax effects of items included in accumulated comprehensive income at December 31, 2017 do not reflect the appropriate tax rate. ASU 2018-02 is effective for interim and annual periods beginning after December 15, 2018. The Company is evaluating the guidance and has not yet determined the impact on its consolidated financial statements.
 
 
9
 
 
4. AMOUNTS OWING ON ACQUISITIONS
 
The Company has outstanding current amounts owing on acquisitions as follows:
 
 
 
June 30,
2018
 
 
December 31,
2017
 
Promissory Note Settlement(a)
 $120,000 
 $120,000 
Due to TMA Vendors(b)
  55,000 
  55,000 
Earn-Out on VBI acquisition(c)
  356,324 
  209,487 
VTB on VBI acquisition (c)
  208,924 
  154,465 
 
 $740,248 
 $538,952 
 
The Company has outstanding long term amounts owing on acquisitions as follows:
 
 
 
June 30,
2018
 
 
December 31,
2017
 
Promissory Note Settlement(a)
 $249,315 
 $270,967 
Earn-Out on VBI acquisition(c)
  746,093 
  871,825 
VTB on VBI acquisition(c)
  171,881 
  221,482 
 
 $1,167,289 
 $1,364,274 
 
(a)            
On July 1, 2015, the Company acquired all of the issued and outstanding shares of E Vapor Labs, a Florida based E-liquid manufacturer. The Company acquired E Vapor Labs in order to procure an E-liquid manufacturing platform allowing the Company to secure large private label contracts as well as manufacture its own brands going forward.
 
In consideration for the acquisition, the Company paid to the vendors, $225,000 in cash and issued $900,000 in unsecured promissory notes on closing (collectively, the “Unsecured Promissory Notes”). The Unsecured Promissory Notes were issued in three equal tranches of $300,000 due four (4), nine (9) and eighteen (18) months respectfully from closing (individually, “Promissory Notes A”, “Promissory Notes B”, and “Promissory Notes C”, respectively). The Unsecured Promissory Notes were all unsecured and non-interest bearing. The Unsecured Promissory Notes were all and each subject to adjustments as outlined in the share purchase agreement (the “SPA”), dated June 25, 2015. At December 31, 2015, the Company adjusted the Promissory Notes A for $116,683 which was the known difference in the working capital balance at closing of the acquisition from the amount specified in the SPA.
 
On August 30, 2017, the Company entered into a settlement agreement (the “Promissory Note Settlement”) with the holders of the Unsecured Promissory Notes to settle all claims between them. As a result of the Promissory Note Settlement, the Company agreed to settle the Unsecured Promissory Notes with a total payment of $600,000 payable as two (2) payments of $20,000 due September 21, 2017 and October 21, 2017 and $10,000 per month for the following fifty-six (56) months beginning November 21, 2017. The Company may prepay the balance of the Promissory Note Settlement at any time and would receive a 10% discount on the outstanding balance upon doing so. A 15% discount rate has been used to calculate the present value of the Promissory Note Settlement based on the Company’s estimate of cost of financing for comparable instruments with similar term and risk profiles. Over the term of the Promissory Note Settlement, interest will be accrued at 15% per annum to accrete the Promissory Note Settlement to its respective principal amount. During the six month period ended June 30, 2018, the Company recorded $28,348 in interest expense related to the accretion of the Promissory Note Settlement (June 30, 2017 – $nil).
 
 
10
 
 
 
 
Total
 
Present value of Promissory Note Settlement at the settlement date
 $431,033 
Payments made
  (60,000)
Interest expense related to accretion
  19,934 
Present value at December 31, 2017
  390,967 
Payments made
  (50,000)
Interest expense related to accretion
  28,348 
Less: Current amount owing
  (120,000)
Long term portion at June 30, 2018
 $249,315  
 
(b)            
On December 2, 2015, the Company acquired all of the assets of The Mad Alchemist, LLC (“TMA”), an E-liquid manufacturer, including the assets, rights and title to own and operate The Mad Alchemist™ and Replicant E-liquid brands (the “TMA Brands”).
 
In consideration for the acquisition, the Company issued 819,672 Common Shares valued at $0.122 per share for a total value of $100,000; agreed to pay a total of $400,000 in deferred payments (the “Amounts Owing on Acquisition”), payable in ten (10) equal payments of $20,000 in cash and $20,000 in Common Shares every three (3) months following the closing date; and agreed to a quarterly earn-out based on the gross profit stream derived from product sales of the TMA Brands. No earn-out had ever been achieved and the Company has since retired the TMA Brands.
 
On April 15, 2016, the Company entered into a settlement agreement (the “TMA Settlement Agreement”) with TMA and the vendors of TMA (collectively, the “TMA Vendors”). Subject to the terms and conditions of the TMA Settlement Agreement, the parties settled: (i) any and all compensation and expenses owing by the Company to the TMA Vendors and (ii) the $400,000 of Amounts Owing on Acquisition in exchange for the Company paying to the TMA Vendors a total settlement consideration of $133,163 payable as $100,000 in cash and $33,163 in the Company’s assets as a payment-in-kind. As at June 30, 2018, $55,000 (December 31, 2017 – $55,000) remains payable to the TMA Vendors.
 
(c)            
On July 31, 2017, the Company’s wholly owned subsidiary, Gilla Enterprises, acquired all of the issued and outstanding shares of VBI, a Canada-based E-liquid manufacturer and distributor.
 
The following summarizes the fair value of the assets acquired, liabilities assumed and the consideration transferred at the acquisition date:
 
 
 
Allocation
 
Assets acquired:
 
 
 
Cash
 $1,377 
Receivables
  5,576 
Other current assets
  74,598 
Inventory
  83,820 
Fixed assets
  214,765 
Intangible assets
  704,846 
Goodwill
  1,596,553 
Total assets acquired
 $2,681,535 
 
    
Liabilities assumed:
    
Bank indebtedness
 $5,597 
Accounts payable
  218,028 
Customer deposits
  33,008 
Loans payable
  112,218 
Capital lease
  125,893 
Due to related parties
  15,707 
Deferred tax liability
  186,793 
Total liabilities assumed
 $697,244 
 
    
Consideration:
    
Issuance of Common Shares
 $350,000 
Issuance of warrants
  252,631 
Vendor Take Back
  356,443 
Earn out
  1,025,217 
Total consideration
 $1,984,291 
 
 
 
11
 
 
 
In consideration for the acquisition, the Company paid to the vendors of VBI the following consideration: (i) 2,500,000 Common Shares of the Company valued at $0.14 per share for a total value of $350,000; (ii) warrants for the purchase of 2,000,000 Common Shares of the Company exercisable over twenty-four (24) months at an exercise price of $0.20 per share from the closing date, such warrants vesting in five (5) equal tranches every four (4) months following the closing date; (iii) a total of CAD $550,000 in non-interest bearing, unsecured vendor-take-back loans (the “VTB”) due over twenty-four (24) months, with principal repayments beginning five (5) months from the closing date until maturity of up to CAD $25,000 per month; and (iv) an earn-out (the “Earn-Out”) capped at: (a) the total cumulative amount of CAD $2,000,000; or (b) five (5) years from the closing date. The Earn-Out shall be calculated as: 15% of the gross profit generated in Canada by VBI’s co-pack and distribution business; 10% of the revenue generated in Canada by Gilla’s existing E-liquid brands; and 15% of the revenue generated globally on VBI’s existing E-liquid brands. Furthermore, the Earn-Out shall be calculated and paid to the vendors of VBI quarterly in arrears and only as 50% of the aforementioned amounts on incremental revenue between CAD $300,000 and CAD $600,000 per quarter and 100% of the aforementioned amounts on incremental revenue above CAD $600,000 per quarter with the Earn-Out payable to the vendors in the fifth year repeated and paid to the vendors in four (4) quarterly payments after the end of the Earn-Out period, subject to the cumulative limit of the Earn-Out. No Earn-Out shall be payable to the vendors of VBI if total revenue for the Earn-Out calculation period is less than CAD $300,000 per quarter. A 15% discount rate has been used to calculate the present value of the Earn-Out on the Company’s estimate of cost of financing for comparable instruments with similar term and risk profiles. Over the term of the respective Earn-Out, interest will be accrued at 15% per annum to accrete the Earn-Out to maximum payable amount.
 
 
 
Total
 
Present value of Earn-Out at the acquisition date
 $1,025,217 
Interest expense related to accretion
  59,110 
Exchange rate differences
  (3,015)
Present value at December 31, 2017
 $1,081,312 
Interest expense related to accretion
  74,859 
Exchange rate differences
  (53,754)
Less: Current amount owing
  (356,324)
Long term portion at June 30, 2018
 $746,093 
 
A 15% discount rate has been used to calculate the present value of the VTB based on the Company’s estimate of cost of financing for comparable instruments with similar term and risk profiles. Over the term of the VTB, interest will be accrued at 15% per annum to accrete the VTB to its respective principal amount.
 
 
 
Total
 
Present value of the VTB at the acquisition date
 $356,443 
Interest expense related to accretion
  26,681 
Exchange rate differences
  (7,177)
Present value at December 31, 2017
 $375,947 
Interest expense related to accretion
  23,337 
Exchange rate differences
  (18,479)
Less: Current amount owing
  (208,924)
Long term portion at June 30, 2018
 $171,881 
 
The results of operations of VBI have been included in the consolidated statements of operations from the acquisition date. The following table presents pro forma results of operations of the Company and VBI as if the companies had been combined as of January 1, 2016. The unaudited condensed combined pro forma information is presented for informational purposes only. The unaudited pro forma results of operations are not necessarily indicative of results that would have occurred had the acquisition taken place at the beginning of the earliest period presented, or of future results.
 
 
 
June 30,
2018
 
 
June 30,
2017
 
Pro forma revenue
 $2,106,998 
 $3,385,834 
Pro forma loss from operations
 $2,004,737 
 $2,406,685 
Pro forma net loss
 $2,789,822 
 $3,574,312 
 
 
 
12
 
 
5. OTHER CURRENT ASSETS
 
Other current assets consist of the following:
 
 
 
June 30,
2018
 
 
December 31,
2017
 
Vendor deposits
 $45,821 
 $22,760 
Prepaid expenses
  49,383 
  17,240 
Trade currency
  - 
  23,550 
Other receivables
  162,394 
  259,998 
 
 $257,598 
 $323,548 
 
Other receivables include VAT receivable, HST receivable and holdback amounts related to the Company’s merchant services accounts.
 
6. INVENTORY
 
Inventory consists of the following:
 
 
 
June 30,
2018
 
 
December 31,
2017
 
E-liquid bottles - finished goods
 $130,491 
 $104,092 
E-liquid components
  106,171 
  113,620 
Bottles and packaging
  364,080 
  233,606 
 
 $600,742 
 $451,318 
 
During the three month and six month periods ended June 30, 2018, the Company expensed $308,902 and $837,802, respectively, of inventory as cost of goods sold. During the three month and six month periods ended June 30, 2017, the Company expensed $493,987 and $1,040,720, respectively, of inventory as cost of goods sold. At June 30, 2018, the full amount of the Company’s inventory serves as collateral for the Company’s secured borrowings. No provision has been recorded against inventory.
 
7. PROPERTY AND EQUIPMENT
 
Property and equipment consist of the following:
 
 
 
June 30,
2018
 
 
December 31, 2017
 
 
 
Cost
 
 
Accumulated Depreciation
 
 
Net
 
 
Net
 
Furniture and equipment
 $78,147 
 $49,089 
 $29,058 
 $41,756 
Leasehold improvements
  71,514 
  31,389 
  40,125 
  61,904 
Computer hardware
  38,473 
  26,258 
  12,215 
  18,906 
Manufacturing equipment
  226,211 
  73,442 
  152,769 
  163,251 
 
 $414,345 
 $180,178 
 $234,167 
 $285,817 
 
During the three month and six month periods ended June 30, 2018, the Company expensed $30,830 and $61,591, respectively, in depreciation. During the three month and six month periods ended June 30, 2017, the Company expensed $10,045 and $19,701, respectively, in depreciation. At June 30, 2018, the full amount of the Company’s property and equipment serves as collateral for the Company’s secured borrowings.
 
 
 
13
 
 
8. WEBSITE DEVELOPMENT
 
Website development consists of the following:
 
 
 
June 30,
2018
 
 
December 31,
2017
 
 
 
Cost
 
 
Accumulated Amortization
 
 
Net
 
 
Net
 
VaporLiq website
 $10,000 
 $5,917 
 $4,083 
 $5,083 
 
Amortization expense on website development for the three and six month periods ended June 30, 2018 amounted to $500 and $1,000, respectively. Amortization expense on website development for the three and six months ended June 30, 2017 amounted to $500 and $1,000, respectively. The estimated amortization expense for the years ended December 31, 2018 and 2019 approximates $2,000 per year. For the year ended December 31, 2020, estimated amortization expense approximates $1,083.
 
9. INTANGIBLE ASSETS
 
Intangible assets consist of the following:
 
 
 
June 30,
2018
 
 
December 31, 2017
 
 
 
Cost
 
 
Accumulated Amortization
 
 
Net
 
 
Net
 
Brands
 $394,413 
 $91,142 
 $303,271 
 $342,712 
Customer relationships
  393,433 
  83,679 
  309,754 
  349,097 
 
 $787,846 
 $174,821 
 $613,025 
 $691,809 
 
Amortization expense on intangible assets for the three and six month periods ended June 30, 2018, amounted to $39,393 and $78,785, respectively. Amortization expense on intangible assets for the three and six month periods ended June 30, 2017, amounted to $11,150 and $22,300, respectively. The estimated amortization expense for the years ending December 31, 2018 and 2019 approximates $157,564 per year. For the years ending December 31, 2020, December 31, 2021 and December 31, 2022 estimated amortization expense approximates $153,464, $140,964 and $82,253, respectively.
 
10. GOODWILL
 
 
 
June 30,
2018
 
 
December 31,
2017
 
Opening balance
 $2,376,605 
 $889,496 
Acquisition of VBI (Note 4)
  - 
  1,596,553 
Impairment
  - 
  (109,444)
End of period
 $2,376,605 
 $2,376,605 
 
During the year ended December 31, 2017, the Company tested goodwill for impairment, and as a result, the Company fully impaired goodwill related to the acquisition of the assets of Vapor Liq in the amount of $109,444 which represented the value of business acumen and access to key E-liquid brands acquired. The goodwill has been impaired as it is difficult to allocate value to VaporLiq business acumen and new purchases of brands are not due to business acumen acquired from the acquisition.
 
 
14
 
 
11. LOANS FROM SHAREHOLDERS
 
The Company has outstanding current loans from shareholders as follows:
 
 
 
June 30,
2018
 
 
December 31,
2017
 
Bears interest of 1.5% per month on a cumulative basis, unsecured, no specific terms of repayment(i)
 $12,496 
 $13,116 
Bears interest of 10% per annum on a cumulative basis, secured by the assets of the Company, matures on April 30, 2019(ii)
  350,225 
  - 
Bears interest of 10% per annum on a cumulative basis, secured by the assets of the Company, matures on April 30, 2019(iii)
  94,234 
  - 
Bears interest of 6% per annum on a cumulative basis, secured by the assets of the Company, matured on March 2, 2018(iv)
  243,008 
  244,187 
Bears interest of 10% per annum on a cumulative basis, secured by the assets of the Company, matures on April 30, 2019(v)
  142,605 
  - 
Bears interest of 10% per annum on a cumulative basis, secured by the assets of the Company, matures on April 30, 2019(vi)
  204,638 
  - 
Bears interest of 1.5% per month on a cumulative basis, unsecured, no specific terms of repayment(vii)
  97,842 
  - 
 
 $1,145,048 
 $257,303 
 
The Company has outstanding long term loans from shareholders as follows:
 
 
 
June 30,
2018
 
 
December 31,
2017
 
Bears interest of 10% per annum on a cumulative basis, secured by the assets of the Company, matures on April 30, 2019(ii)
 $- 
 $351,679 
Bears interest of 10% per annum on a cumulative basis, secured by the assets of the Company, matures on April 30, 2019(iii)
  - 
  90,828 
Bears interest of 10% per annum on a cumulative basis, secured by the assets of the Company, matures on April 30, 2019(v)
  - 
  144,611 
Bears interest of 10% per annum on a cumulative basis, secured by the assets of the Company, matures on April 30, 2019(vi)
  - 
  207,517 
 
 $- 
 $794,635 
 
(i)            
During the three and six month periods ended June 30, 2018, the Company accrued interest of $1,523 and $2,890, respectively, on this shareholder loan (June 30, 2017 – $1,327 and $2,726). Total accrued interest owing on such shareholder loan at June 30, 2018 was $21,316 (December 31, 2017 – $19,341) which is included in accrued liabilities.
 
 
15
 
 
(ii)        
On February 13, 2014, the Company entered into a secured promissory note (the “Secured Note”) with a shareholder, whereby the Company agreed to pay the party the aggregate unpaid principal amount of CAD $500,000 on or before August 13, 2014, bearing interest at a rate of 10% per annum, such interest to accrue monthly and added to the principal. The Secured Note is secured by a general security agreement granting a general security interest over all the assets of the Company. During the years ended December 31, 2014 and 2015, the Company and the shareholder extended the maturity date of the Secured Note to January 1, 2016 and July 1, 2017, respectively. During the years ended December 31, 2016 and 2017, the Company and the shareholder extended the maturity date of the Secured Note to July 1, 2018 and April 30, 2019, respectively. In connection to the maturity date extensions, the Company issued warrants for the purchase of Common Shares (note 16(h and dd)). The relative fair value of the warrants issued were recorded as debt discount to be amortized over the life of the loan. At June 30, 2018, the value of the Secured Note was $350,225 (December 31, 2017 – $351,679) including a debt discount of $29,475 (December 31, 2017 - $46,871). During the three and six month periods ended June 30, 2018, the Company expensed $9,901 and $17,396, respectively, in interest expense related to the amortization of the debt discount. The amendments to the Secured Note were accounted for as a modification of debt and no gain or loss was recognized on the amendments.
 
During the three and six month periods ended June 30, 2018, the Company accrued interest of $13,972 and $26,775, respectively, on the Secured Note (June 30, 2017 – $12,114 and $24,028). Total accrued interest owing on the Secured Note at June 30, 2018 was $171,537 (December 31, 2017 – $151,948) which is included in accrued liabilities.
 
(iii)      
On July 15, 2014, the Company entered into a secured promissory note (the “Secured Note No.2”) with a shareholder, whereby the Company agreed to pay the party the aggregate unpaid principal amount of $100,000 on or before July 18, 2014, bearing interest at a rate of 10% per annum, such interest to accrue monthly and added to the principal. The Secured Note No.2 is secured by the general security agreement issued with the Secured Note. During the years ended December 31, 2014 and 2015, the Company and the shareholder extended the maturity date of the Secured Note No.2 to January 1, 2016 and July 1, 2017, respectively. During the years ended December 31, 2016 and 2017, the Company and the shareholder extended the maturity date of the Secured Note No.2 to July 1, 2018 and April 30, 2019, respectively. In connection to the maturity date extensions, the Company issued warrants for the purchase of Common Shares (note 15(h and dd)). The relative fair value of the warrants issued were recorded as debt discount to be amortized over the life of the loan. At June 30, 2018, the value of the Secured Note No.2 was $94,234 (December 31, 2017 - $90,828) including a debt discount of $5,766 (December 31, 2017 – $9,172). During the three and six month periods ended June 30, 2018, the Company expensed $1,938 and $3,406, respectively, in interest expense related to the amortization of the debt discount. The amendments to the Secured Note were accounted for as a modification of debt and no gain or loss was recognized on the amendments.
 
During the three and six month periods ended June 30, 2018, the Company accrued interest of $3,573 and $7,058, respectively, on the Secured Note No.2 (June 30, 2017 – $3,234 and $6,389). Total accrued interest owing on the Secured Note No.2 at June 30, 2018 was $45,315 (December 31, 2017 – $38,257) which is included in accrued liabilities.
 
(iv)       
On March 2, 2016, the Company entered into a loan agreement (the “Loan Agreement”) with a shareholder, whereby the shareholder would make available to the Company the aggregate principal amount of CAD $670,000 (the “Shareholder Loan”) for capital expenditures, marketing expenditures and working capital. Under the terms of the Loan Agreement, the Shareholder Loan was made available to the Company in two equal tranches of CAD $335,000, for a total loan amount of CAD $670,000, with the first tranche (“Loan Tranche A”) received on March 3, 2016 and the second tranche (“Loan Tranche B”) received on April 14, 2016. The Shareholder Loan bears interest at a rate of 6% per annum, on the outstanding principal, and matured on March 2, 2018, whereby the outstanding principal together with all accrued and unpaid interest thereon became due and payable. The Company was also to repay 5% of the initial principal amount of Loan Tranche A and 5% of Loan Tranche B, monthly in arrears, with the first principal repayment beginning on June 30, 2016. The Company could elect to repay the outstanding principal of the Shareholder Loan together with all accrued and unpaid interest thereon prior to maturity without premium or penalty. The Company also agreed to service the Shareholder Loan during the term prior to making any payments to the Company’s Chief Executive Officer, Chief Financial Officer and Board of Directors. The Shareholder Loan is secured by a general security agreement granting a general security interest over all the assets of the Company. On March 2, 2016 and in connection to the Loan Agreement, the Company issued warrants for the purchase of 1,000,000 Common Shares exercisable until March 2, 2018 at an exercise price of $0.20 per share. The warrants shall vest in two equal tranches, with 500,000 warrants to vest upon the close of Loan Tranche A and the remaining 500,000 warrants to vest upon the close of Loan Tranche B. On March 3, 2016 and April 14, 2016, the Company closed Loan Tranche A and Loan Tranche B, respectively, at which dates the warrants became fully vested and exercisable (note 16(d)). The relative fair value of the warrants issued were recorded as debt discount to be amortized over the life of the loan. At June 30, 2018, the value of the Shareholder Loan was $243,008 (December 31, 2017 – $244,187 including a debt discount of $10,885 and the debt discount on this loan had fully accreted. During the three and six month periods ended June 30, 2018, the Company expensed $nil and $10,885 in interest expense related to the amortization of the debt discount. During the year ended December 31, 2017, CAD $350,000 of the Shareholder Loan was assumed by a separate shareholder (see (vii) below).
 
During the three and six month periods ended June 30, 2018, the Company accrued interest of $4,643 and $8,943, respectively, on the Shareholder Loan (June 30, 2017 – $8,048 and $16,042). Total accrued interest owing on the Shareholder Loan at June 30, 2018 was $69,760 (December 31, 2017 – $61,523) which is included in accrued liabilities. At June 30, 2018, the Shareholder Loan was in default.
 
 
16
 
 
 
(v)       
On January 12, 2017, the Company entered into a bridge loan agreement (the “Bridge Loan Agreement”) with a shareholder, whereby the shareholder would make available to the Company the aggregate principal amount of CAD $200,000 (the “Bridge Loan”) in two equal tranches of CAD $100,000. The Company received the first tranche on January 12, 2017 (“Bridge Loan Note A”) and the second tranche on January 18, 2017 (“Bridge Loan Note B”). The Bridge Loan is non-interest bearing and was to mature on March 12, 2017. Pursuant to the terms of the Bridge Loan Agreement, the shareholder received a 5% upfront fee upon the closing of Bridge Loan Note A and a 5% upfront fee upon the closing of Bridge Loan Note B. The Bridge Loan is secured by the general security agreement issued in connection to the Secured Note. On January 12, 2017 and in connection to the Bridge Loan Agreement, the Company issued warrants for the purchase of 50,000 Common Shares exercisable until January 11, 2018 at an exercise price of $0.20 per share, with 25,000 warrants to vest upon the closing of Bridge Loan Note A and the remaining 25,000 warrants vest upon the closing of Bridge Loan Note B. On January 12, 2017 and January 18, 2017, the Company closed Bridge Loan Note A and Bridge Loan Note B, respectively, at which dates the warrants became fully vested and exercisable (note 16(j)). During the year ended December 31, 2017, the Company and the shareholder extended the maturity date of Bridge Loan to April 30, 2019 and, commencing on November 15, 2017, the Company began accruing interest at a rate of 10% per annum. In connection to the amendment, the Company issued warrants for the purchase of Common Shares (note 16(dd)). The relative fair value of the warrants issued were recorded as debt discount to be amortized over the life of the loan. At June 30, 2018, the value of the Bridge Loan was $142,605 (December 31, 2017 - $144,611) including a debt discount of $9,275 (December 31, 2017 – $14,809). During the three and six month periods ended June 30, 2018, the Company expensed $3,144 and $5,534, respectively, in interest expense related to the amortization of the debt discount. The amendment to the Bridge Loan was accounted for as a modification of debt and no gain or loss was recognized on the amendments.
 
During the three and six month periods ended June 30, 2018, the Company accrued interest of $4,097 and $8,093, respectively, on the Bridge Loan (June 30, 2017 – $nil and $nil). Total accrued interest owing on the Bridge Loan at June 30, 2018 was $9,755 (December 31, 2017 – $1,998) which is included in accrued liabilities.
 
(vi)      
On November 15, 2017, CAD $350,000 of the Shareholder Loan was assumed by a separate shareholder (the “Shareholder Loan No.2”). Upon assumption of the Shareholder Loan No.2, CAD $52,000 (USD $41,449) was offset by the amount held in trust by the shareholder under the Shareholder Loan (see (v) above) and CAD $11,000 (USD $8,769) was forgiven by the shareholder. During the year ended December 31, 2017 and as a result of the loan forgiveness, the Company recorded a gain on loan settlement in the amount of $8,221 and the principal amount due under the Shareholder Loan No.2 was CAD $287,000. The Company agreed to repay the unpaid principal amount of the Shareholder Loan No.2 on or before April 30, 2019, bearing interest at a rate of 10% per annum, such interest to accrue monthly and due at maturity. In connection to the amendment, the Company issued warrants for the purchase of Common Shares (note 16(dd)). The relative fair value of the warrants issued were recorded as debt discount to be amortized over the life of the loan. At June 30, 2018, the value of the Shareholder Loan No.2 was $204,638 (December 31, 2017 - $207,517) including a debt discount of $13,310 (December 31, 2017 – $16,939). During the three and six month periods ended June 30, 2018, the Company expensed $4,512 and $7,940, respectively, in interest expense related to the amortization of the debt discount.
 
During the three and six month periods ended June 30, 2018, the Company accrued interest of $5,951 and $11,756, respectively, on the Shareholder Loan No.2 (June 30, 2017 – $nil and $nil). Total accrued interest owing on the Shareholder Loan No.2 at June 30, 2018 was $16,836 (December 31, 2017 – $5,701) which is included in accrued liabilities.
 
(vii)      
On March 21, 2018, the Company received CAD $31,000 (USD $24,044) from a shareholder of the Company. On May 4, 2018 and May 7, 2018, the Company received a further USD $50,000 and CAD $32,000 (USD $24,301) from the Shareholder. The loan bears interest of 1.5% per month on a cumulative basis is unsecured and has no specific terms of repayment. As at June 30, 2018, the value of this shareholder loan was $97,842 (December 31, 2017 - $nil).
 
During the three and six month periods ended June 30, 2018, the Company accrued interest of $4,442 and $4,547, respectively on this shareholder loan (June 30, 2017 – $nil and $nil). Total accrued interest owing on such shareholder loan at June 30, 2018 was $4,477 (December 31, 2017 – $nil) which is included in accrued liabilities.
 
12. TERM LOAN
 
On January 18, 2016, the Company entered into a term loan (the “Term Loan”) with an unrelated party acting as an agent to a consortium of participants (the “Lenders”), whereby the Lenders would loan the Company the aggregate principal amount of CAD $1,000,000 for capital expenditures, marketing expenditures and working capital. The agent who arranged the Term Loan was not a related party of the Company. The Term Loan bears interest at a rate of 16% per annum, on the outstanding principal, and was to mature on July 3, 2017, whereby any outstanding principal together with all accrued and unpaid interest thereon shall be due and payable. The Term Loan is secured by an intercreditor and subordination agreement as well as a security agreement. The Term Loan is subject to a monthly cash sweep, calculated as the total of (i) CAD $0.50 for every E-liquid bottle, smaller than 15 ml, sold by the Company within a monthly period; and (ii) CAD $1.00 for every E-liquid bottle, greater than 15 ml, sold by the Company within a monthly period (the “Cash Sweep”). The Cash Sweep will be disbursed to the Lenders in the following priority: first, to pay the monthly interest due on the Term Loan; and second, to repay any remaining principal outstanding on the Term Loan. The Company may elect to repay the outstanding principal of the Term Loan together with all accrued and unpaid interest thereon prior to the maturity, subject to an early repayment penalty of the maximum of (i) 3 months interest on the outstanding principal; or (ii) 50% of the interest payable on the outstanding principal until maturity (the “Early Repayment Penalty”). The Term Loan shall be immediately due and payable at the option of the Lenders if there is a change in key personnel meaning the Company’s current Chief Executive Officer and Chief Financial Officer. On January 18, 2016 and in connection to the Term Loan, the Company issued warrants for the purchase of 250,000 Common Shares (note 16(c)) exercisable until December 31, 2017 at an exercise price of $0.20 per share. In addition, the Company also extended the expiration date of the 250,000 warrants (note 16(c)) issued on August 1, 2014 in connection with the Credit Facility until December 31, 2017, with all other terms of the warrants remaining the same. The relative fair value of the warrants issued were recorded as debt discount to be amortized over the life of the loan.
 
 
17
 
 
The Company’s Chief Executive Officer and Chief Financial Officer are both participants of the consortium of Lenders of the Term Loan, each having committed to provide ten percent of the principal amount of the Term Loan. Neither the Chief Executive Officer nor the Chief Financial Officer participated in the warrants issued or warrants extended in connection with the Term Loan and both parties have appropriately abstained from voting on the Board of Directors to approve the Term Loan, where applicable.
 
On July 15, 2016, the Company and the Lenders of the Term Loan entered into a term loan amendment (the “Term Loan Amendment”) in which the Lenders agreed to extend to the Company an additional CAD $600,000 in principal to increase the Term Loan facility up to the aggregate principal amount of CAD $1,600,000. The parties also extended the maturity date of the Term Loan to July 2, 2018 with all other terms of the Term Loan remaining the same. The Company’s Chief Executive Officer and its Chief Financial Officer are both participants in the consortium of Lenders having each committed to provide a total of CAD $150,000 of the initial principal of the Term Loan and the additional principal of the Term Loan pursuant to the Term Loan Amendment.
 
On July 15, 2016 and in connection to the Term Loan Amendment, the Company issued warrants for the purchase of 300,000 Common Shares (note 16(g)) exercisable until December 31, 2018 at an exercise price of $0.20 per share. The Company also extended the expiration dates of: (i) the warrants for the purchase of 250,000 Common Shares (note 16(c)) issued on January 18, 2016 in connection to the Term Loan; and (ii) the warrants for the purchase of 250,000 Common Shares (note 16(c)) issued on August 1, 2014 and extended on January 18, 2016 in connection to the Term Loan, both until December 31, 2018, with all other terms of the warrants remaining the same. The relative fair value of the warrants issued were recorded as debt discount to be amortized over the life of the loan.
During the year ended December 31, 2016, the Company was advanced CAD $1,600,000 from the Term Loan including the CAD $294,000 and CAD $3,093 rolled in from a revolving credit facility the Company previously entered into with the Lenders as well as CAD $240,581 of advances from the Company’s Chief Executive Officer and Chief Financial Officer.
 
On February 27, 2017, the Company and the Lenders of the Term Loan entered into a term loan amendment (the “Term Loan Amendment No.2”) to amend certain terms and conditions of the Term Loan. Pursuant to the Term Loan Amendment No.2, the parties agreed to modify the Cash Sweep to be calculated as the total of CAD $0.01667 per ml of E-liquid sold by the Company within a monthly period, such modification to be retroactively applied as of January 1, 2017. The Lenders also agreed to cancel the Early Repayment Penalty and waive any interest payment penalties due under the Term Loan. On February 27, 2017 and in connection to the Term Loan Amendment No.2, the Company agreed to issue 500,000 private placement units at a price of $0.10 per unit as a settlement of financing fees with a relative fair value of $48,485. Each unit consisted of one Common Share and a half Common Share purchase warrant exercisable over twelve months at an exercise price of $0.20 per share. On April 4, 2017, the Company issued the 500,000 units. The Company’s Chief Executive Officer and its Chief Financial Officer received a total of 93,622 units which included 93,622 Common Shares and warrants for the purchase of 46,811 Common Shares. The Term Loan Amendment No.2 was accounted for as a modification of debt and no gain or loss was recognized on the amendment.
 
The relative fair value of the warrants issued in relation to the Term Loan and Term Loan amendments were recorded as debt discount to be amortized over the life of the loan. At June 30, 2018, the value of the Term Loan was $1,078,702 including a debt discount of $nil (December 31, 2017 – $1,051,334 including a debt discount of $54,815). During the three and six month periods ended June 30, 2018, the Company expensed $43,333 and $68,768, respectively, in interest expense related to the amortization of the debt discount. Neither the Chief Executive Officer nor the Chief Financial Officer participated in the warrants issued or warrants extended in connection with the Term Loan Amendment.
 
During the three and six month periods ended June 30, 2018, the Company expensed $40,811 and $83,388 in interest on the Term Loan (June 30, 2017 – $42,120 and $86,673). Pursuant to the Cash Sweep, during the six month period ended June 30, 2018, the Company paid a total of $71,812 to the Lenders consisting of $69,602 in interest and $2,210 in principal repayments. During the six month period ended June 30, 2017, the Company paid a total of $171,976 to the Lenders consisting of $101,511 in interest and $70,465 in principal payments.
 
 
18
 
 
The amount owing on the Term Loan is as follows:
 
 
 
June 30,
2018
 
 
December 31,
2017
 
Opening balance/amount advanced
 $1,051,334 
 $1,061,269 
Accretion of debt discount
  68,768 
  14,300 
Exchange loss (gain) during the period/year
  (52,976)
  86,143 
Principal payments made
  (2,210)
  (88,066)
Interest accrued
  83,388 
  173,035 
Interest payments made
  (69,602)
  (195,347)
Ending balance
 $1,078,702 
 $1,051,334 
 
13. PROMISSORY NOTES
 
The Company has outstanding current promissory notes as follows:
 
 
 
June 30,
2018
 
 
December 31,
2017
 
 
 
 
 
 
 
 
Unsecured, bears interest at 15% per annum, matures April 12, 2018(i)
 $222,775 
 $230,109 
Unsecured, bears interest at 15% per annum, matures February 18, 2019(ii)
  227,820 
  - 
Unsecured, bears interest at 18% per annum, matures June 19, 2019(iii)
  30,000 
  30,000 
Secured, bears interest at RBP + 2% per annum, due on demand(iv)
  37,970 
  39,855 
Secured, bears interest at RBP + 3% per annum, due on demand(v)
  53,659 
  64,774 
Lease agreement, bears interest at 4.7% per annum, matures October 13, 2023(vi)
  19,364 
  23,441 
Unsecured, interest free, matured October 29, 2017(vii)
  - 
  7,971 
Secured, bears interest at 24%, matured March 6, 2018 (viii)
  - 
  102,372 
Unsecured, bears interest at 15% per annum, matured April 20, 2018(ix)
  49,361 
  - 
Equipment Facility, secured, bears interest at 15% per annum, matures April 1, 2020 (x)
  149,441 
  - 
 
 $790,390 
 $498,522 
 
The Company has outstanding long term promissory notes as follows:
 
 
 
June 30,
2018
 
 
December 31,
2017
 
Unsecured, bears interest at 15% per annum, matures February 18, 2019(ii)
 $- 
 $234,034 
Unsecured, bears interest at 18% per annum, matures June 19, 2019(iii)
  - 
  17,500 
Lease agreement, bears interest at 4.7% per annum, matures October 13, 2023(vi)
  84,358 
  94,468 
Equipment Facility, secured, bears interest at 15% per annum, matures April 1, 2020 (x)
  106,206 
  - 
 
 $190,564 
 $346,002 
 
(i)      
On October 12, 2017, the Company issued an unsecured promissory note in the principal amount of CAD $300,000. The promissory note matured on April 12, 2018 and bears interest at a rate of 15% per annum, accrued monthly and due at maturity. In connection to the promissory note, the Company issued warrants for the purchase of 100,000 Common Shares of the Company exercisable at $0.20 per share until April 11, 2019. The relative fair value of the warrants issued were recorded as a debt discount to be amortized over the life of the loan. During the three and six month periods ended June 30, 2018, the Company expensed $2,306 and $3,976, respectively, in interest expense related to the amortization of the debt discount (note 16(cc)).
 
 
19
 
 
During the three and six month periods ended June 30, 2018, the Company accrued $9,679 and $19,066, respectively, in interest on the promissory note which has been recorded in accrued liabilities (June 30, 2017 – $nil and $nil). At June 30, 2018, the value of the promissory note was $222,775 inclusive of a debt discount of $5,045 (December 31, 2017 – $230,109 inclusive of a debt discount of $9,021). As at the date of these financial statements, this note is currently in default.
 
(ii)       
On August 18, 2017, the Company issued an unsecured promissory note in the principal amount of CAD 300,000. The promissory note matures on February 18, 2019 and bears interest at a rate of 15% per annum, paid monthly in arrears with interest payments beginning on March 18, 2018. The interest accrued for the initial seven (7) months shall be due at maturity. In connection to the promissory note, the Company issued warrants for the purchase of 150,000 Common Shares of the Company exercisable at $0.20 per share until February 18, 2019. The relative fair value of the warrants issued were recorded as a debt discount to be amortized over the life of the loan. During the three and six month periods ended June 30, 2018, the Company expensed $1,283 and $5,096, respectively, in interest expense related to the amortization of the debt discount (note 16(aa)).
 
During the three and six month periods ended June 30, 2018, the Company accrued $9,473 and $18,962, respectively, in interest on the promissory note which has been recorded in accrued liabilities (June 30, 2017 – $nil and $nil). At June 30, 2018, the value of the promissory note was $227,820 inclusive of a debt discount of $nil (December 31, 2017 – $234,034 inclusive of a debt discount of $5,096).
 
(iii)     
On June 30, 2017, the Company issued an unsecured promissory note in the principal amount of $60,000. The principal together with interest at a rate of 18% per annum is payable in monthly instalments of $3,400 with the first payment due on July 19, 2017 and the final payment due on June 19, 2019. In the event of default, by way of any missed payment under the promissory note and not cured for a period of 15 days, at the option of the holder, the entire unpaid principal amount outstanding would become due and payable.
 
During the three and six month periods ended June 30, 2018, the Company expensed and paid $2,700 and $5,400, respectively, in interest on the promissory note (June 30, 2017 – $nil and $nil). At June 30, 2018 the value of the promissory note was $30,000 (December 31, 2017 - $47,500).
 
(iv)      
On July 18, 2016, VBI entered into a revolving credit facility with The Royal Bank of Canada (“RBC”) for CAD $50,000. The facility is secured by the assets of VBI, due on demand and bears interest at a rate of RBC Prime (“RBP”) + 2%. Interest is payable monthly in arrears.
 
During the three and six month periods ended June 30, 2018, the Company expensed and paid $538 and $1,052, respectively, in interest on the facility (June 30, 2017 – $nil and $nil). At June 30, 2018, $37,970 (December 31, 2017 - $39,855) in principal remains owing on the facility.
 
(v)      
On July 18, 2016, VBI entered into a credit facility with RBC for CAD $106,000. The facility is secured by the assets of VBI, due on demand and bears interest at the rate of RBP + 3%, maturing on July 18, 2021. Interest is payable monthly in arrears and the Company is required to make monthly principal payments of CAD $1,416.
 
During the three and six month periods ended June 30, 2018, the Company paid $945 and $1,922, respectively, in interest (June 30, 2017 – $nil and $nil) and made principal repayments of $8,051 on the facility. At June 30, 2018, $53,659 (December 31, 2017 - $64,774) in principal remains owing on the facility.
 
(vi)       
On October 13, 2016, VBI entered into a capital lease agreement with RBC for the lease of manufacturing equipment in the amount of CAD $175,132. Under the lease agreement, the Company is required to make monthly payments of interest and principal to RBC in the amount of CAD $2,451, the lease matures on October 13, 2023.
 
During the three and six month periods ended June 30, 2018, the Company paid $1,277 and $2,634, respectively, in interest (June 30, 2017 – $nil and $nil) and made principal repayments of $8,611 on the facility. At June 30, 2018, a total of $103,722 (December 31, 2017 - $117,909) in principal remains payable under the lease with $19,364 (December 31, 2017 – $23,441) being allocated to current liabilities and $84,358 (December 31, 2017 – $94,468) being allocated to long term liabilities on the consolidated balance sheet.
 
(vii)     
On closing of the VBI acquisition, VBI had an amount owing to a vendor of VBI in the principal amount of CAD $20,000. Pursuant to the share purchase agreement, the Company agreed to repay the loan to the vendor with two (2) payments of CAD $5,000, payable thirty (30) and sixty (60) days after the closing and a final payment of CAD $10,000 due ninety (90) days after the closing. The loan was unsecured, interest free as was repaid at March 31, 2018.
 
 
20
 
 
(viii)  
On December 7, 2017, the Company entered into a revolving credit facility (the “Revolving Facility”) in the aggregate principal amount of CAD $200,000. The Revolving Facility is secured by certain inventory and receivables of the Company, due March 6, 2018 with an option to extend and bears interest at a rate of 24% per annum payable monthly in arrears. The Revolving Facility is also subject to a standby fee with respect to the unused portion of the facility, calculated on a daily basis as being the difference between the CAD $200,000 revolving limit and the then outstanding advances, multiplied by 3% and divided by 365 and payable in arrears on the last day of each month. During the year ended December 31, 2017, the Company received $100,000 in advances under the Revolving Facility.
 
During the three and six month periods ended June 30, 2018, the Company accrued $nil and $6,227, respectively, in interest (June 30, 2017 – $nil and $nil) and $nil and $419, respectively, in standby fees (June 30, 2017 – $nil and $nil) on the Revolving Facility. On April 2, 2018 and in connection with the Equipment Facility (note 13(x)), the Revolving Facility was terminated and retired and all amounts due under the Revolving Facility were rolled into the Equipment Facility.
 
(ix)  
On April 3, 2018, the Company issued an unsecured promissory note in the principal amount of CAD $65,000 (USD $49,361). The promissory note matured on April 20, 2018 and bears interest at a rate of 15% per annum, accrued monthly but subject to a minimum interest payment of CAD $750. During the three and six months ended June 30, 2018, the Company expensed $1,932 in interest as a result of this promissory note (June 30, 2017 - $nil). The Company is currently in default on this promissory note.
 
(x)     
On April 2, 2018, the Company entered into an equipment financing facility (the “Equipment Facility”) in the aggregate principal amount of CAD $340,850 (USD $258,841). The Equipment Facility is secured by certain equipment of the Company, due April 1, 2020 and bears interest at a rate of 15% per annum. The Company shall be required to make principal and interest payments of CAD $16,527, monthly in arrears. On April 2, 2018 and in connection with the Equipment Facility, the Revolving Facility entered into on December 7, 2017 was terminated and retired and all amounts due under the Revolving Facility were rolled into the Equipment Facility. On April 11, 2018, the Company received the full balance of the aggregate principal amount made available to the Company under the Equipment Facility.
 
During the three and six months ended June 30, 2018, the Company expensed $12,320 in interest as a result of the Equipment Facility. During the six month period ended June 30, 2018, the Company made a payment of $12,550 including $9,315 in principal and $3,236 in interest. At June 30, 2018, a total of $255,647 (December 31, 2017 - $nil) in principal remains payable under the facility with $149,441 (December 31, 2017 – $nil) being allocated to current liabilities and $106,206 (December 31, 2017 – $nil) being allocated to long term liabilities on the consolidated balance sheet.
 
14. CONVERTIBLE DEBENTURES
 
Convertible Debentures Series A
 
On September 3, 2013, December 23, 2013 and February 11, 2014, the Company issued $425,000, $797,000 and $178,000, respectively, of unsecured subordinated convertible debentures (“Convertible Debentures Series A”). The Convertible Debentures Series A matured on January 31, 2016 and charged interest at a rate of 12% per annum, payable quarterly in arrears. The Convertible Debentures Series A were convertible into Common Shares at a fixed conversion rate of $0.07 per share at any time prior to the maturity date. Of the $178,000 in face value of Convertible Debentures Series A issued on February 11, 2014, $3,000 were issued in settlement of loans from shareholders and $50,000 were issued in settlement of loans from related parties.
 
Convertible Debentures Series B
 
On December 31, 2015, the Company issued 650 unsecured subordinated convertible debenture units (“Convertible Debentures Series B”) for proceeds of $650,000. Each Convertible Debentures Series B consisted of an unsecured subordinated convertible debenture having a principal amount of $1,000 and warrants for the purchase of 5,000 Common Shares at a price of $0.20 per share for a period of twenty-four months from the date of issuance (note 16(c)). The Convertible Debentures Series B matured on January 31, 2018 and charged interest at a rate of 8% per annum, payable quarterly in arrears. The face value of the Convertible Debentures Series B, together with all accrued and unpaid interest thereon, are convertible into Common Shares at a fixed conversion rate of $0.10 per share at any time prior to maturity. The Company also has the option to force conversion of any outstanding Convertible Debentures Series B at any time after six months from issuance and prior to maturity. Of the $650,000 in face value of Convertible Debentures Series B issued on December 31, 2015, $276,000 were issued in settlement of loans from related parties, $10,000 were issued in settlement of related party consulting fees $20,000 were issued in settlement of consulting fees owing to an unrelated party and $227,000 were issued in settlement of loans from shareholders.
 
 
21
 
 
Convertible Debentures Series C
 
On May 20, 2016, the Company issued 375 unsecured subordinated convertible debenture units (the “Convertible Debentures Series C”) for proceeds of $375,000. Each Convertible Debentures Series C consisted of an unsecured subordinated convertible debenture having a principal amount of $1,000 and warrants for the purchase of 10,000 Common Shares at a price of $0.20 per share for a period of twenty-four months from the date of issuance (note 16(e)). The Convertible Debentures Series C matured on January 31, 2018 and charged interest at a rate of 8% per annum, accrued quarterly in arrears. The face value of the Convertible Debentures Series C, together with all accrued and unpaid interest thereon, are convertible into Common Shares at a fixed conversion rate of $0.10 per share at any time prior to maturity. The Company also has the option to force conversion of any outstanding Convertible Debentures Series C at any time after six months from issuance and prior to maturity. For Canadian holders, the Company may only force conversion of any outstanding Convertible Debentures Series C at such time that the Company is a reporting issuer within the jurisdiction of Canada. Of the $375,000 in face value of Convertible Debentures Series C issued on May 20, 2016 (“Convertible Debentures Series C-1”), $55,000 were issued in settlement of amounts owing to related parties (note 19(c)) and $10,000 were issued in settlement of amounts owing to an employee. The Company incurred costs of $22,725 as a result of the issuance of Convertible Debentures Series C-1 on May 20, 2016.
 
On December 31, 2016, the Company issued an additional 275 units of Convertible Debentures Series C (“Convertible Debentures Series C-2”) for proceeds of $275,000 which were fully issued in exchange for cash.
 
On January 20, 2017, the Company issued an additional 75 units of Convertible Debentures Series C (“Convertible Debentures Series C-3”) in settlement of $65,000 owing to a related party (note 19(c)) and $10,000 owing in shareholder loans (note 11(ii)).
 
The Company evaluated the terms and conditions of the Convertible Debentures Series A, Convertible Debentures Series B and each tranche of Convertible Debentures Series C (together, the “Convertible Debentures”) under the guidance of ASC No. 815, Derivatives and Hedging (“ASC 815”). The conversion feature met the definition of conventional convertible for purposes of applying the conventional convertible exemption. The definition of conventional contemplates a limitation on the number of shares issuable under the arrangement. The instrument was convertible into a fixed number of shares and there were no down round protection features contained in the contracts.
 
Since a portion of the Convertible Debentures were issued in exchange for nonconvertible instruments at the original instrument’s maturity date, the guidance of ASC 470-20-30-19 & 20 were applied. The fair value of the newly issued Convertible Debentures were equal to the redemption amounts owed at the maturity date of the original instruments. Therefore, there was no gain or loss on extinguishment of debt recorded. After the exchange occurred, the Company was required to consider whether the new hybrid contracts embodied a beneficial conversion feature (“BCF”).
 
For the face value $425,000 of Convertible Debentures Series A issued on September 3, 2013, the calculation of the effective conversion amount did not result in a BCF because the effective conversion price was greater than the Company’s stock price on the date of issuance, therefore no BCF was recorded. However, for the face value $797,000 of Convertible Debentures Series A that were issued on December 23, 2013 and the face value $178,000 of Convertible Debentures Series A that were issued on February 11, 2014, the calculation of the effective conversion amount resulted in a BCF because the effective conversion price was less than the Company’s stock price on the date of issuance and a BCF in the amount of $797,000 and $178,000, respectively, were recorded in additional paid-in capital.
 
For the face value $650,000 of Convertible Debentures Series B issued on December 31, 2015, the relative fair value of the warrants included in the issuance totaling $287,757 was calculated using the Black-Scholes option pricing model. The resulting fair value of such Convertible Debentures Series B issuance was calculated to be $362,243. The calculation of the effective conversion amount resulted in a BCF because the effective conversion price was less than the Company’s stock price on the date of issuance and a BCF in the amount of $133,657 was recorded in additional paid-in capital.
 
For the face value $375,000 of Convertible Debentures Series C-1 issued on May 20, 2016, the relative fair value of the warrants included in the issuance totaling $234,737 (note 16(e)) was calculated using the Black-Scholes option pricing model. The resulting fair value of such Convertible Debentures Series C-1 was calculated to be $140,263. The calculation of the effective conversion amount resulted in a BCF because the effective conversion price was less than the Company’s stock price on the date of issuance and a BCF in the amount of $117,538, net of transaction costs, was recorded in additional paid-in capital.
 
For the face value $275,000 of Convertible Debentures Series C-2 issued on December 31, 2016, the relative fair value of the warrants included in the issuance totaling $143,871 (note 16(i)) was calculated using the Black-Scholes option pricing model. The resulting fair value of such Convertible Debentures Series C-2 was calculated to be $131,129. The calculation of the effective conversion amount resulted in a BCF because the effective conversion price was less than the Company’s stock price on the date of issuance and a BCF in the amount of $131,129, was recorded in additional paid-in capital.
 
 
22
 
 
For the face value $75,000 of Convertible Debentures Series C-3 issued on January 20, 2017, the relative fair value of the warrants included in the issuance totaling $43,737 (note 16(k)) was calculated using the Black-Scholes option pricing model. The resulting fair value of such Convertible Debentures Series C-3 was calculated to be $31,263. The calculation of the effective conversion amount resulted in a BCF because the effective conversion price was less than the Company’s stock price on the date of issuance and a BCF in the amount of $31,263, was recorded in additional paid-in capital.
 
The BCF and the fair value of the warrants, which represents debt discount, is accreted over the life of the Convertible Debentures using the effective interest rate. Amortization of debt discount was recorded as follows:
 
 
 
For the Three Months Ended
June 30, 2018
 
 
For the Three
Months Ended
June 30, 2017
 
 
For the Six
Months Ended
June 30, 2018
 
 
For the Six
Months Ended
June 30, 2017
 
Convertible Debentures Series B
 $38,190 
 $40,104 
 $38,190 
 $83,841 
Conversion of Convertible Debentures Series B
  - 
  342,399 
  - 
  342,399 
Convertible Debentures Series C-1
  21,661 
  24,412 
  21,661 
  44,584 
Conversion of Convertible Debentures Series C-1
  - 
  163,599 
  - 
  163,599 
Convertible Debentures Series C-2
  - 
  15,077 
  - 
  20,286 
Convertible Debentures Series C-3
  - 
  4,112 
  - 
  6,283 
 
 $59,851 
 $589,703 
 $59,851 
 $660,992 
 
Convertible Debentures as of June 30, 2018 and December 31, 2017, are as follows:
 
    
Balance, December 31, 2016
 $83,704 
Face Value Convertible Debentures Series C-3
  75,000 
Relative fair value of detachable warrants
  (43,737)
BCF
  (31,263)
Conversion of Convertible Debentures Series B
  (423,000)
Conversion of Convertible Debenture Series C-1
  (265,000)
Conversion of Convertible Debenture Series C-2
  (275,000)
Conversion of Convertible Debenture Series C-3
  (75,000)
Amortization of debt discount
  1,231,445 
Balance, December 31, 2017
 $277,149 
Amortization of debt discount
  59,851 
Balance, June 30, 2018
 $337,000 
 
Conversions and Repayments of Convertible Debentures Series A
 
The Company received forms of election whereby holders of the Convertible Debentures Series A elected to convert the face value of the debentures into Common Shares at $0.07 per share pursuant to the terms of the Convertible Debentures Series A. As at June 30, 2018, the Company received the following forms of elections from holders of the Convertible Debentures:
 
Date Form of
Election Received
 
Face Value of Convertible Debentures Series A Converted
 
 
Number of
Common Shares Issued on Conversion
 
April 15, 2014
 $50,000 
  714,286 
September 30, 2014
  800,000 
  11,428,572 
November 10, 2014
  275,000 
  3,928,571 
March 9, 2015(1)
  52,000 
  742,857 
July 15, 2015
  105,000 
  1,500,000 
September 1, 2015
  20,000 
  285,714 
 
 $1,302,000 
  18,600,000 
 
(1) 
On March 9, 2015, the Company settled interest payable on the Convertible Debentures Series A in the amount of $1,096 with the issuance of Common Shares at a price of $0.15 per share, of which, $358 of interest payable on the Convertible Debentures Series A was settled with a Director of the Company.
 
 
23
 
 
On January 25, 2016, the Company received a form of election to convert face value $23,000 of Convertible Debentures Series A, such 328,571 Common Shares remain unissued. On March 10, 2016, the Company settled face value $25,000 of Convertible Debentures Series A with a cash payment. On July 6, 2016, the Company settled face value $50,000 of Convertible Debentures Series A and agreed to pay to the holders such face value in monthly payments ending on November 1, 2016. As at December 31, 2016, the $50,000 was fully paid.
 
As at June 30, 2018, all Convertible Debentures Series A had been fully settled and only the 328,571 Common Shares valued at $23,000 remain unissued (note 18).
 
Conversions and Repayments of Convertible Debentures Series B & C
 
On April 30, 2017 and pursuant to the terms of the Convertible Debentures Series B, the Company sent notices of its election to convert $423,000 in face value and $45,058 in accrued interest to holders of Convertible Debentures Series B at $0.10 per share for a total of 4,680,581 Common Shares of the Company. As a result of these conversions, the Company recorded a debt discount in the amount of $342,399. The above amount included the conversion of $286,000 in face value and $30,465 in accrued interest held by related parties of the Company (note 19(c)).
 
On April 30, 2017 and pursuant to the terms of the Convertible Debentures Series C, the Company sent notices of its election to convert $190,000 in face value and $14,367 in accrued interest to holders of Convertible Debentures Series C at $0.10 per share for a total of 2,043,670 Common Shares of the Company. As a result of these conversions, the Company recorded a debt discount in the amount of $168,798. The above amount included the conversion of $5,000 in face value and $378 in accrued interest held by related parties of the Company (note 19(c)).
 
On December 29, 2017 and pursuant to the terms of the Convertible Debentures Series C, the Company converted $425,000 in face value and $37,184 in accrued interest to holders of Convertible Debentures Series C at $0.10 per share for a total of 4,621,836 Common Shares of the Company. As a result of these conversions, the Company recorded a debt discount in the amount of $119,172. The above amount included the conversion of $130,000 in face value and $13,264 in accrued interest held by related parties of the Company (note 19(c)).
 
As at June 30, 2018, face value $227,000 of Convertible Debentures Series B and face value $110,000 of Convertible Debentures Series C remain owing to their respective debenture holders.
 
Interest on Convertible Debentures
 
During the three and six month periods ended June 30, 2018, the Company recorded interest expense in the amount of $6,721 and $13,369, respectively, on the Convertible Debentures (June 30, 2017 – $19,229 and $46,023). The interest owing on the convertible debentures is included in accrued liabilities on the Company’s consolidated balance sheet.
 
Convertible Debentures to be Issued in Hystyle
 
During the three months and six months ended June 30, 2018, the Company’s wholly-owned subsidiary, Hystyle, received $189,850 (CAD $250,000) in subscriptions for 250 unsecured subordinated convertible debenture units (“Convertible Debentures Series H-1”), $6,835 (CAD $9,000) of which from a director of the Company. Each unit of Convertible Debentures Series H-1 shall be comprised of CAD $1,000 in principal of 5% unsecured subordinated convertible debentures and 1,333 common share purchase warrants. The principal amount and accrued interest thereon shall be due twenty-four (24) months from closing and shall be convertible into common shares of Hystyle anytime after ninety (90) days from closing until maturity at a conversion price of CAD $0.375 per share. Hystyle shall also have the option to force conversion of the principal and interest of the Convertible Debentures Series H-1 at any time prior to maturity if Hystyle is listed on a recognized stock exchange. The warrants shall be exercisable for a period of eighteen (18) months from closing at an exercise price of CAD $0.50 per share. The Convertible Debentures Series H-1 remain unissued.
 
During the three and six months ended June 30, 2018, the Company’s wholly-owned subsidiary, Hystyle, received $18,985 (CAD $25,000) in subscriptions for 25 unsecured subordinated convertible debenture units (“Convertible Debentures Series H-2”). Each unit of Convertible Debentures Series H-2 shall be comprised of CAD $1,000 in principal of 8% unsecured subordinated convertible debentures and 1,000 common share purchase warrants. The principal amount and accrued interest thereon shall be due twenty-four (24) months from closing and shall be convertible into common shares of Hystyle anytime after ninety (90) days from closing until maturity at a conversion price of CAD $0.50 per share. Hystyle shall also have the option to force conversion of the principal and interest of the Convertible Debentures Series H-2 at any time prior to maturity if Hystyle is listed on a recognized stock exchange. The warrants shall be exercisable for a period of eighteen (18) months from closing at an exercise price of CAD $0.80 per share. The Convertible Debentures Series H-2 remain unissued.
 
 
24
 
 
15. COMMON STOCK
 
During the six month period ended June 30, 2018, the Company:
 
 
Issued 600,000 Common Shares at a price of $0.10 per share, for a fair value of $60,000 related to a six month consulting agreement; the $60,000 was booked as a prepaid to be expensed over the life of the agreement. During the six months ended June 30, 2018, the Company expensed $20,000 from the prepaid as stock based compensation;
 
 
Issued 50,000 Common Shares on the exercise of warrants, at a price of $0.20 per common share, for cash proceeds of $10,000;
 
 
Issued 3,486,362 Common Shares on a private placement basis, at a price of $0.11 per common share for cash proceeds of $383,500;
 
 
Issued 190,909 Common Shares on a private placement basis, at a price of $0.11 per common share for payment of consulting fees in the amount of $21,000 owing to an unrelated party; and
 
 
Issued 4,621,836 Common Shares at a price of $0.10 per share, for conversion of $425,000 in face value and $37,184 in accrued interest to holders of Convertible Debentures, including the conversion of $130,000 in face value and $13,264 in accrued interest held by related parties of the Company.
 
16. WARRANTS
 
The following schedule summarizes the outstanding warrants for the purchase of Common Shares of the Company:
 
 
 
June 30,
2018
 
 
December 31,
2017
 
 
 
Warrants Outstanding
 
 
Weighted Average Exercise Price
 
 
Weighted Average Life Remaining (yrs)
 
 
Warrants Outstanding
 
 
Weighted Average Exercise Price
 
 
Weighted Average Life Remaining (yrs)
 
Beginning of period
  28,237,782 
 $0.23 
  0.84 
  17,560,000 
 $0.23 
  1.21 
Issued
  250,000 
  0.20 
  1.84 
  18,927,782 
  0.21 
  1.61 
Cancelled
  - 
  - 
  - 
  (1,750,000)
  0.25 
  - 
Expired
  (5,560,000)
  0.21 
  - 
  (6,500,000)
  0.27 
  - 
End of period
  22,927,782 
 $0.21 
  0.47 
  28,237,782 
 $0.23 
  0.84 
 
 
 
25
 
 
The Company has issued warrants for the purchase of Common Shares of the Company as follows:
 
Issuance Date
 
Number of Warrants
 
Expected Life in Years
 
Exercise Price ($)
 
Risk Free Rate
 
Dividend
Yield
 
Expected Volatility
 
Fair Value ($)
May 29, 2015
(a)
250,000
 
2.00
 
0.40
 
0.85%
 
Nil
 
298%
 
35,362
May 29, 2015
(a)
250,000
 
2.00
 
0.50
 
0.85%
 
Nil
 
298%
 
35,134
May 29, 2015
(a)
250,000
 
2.00
 
0.60
 
0.85%
 
Nil
 
298%
 
34,934
May 29, 2015
(a)
250,000
 
2.00
 
0.70
 
0.85%
 
Nil
 
298%
 
34,755
December 31, 2015
(b)
3,250,000
 
2.00
 
0.20
 
1.19%
 
Nil
 
265%
 
516,343
January 18, 2016
(c)
250,000
 
2.46
 
0.20
 
0.91%
 
Nil
 
263%
 
51,598
March 2, 2016
(d)
1,000,000
 
2.00
 
0.20
 
0.91%
 
Nil
 
271%
 
158,995
May 20, 2016
(e)
3,750,000
 
2.00
 
0.20
 
1.03%
 
Nil
 
259%
 
234,737
May 20, 2016
(f)
85,000
 
2.00
 
0.20
 
1.03%
 
Nil
 
259%
 
14,225
July 15, 2016
(g)
300,000
 
2.46
 
0.20
 
0.91%
 
Nil
 
263%
 
45,799
December 22, 2016
(h)
250,000
 
1.50
 
0.20
 
0.87%
 
Nil
 
180%
 
18,840
December 31, 2016
(i)
2,750,000
 
2.00
 
0.20
 
1.20%
 
Nil
 
259%
 
143,871
January 12, 2017
(j)
50,000
 
1.00
 
0.20
 
0.81%
 
Nil
 
191%
 
4,988
January 20, 2017
(k)
750,000
 
2.00
 
0.20
 
1.20%
 
Nil
 
267%
 
43,737
January 31, 2017
(l)
3,773,006
 
1.00
 
0.20
 
0.84%
 
Nil
 
173%
 
224,479
January 31, 2017
(m)
411,361
 
1.00
 
0.20
 
0.84%
 
Nil
 
173%
 
24,474
February 17, 2017
(n)
907,948
 
1.00
 
0.20
 
0.82%
 
Nil
 
167%
 
63,641
February 17, 2017
(o)
108,954
 
1.00
 
0.20
 
0.82%
 
Nil
 
167%
 
7,615
March 8, 2017
(p)
1,500,000
 
2.00
 
0.25
 
1.36%
 
Nil
 
266%
 
193,438
March 21, 2017
(q)
3,270,045
 
1.00
 
0.20
 
1.00%
 
Nil
 
165%
 
236,773
March 21, 2017
(r)
27,623
 
1.00
 
0.20
 
1.00%
 
Nil
 
165%
 
2,000
April 4, 2017
(s)
250,000
 
1.00
 
0.20
 
1.03%
 
Nil
 
163%
 
19,703
April 6, 2017
(t)
500,000
 
2.00
 
0.25
 
1.24%
 
Nil
 
167%
 
52,643
June 2, 2017
(u)
1,634,615
 
1.00
 
0.20
 
1,16%
 
Nil
 
171%
 
110,602
June 16, 2017
(v)
769,230
 
1.00
 
0.20
 
1.21%
 
Nil
 
171%
 
57,765
June 28, 2017
(w)
300,000
 
1.00
 
0.20
 
1.21%
 
Nil
 
159%
 
23,020
July 1, 2017
(x)
75,000
 
1.50
 
0.20
 
1.24%
 
Nil
 
158%
 
7,000
July 31, 2017
(y)
2,000,000
 
2.00
 
0.20
 
1.34%
 
Nil
 
245%
 
252,631
July 31, 2017
(z)
1,000,000
 
2.00
 
0.20
 
1.34%
 
Nil
 
245%
 
21,930
August 18, 2017
(aa)
150,000
 
1.50
 
0.20