Quarterly Report (10-q)

Date : 04/30/2019 @ 11:19AM
Source : Edgar (US Regulatory)
Stock : Gala Pharmaceutical Inc (PK) (GLPH)
Quote : 0.0097  0.0 (0.00%) @ 9:27PM

Quarterly Report (10-q)

 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

þ  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended February 28, 2019

 

o TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT

 

For the transition period from _________ to _________

 

Commission File Number: 333-172744

 

GALA PHARMACEUTICAL INC.

(Name of Small Business Issuer in its charter)

 

   
Nevada 42-1771014
(state or other jurisdiction of incorporation or organization) (I.R.S. Employer I.D. No.)
   

 

18881 Von Karman Ave. Suite 1440

Irvine, CA 92612

(Address of principal executive offices)

 

(775) 321-8238

Issuer’s telephone number

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was require to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes   þ    No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  o Accelerated filer  o
Non-accelerated filer  o Smaller reporting company  þ
  Emerging growth company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o       No þ  

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

As of April 18, 2019, the registrant had 107,672,976 shares of common stock outstanding.

 

 

 

     

 

GALA PHARMACEUTICAL INC.

 

Table of Contents

 

 

PART I – FINANCIAL INFORMATION 4
Item 1. Financial Statements (unaudited) 4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 22
   
PART II – OTHER INFORMATION 24
Item 1. Legal Proceedings 24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Securities 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Mine Safety Disclosures 24
Item 5. Other Information 24
Item 6. Exhibits 24
SIGNATURES 25

 

 

 

 

 

  2  

 

   

GALA PHARMACEUTICAL INC.

(formerly Gala Global Inc.)

 

Condensed Consolidated Financial Statements

(unaudited)

 

For the Period Ended February 28, 2019

 

Condensed Consolidated Balance Sheets (unaudited) 4
Condensed Consolidated Statements of Operations (unaudited) 5
Condensed Consolidated Statements of Stockholders’ Deficit (unaudited) 6
Condensed Consolidated Statements of Cash Flows (unaudited) 7
Notes to the Condensed Consolidated Financial Statements (unaudited) 8

 

 

 

 

 

  3  

 

 

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

 

GALA PHARMACEUTICAL INC.

Condensed Consolidated Balance Sheets

 

    February 28,
2019
$
    November 30,
2018
$
 
    (unaudited)        
ASSETS                
                 
Current assets                
                 
Cash     179,293       116,198  
Inventory            
Prepaid expenses            
Prepaid expenses – related parties     27,000       69,000  
Marketable securities     37,200       41,800  
                 
Total current assets     243,493       226,998  
                 
Equipment, net of accumulated depreciation     39,140       35,160  
                 
Total assets     282,633       262,158  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
                 
Current liabilities                
                 
Accounts payable and accrued liabilities     97,206       82,275  
Accounts payable and accrued liabilities – related party     42,201       49,761  
Deferred rent     29,096       29,096  
Due to related parties     176,188       203,688  
Loans payable     42,000       42,000  
Loans payable – related parties     5,764       5,764  
Warrant liability     5,882       5,694  
Convertible note, net of discount of $282,026 and $76,903, respectively     240,628       244,477  
Derivative liabilities     994,126       458,109  
                 
Total liabilities     1,633,091       1,120,864  
                 
Organization and nature of operations (Note 1)                
Commitments and contingencies (Note 12)                
Subsequent events (Note 13)                
                 
STOCKHOLDERS’ DEFICIT                
                 
Preferred stock Authorized: 10,000,000 shares with a par value of $0.001 per share Issued and outstanding: 500,000 and nil shares, respectively     500       500  
                 
Common stock Authorized: 500,000,000 shares with a par value of $0.001 per share Issued and outstanding: 95,197,976 and 92,011,666 shares, respectively     95,198       92,012  
                 
Additional paid-in capital     4,352,635       4,290,722  
Deferred compensation     (74,486 )     (117,021 )
Deficit     (5,654,618 )     (5,077,446 )
                 
Total stockholders’ deficit attributable to Gala Pharmaceutical Inc.     (1,280,771 )     (811,233 )
Non-controlling interest     (69,687 )     (47,473 )
                 
Total liabilities and stockholders’ deficit     282,633       262,158  

 

(The accompanying notes to are an integral part of these condensed consolidated financial statements)

 

 

  4  

 

 

GALA PHARMACEUTICAL INC.

Condensed Consolidated Statements of Operations

(unaudited)

 

    Three months ended
February 28, 2019
$
    Three months ended
February 28, 2018
$
 
             
Revenue        
Cost of revenue        
             
Gross Profit            
                 
Operating expenses                
                 
Consulting fees     55,690       115,343  
Consulting fees – related party     89,137       320,192  
Depreciation     2,723       2,730  
General and administrative     38,666       36,263  
General and administrative – related party     16,397       60,515  
Rent     28,050       13,185  
                 
Total operating expense     230,663       548,228  
                 
Loss before other income (expense)     (230,663 )     (548,228 )
                 
Other income (expense)                
                 
Change in fair value of derivative liabilities     (353,949 )     (111,519 )
Interest expense     (27,007 )     (18,238 )
Gain (loss) on settlement of debt     16,833       94,743  
Unrealized loss on marketable securities     (4,600 )      
                 
Total other income (expense)     (368,723 )     (35,014 )
                 
Net loss     (599,386 )     (583,242 )
Less: loss attributed to non-controlling interest     22,214        
                 
Net loss to Gala Pharmaceutical Inc.     (577,172 )     (583,242 )
                 
Net loss per share, basic and diluted     (0.01 )     (0.01 )
                 
Weighted average common shares outstanding, basic and diluted     94,133,908       40,202,240  

 

(The accompanying notes to are an integral part of these condensed consolidated financial statements)

 

 

 

  5  

 

 

GALA PHARMACEUTICAL INC.

Condensed Consolidated Statements of Changes in Stockholders’ Deficit

For the period from December 1, 2017 to February 28, 2019

(unaudited)

 

 

 

Preferred stock

  Common stock  

Additional

paid-in

  Common Stock   Deferred   Non controlling          
  Shares  

Par Value

  Shares   Par value   capital   Issuable   Compensation   Interest   Deficit   Total  
  #   $   #   $   $   $   $   $   $   $  
                                                             
Balance, November 30, 2017   500,000     500     35,701,590     35,702     2,417,400     25,000     (165,853 )       (3,218,569 )   (905,820 )
                                                             
Shares issued for cash           27,250,000     27,250     492,750                     520,000  
                                                             
Shares issued for settlement of debt           4,143,409     4,143     365,989                     370,131  
                                                             
Shares issued for consulting services           11,500,000     11,500     548,500     (25,000 )               535,000  
                                                             
Shares issued for consulting services – related party           13,416,667     13,417     466,083                     479,500  
                                                             
Deferred compensation                           48,832             48,832  
                                                             
Net loss for the year                               (47,473 )   (1,858,877 )   (1,906,350 )
                                                             
Balance, November 30, 2018   500,000     500     92,011,666     92,012     4,290,722         (117,021 )   (47,473 )   (5,077,446 )   (858,706 )
                                                             
Shares issued for services           2,000,000     2,000     37,000                     39,000  
                                                             
Shares issued for conversion of debt               1,186,310     1,186     24,913                         26,099  
                                                             
Deferred compensation                           42,535             42,535  
                                                             
Net loss for the period                               (22,214 )   (577,172 )   (599,386 )
                                                             
Balance, February 28, 2019   500,000     500     95,197,976     95,198     4,352,635         (74,486 )   (69,687 )   (5,654,618 )   (1,350,458 )

 

(The accompanying notes to are an integral part of these condensed consolidated financial statements)

 

 

 

  6  

 

 

GALA PHARMACEUTICAL INC.

Condensed Consolidated Statements of Cash Flows

 

    Three months ended February 28,
2019
$
    Three months ended February 28,
2018
$
 
             
Operating activities                
                 
Net loss for the year     (599,386 )     (583,242 )
                 
Adjustments to reconcile net loss to net cash used in operating activities:                
                 
Accretion expense     9,877        
Amortization of deferred compensation costs     42,535       120,822  
Change in fair value of derivative liability     353,949       111,519  
Common shares issued for services and compensation – related party     39,000       200,000  
Depreciation     2,723       2,730  
Gain on settlement of debt     (16,833 )     (94,743 )
Unrealized loss on marketable securities     4,600        
                 
Changes in operating assets and liabilities:                
                 
Prepaid expenses     42,000       111,735  
Accounts payable and accrued liabilities     21,143       39,565  
Accounts payable and accrued liabilities – related party     (7,500 )     9,015  
Warrant liability     190        
                 
Net cash used in operating activities     (107,702 )     (82,599 )
                 
Investing activities                
                 
Purchase of equipment     (6,703 )      
                 
Net cash used in investing activities     (6,703 )      
                 
Financing activities                
                 
Proceeds from related party operating advances           75,000  
Proceeds from convertible notes, net     205,000        
Repayments to related party     (27,500 )      
                 
Net cash provided by financing activities     177,500       75,000  
                 
Increase (decrease) in cash     63,095       (7,599 )
                 
Cash, beginning of period     116,198       7,767  
                 
Cash, end of period     179,293       168  
1                
Supplemental disclosures (Note 11)                

 

(The accompanying notes to are an integral part of these condensed consolidated financial statements)

 

 

 

  7  

 

 

GALA PHARMACEUTICAL INC.

Notes to the Condensed Consolidated Financial Statements

For the period ended February 28, 2019

(unaudited)

 

1. Organization and Nature of Operations

 

Gala Pharmaceutical Inc. (the “Company” or “GPI”) was incorporated in the State of Nevada on March 10, 2010. The Company provides Testing or Analytical Chemistry tools for chemical, plant, soil, and liquid composition analysis. GPI provides analysis of compositional traits for hemp and cannabis products (cannabinoid, terpenes, pesticides, residual solvents and microbial). The analysis is being done at certified labs with persistent results.

 

The Company also provides genetic “fingerprinting” and “sequencing” of various crop species. This fingerprinting allows for storing genetic fingerprint information into a proprietary database. Customers can access genetic fingerprint data which can be used for predictive breeding applications and for protecting intellectual property (IP). Additionally, the Company can develop new genetics by using state of the art breeding technology and provides tissue culture and cloning services. These clones are guaranteed to be disease free, chemical free and healthy and robust.

 

Additionally, the Company provides consulting on testing and manufacturing lab designs and SOPs.  The Company provides services to customers for building turnkey labs, drug formulations and troubleshooting. It has highly qualified professionals to bring productivity and efficiency within your current resources.

 

Going Concern

 

These consolidated financial statements have been prepared on a going concern basis, which implies that the Company will continue to realize its assets and discharge its liabilities in the normal course of business. As at February 28, 2019, the Company has a working capital deficit of $1,389,598 and an accumulated deficit of $5,654,618. The continuation of the Company as a going concern is dependent upon the continued financial support from its management, and its ability to identify future investment opportunities and obtain the necessary debt or equity financing, and generating profitable operations from the Company’s future operations. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

2. Summary of Significant Accounting Policies

 

a) Basis of Presentation

 

These consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) and are expressed in U.S. dollars. The Company’s fiscal year end is November 30.

 

b) Principles of Consolidation

 

These consolidated financial statements include the accounts of the Company and its subsidiaries: 51% ownership of Gala Pharmaceutical (California), Inc. (“Gala California”) from February 7, 2018 (date of incorporation) to current date, and 100% ownership of Cannabis Ventures Inc (USA), Cannabis Ventures Inc. (Canada), and CBD Life, Inc. until the sale of these subsidiaries on June 20, 2018. All inter-company transactions and balances have been eliminated on consolidation and the proportionate net income/loss on the 49% non-controlling interest has been deducted from the Company’s net loss on the consolidated statement of operations commencing with a corresponding entry within stockholders’ deficit.

 

 

 

  8  

 

 

GALA PHARMACEUTICAL INC.

Notes to the Condensed Consolidated Financial Statements

For the period ended February 28, 2019

(unaudited)

 

 

2. Summary of Significant Accounting Policies (continued)

 

  (c) Interim Financial Statements

 

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In management’s opinion the financial statements include all adjustments (consisting of normal recurring accruals) necessary in order to make the financial statements not misleading. Operating results for the three months ended February 28, 2019 are not necessarily indicative of the results that may be expected for the year ended November 30, 2019. For more complete financial information, these unaudited financial statements should be read in conjunction with the audited financial statements for the year ended November 30, 2018 included in our Form 10-K filed with the SEC.

 

(d) Use of Estimates

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions related to the valuation of inventory, valuation of derivative liability and share-based compensation, and deferred income tax asset valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

 

(e) Financial Instruments

 

Pursuant to ASC 820, Fair Value Measurements and Disclosures , an entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 prioritizes the inputs into three levels that may be used to measure fair value:

 

Level 1

 

Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

 

Level 2

 

Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

 

Level 3

 

Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

 

 

 

  9  

 

 

GALA PHARMACEUTICAL INC.

Notes to the Condensed Consolidated Financial Statements

For the period ended February 28, 2019

(unaudited)

 

 

2. Summary of Significant Accounting Policies (continued)

 

  (e) Financial Instruments (continued)

 

The Company’s financial instruments consist principally of cash, marketable securities, accounts payable and accrued liabilities, accounts payable and accrued liabilities – related parties, loans payable, loans payable – related parties, convertible debt, derivative liabilities, and amounts due to related parties. Pursuant to ASC 820, the fair value of cash is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets. The recorded values of all other financial instruments approximate their current fair values because of their nature and respective maturity dates or durations.

 

The following table represents assets and liabilities that are measured and recognized in fair value as of February 28, 2019, on a recurring basis:

 

    Level 1
$
    Level 2
$
    Level 3
$
    Total gains and (losses)  
                         
Marketable securities     37,200                   (4,600 )
Warrant liability                 (5,885 )      
Derivative liabilities                 (994,126 )     (353,949 )
                                 
Total     37,200             (1,000,011 )     (358,549 )

 

The following table represents assets and liabilities that are measured and recognized in fair value as of November 30, 2018, on a recurring basis:

 

    Level 1
$
    Level 2
$
    Level 3
$
    Total gains and (losses)  
                         
Marketable securities     41,800                   (30,000 )
Warrant liability                 (5,695 )      
Derivative liabilities                 (458,109 )     (257,861 )
                                 
Total     41,800             (463,804 )     (287,861 )

 

(f) Basic and Diluted Net Loss per Share

 

The Company computes net income (loss) per share in accordance with ASC 260, Earnings per Share . ASC 260 requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti dilutive. No potentially dilutive debt or equity instruments were issued and outstanding during the periods ended February 28, 2019 and November 30, 2018. As at February 28, 2019, the Company had 60,532,565 (November 30, 2018 – 12,254,104) potentially issuable shares from outstanding convertible notes and share purchase warrants.

 

 

 

  10  

 

 

GALA PHARMACEUTICAL INC.

Notes to the Condensed Consolidated Financial Statements

For the period ended February 28, 2019

(unaudited)

 

 

2. Summary of Significant Accounting Policies (continued)

 

(g) Recent Accounting Pronouncements

 

In August 2018, the FASB issued guidance to improve the effectiveness of fair value measurement disclosures by removing or modifying certain disclosure requirements and adding other requirements. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. Certain amendments should be applied prospectively, while all other amendments should be applied retrospectively to all periods presented. The Company is currently evaluating the impact of the new guidance.

 

In February 2018, the FASB issued guidance that permits the Company to reclassify disproportionate tax effects in accumulated other comprehensive income caused by the Tax Cuts and Jobs Act of 2017 to retained earnings. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of the new guidance.

 

In July 2017, the FASB issued ASU 2017-11 which simplifies the accounting for certain financial instruments with down round features. The new standard will reduce income statement volatility for companies that issue warrants and convertible instruments containing such features. The guidance is effective for fiscal years beginning after December 15, 2018 with early adoption permitted. The Company is currently evaluating the impact of the new guidance.

 

In June 2016, the FASB issued a new credit loss standard that replaces the incurred loss impairment methodology in current GAAP. The new impairment model requires immediate recognition of estimated credit losses expected to occur for most financial assets and certain other instruments. It is effective for annual reporting periods beginning after December 15, 2019 and interim periods within those annual periods. Early adoption for fiscal years beginning after December 15, 2018 is permitted. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first effective reporting period. The Company is currently evaluating the impact of the new guidance.

 

In February 2016, the FASB issued new lease accounting guidance in ASU No. 2016-02, “ Leases ”. This new guidance was initiated as a joint project with the International Accounting Standards Board to simplify lease accounting and improve the quality of and comparability of financial information for users. This new guidance would eliminate the concept of off-balance sheet treatment for “operating leases” for lessees for the vast majority of lease contracts. Under ASU No. 2016-02, at inception, a lessee must classify all leases with a term of over one year as either finance or operating, with both classifications resulting in the recognition of a defined “right-of-use” asset and a lease liability on the balance sheet. However, recognition in the income statement will differ depending on the lease classification, with finance leases recognizing the amortization of the right-of-use asset separate from the interest on the lease liability and operating leases recognizing a single total lease expense. Lessor accounting under ASU No. 2016-02 would be substantially unchanged from the previous lease requirements under GAAP. ASU No. 2016-02 will take effect for public companies in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted and for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, lessees and lessors must apply a modified retrospective transition approach. The Company is currently evaluating the new guidance and has not determined the impact this standard may have on the consolidated financial statements.

 

The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.

 

 

 

  11  

 

 

GALA PHARMACEUTICAL INC.

Notes to the Condensed Consolidated Financial Statements

For the period ended February 28, 2019

(unaudited)

 

 

2. Summary of Significant Accounting Policies (continued)

 

  (g) Recently Adopted Accounting Pronouncements

 

In January 2016, the FASB issued new guidance which amends various aspects of the recognition, measurement, presentation, and disclosure of financial instruments. With respect to the Company’s consolidated financial statements, the most significant impact relates to the accounting for equity investments (other than those that are consolidated or accounted under the equity method) which will be measured at fair value through earnings. The new guidance is effective for annual reporting periods, and interim periods within those years beginning after December 15, 2017, with early adoption permitted only for certain provisions. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, with other amendments related specifically to equity securities without readily determinable fair values applied prospectively. The adoption did not have a material impact on the Company's consolidated financial statements.

 

3. Deferred Compensation

 

Deferred compensation is comprised of common shares issued to officers and directors of the Company for compensation services. During the three months ended February 28 2019, the Company recorded $42,535 (February 28, 2018 - $120,822) of compensation expense and the remaining $74,486 (November 30, 2018 - $117,021) was recorded as deferred compensation within shareholders’ equity.

 

4. Equipment

 

    Cost
$
    Accumulated amortization
$
    February 28,
2019
$
    November 30,
2018
$
 
                         
Machinery     51,449       19,012       32,437       35,160  
Leasehold improvements     6,703             6,703        
                                 
      58,152       19,012       39,140       35,160  

 

During the three months ended February 28, 2019, the Company recorded $2,723 (February 28, 2018 - $2,730) of depreciation expense.

 

5. Convertible Debentures

 

(a) On May 15, 2017, the Company entered into a promissory note agreement with a non-related party for proceeds of $280,000, net of an original issuance discount and legal fees of $30,000 which were capitalized and amortized over the period of the convertible debenture. The promissory note is unsecured, bears interest at 10% per annum, and was due on November 30, 2017. The promissory note is convertible into common shares at the lesser of: (a) $0.35; or (b) 65% of the average of the three lowest volume weighted average price of the Company’s common shares in the 20 days preceding the notice of conversion.

 

The embedded conversion option qualifies for derivative accounting under ASC 815-15, Derivatives and Hedging . The fair value of the derivative liability resulted in a full discount of the $250,000 based on the net proceeds received from promissory note. The carrying value of the convertible debenture will be accreted over the term of the convertible debenture up to the face value of $280,000. On November 30, 2017, a default penalty of $73,629 was applied as the Company defaulted on the convertible debenture. During the period ended February 28, 2019, the Company issued 1,186,310 common shares for the conversion of $13,726 of principal balance and $6,274 of accrued interest. As at February 28, 2019, the carrying value of the convertible debenture was $227,654 (November 30, 2018 - $241,380).

 

 

 

  12  

 

 

GALA PHARMACEUTICAL INC.

Notes to the Condensed Consolidated Financial Statements

For the period ended February 28, 2019

(unaudited)

 

5. Convertible Debentures (continued)

 

(b) On June 6, 2018, the Company issued a callable secured convertible note for $15,000. Under the terms of the note, the amount owing is unsecured, bears interest at 12% per annum, and is due on June 1, 2019. The note is also convertible into common shares of the Company at the lesser of: (a) $0.04; or (b) 50% of the lowest 3 trading prices during the 20 trading days prior to the date of conversion. Upon default of the note, the interest rate will increase to 15% per annum. In addition to the note, the Company also issued 30,000 share purchase warrants which entitles the note holder to acquire 30,000 common shares at $0.01 per common share for a period of seven years.

 

The embedded conversion option qualifies for derivative accounting under ASC 815-15, Derivatives and Hedging . The fair value of the derivative liability resulted in a full discount of the $15,000 based on the net proceeds received from promissory note. The carrying value of the convertible debenture will be accreted over the term of the convertible debenture up to the face value of $15,000. As at February 28, 2019, the carrying value of the convertible debenture was $5,126 (November 30, 2018 - $1,675) and the unamortized discount on the convertible debenture was $9,874 (November 30, 2018 - $13,325).

 

c) On July 24, 2018, the Company issued a callable secured convertible note for $15,000. Under the terms of the note, the amount owing is unsecured, bears interest at 12% per annum, and is due on June 1, 2019. The note is also convertible into common shares of the Company at the lesser of: (a) $0.04; or (b) 50% of the lowest 3 trading prices during the 20 trading days prior to the date of conversion. Upon default of the note, the interest rate will increase to 15% per annum. In addition to the note, the Company also issued 30,000 share purchase warrants which entitles the note holder to acquire 30,000 common shares at $0.01 per common share for a period of seven years.

 

The embedded conversion option qualifies for derivative accounting under ASC 815-15, Derivatives and Hedging . The fair value of the derivative liability resulted in a full discount of the $15,000 based on the net proceeds received from promissory note. The carrying value of the convertible debenture will be accreted over the term of the convertible debenture up to the face value of $15,000. As at February 28, 2019, the carrying value of the convertible debenture was $4,175 (November 30, 2018 - $1,089) and the unamortized discount on the convertible debenture was $10,825 (November 30, 2018 - $13,911).

 

d) On November 10, 2018, the Company issued a callable secured convertible note for $50,000. Under the terms of the note, the amount owing is unsecured, bears interest at 12% per annum, and is due on November 10, 2019. The note is also convertible into common shares of the Company at the lesser of: (a) $0.04; or (b) 50% of the lowest 3 trading prices during the 20 trading days prior to the date of conversion. Upon default of the note, the interest rate will increase to 15% per annum.

 

The embedded conversion option qualifies for derivative accounting under ASC 815-15, Derivatives and Hedging . The fair value of the derivative liability resulted in a full discount of the $50,000 based on the net proceeds received from promissory note. The carrying value of the convertible debenture will be accreted over the term of the convertible debenture up to the face value of $15,000. As at February 28, 2019, the carrying value of the convertible debenture was $2,329 (November 30, 2018 - $333) and the unamortized discount on the convertible debenture was $47,671 (November 30, 2018 - $49,667).

 

 

 

  13  

 

 

GALA PHARMACEUTICAL INC.

Notes to the Condensed Consolidated Financial Statements

For the period ended February 28, 2019

(unaudited)

 

5. Convertible Debentures (continued)

 

e) On January 30, 2019, the Company issued a callable secured convertible note for $210,000. Under the terms of the note, the amount owing is unsecured, bears interest at 8% per annum, and is due on January 30, 2020. The note is also convertible into common shares of the Company at 62% of the lowest 2 trading prices during the 20 trading days prior to the date of conversion. Upon default of the note, the interest rate will increase to 15% per annum.

 

The embedded conversion option qualifies for derivative accounting under ASC 815-15, Derivatives and Hedging . The fair value of the derivative liability resulted in a full discount of the $210,000 based on the net proceeds received from promissory note. The carrying value of the convertible debenture will be accreted over the term of the convertible debenture up to the face value of $210,000. As at February 28, 2019, the carrying value of the convertible debenture was $1,307 (November 30, 2018 - $nil) and the unamortized discount on the convertible debenture was $208,693 (November 30, 2018 - $nil).

 

f) On February 6, 2019, the Company issued a callable secured convertible note for $5,000. Under the terms of the note, the amount owing is unsecured, bears interest at 12% per annum, and is due on February 5, 2020. The note is also convertible into common shares of the Company at the lesser of: (a) $0.04; or (b) 50% of the lowest 3 trading prices during the 20 trading days prior to the date of conversion. Upon default of the note, the interest rate will increase to 15% per annum.

 

The embedded conversion option qualifies for derivative accounting under ASC 815-15, Derivatives and Hedging . The fair value of the derivative liability resulted in a full discount of the $5,000 based on the net proceeds received from promissory note. The carrying value of the convertible debenture will be accreted over the term of the convertible debenture up to the face value of $5,000. As at February 28, 2019, the carrying value of the convertible debenture was $37 (November 30, 2018 - $nil) and the unamortized discount on the convertible debenture was $4,963 (November 30, 2018 - $nil).

 

6. Derivative Liability

 

The Company records the fair value of the conversion price of the convertible debentures, as disclosed in Note 5, in accordance with ASC 815, Derivatives and Hedging . The fair value of the derivative liability is revalued on each balance sheet date or upon conversion of the underlying convertible debenture into equity with corresponding gains and losses recorded in the consolidated statement of operations. During the period ended February 28, 2019, the Company recorded a loss on the change in fair value of the derivative liability of $353,949 (February 28, 2018 - $111,519). As at February 28, 2019, the Company had a derivative liability of $994,126 (November 30, 2018 - $458,109).

 

The following inputs and assumptions were used to value the derivative liabilities outstanding during the periods ended February 28, 2019 and November 30, 2018, assuming no dividend yield:

 

    February 28,
2019
    November 30,
2018
 
             
Expected volatility     375%       485%  
Risk free rate     2.49%       2.52%  
Expected life (in years)     0.5       0.5  

 

A summary of the activity of the derivative liability is shown below:

 

    $  
       
Balance, November 30, 2018     458,109  
Derivative loss due to new issuances     334,740  
Adjustment for conversion     (22,932 )
Mark to market adjustment     224,209  
         
Balance, February 28, 2019     994,126  

 

 

 

  14  

 

 

GALA PHARMACEUTICAL INC.

Notes to the Condensed Consolidated Financial Statements

For the period ended February 28, 2019

(unaudited)

 

 

7. Related Party Transactions

 

(a) As at February 28, 2019, the Company owed $176,188 (November 30, 2018 - $203,688) to a company controlled by a significant shareholder of the Company to fund payment of operating expenditures. During the period ended February 28, 2019, the Company repaid $27,500 of financing. The amount owed is unsecured, non-interest bearing, and due on demand.

 

(b) As at February 28, 2019, the Company owed $52,000 (November 30, 2018 - $43,000) to a significant shareholder of the Company, which has been recorded in accounts payable and accrued liabilities - related parties. The amount owed is unsecured, non-interest bearing, and due on demand. During the period ended February 28, 2019, the Company incurred $16,397 (February 28, 2018 - $9,000) of consulting expense relating to services provided to the Company.

 

(c) As at February 28, 2019, the Company owed $2,064 (November 30, 2018 - $2,064) to a significant shareholder of the Company. The amount is unsecured, bears interest at 3% per annum, and due 180 days from the date of issuance. As at February 28, 2019, accrued interest of $144 (November 30, 2018 - $129) has been included in accounts payable and accrued liabilities, related parties.

 

(d) As at February 28, 2019, the Company owed $3,500 (November 30, 2018 - $3,500) to a company controlled by a significant shareholder of the Company. The amount owed is unsecured, non-interest bearing, and due on demand.

 

(e) As at February 28, 2019, the Company owed $nil (November 30, 2018 - $6,560) to the Chief Executive Officer of the Company. During the period ended February 28, 2019, the Company incurred $89,137 (February 28, 2018 - $7,397) of compensation costs.

 

(f) As at February 28, 2019, the Company prepaid $27,000 (November 30, 2018 - $27,000) of prepaid rent to a shareholder that holds 49% interest of Gala California. The amounts owed are unsecured, non-interest bearing, and due on demand.

 

8. Loans Payable

 

a) On April 22, 2016, the Company issued a $22,000 promissory note to an unrelated party. Under the terms of the note, the amount due is unsecured, bears interest at 3% per annum, and is due 180 days from the date of issuance. As at February 28, 2019, the outstanding balance of the promissory note was $22,000 (November 30, 2018 - $22,000).

 

b) On June 3, 2016, the Company issued a $20,000 promissory note to an unrelated party. Under the terms of the note, the amount due is unsecured, bears interest at 3% per annum, and is due 180 days from the date of issuance. As at February 28, 2019, the outstanding balance of the promissory note was $20,000 (November 30, 2018 - $20,000).

 

 

9. Common Shares

 

(a) On December 31, 2018, the Company issued 2,000,000 common shares with a fair value of $39,000 for services, including 1,500,000 common shares to a director of the Company as director’s fees.

 

(b) On January 8, 2019, the Company issued 1,186,310 common shares with a fair value of $26,099 to settle convertible debentures of $20,000 and derivative liability of $22,932 resulting in a gain on settlement of debt of $16,833.

 

 

 

  15  

 

 

GALA PHARMACEUTICAL INC.

Notes to the Condensed Consolidated Financial Statements

For the period ended February 28, 2019

(unaudited)

 

10. Share Purchase Warrants

 

During the period ended February 28, 2019, the Company issued 10,000 share purchase warrants as part of the issuance of convertible debentures. The fair value of the share purchase warrants was $190, calculated using the Black-Scholes option pricing model assuming no expected dividends, volatility of 380%, expected life of 7 years, and a risk free rate of 2.89%.

 

    Number of
warrants
    Weighted average
exercise price
$
 
             
Balance, November 30, 2018     60,000       0.01  
Issued     10,000       0.01  
                 
Balance, February 28, 2019     70,000       0.01  

 

11. Supplemental Disclosures

 

    Three months ended
February 28,
2019
$
    Three months ended
February 28,
2018
$
 
Non-cash investing and financing activities:                
                 
Common shares issued for consulting services – related party           200,000  
Common shares issued to settle third party debt     13,726       198,557  
Common shares issued for prepaid services           335,000  
Convertible note accrued interest converted to common stock     6,274       32,836  
Expenses paid by related parties that increased related party debt           87,163  
Original issue discount     10,000        
Warrants issued with debt     190        
                 
Supplemental disclosures:                
                 
Interest paid            
Income tax paid            

 

12. Commitments and Contingencies

 

(a) On May 1, 2018, Gala California, a 51% owned subsidiary of the Company, entered into a lease agreement with an individual who holds a 49% interest in Gala California to lease a commercial building in Long Beach, California. Under the terms of the lease agreement, the Company is committed to the following minimum lease payments:

 

Fiscal year ended   $  
       
November 30, 2019     83,250  
November 30, 2020     114,941  
November 30, 2021     119,538  
November 30, 2022     124,320  
November 30, 2023     52,644  
         
Total minimum lease payments     494,693  

 

(b) In April 2019, the Company finalized a settlement agreement with the consultant and the Company has accrued $64,000 as part of the settlement amount as at February 28, 2019 and November 30, 2018.

 

 

 

  16  

 

 

GALA PHARMACEUTICAL INC.

Notes to the Condensed Consolidated Financial Statements

For the period ended February 28, 2019

(unaudited)

 

 

13. Subsequent Events

 

In accordance with ASC 855, Subsequent Events, the Company has evaluated subsequent events through to the date of issuance of the financial statements, and did not have any material recognizable subsequent events after February 28, 2019 with the exception of the following:

 

  (a) On March 19, 2019, the Company issued 1,500,000 common shares for proceeds of $75,000.
  (b) On March 19, 2019, the Company issued 1,000,000 common shares for consulting services to a non-related party.
  (c) On March 19, 2019, the Company issued 1,725,000 common shares for the conversion of $1,725 of a loan payable.
  (d) On April 1, 2019 the Company issued 1,500,000 common shares for consulting services to a non-related party.
  (e) On April 5, 2019, the Company issued 2,500,000 common shares for consulting services to a non-related party.
  (f) On April 11, 2019 the Company issued 2,750,000 common shares for a partial settlement of a lawsuit to non-related parties.
  (g) On April 12, 2019 the Company issued 1,500,000 common shares for consulting services to a non-related party.

 

 

 

 

 

 

 

 

 

  17  

 

 

ITEM 2     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Safe Harbor Statement

 

This report on Form 10-Q contains certain forward-looking statements.  All statements other than statements of historical fact are “forward-looking statements” for purposes of these provisions, including any projections of earnings, revenues, or other financial items; any statements of the plans, strategies, and objectives of management for future operation; any statements concerning proposed new products, services, or developments; any statements regarding future economic conditions or performance; statements of belief; and any statement of assumptions underlying any of the foregoing. Such forward-looking statements are subject to inherent risks and uncertainties, and actual results could differ materially from those anticipated by the forward-looking statements.

 

These forward-looking statements involve significant risks and uncertainties, including, but not limited to, the following: competition, promotional costs, and risk of declining revenues.  Our actual results could differ materially from those anticipated in such forward-looking statements as a result of a number of factors.  These forward-looking statements are made as of the date of this filing, and we assume no obligation to update such forward-looking statements.  The following discusses our financial condition and results of operations based upon our financial statements which have been prepared in conformity with accounting principles generally accepted in the United States.  It should be read in conjunction with our financial statements and the notes thereto included elsewhere herein.

 

The following discussion should be read in conjunction with our financial statements, including the notes thereto, appearing elsewhere in this Form 10-Q. The discussions of results, causes and trends should not be construed to imply any conclusion that these results or trends will necessarily continue into the future.

 

BUSINESS

 

Gala Pharmaceutical Inc. (the “Company”)(“GPI”) was incorporated in the State of Nevada on March 10, 2010. The Company was originally formed to provide garment tailoring and alteration services.

 

The Company then expanded into the Hemp and Cannabidiol (“CBD”) industry. The expansion focused on the development, research, and commercialization of products derived from the Hemp and Cannabis Plant. At the time GPI was also seeking acquisition candidates in this area of interest in the nutraceutical and pharmaceutical industries.

 

Gala Pharmaceutical Inc. then hired industry-leading experts in the field of Genomics to utilize their expertise to improve crop yields by utilizing advanced breeding and molecular technologies. The company intended to use proprietary equipment and techniques to ensure the genetic fingerprint of each plant is identical and is cultivated in a controlled environment significantly reducing the variability of each plants yield. It is anticipated that Gala Pharmaceuticals Inc., may at some point provide oversight for the development of fully cGMP production of Active Pharmaceutical Ingredients (API) for use in forecasted clinical trials supporting the safety and efficacy of the various plant extracts.

 

The Company currently has been approved by the City of Long Beach to build a testing Cannabis Lab and the Lab build-out is scheduled to be completed on May 20, 2019. The company intends to provide Testing or Analytical Chemistry tools for chemical, plant, soil, and liquid.

 

The Company also will provide genetic “fingerprinting” and “sequencing” of various crop species. This Fingerprinting allows for storing genetic fingerprint information into a proprietary database. Customers can access genetic fingerprint data which can be used for predictive breeding applications and for protecting intellectual property (IP).

 

RESULTS OF OPERATIONS

 

Working Capital

 

    February 28,
2019
$
    November 30,
2018
$
 
Current Assets     243,493       226,998  
Current Liabilities     (1,633,091 )     (1,120,864 )
Working Capital (Deficit)     (1,389,598 )     (893,866 )

  

 

 

 

  18  

 

 

Cash Flows

 

    Three months ended
February 28, 2019
$
    Three months ended
February 28, 2018
$
 
Cash Flows from (used in) Operating Activities     (107,702 )     (82,599 )
Cash Flows from (used in) Investing Activities     (6,703 ))      
Cash Flows from (used in) Financing Activities     177,500       75,000  
Net Increase (decrease) in Cash During Period     63,095       (7,599 )

  

Operating Expenses

 

Three Months Ended February 28, 2019 and 2018

 

During the three months ended February 28, 2019, the Company incurred operating expenses of $230,663 compared to operating expenses of $548,228 during the three months ended February 28, 2018. The decrease in operating expense was due to a $290,700 decrease in consulting expenses including a $231,055 decrease to related parties for consulting services. The Company also had a decrease in general and administrative expenses of $41,715 including $44,118 to related party expenses offset by an increase in other general and administrative expenses of $2,403 from prior year. Rent expense increased $14,865 due to the costs incurred on the Gala California office lease in fiscal 2019 that was not applicable in the first quarter of fiscal 2018.

 

The Company incurred a net loss of $577,172 during the three months ended February 28, 2019 compared to a net loss of $583,242 during the three months ended February 28, 2018. In addition to operating expenses, the Company recorded a loss of $353,949 for the change in fair value of the derivative liabilities relating to the beneficial conversion feature of the conversion option in the outstanding convertible note, as well as interest expense of $27,007 for interest incurred on the Company’s debts. Furthermore, the Company recorded a gain of $16,833 relating to the settlement of conversion of outstanding convertible debt during the period. For the three months ended February 28, 2018, the Company recorded a loss of $111,519 for the change in fair value of the derivative liabilities relating to the beneficial conversion feature of the conversion option in the outstanding convertible note, as well as interest expense of $18,238 for interest incurred on the Company’s debts. Furthermore, the Company recorded a gain of $94,743 relating to the settlement of conversion of outstanding convertible debt during the period.

 

Net Loss

 

During the three months ended February 28, 2019, the Company incurred a net loss of $577,172 or $0.01 loss per share compared to a net loss of $583,242 and loss per share of $0.01 during the three months ended February 28, 2018. The increase in the net loss and loss per share amounts were due to greater expenditures relating to the fair value of share-based compensation that was issued during the current period.

 

Liquidity and Capital Resources

 

As of February 28, 2019, the Company has working capital deficit of $1,389,598 and an accumulated deficit of $5,654,618 compared to a working capital deficit of $893,866 and an accumulated deficit of $5,077,446 as at November 30, 2018. The decrease in working capital deficit was due to the settlement of outstanding convertible notes with the issuance of common shares, which also led to a decrease in the derivative liability balance outstanding at February 28, 2019. Furthermore, the Company issued common shares to management and consultants of the Company which was recorded as prepaid expense as the fair value of the common shares issued were for services over a period of 12 months from the date of the agreements.

 

 

 

  19  

 

 

During the three months ended February 28, 2019, the Company issued the following common shares:

 

(a) On December 6, 2018, the Company issued 500,000 common shares to a non-related party for previous issuances of 500,000 common shares at $0.10 per share which was revalued to $0.05 per share.

 

(b) On December 31, 2018, the Company issued 1,500,000 common shares with a fair value of $39,000 to a director of the Company as directors fees.

 

(c) On January 8, 2019, the Company issued 1,186,310 common shares with a fair value of $26,099 to settle convertible debentures of $20,000 and derivative liability of $22,932 resulting in a gain on settlement of debt of $16,833.

 

Cash flow from Operating Activities

 

During the three months ended February 28, 2019, the Company used cash of $107,702 for operating activities compared to $82,599 during the three months ended February 28, 2018. The increase in the cash used for operating activities was due to higher operating expenditures compared to the prior year.

 

Cash flow from Investing Activities

 

During the three months ended February 28, 2019 there were $6,703 in leasehold improvements in 2019 and $nil in 2018

  

Cash flow from Financing Activities

 

During the three months ended February 28, 2019, the Company received $177,500 of proceeds from financing activities comprised of $205,000 net proceeds from the issuance of two convertible notes offset by repayment of $27,500 to related parties compared to proceeds received of $75,000 from related parties during the three months ended February 28, 2018.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

Subsequent Events

 

  (a)  On March 19, 2019, the Company issued 1,500,000 common shares for proceeds of $75,000.
     
  (b) On March 19, 2019, the Company issued 1,000,000 common shares for consulting services to a non-related party.
     
  (c) On March 19, 2019, the Company issued 1,725,000 common shares for the conversion of $1,725 of a loan payable.
     
  (d) On April 1, 2019 the Company issued 1,500,000 common shares for consulting services to a non-related party.
     
  (e) On April 5, 2019, the Company issued 2,500,000 common shares for consulting services to a non-related party.
     
  (f) On April 11, 2019 the Company issued 2,750,000 common shares for a partial settlement of a lawsuit to non-related parties.
     
  (g) On April 12, 2019 the Company issued 1,500,000 common shares for consulting services to a non-related party.

 

 

 

  20  

 

 

Going Concern

 

The continuation of the Company as a going concern is dependent upon the continued financial support from its management, and its ability to identify future investment opportunities and obtain the necessary debt or equity financing, and generating profitable operations from the Company’s future operations. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

Future Financings

 

We will continue to rely on equity sales of our common shares in order to continue to fund our business operations. Issuances of additional shares will result in dilution to existing stockholders. There is no assurance that we will achieve any additional sales of the equity securities or arrange for debt or other financing to fund planned acquisitions and activities.

 

Critical Accounting Policies

 

Our financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

 

We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. A complete summary of these policies is included in note (1) of the notes to our financial statements. In general, management's estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes for the reporting period. Significant areas requiring the use of management estimates relate to the valuation of its mineral leases and claims and our ability to obtain final government permission to complete the project.

 

Stock-Based Compensation

 

The Company records stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation , using the fair value method. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. Equity instruments issued to employees and the cost of the services received as consideration are measured and recognized based on the fair value of the equity instruments issued.

 

Derivative Liability

 

From time to time, the Company may issue equity instruments that may contain an embedded derivative instrument which may result in a derivative liability. A derivative liability exists on the date the equity instrument is issued when there is a contingent exercise provision. The derivative liability is records at is fair value calculated by using an option pricing model such as a multi-nominal lattice model. The fair value of the derivative liability is then calculated on each balance sheet date with the corresponding gains and losses recorded in the consolidated statement of operations.

 

 

 

  21  

 

 

Beneficial Conversion Features

 

From time to time, the Company may issue convertible notes that may contain an embedded beneficial conversion feature. A beneficial conversion feature exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the remaining unallocated proceeds of the note after first considering the allocation of a portion of the note proceeds to the fair value of the warrants, if related warrants have been granted. The intrinsic value of the beneficial conversion feature is recorded as a debt discount with a corresponding amount to additional paid in capital. The debt discount is amortized to interest expense over the life of the note using the effective interest method.

 

Recently Issued Accounting Pronouncements

 

The Company has reviewed all the recently issued, but not yet effective, accounting pronouncements and does not believe that the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations as reported in its financial statements.

 

Contractual Obligations

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

ITEM 3.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

  

ITEM 4.     CONTROLS AND PROCEDURES

 

(a) Evaluation of disclosure controls and procedures. Our Chief Executive Officer and Principal Financial Officer, after evaluating the effectiveness of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q (the "Evaluation Date"), concluded that as of the Evaluation Date, our disclosure controls and procedures were not effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.

 

(b) Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting during our most recent fiscal quarter that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on the Effectiveness of Internal Controls

 

Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity's disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors or mistakes or intentional circumvention of the established process.

 

Management's Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Securities Exchange Act of 1934 Rule 13a-15(f). Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (" 2013 COSO Framework ").

 

 

 

  22  

 

 

A material weakness is a deficiency or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

 

Our management concluded we have a material weakness due to lack of segregation of duties and accounting for complex debt and equity transactions. Our size has prevented us from being able to employ sufficient resources to enable us to have an adequate level of supervision and segregation of duties within our internal control system. There is mainly one person involved in processing of transactions. Therefore, it is difficult to effectively segregate accounting duties. We have hired an additional administrative person and retained an outside professional firm to assist in the separation of duties on an ongoing basis. The use of the outside firm has proven successful in assisting in the separation of duties. During the year the Company had several audit adjustments related to accounting for complex debt and equity that were deemed material. Management did not have sufficient experience to review these complex debt and equity transactions. As such, we believe this deficiency to have been a material weakness.

 

However, additional people are not needed to do the administrative work therefore segregation of duties will continue to be an ongoing weakness.

 

Based on this evaluation and because of the material weaknesses, management has concluded that our internal control over financial reporting was not effective as of February 28, 2019.

 

This quarterly report does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's independent registered public accounting firm pursuant to rules of the SEC that permit the company to provide only management's report on internal control in this quarterly report.

 

 

 

 

 

 

 

 

 

  23  

 

 

PART II – OTHER INFORMATION

 

ITEM 1.     LEGAL PROCEEDINGS

 

As of February 28, 2019, the Company is subject of a civil action relating to a former consultant for a breach of contract. In April 2019, the Company anticipates a settlement agreement of this action. The Company had accrued $64,000 as part of the settlement amount at November 30, 2018

 

ITEM 2.      UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS SECURITIES

 

For the three months ended February 28, 2019, there were the following equity transactions.

 

(a)       On December 5, 2018, the Company issued 500,000 common shares for proceeds of $25,000

 

(b)       On December 31, 2018, the Company issued 1,500,000 common shares for consulting services to a director of the company

 

(c)       On January 7, 2019, the Company issued 1,186,310 common shares for the conversion of $20,000 of loan payable

 

(d)       On February 5, 2019, the Company entered into a convertible note agreement for $5,000. The note is unsecured, bears interest at 12% per annum, and is due on February 5, 2020. The note is convertible into common shares at the lower of: (i) $0.04 per share; or (ii) 50% of the lowest three trading prices in the twenty day trading period leading up to the date of conversion. In addition, the Company granted 10,000 share purchase warrants to the note holder with an exercise price of $0.01 per share until February 5, 2026

 

(e)       On February 8, 2019, the Company entered into a convertible note agreement for $210,000. The note is unsecured, bears interest at 8% per annum, and is due on January 30, 2020. The note is convertible into common shares at 62% of the average two lowest trading prices in the twenty trading days leading up to the date of conversion

 

ITEM 3.      DEFAULTS UPON SENIOR SECURITIES  

  

None noted

  

ITEM 4.     MINE SAFETY DISCLOSURES

 

Not applicable to our Company.

 

ITEM 5.      OTHER INFORMATION

 

None noted

 

ITEM 6.     EXHIBITS

 

Exhibit

Number

Exhibit

Description

31.1 Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14 or 15d-14 of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema
101.CAL XBRL Taxonomy Extension Calculation Linkbase
101.LAB XBRL Taxonomy Extension Label Linkbase
101.PRE XBRL Taxonomy Extension Presentation Linkbase
101.DEF XBRL Taxonomy Extension Definition Linkbase

 

 

 

 

 

  24  

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on our behalf by the undersigned thereunto duly authorized.

 

  GALA PHARMACEUTICAL INC.
    (REGISTRANT)
   
Date:  April 29, 2019 /s/   Maqsood Rehman
    Maqsood Rehman
    Chief Executive Officer
    (Authorized Officer for Registrant)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  25  

 

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