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Gala Pharmaceutical
10-Q 2019-05-31 Quarter: 2019-05-31
10-Q 2019-02-28 Quarter: 2019-02-28
10-K 2018-11-30 Annual: 2018-11-30
10-Q 2018-08-31 Quarter: 2018-08-31
10-Q 2018-05-31 Quarter: 2018-05-31
10-Q 2018-02-28 Quarter: 2018-02-28
10-K 2017-11-30 Annual: 2017-11-30
10-Q 2017-08-31 Quarter: 2017-08-31
10-Q 2017-05-31 Quarter: 2017-05-31
10-Q 2017-02-28 Quarter: 2017-02-28
10-K 2016-11-30 Annual: 2016-11-30
10-Q 2016-08-31 Quarter: 2016-08-31
10-Q 2016-05-31 Quarter: 2016-05-31
10-Q 2016-02-29 Quarter: 2016-02-29
10-K 2015-11-30 Annual: 2015-11-30
10-Q 2015-08-31 Quarter: 2015-08-31
10-Q 2015-05-31 Quarter: 2015-05-31
10-Q 2015-02-28 Quarter: 2015-02-28
10-K 2014-11-30 Annual: 2014-11-30
10-Q 2014-08-31 Quarter: 2014-08-31
10-Q 2014-05-31 Quarter: 2014-05-31
10-Q 2014-02-28 Quarter: 2014-02-28
10-K 2013-11-30 Annual: 2013-11-30
8-K 2019-03-19 Other Events
8-K 2019-01-10 Accountant, Exhibits
8-K 2019-01-02 Officers
8-K 2018-11-30 Officers, Exhibits
8-K 2018-09-26 Officers, Exhibits
8-K 2018-07-09 Other Events, Exhibits
8-K 2018-06-20 Other Events, Exhibits
8-K 2018-01-10 Officers, Amend Bylaw, Exhibits
LEVI Levi Strauss 6,521
FRHC Freedom Holding 718
QPWR Q2Earth 3
EVIO EVIO 0
ADFK Admiral Financial 0
SBFM Sunshine Biopharma 0
C130 Ministry Partners Investment Company 0
MSCD Morgan Stanley Smith Barney Charter Aspect 0
SHEPH Shepherd's Finance 0
STSA Satsuma Pharmaceuticals 0
GLAG 2019-05-31
Part I - Financial Information
Item 1 - Financial Statements
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Securities
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 gala_ex3101.htm
EX-32.1 gala_ex3201.htm

Gala Pharmaceutical Earnings 2019-05-31

GLAG 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 gala_10q-053119.htm QUARTERLY REPORT

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 May 31, 2019

 

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

 

For the transition period from _________ to _________

 

Commission File Number: 000-55998

 

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 has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes   þ     No   o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 July 19, 2019, the registrant had 118,022,976 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 25
Item 4. Mine Safety Disclosures 25
Item 5. Other Information 25
Item 6. Exhibits 25
SIGNATURES 26

 

 

 

 

 

 

 

 

 

 

 

 2 
 

 

GALA PHARMACEUTICAL INC.

 

Consolidated Financial Statements

 

For the Six Months Ended May 31, 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

 

   May 31,
2019
$
   November 30,
2018
$
 
   (unaudited)     
ASSETS          
           
Current assets          
           
Cash   37,252    116,198 
Prepaid expenses – related parties   27,000    69,000 
Marketable securities   28,800    41,800 
           
Total current assets   93,052    226,998 
           
Equipment, net of accumulated depreciation   292,552    35,160 
           
Total assets   385,604    262,158 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
           
Current liabilities          
           
Accounts payable and accrued liabilities   85,547    82,275 
Accounts payable and accrued liabilities – related party   82,642    49,761 
Deferred rent   29,096    29,096 
Due to related parties   182,397    203,688 
Loans payable   40,275    42,000 
Loans payable – related parties   5,764    5,764 
Warrant liability   65,884    5,694 
Convertible note, net of discount of $425,060 and $76,903, respectively   275,594    244,477 
Derivative liabilities   2,697,193    458,109 
           
Total liabilities   3,464,392    1,120,864 
           
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: 107,672,976 and 92,011,666 shares, respectively   107,673    92,012 
           
Additional paid-in capital   4,692,859    4,290,722 
Share subscriptions received   7,000     
Deferred compensation   (31,952)   (117,021)
Deficit   (7,767,420)   (5,077,446)
           
Total stockholders’ deficit attributable to Gala Pharmaceutical Inc.   (2,991,339)   (811,233)
Non-controlling interest   (87,448)   (47,473)
           
Total liabilities and stockholders’ deficit   385,604    262,158 

 

 

 

 4 
 

 

GALA PHARMACEUTICAL INC.

Condensed Consolidated Statements of Operations

(unaudited)

 

   Three months ended May 31, 2019
$
   Three months ended May 31, 2018
$
   Six months ended May 31, 2019
$
   Six months ended May 31, 2018
$
 
                 
Revenue       4,675        4,675 
Cost of revenue       3,216        3,216 
                     
Gross Profit       1,459        1,459 
                     
Operating expenses                    
                     
Consulting fees   205,500    135,235    261,190    250,578 
Consulting fees – related party   168,137    101,840    257,274    422,032 
Depreciation   10,810    2,724    13,533    5,454 
General and administrative   76,890    109,068    115,556    145,331 
General and administrative – related party   1,603    24,890    18,000    85,405 
Rent   19,050    10,418    47,100    23,603 
                     
Total operating expense   481,990    384,175    712,653    932,403 
                     
Loss before other income (expense)   (481,990)   (382,716)   (712,653)   (930,944)
                     
Other income (expense)                    
Change in fair value of derivative liabilities   (1,525,067)   329    (1,879,016)   (111,190)
Interest expense   (57,631)   (15,769)   (84,638)   (34,007)
Gain (loss) on settlement of debt   (36,225)       (19,392)   94,743 
Settlement expense   (21,250)       (21,250)    
Unrealized loss on marketable securities   (8,400)       (13,000)    
                     
Total other income (expense)   (1,648,573)   (15,440)   (2,017,296)   (50,454)
                     
Net loss   (2,130,563)   (398,156)   (2,729,949)   (981,398)
Less: loss attributed to non-controlling interest   17,761    4,410    39,975    4,410 
                     
Net loss to Gala Pharmaceutical Inc.   (2,112,802)   (393,746)   (2,689,974)   (976,988)
                     
Net loss per share, basic and diluted   (0.02)   (0.01)   (0.03)   (0.02)
                     
Weighted average common shares outstanding, basic and diluted   103,642,813    53,204,863    98,940,607    46,774,994 

 

 

 

 

 

 

 

 5 
 

 

GALA PHARMACEUTICAL INC.

Condensed Consolidated Statements of Changes in Stockholders’ Deficit

For the period from December 1, 2017 to May 31, 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    365,988                    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 cash           1,500,000    1,500    28,500                    30,000 
                                                   
Shares issued for services           8,500,000    8,500    230,000                    238,500 
                                                   
Shares issued for settlement expense           2,750,000    2,750    82,500                    85,250 
                                                   
Shares issued for conversion of debt             2,911,310    2,911    61,137                    64,048 
                                                   
Share subscriptions received                       7,000                7,000 
                                                   
Deferred compensation                           85,069            85,069 
                                                   
Net loss for the period                               (39,975)   (2,689,974)   (2,729,949)
                                                   
Balance, May 31, 2019   500,000    500    107,672,976    107,673    4,692,859    7,000    (31,952)   (87,448)   (7,767,420)   (3,078,788)

 

 

 

 

 6 
 

 

GALA PHARMACEUTICAL INC.

Condensed Consolidated Statements of Cash Flows

 

   Six months ended
May 31,
2019
$
   Six months ended
May 31,
2018
$
 
         
Operating activities          
           
Net loss for the year   (2,729,949)   (981,398)
           
Adjustments to reconcile net loss to net cash used in operating activities:          
           
Accretion expense   44,843     
Change in fair value of derivative liability   1,879,016    111,190 
Common shares issued for services and compensation – related party   39,000    200,000 
Common shares issued for services   284,568    586,767 
Common shares issued for settlement expenses   85,250     
Depreciation and amortization   13,533    5,454 
Loss (gain) on settlement of debt   19,392    (94,743)
Unrealized loss on marketable securities   13,000     
           
Changes in operating assets and liabilities:          
Prepaid expenses   42,000    (131,631)
Accounts payable and accrued liabilities   9,546    26,902 
Accounts payable and accrued liabilities – related party   32,881    33,867 
Warrant liability   60,190     
           
Net cash used in operating activities   (206,730)   (243,592)
           
Investing activities          
           
Purchase of equipment   (270,925)    
           
Net cash used in investing activities   (270,925)    
           
Financing activities          
Proceeds from related party operating advances   15,209    75,000 
Proceeds from convertible notes   383,000     
Proceeds from share issuances   37,000    200,000 
Repayments to related party   (36,500)    
           
Net cash provided by financing activities   398,709    275,000 
           
Increase (decrease) in cash   (78,946)   31,408 
           
Cash, beginning of period   116,198    7,767 
           
Cash, end of period   37,252    39,175 

 

Supplemental disclosures (Note 11)

                 

 

 

 

 7 
 

 

GALA PHARMACEUTICAL INC.

Notes to the Condensed Consolidated Financial Statements

For the period ended May 31, 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 May 31, 2019, the Company has a working capital deficit of $3,371,340 and an accumulated deficit of $7,767,420. 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 condensed 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 condensed 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 condensed 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.

 

  (c) Interim Financial Statements

 

The accompanying unaudited condensed 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 and six months ended May 31, 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 condensed consolidated 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.

 

 

 

 

 8 
 

 

GALA PHARMACEUTICAL INC.

Notes to the Condensed Consolidated Financial Statements

For the period ended May 31, 2019

(unaudited)

 

 

2.Summary of Significant Accounting Policies (continued)

 

(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.

 

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.

 

 

 

 

 9 
 

 

GALA PHARMACEUTICAL INC.

Notes to the Condensed Consolidated Financial Statements

For the period ended May 31, 2019

(unaudited)

 

 

2.Summary of Significant Accounting Policies (continued)

 

  (e) Financial Instruments (continued)

 

The following table represents assets and liabilities that are measured and recognized in fair value as of May 31, 2019, on a recurring basis:

 

   Level 1
$
   Level 2
$
   Level 3
$
   Total gains and (losses) 
                 
Marketable securities   28,800            (13,000)
Warrant liability           (65,884)    
Derivative liabilities           (2,697,193)   (1,879,016)
                     
Total   28,800        (2,763,077)   (1,892,016)

 

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           (5,694)    
Derivative liabilities           (458,109)   (257,861)
                     
Total   41,800        (463,803)   (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 May 31, 2019 and November 30, 2018. As at May 31, 2019, the Company had 102,042,669 (November 30, 2018 – 12,354,104) potentially issuable shares from outstanding convertible notes and share purchase warrants.

 

(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.

 

 

 

 

 

 10 
 

 

GALA PHARMACEUTICAL INC.

Notes to the Condensed Consolidated Financial Statements

For the period ended May 31, 2019

(unaudited)

 

 

2.Summary of Significant Accounting Policies (continued)

 

  (g) Recently Adopted Accounting Pronouncements (continued)

 

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.

 

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 six months ended May 31, 2019, the Company recorded $85,069 (May 31, 2018 - $164,767) of compensation expense and the remaining $31,952 (November 30, 2018 - $117,021) was recorded as deferred compensation within shareholders’ equity.

 

 

 

 

 11 
 

 

GALA PHARMACEUTICAL INC.

Notes to the Condensed Consolidated Financial Statements

For the period ended May 31, 2019

(unaudited)

 

 

4.Equipment

 

   Cost
$
   Accumulated amortization
$
   May 31,
2019
$
   November 30,
2018
$
 
                 
Machinery   74,089    (22,073)   52,016    35,160 
Leasehold improvements   248,285    (7,749)   240,536     
                     
    322,374    (29,822)   292,552    35,160 

 

During the three months ended May 31, 2019, the Company recorded $10,810 (May 31, 2018 - $2,724) of depreciation expense. During the six months ended May 31, 2019, the Company recorded $13,533 (May 31, 2018 - $5,454) 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 May 31, 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 May 31, 2019, the carrying value of the convertible debenture was $227,654 (November 30, 2018 - $241,380).

 

(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 May 31, 2019, the carrying value of the convertible debenture was $15,000 (November 30, 2018 - $1,675) and the unamortized discount on the convertible debenture was $nil (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.

 

 

 

 

 12 
 

 

GALA PHARMACEUTICAL INC.

Notes to the Condensed Consolidated Financial Statements

For the period ended May 31, 2019

(unaudited)

 

 

5.Convertible Debentures (continued)

 

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 May 31, 2019, the carrying value of the convertible debenture was $15,000 (November 30, 2018 - $1,089) and the unamortized discount on the convertible debenture was $nil (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 $50,000. As at May 31, 2019, the carrying value of the convertible debenture was $7,626 (November 30, 2018 - $333) and the unamortized discount on the convertible debenture was $42,374 (November 30, 2018 - $49,667).

 

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 May 31, 2019, the carrying value of the convertible debenture was $8,158 (November 30, 2018 - $nil) and the unamortized discount on the convertible debenture was $201,842 (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 May 31, 2019, the carrying value of the convertible debenture was $209 (November 30, 2018 - $nil) and the unamortized discount on the convertible debenture was $4,791 (November 30, 2018 - $nil).

 

g)On April 22, 2019, the Company issued a callable secured convertible note for $120,000. Under the terms of the note, the amount owing is unsecured, bears interest at 12% per annum, and is due on April 22, 2020. The note is also convertible into common shares of the Company at 50% of the lowest trading price during the 25 trading days prior to the date of conversion. Upon default of the note, the interest rate will increase to 24% 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 $120,000 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 $120,000. As at May 31, 2019, the carrying value of the convertible debenture was $1,560 (November 30, 2018 - $nil) and the unamortized discount on the convertible debenture was $118,440 (November 30, 2018 - $nil).

 

 

 

 

 13 
 

 

GALA PHARMACEUTICAL INC.

Notes to the Condensed Consolidated Financial Statements

For the period ended May 31, 2019

(unaudited)

 

 

5.Convertible Debentures (continued)

 

h)On May 7, 2019, the Company issued a callable secured convertible note for $58,000. Under the terms of the note, the amount owing is unsecured, bears interest at 10% per annum, and is due on May 7, 2020. The note is also convertible into common shares of the Company at 61% of the lowest trading price during the 15 trading days prior to the date of conversion. Upon default of the note, the interest rate will increase to 22% 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 $58,000 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 $58,000. As at May 31, 2019, the carrying value of the convertible debenture was $387 (November 30, 2018 - $nil) and the unamortized discount on the convertible debenture was $57,613 (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 May 31, 2019, the Company recorded a loss on the change in fair value of the derivative liability of $1,879,016 (May 31, 2018 - $111,190). As at May 31, 2019, the Company had a derivative liability of $2,697,193 (November 30, 2018 - $458,109).

 

The following inputs and assumptions were used to value the derivative liabilities outstanding during the periods ended May 31, 2019 and November 30, 2018, assuming no dividend yield:

 

   May 31,
2019
   November 30,
2018
 
         
Expected volatility   436%    485% 
Risk free rate   2.49%    2.52% 
Expected life (in years)   0.8    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   383,000 
Adjustment for conversion   (22,932)
Mark to market adjustment   1,879,016 
      
Balance, May 31, 2019   2,697,193 

 

7.Related Party Transactions

 

(a)As at May 31, 2019, the Company owed $182,397 (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 May 31, 2019, the Company repaid $36,500 of financing and received $15,209. The amount owed is unsecured, non-interest bearing, and due on demand.

 

(b)As at May 31, 2019, the Company owed $61,000 (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 May 31, 2019, the Company incurred $18,000 (May 31, 2018 - $18,000) of consulting expense relating to services provided to the Company.

 

(c)As at May 31, 2019, the Company owed $5,625 (November 30, 2018 - $5,625) to an officer of the Company, which has been recorded in accounts payable and accrued liabilities – related parties. The amount owing is unsecured, non-interest bearing, and due on demand.

 

 

 

 

 14 
 

 

GALA PHARMACEUTICAL INC.

Notes to the Condensed Consolidated Financial Statements

For the period ended May 31, 2019

(unaudited)

 

 

7.Related Party Transactions (continued)

 

(d)As at May 31, 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 May 31, 2019, accrued interest of $160 (November 30, 2018 - $129) has been included in accounts payable and accrued liabilities, related parties.

 

(e)As at May 31, 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.

 

(f)As at May 31, 2019, the Company owed $nil (November 30, 2018 - $6,560) to the Chief Executive Officer of the Company. During the period ended May 31, 2019, the Company incurred $163,479 (May 31, 2018 - $317,430) of compensation costs.

 

(g)As at May 31, 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. During the period ended May 31, 2019, the Company paid $45,000 (May 31, 2018 - $nil) of rent to the shareholder.

 

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. In March 2019, the Company issued 1,725,000 at $0.001 per share to settle $1,725 of promissory note. As at May 31, 2019, the outstanding balance of the promissory note was $20,275 (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 May 31, 2019, the outstanding balance of the promissory note was $20,000 (November 30, 2018 - $20,000).

 

9.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.

 

(d)On March 19, 2019, the Company issued 1,725,000 common shares with a fair value of $37,950 to settle outstanding loans payable of $1,725 resulting in a loss on settlement of debt of $36,225. Refer to Note 8(a).

 

(e)On March 19, 2019, the Company issued 1,000,000 common shares with a fair value of $22,000 for consulting services.

 

(f)On March 19, 2019, the Company issued 1,500,000 common shares at $0.02 per share for proceeds of $30,000.

 

(g)On April 1, 2019, the Company issued 3,000,000 common shares with a fair value of $75,000 for consulting services.

 

(h)On April 5, 2019, the Company issued 2,500,000 common shares with a fair value of $77,500 for consulting services.

 

(i)On April 7, 2019, the Company issued 2,750,000 common shares with a fair value of $85,250 for settlement expenses with respect to outstanding litigation against the Company.

 

 

 

 

 

 15 
 

 

GALA PHARMACEUTICAL INC.

Notes to the Condensed Consolidated Financial Statements

For the period ended May 31, 2019

(unaudited)

 

 

10.Share Purchase Warrants

 

In February 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%.

 

In April 2019, the Company issued 2,000,000 share purchase warrants as part of the issuance of convertible debentures. The fair value of the share purchase warrants was $60,000, calculated using the Black-Scholes option pricing model assuming no expected dividends, volatility of 411%, expected life of 5 years, and a risk free rate of 2.30%.

 

   Number of
warrants
   Weighted average exercise price
$
 
         
Balance, November 30, 2018   160,000    0.01 
Issued   2,010,000    0.03 
           
Balance, May 31, 2019   2,170,000    0.03 

 

11.Supplemental Disclosures

 

   Six months ended
May 31,
2019
$
   Six months ended
May 31,
2018
$
 
Non-cash investing and financing activities:          
           
Common shares issued to settle third party debt   15,451    198,557 
Common shares issued for deferred compensation       60,000 
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   60,190     
           
Supplemental disclosures:          
           
Interest paid        
Income tax paid        

 

 

 

 

 16 
 

 

GALA PHARMACEUTICAL INC.

Notes to the Condensed Consolidated Financial Statements

For the period ended May 31, 2019

(unaudited)

 

 

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   65,160 
November 30, 2020   114,941 
November 30, 2021   119,538 
November 30, 2022   124,320 
November 30, 2023   52,644 
      
Total minimum lease payments   476,603 

 

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 May 31, 2019 with the exception of the following:

 

(a)On June 24, 2019, the Company issued 350,000 common shares to a non-related party for proceeds of $7,000, which was previously received as at May 31, 2019.

 

(b)On June 24, 2019, the Company issued 10,000,000 common shares pursuant to a revised stock purchase agreement adjusting the stock purchase price to $0.01 per share.

 

(c)On June 27, 2019, the Company issued a callable secured convertible note for $38,000. Under the terms of the note, the amount owing is unsecured, bears interest at 10% per annum, and is due on May 7, 2020. The note is also convertible into common shares of the Company at 61% of the lowest trading price during the 15 trading days prior to the date of conversion. Upon default of the note, the interest rate will increase to 22% per annum.

 

 

 

 

 

 

 

 

 

 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.

 

RESULTS OF OPERATIONS

 

Working Capital

 

   May 31,
2019
$
   November 30,
2018
$
 
Current Assets   93,052    226,998 
Current Liabilities   (3,464,392)   (1,120,864)
Working Capital (Deficit)   (3,371,340)   (893,866)

  

Cash Flows

 

   Six months ended May 31, 2019
$
   Six months ended May 31, 2017
$
 
Cash Flows from (used in) Operating Activities   (206,730)   (243,592)
Cash Flows from (used in) Investing Activities   (270,925)    
Cash Flows from (used in) Financing Activities   398,709    275,000 
Net Increase (decrease) in Cash During Period   (78,946)   31,408 

 

 

Revenues

 

During the three and six months ended May 31, 2019, the Company earned $nil revenues compared to revenues of $4,675 from the sale of parts and equipment with a cost of sales of $3,216 for the three and six months ended May 31, 2018.

 

 

 

 

 18 
 

 

Operating Expenses

 

Three Months Ended May 31, 2019 and 2018

 

During the three months ended May 31, 2019, the Company incurred operating expenses of $481,990 compared to operating expenses of $384,175 during the three months ended May 31, 2018. The increase in operating expenses was due to an increase of $136,562 of consulting expenses as the Company incurred more consulting costs due to an increase in its lab activities. The increase was offset by a decrease in general and administrative expense of $55,465 as the Company as the Company focused more on consulting costs and less on day-to-day overhead costs.

 

The Company incurred a net loss of $2,112,802 during the three months ended May 31, 2019 compared to a net loss of $393,746 during the three months ended May 31, 2018. In addition to operating expenses, the Company recorded a loss of $1,525,067 for change in the fair value of derivative liabilities due to the fair value of the beneficial conversion feature on the Company’s convertible debentures which fluctuates due to the floating conversion rates. The Company also recorded interest expense of $57,631 during the three months ended May 31, 2019 compared to interest expense of $15,769 during the three months ended May 31, 2018 and the increase was due to an overall increase of convertible notes outstanding during the current period. The Company also recorded a loss on $36,225 for settlement of debt, $21,250 of additional settlement expense relating to the issuance of common shares to settle outstanding litigation claims, and a $8,400 loss on the change in the fair value of the Company’s holdings of Green Gro Technologies.

 

Six Months Ended May 31, 2019 and 2018

 

During the six months ended May 31, 2019, the Company incurred operating expenses of $712,653 compared to operating expenses of $932,403 during the six months ended May 31, 2018. The decrease in operating expenses was due to a decrease of $154,146 of consulting expenses as the Company issued substantially more common shares during the six months ended May 31, 2018 for management and consulting expenses including 5,000,000 common shares issued to the Company’s Chief Executive Officer as a compensation bonus with a fair value of $200,000. The Company also had a decrease in general and administrative expense of $97,180 as the Company preserved available cash flow for the development of its lab activities and less on overhead costs. The decrease was offset by an increase of $23,497 of rent expenses which included rent costs incurred on a new facility for Gala California in preparation for its lab testing activities.

 

The Company incurred a net loss of $2,689,974 during the six months ended May 31, 2019 compared to a net loss of $976,988 during the six months ended May 31, 2018. In addition to operating expenses, the Company recorded interest expense of $84,638, a loss on the change in fair value of derivative liabilities of $1,879,016 relating to the increase in the fair value of the beneficial conversion feature of the Company’s convertible notes payable, a loss on settlement of debt of $19,392, settlement expense of $21,250 relating to the issuance of common shares for the settlement of outstanding litigation against the Company, and an unrealized loss of $13,000 for the fair value of common shares of Green Gro Technologies that is being held by the Company. During the six months ended May 31, 2018, the Company incurred a loss of $111,190 for the change in fair value of the beneficial conversion feature of its convertible notes, $34,007 of interest expense, and a gain on settlement of debt of $94,743. The increase in other expenses was due to a significant increase in the loss on the change in fair value of derivative liabilities due to an increase in the overall convertible notes outstanding which also explains why interest expense was higher in fiscal 2019 compared to fiscal 2018.

 

Net Loss

 

During the six months ended May 31, 2019, the Company incurred a net loss of $2,689,974 or $0.03 loss per share compared to a net loss of $976,988 and a loss per share of $0.02 during the six months ended May 31, 2018. The increase in the net loss and loss per share amounts were due to increases in expenditures and the loss in the change in fair value of derivative liabilities.

 

Liquidity and Capital Resources

 

As of May 31, 2019, the Company has working capital deficit of $3,371,340 and an accumulated deficit of $7,767,420 compared to a working capital deficit of $893,866 and an accumulated deficit of $5,077,446 as at November 30, 2018. The increase in working capital deficit was due to an increase of $2,239,084 in the derivative liability due to an increase in the volatility of the Company’s common shares and an increase in the face value of convertible notes outstanding. Furthermore, the Company had a decrease of $78,946 of cash as the Company used cash for operating and investing activities at a greater rate than the amounts that were funded by financing activities during the period.

 

 

 

 

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During the six months ended May 31, 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 director’s 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.

 

(d)On March 19, 2019, the Company issued 1,500,000 common shares for proceeds of $30,000.

 

(e)On March 19, 2019, the Company issued 1,725,000 common shares with a fair value of $37,950 for the conversion of $1,725 of outstanding loans payable.

 

(f)On March 19, 2019, the Company issued 1,000,000 common shares with a fair value of $22,000 for services.

 

(g)On April 1, 2019, the Company issued 3,000,000 common shares with a fair value of $75,000 for services.

 

(h)On April 5, 2019, the Company issued 2,500,000 common shares with a fair value of $77,500 for services.

 

(i)On April 7, 2019, the Company issued 2,750,000 common shares with a fair value of $85,250 for the settlement of outstanding litigation against the Company.

 

Cash flow from Operating Activities

 

During the six months ended May 31, 2019, the Company used cash of $206,730 for operating activities compared to $243,592 during the six months ended May 31, 2018. The decrease in the use of cash for operating activities is due to the fact that the Company had lower operating expenses during the current period and allocated some of its limited cash flows for the purchase of equipment which is classified as an investing activity.

 

Cash flow from Investing Activities

 

During the six months ended May 31, 2019, the Company used $270,925 of cash for the purchase of equipment and leasehold improvements. During the six months ended May 31, 2018, the Company did not have any investing activities.

  

Cash flow from Financing Activities

 

During the six months ended May 31, 2019, the Company received $398,709 of cash from financing activities which included $383,000 from the issuance of convertible notes, $37,000 from the issuance of common shares, $15,209 from related parties and offset by repayments of $36,500 to related parties. During the six months ended May 31, 2018, the Company received $275,000 from financing activities, which included $75,000 from related party advances and $200,000 from the issuance of common shares.

 

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.

 

 

 

 

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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 May 31, 2019 with the exception of the following:

 

 (a)On June 24, 2019, the Company issued 350,000 common shares for proceeds of $7,000.
   
(b)On June 24, 2019, the Company issued 10,000,000 common shares pursuant to a revised stock purchase agreement which revised the purchase price to $0.01 per share of common stock.

 

(c)On June 27, 2019, the Company issued a callable secured convertible note for $38,000. Under the terms of the note, the amount owing is unsecured, bears interest at 10% per annum, and is due on May 7, 2020. The note is also convertible into common shares of the Company at 61% of the lowest trading price during the 15 trading days prior to the date of conversion. Upon default of the note, the interest rate will increase to 22% per annum.

 

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.

 

 

 

 

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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.

 

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.

 

 

 

 

 

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(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").

 

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 May 31, 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.

 

 

 

 

 

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PART II – OTHER INFORMATION

 

ITEM 1.     LEGAL PROCEEDINGS

 

As of April 24, 2019, the civil action relating to a former consultant for a breach of contract was dismissed.

 

 

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

 

For the six months ended May 31, 2019, there were the following equity transactions.

 

(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 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 March 19, 2019, the Company issued 1,725,000 common shares with a fair value of $37,950 to settle outstanding loans payable of $1,725 resulting in a loss on settlement of debt of $36,225. Refer to Note 8(a).

 

(e)On March 19, 2019, the Company issued 1,000,000 common shares with a fair value of $22,000 for consulting services.

 

(f)On March 19, 2019, the Company issued 1,500,000 common shares at $0.02 per share for proceeds of $30,000.

 

(g)On April 1, 2019, the Company issued 3,000,000 common shares with a fair value of $75,000 for consulting services.

 

(h)On April 5, 2019, the Company issued 2,500,000 common shares with a fair value of $77,500 for consulting services.

 

(i)On April 7, 2019, the Company issued 2,750,000 common shares with a fair value of $85,250 for settlement expenses with respect to outstanding litigation against the Company.

 

(j)On January 30, 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

 

(k)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.

 

(l)On April 22, 2019, the Company issued a callable secured convertible note for $120,000. Under the terms of the note, the amount owing is unsecured, bears interest at 12% per annum, and is due on April 22, 2020. The note is also convertible into common shares of the Company at 50% of the lowest trading price during the 25 trading days prior to the date of conversion. Upon default of the note, the interest rate will increase to 24% per annum.

 

(m)On May 7, 2019, the Company issued a callable secured convertible note for $58,000. Under the terms of the note, the amount owing is unsecured, bears interest at 10% per annum, and is due on May 7, 2020. The note is also convertible into common shares of the Company at 61% of the lowest trading price during the 15 trading days prior to the date of conversion. Upon default of the note, the interest rate will increase to 22% per annum.

 

 

 

 

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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

 

 

 

 

 

 

 

 

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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:  July 23, 2019 /s/   Maqsood Rehman
    Maqsood Rehman
    Chief Executive Officer
    (Authorized Officer for Registrant)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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