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, 2018

 

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.)

 

2780 South Jones Blvd. #3725

Las Vegas, Nevada 89146

(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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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, 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. (Check one)

 

	Large accelerated filer  o	Accelerated filer  o
	Non-accelerated filer  o	Smaller reporting company  x
	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 May 2, 2018, the registrant had 52,635,116 shares of common stock outstanding.

 

 

 

 

GALA PHARMACEUTICAL INC.

 

Table of Contents

 

 

PART I – FINANCIAL INFORMATION	3
Item 1. Financial Statements (unaudited)	3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3. Quantitative and Qualitative Disclosures About Market Risk	17
Item 4. Controls and Procedures	17
PART II – OTHER INFORMATION	19
Item 1. Legal Proceedings	19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Securities	19
Item 3. Defaults Upon Senior Securities	19
Item 4. Mine Safety Disclosures	19
Item 5. Other Information	19
Item 6. Exhibits	20
SIGNATURES	21

 

 

 

 

 

 

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

 

GALA PHARMACEUTICAL INC.

(formerly Gala Global Inc.)

 

Condensed Consolidated Financial Statements

(unaudited)

 

For the Period Ended February 28, 2018

 

  

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GALA PHARMACEUTICAL INC.

(formerly Gala Global Inc.)

Condensed Consolidated Balance Sheets

 

		February 28, 2018 $				November 30, 2017 $
		(unaudited)
ASSETS
Current assets
Cash			168				7,767
Inventory			2,241				2,241
Prepaid expenses			265,173				41,908
Prepaid expenses – related parties			10,000				10,000
Total current assets			277,582				61,916
Equipment, net of depreciation			43,330				46,060
Total assets			320,912				107,976
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities
Accounts payable and accrued liabilities			41,285				34,556
Accounts payable and accrued liabilities – related party			70,490				61,475
Due to related parties			123,367				48,367
Loans payable			42,000				42,000
Loans payable - related parties			20,764				20,764
Convertible note			266,466				353.629
Derivative liabilities			391,223				453,005
Total liabilities			955,595				1,013,796
Contingency (Note 11)			–				–
STOCKHOLDERS’ DEFICIT
Preferred stock
Authorized: 10,000,000 shares with a par value of $0.001 per share issued and outstanding: 500,000 and 500,000 shares, respectively			500				500
Common stock
Authorized: 500,000,000 shares with a par value of $0.001 per share issued and outstanding: 47,635,116 and 35,701,561 shares, respectively			47,635				35,702
Additional paid-in capital			3,164,024				2,417,400
Common stock issuable			–				25,000
Deferred compensation – related party			(45,031	)			(165,853	)
Accumulated deficit			(3,801,811	)			(3,218,569	)
Total stockholders’ deficit			(634,683	)			(905,820	)
Total liabilities and stockholders’ deficit			320,912				107,976

 

 

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

 

 

 

 

GALA PHARMACEUTICAL INC.

(formerly Gala Global Inc.)

Condensed Consolidated Statements of Operations

(unaudited)

 

		Three months ended February 28, 2018 $				Three months ended February 28, 2017 $
Operating expenses
Consulting fees			115,343				–
Consulting fees – related party			320,192				–
Depreciation			2,730				–
General and administrative			36,263				10,652
General and administrative – related party			60,515				19,000
Rent			13,185				1,050
Total operating expense			548,228				30,702
Loss before other income (expense)			(548,228	)			(30,702	)
Other income (expense)
Change in fair value of derivative liabilities			(111,519	)			–
Interest expense			(18,238	)			(673	)
Gain on settlement of debt			94,743				–
Total other income (expense)			(35,014	)			(673	)
Net loss			(583,242	)			(31,375	)
Net loss per share, basic and diluted			(0.01	)			(0.02	)
Weighted average common shares outstanding			40,202,240				1,369,224

 

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

 

 

 

GALA PHARMACEUTICAL INC.

(formerly Gala Global Inc.)

Consolidated Statements of Cash Flows

(unaudited)

 

		Three months ended February 28, 2018 $				Three months ended February 28, 2017 $
Operating activities
Net loss for the period			(583,242	)			(31,375	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of deferred compensation costs			120,822				–
Amortization of prepaid expense			111,735				–
Change in fair value of derivative liability			111,519				–
Common shares issued for services and compensation – related party			200,000				–
Depreciation			2,730				–
Gain on settlement of debt			(94,743	)			–
Changes in operating assets and liabilities:
Bank overdraft			–				62
Accounts payable and accrued liabilities			39,565				(416	)
Accounts payable and accrued liabilities – related party			9,015				9,088
Net cash used in operating activities			(82,599	)			(22,641	)
Financing activities
Proceeds from related party operating advances			75,000				11,800
Net cash provided by financing activities			75,000				11,800
Increase (decrease) in cash			(7,599	)			(10,841	)
Cash, beginning of period			7,767				10,841
Cash, end of period			168				–
Supplemental disclosures (Note 10)

 

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

 

 

GALA PHARMACEUTICAL INC.

(formerly Gala Global Inc.)

Notes to the Condensed Consolidated Financial Statements

For the Three Months Ended February 28, 2018 and 2017

(unaudited)

 

1.	Organization and Nature of Operations

 

Gala Pharmaceutical Inc. (formerly Gala Global Inc.) (the “Company”) 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. The Company 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 unaudited condensed 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, 2018, the Company has not recorded any revenues, has a working capital deficit of $678,013, and an accumulated deficit of $3,801,811. 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 wholly-owned subsidiaries, Cannabis Ventures Inc. (USA), Cannabis Ventures Inc. (Canada), from the date of their acquisition by the Company effective June 26, 2014 and CBD Life, Inc. from June 26, 2014 (date of acquisition) to December 30, 2016 (date of dissolution). All inter-company transactions and balances have been eliminated on consolidation.

 

 

 

GALA PHARMACEUTICAL INC.

(formerly Gala Global Inc.)

Notes to the Condensed Consolidated Financial Statements

For the Three Months Ended February 28, 2018 and 2017

(unaudited)

 

 

2.	Summary of Significant Accounting Policies (continued)

 

(c)

Interim Financial Statements

 

The accompanying unaudited 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, 2018 are not necessarily indicative of the results that may be expected for the year ended November 30, 2018. 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, 2017 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 the 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)

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. All effects of the reverse stock split discussed at Note 9(d) has been applied retroactively to calculations of basic and diluted net loss per share for periods presented. As at February 28, 2018, the Company had 7,535,788 (November 30, 2017 – 2,128,655) potentially issuable shares from an outstanding convertible note.

 

(f)

Recent Accounting Pronouncements

 

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.

 

3.	Deferred Compensation

 

Deferred compensation is comprised of common shares issued to officers and directors of the Company as compensation for services. As at February 28, 2018, deferred compensation of $45,031 (November 30, 2017 - $165,853) was recorded within shareholders’ equity. During the three months ended February 28, 2018, $120,822 (February 28, 2017 - $nil) of deferred compensation costs were expensed to the consolidated statement of operations.

 

 

 

 

GALA PHARMACEUTICAL INC.

(formerly Gala Global Inc.)

Notes to the Condensed Consolidated Financial Statements

For the Three Months Ended February 28, 2018 and 2017

(unaudited)

 

 

4.

Equipment

 

Equipment consists of the following:

 

February 28, 2018

Net,

Net,

Cost $

Accumulated amortization $

February 28, 2018 $

November 30, 2017 $

Machinery

52,869

9,539

43,330

46,060

 

5.	Convertible Debenture

 

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, bore interest at 10% per annum, and was due on November 30, 2017. The promissory note is in default as of November 30, 2017, resulting in a default interest rate of 22% per annum. 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 limited by a conversion floor price of $0.05 per share.

 

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. As at February 28, 2018, the carrying value of the convertible debenture was $266,466 (November 30, 2017 - $353,629).

 

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. The fair value of the derivative as of May 15, 2017 was $305,957 calculated using the binomial option pricing model. During the three months ended February 28, 2018, the Company recorded a loss on the change in fair value of the derivative liability of $111,519 (February 28, 2017 - $nil). As at February 28, 2018, the Company had a derivative liability of $391,223 (November 30, 2017 - $453,005).

 

Balance, November 30, 2017		$	453,005
Adjustment for conversion			(173,301	)
Change in fair value			111,519
Balance, February 28, 2018			391,223

 

 

 

 

GALA PHARMACEUTICAL INC.

(formerly Gala Global Inc.)

Notes to the Condensed Consolidated Financial Statements

For the Three Months Ended February 28, 2018 and 2017

(unaudited)

 

 

6.	Derivative Liability (continued)

 

The following inputs and assumptions were used to value the convertible debentures outstanding during the period ended February 28, 2018:

 

		Expected Volatility				Risk-free Interest Rate				Expected Dividend Yield				Expected Life (in years)
May 15, 2017 convertible debenture:
As at May 15, 2017 (date of issuance)			288%				1.02%				0%				0.50
As at December 7, 2017 (conversion)			294%				1.67%				0%				0.98
As at February 2, 2018 (conversion)			301%				1.88%				0%				0.83
As at February 13, 2018 (conversion)			304%				1.95%				0%				0.80
As at February 26, 2018 (conversion)			312%				2.03%				0%				0.76
As at February 28, 2018 (mark-to-market)			312%				2.07%				0%				0.75

 

7.	Related Party Transactions

 

(a)

As at February 28, 2018, the Company owed $123,367 (November 30, 2017 - $48,367) to a company controlled by a significant shareholder of the Company to fund payment of operating expenditures. During the three months ended February 28, 2018, the Company received an additional $75,000 of financing. The amount owed is unsecured, non-interest bearing, and due on demand.

 

(b)

As at February 28, 2018, the Company owed $34,000 (November 30, 2017 - $25,000) 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 three months ended February 28, 2018, the Company incurred $9,000 (February 28, 2017 - $19,000) of consulting expense relating to services provided to the Company.

 

(c)

As at February 28, 2018, the Company owed $5,625 (November 30, 2017 - $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.

 

(d)

As at February 28, 2018, the Company owed $18,500 (November 30, 2017 - $18,500) 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, 2018, the Company owed $2,064 (November 30, 2017 - $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, 2018, accrued interest of $97 (November 30, 2017 - $82) has been included in accounts payable and accrued liabilities, related parties.

 

(f)

As at February 28, 2018, the Company owed $1,195 (November 30, 2017 - $1,195) to the Chief Executive Officer of the Company. During the period ended February 28, 2018, the Company issued 5,000,000 common shares with a fair value of $200,000 as bonus compensation.

 

(g)

During the year ended November 30, 2017, the Company issued 24,500,000 common shares with a fair value of $490,000 to officers and directors of the Company as compensation for services for a period of one year. As at February 28, 2018, the Company recorded $45,031 (November 30, 2017 - $165,853) as deferred compensation within shareholders’ equity. During the period ended February 28, 2018, the Company recorded $122,082 (2017 - $nil) of compensation expense relating to the shares issued as deferred compensation.

 

 

 

 

GALA PHARMACEUTICAL INC.

(formerly Gala Global Inc.)

Notes to the Condensed Consolidated Financial Statements

For the Three Months Ended February 28, 2018 and 2017

(unaudited)

 

 

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 and is now considered in default. As at February 28, 2018, the outstanding balance of the promissory note was $22,000 (November 30, 2017 - $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 and is now considered in default. As at February 28, 2018, the outstanding balance of the promissory note was $20,000 (November 30, 2017 - $20,000).

 

9.	Stockholders’ Equity

 

Authorized:

10,000,000 preferred shares, with a par value of $0.001 per preferred share with each preferred share having 500 votes per common share, subject to dividends when and if declared, and liquidation rights in the amounts of the par value in accordance with the Company’s certificate of designation. 500,000,000 common shares, with a par value of $0.001 per common share

  

(a)

On December 7, 2017, the Company issued 209,727 common shares with a fair value of $56,773 to settle convertible debentures of $30,000 and derivative liability of $50,993 resulting in a gain on settlement of debt of $24,220.

 

(b)

On January 11, 2018, the Company issued 5,000,000 common shares with a fair value of $200,000 to the Chief Executive Officer of the Company as a performance bonus.

 

(c)

On February 1, 2018, the Company issued 1,500,000 common shares with a fair value of $60,000 for consulting services for a period twelve months from the date of issuance.

 

(d)

On February 2, 2018, the Company issued 3,000,000 common shares, which were issuable at November 30, 2017, for consulting services with a fair value of $300,000.

 

(e)

On February 2, 2018, the Company issued 618,684 common shares with a fair value of $49,495 to settle convertible debentures of $30,000 and derivative liability of $43,021 resulting in a gain on settlement of debt of $23,526.

 

(f)

On February 13, 2018, the Company issued 758,284 common shares with a fair value of $41,478 to settle convertible debentures of $30,000 and derivative liability of $35,246 resulting in a gain on settlement of debt of $23,768.

 

(g)

On February 26, 2018, the Company issued 846,860 common shares with a fair value of $50,812 to settle convertible debentures of $30,000 and derivative liability of $44,041 resulting in a gain on settlement of debt of $23,229.

 

 

 

GALA PHARMACEUTICAL INC.

(formerly Gala Global Inc.)

Notes to the Condensed Consolidated Financial Statements

For the Three Months Ended February 28, 2018 and 2017

(unaudited)

 

 

10.	Supplemental Disclosures

 

		Three months ended February 28, 2018 $				Three months ended February 28, 2017 $
Non-cash investing and financing activities:
Common shares issued for consulting services – related party			200,000				–
Common shares issued for prepaid expenses			335,000				–
Common shares issued to settle third party debt			198,557				–
Convertible note accrued interest converted to common stock			32,836				–
Convertible note principal converted to common stock			87,163				–
Expenses paid by related parties that increased related party debt			–				4,500
Supplemental disclosures:
Interest paid			–				–
Income tax paid			–				–

 

11.	Contingency

 

In April 2018, the Company received notice of a pending lawsuit, filed in the State of California for which the Company was one of several defendants named, citing breach of contract, conspiracy to commit fraud, and specific performance. The Company’s position is that the claims are without merit and intends to defend itself and its position in a court of law. As of the date of the filing, the likelihood of loss and the amount of loss cannot be quantified and as such, no accrual has been made as of February 28, 2018.

 

12.	Subsequent Events

 

(a)

On March 29, 2018, the Company issued 2,500,000 common shares for proceeds of $100,000.

 

(b)

On April 6, 2018, the Company entered into a commercial lease for an office location. Under the terms of the lease, the Company is committed to annual lease payments of $108,000 commencing May 1, 2018, with annual increases of 4% per annum on each May 1st until the termination date on May 1, 2023.

 

(c)

On April 16, 2018, the Company issued 2,500,000 common shares for proceeds of $100,000.

 

 

 

 

 

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”) 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 GALA was also seeking acquisition candidates in this area of interest in the nutraceutical and pharmaceutical industries. The Company also planned to enter into the medical marijuana cultivation industry as approved in the United States and Canada to build legalized cultivation operations.

 

Currently, Gala Pharmaceutical Inc. has hired industry-leading experts in the field of Genomics that improves crop yields by utilizing advanced breeding and molecular technologies. The company will 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. In addition, the company will be able to provide pharmaceutical expertise to its customers for manufacturing and production. It is anticipated that Gala Pharmaceuticals Inc., will 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 also intends to provide Testing for chemical, plant, soil, and liquid composition analysis as well as analysis of compositional traits for hemp and cannabis products (cannabinoid, terpenes, pesticides, residual solvents and microbial). GPI is currently developing an ISO certified lab with state of the art equipment for these analysis which will provide persistent results.

 

The Company’s other services include the development of cannabinoid based health and wellness products; the development of medical grade compounds; the licensing of proprietary testing, genetics, labeling and packaging, tracking, production, and standardization methods for the medicinal herb industry.

 

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

 

 

 

 

RESULTS OF OPERATIONS

 

Working Capital

 

		February 28, 2018 $				November 30, 2017 $
Current Assets			277,582				61,916
Current Liabilities			(955,595	)			(1,013,796	)
Working Capital (Deficit)			(678,013	)			(951,880	)

  

Cash Flows

 

		Three months ended February 28, 2018 $				Three months ended February 28, 2017 $
Cash Flows from (used in) Operating Activities			(82,599	)			(22,641	)
Cash Flows from (used in) Investing  Activities			–				–
Cash Flows from (used in) Financing Activities			75,000				11,800
Net Increase (decrease) in Cash During Period			(7,599	)			(10,841	)

 

 

Operating Expenses

 

Three Months Ended February 28, 2018 and 2017

 

During the three months ended February 28, 2018, the Company incurred operating expenses of $548,228 compared to operating expenses of $30,702 during the three months ended February 28, 2017. The increase in operating expenses was due to $435,535 of consulting expenses including $320,192 to related parties for consulting services. These amounts included 5,000,000 common shares issued to the Company’s Chief Executive Officer as a compensation bonus with a fair value of $200,000, as well as the recognition of $120,822 of deferred compensation for shares which were previously issued. The Company also had an increase in general and administrative expenses of $67,126 including $41,515 to related parties for legal and other services incurred to a significant shareholder of the Company. Furthermore, the Company incurred more professional fees related to accounting and audit services as the amount of transactions in the Company and overall operations increased compared to prior year.

 

The Company incurred a net loss of $583,242 during the three months ended February 28, 2018 compared to a net loss of $31,375 during the three months ended February 28, 2017. In addition to operating expenses, 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 conversion of outstanding convertible debt during the period. For the three months ended February 28, 2017, the Company incurred interest expense of $673.

 

Net Loss

 

During the three months ended February 28, 2018, the Company incurred a net loss of $583,242 or $0.01 loss per share compared to a net loss of $31,375 and loss per share of $0.02 during the three months ended February 28, 2017. 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, 2018, the Company has working capital deficit of $678,013 and an accumulated deficit of $3,801,811 compared to a working capital deficit of $951,880 and an accumulated deficit of $3,218,569 as at November 30, 2017. 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, 2018. 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.

 

During the three months ended February 28, 2018, the Company issued the following common shares:

 

·

Issuance of 2,433,555 common shares to settle outstanding convertible note balances of $120,000 and recorded derivative liabilities of $173,301;

·

Issuance of 5,000,000 common shares to the Chief Executive Officer of the Company with a fair value of $200,000 pursuant to bonus compensation;

·

Issuance of 1,500,000 common shares to a consultant with a fair value of $60,000 for consulting services over a one year period; and

·

Issuance of 3,000,000 common shares to consultants with a fair value of $300,000 for consulting services over a one-year period.

 

Cash flow from Operating Activities

 

During the three months ended February 28, 2018, the Company used cash of $82,599 for operating activities compared to $22,641 during the three months ended February 28, 2017. 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, 2018 and 2017, the Company did not have any investing activities.

  

Cash flow from Financing Activities

 

During the three months ended February 28, 2018, the Company received $75,000 from related party advances compared to $11,800 received from related party advances during the three months ended February 28, 2017.

 

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 29, 2018, the Company issued 2,500,000 common shares for proceeds of $100,000.

 

(b)	On April 6, 2018, the Company entered into a commercial lease for an office location.  Under the terms of the lease, the Company is committed to annual lease payments of $108,000 commencing May 1, 2018, with annual increase of 4% per annum on each May 1st until the termination date on May 1, 2023.

 

(c)	On April 16, 2018, the Company issued 2,500,000 common shares for proceeds of $100,000.

 

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.

 

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

 

Management's Report on Internal Control over Financial Reporting.

 

Our Internal control over financial reporting is a process that, under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, was designed to provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and our trustees; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that our controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

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

 

Evaluation of disclosure controls and procedures.

 

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q.  In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.  In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

 

 

 

 

Based on that evaluation, our chief executive officer and chief financial officer concluded that, as of February 28, 2018, 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 Securities and Exchange Commission rules, regulations and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in internal controls.

 

Our management, with the participation of the chief executive officer and chief financial officer, has concluded there were no significant changes in our internal controls over financial reporting that occurred during our last quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

  

 

 

 

 

 

 

 

 

 

 

PART II – OTHER INFORMATION

 

ITEM 1.     LEGAL PROCEEDINGS

 

In April 2018, the Company received notice of a pending lawsuit, filed in the State of California for which the Company was one of several defendants named, citing breach of contract, conspiracy to commit fraud, and specific performance. The Company’s position is that the claims are without merit and intends to defend itself and its position in a court of law. As of the date of the filing, the likelihood of loss and the amount of loss cannot be quantified and as such, no accrual has been made as of February 28, 2018.

 

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

 

For the three months ended February 28, 2018, there were the following equity transactions.

 

(i)	On December 7, 2017, the Company issued 209,727 common shares with a fair value of $56,773 to settle convertible debentures of $30,000 and derivative liability of $50,993 resulting in a gain on settlement of debt of $24,220.

 

(ii)	On January 11, 2018, the Company issued 5,000,000 common shares with a fair value of $200,000 to the Chief Executive Officer of the Company as a performance bonus.

 

(iii)

On February 1, 2018, the Company issued 1,500,000 common shares with a fair value of $60,000 for consulting services for a period twelve months from the date of issuance.

 

(iv)	On February 2, 2018, the Company issued 3,000,000 common shares, which were issuable at November 30, 2017, for consulting services with a fair value of $300,000.

 

(v)	On February 2, 2018, the Company issued 618,684 common shares with a fair value of $49,495 to settle convertible debentures of $30,000 and derivative liability of $43,021 resulting in a gain on settlement of debt of $23,526.

 

(vi)	On February 13, 2018, the Company issued 758,284 common shares with a fair value of $41,478 to settle convertible debentures of $30,000 and derivative liability of $35,246 resulting in a gain on settlement of debt of $23,768.

 

(vii)

On February 26, 2018, the Company issued 846,860 common shares with a fair value of $50,812 to settle convertible debentures of $30,000 and derivative liability of $44,041 resulting in a gain on settlement of debt of $23,229.

 

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

 

 

 

 

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:  May 8, 2018	/s/   Maqsood Rehman
		Maqsood Rehman
		Chief Executive Officer
		(Authorized Officer for Registrant)