REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Directors and Stockholders of
Gala Global, Inc. (now known as Gala Pharmaceutical,
Inc.)
Las Vegas, NV
We have audited the accompanying consolidated
balance sheet of Gala Global, Inc. (now known as Gala Pharmaceutical, Inc.) as of November 30, 2016 and the related consolidated
statements of operations, changes in stockholders’ deficit and cash flows for the year then ended. These financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of Gala Global, Inc. (now known as
Gala Pharmaceutical, Inc.) as of November 30, 2016 and the results of its operations and its cash flows for the year then ended
in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have
been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the
Company has suffered continuing losses and has yet established a reliable, consistent and proven source of revenue to meet its
operating costs on an ongoing basis and currently does not have sufficient available funding to fully implement its business plan.
These factors raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these
matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ Pritchett, Siler & Hardy, P.C.
Pritchett, Siler & Hardy, P.C.
Salt Lake City, Utah
March 9, 2017
To the Board of Directors and
Stockholders of Gala Pharmaceutical, Inc. (formerly Gala Global, Inc.)
Opinion on the Financial Statements
We have audited the accompanying balance
sheet of Gala Pharmaceutical, Inc. (formerly Gala Global, Inc.) (the Company) as of November 30, 2017, and the related statement
of operations, stockholders’ deficit, and cash flows for the year ended November 30, 2017, and the related notes (collectively
referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the
financial position of the Company as of November 30, 2017, and the results of its operations and its cash flows for the year ended
November 30, 2017, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based
on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required
to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable
basis for our opinion.
Consideration of the Company’s Ability to Continue
as a Going Concern
The accompanying financial statements have
been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1 to the financial statements,
the Company has recurring losses, negative working capital and negative cash flows from operations. These factors raise substantial
doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are
also described in Note 1 to the financial statements. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty. If the Company is unable to obtain financing, there could be a material adverse effect on
the Company.
/s/ Haynie & Company
Haynie & Company
We have served as the Company’s auditor since 2017.
Salt Lake City, Utah
April 5, 2018
(The accompanying notes are an integral
part of these consolidated financial statements)
(The accompanying notes are an integral
part of these consolidated financial statements)
(The accompanying notes are an integral
part of these consolidated financial statements)
(The accompanying notes are an integral
part of these consolidated financial statements)
Notes to the Consolidated Financial Statements
Years ended November 30, 2017 and 2016
1.
|
Organization and Nature of Operations
|
Gala Pharmaceutical Inc. (formerly
Gala Global 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 standard operating procedures. 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 November 30, 2017, the Company has a working capital deficit
of $951,880 and an accumulated deficit of $3,218,569. 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), and CBD Life, Inc. All inter-company transactions and balances have been eliminated on consolidation.
The preparation of consolidated
financial statements in conformity with US GAAP requires 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.
GALA PHARMACEUTICAL INC.
(formerly Gala Global Inc.)
Notes to the Consolidated Financial Statements
Years ended November 30, 2017 and 2016
|
2.
|
Summary of Significant Accounting Policies
(continued)
|
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(c)
|
Use of Estimates (continued)
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|
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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.
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(d)
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Inventory
|
|
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|
|
|
Inventory is comprised of Vape
Mods purchased for resale, and is recorded at the lower of cost or net realizable value on a first-in first-out basis. The Company
establishes inventory reserves for estimated obsolete or unsaleable inventory equal to the difference between the cost of inventory
and the estimated realizable value based upon assumptions about future market conditions.
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(e)
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Cash and Cash Equivalents
|
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The Company considers all highly
liquid instruments with a maturity of three months or less at the time of issuance to be cash equivalents. As of November 30, 2017
and 2016, there were no cash equivalents.
|
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(f)
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Financial Instruments
|
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The Company’s financial
instruments consist principally of cash, accounts payable and accrued liabilities, loans payable to related parties, loans payable,
and amounts due to related party. The recorded values of all these financial instruments approximate their current fair values
because of the short term nature of these financial instruments.
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(g)
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Income Taxes
|
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The Company accounts for income
taxes using the asset and liability method in accordance with ASC 740,
Accounting for Income Taxes
. Deferred taxes are provided
on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred taxes will not
be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
On December 22, 2017, the Tax Cuts and Jobs Act was enacted which reduced the corporate statutory tax rate from 34% to 21% commencing
on January 1, 2018. The Company has used an effective tax rate of 34%.
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(h)
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Property and Equipment
|
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Property and equipment are stated
at cost, and is presented net of accumulated depreciation. Depreciation is computed for financial reporting purposes using the
straight-line method over the estimated useful lives of the assets. Repairs and maintenance that do not extend the useful life
of property and equipment are charged to expense as incurred. When property and equipment are retired or otherwise disposed of,
the asset and its accumulated depreciation are removed, and the resulting profit or loss is reflected in income.
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|
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|
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The
estimated service lives of property and equipment are principally as follows:
|
Computers and equipment
|
3-5 years
|
Furniture
& Fixtures
|
5-10 years
|
GALA PHARMACEUTICAL INC.
(formerly Gala Global Inc.)
Notes to the Consolidated Financial Statements
Years ended November 30, 2017 and 2016
|
2.
|
Summary of Significant Accounting Policies
(continued)
|
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(i)
|
Fair Value of Financial Instruments
|
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|
|
|
The Company complies with
the accounting guidance under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC")
820-10,
Fair Value Measurements,
as well as certain related FASB staff positions. This guidance defines fair value as the
price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair
value, the Company considers the principal or most advantageous market in which it would transact business and considers assumptions
that marketplace participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and
risk of nonperformance.
|
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The guidance also establishes
a fair value hierarchy for measurements of fair value as follows:
|
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Level 1 — quoted market
prices in active markets for identical assets or liabilities.
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Level 2 — inputs other
than Level
I
that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets
or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that
are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
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Level 3 — unobservable inputs that are
supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
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As of November 30, 2017, the Company had the following
assets and liabilities measured at fair value on a recurring basis.
|
|
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Total
$
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|
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Level 1
$
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Level 2
$
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Level 3
$
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|
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|
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Derivative Liability
|
|
|
453,005
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–
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–
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453,005
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(j)
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Revenue Recognition
|
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The Company earns revenue from
the sale of Vape Mods, which are modified electronic cigarettes and vape pens. Revenue will be recognized only when the price is
fixed and determinable, persuasive evidence of an arrangement exists, the service has been provided, and collectability is assured.
The Company is not exposed to any credit risks as amounts are prepaid prior to performance of services.
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(k)
|
Stock-based Compensation
|
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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.
|
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(l)
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Deferred Compensation
|
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|
Deferred compensation is comprised
of the fair value of common shares issued to officers and directors of the Company for which services have not been rendered. As
services are rendered, the amounts in deferred compensation are expensed as incurred in the consolidated statements of operations.
As at November 30, 2017, the Company recorded $165,853 (2016 - $nil) of deferred compensation.
|
GALA PHARMACEUTICAL INC.
(formerly Gala Global Inc.)
Notes to the Consolidated Financial Statements
Years ended November 30, 2017 and 2016
|
2.
|
Summary of Significant Accounting Policies (continued)
|
|
(m)
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Foreign Currency Translation
|
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|
The Company’s functional
and reporting currency is the U.S. dollar. Monetary assets and liabilities of integrated operations and other monetary assets
and liabilities denominated in foreign currencies are translated to U.S. dollars at exchange rates in effect at the balance sheet
date. Non-monetary assets and liabilities are translated at historical rates. Revenues and expenses are translated
at average rates for the period, except for amortization, which is translated on the same basis as the related asset. The
resulting exchange gains or losses are recognized in the statements of operations.
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(n)
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Basic and Diluted Net Loss per Share
|
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|
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 November
30, 2017, the Company had 2,659,468 (2016 – nil) potentially issuable shares from an outstanding convertible note, which
are anti-dilutive.
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(o)
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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 recorded at its 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
|
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(p)
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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.
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|
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(q)
|
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.
|
Deferred compensation
is comprised of common shares issued to officers and directors of the Company for compensation services. During the year ended
November 30, 2017, the Company issued 24,500,000 common shares with a fair value of $490,000 for compensation of which $324,147
was expensed during the period and the remaining $165,853 was recorded as deferred compensation within shareholders’ equity.
GALA PHARMACEUTICAL INC.
(formerly Gala Global Inc.)
Notes to the Consolidated Financial Statements
Years ended November 30, 2017 and 2016
|
|
|
Cost
$
|
|
|
Accumulated amortization
$
|
|
|
November 30,
2017
$
|
|
|
November 30,
2016
$
|
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|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
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Machinery
|
|
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|
52,869
|
|
|
|
6,809
|
|
|
|
46,060
|
|
|
|
–
|
|
During the
year ended November 30, 2017, the Company recorded $5,389 (2016 - $nil) of depreciation expense.
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 is 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 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 was accreted over the term of the convertible debenture up to the face value of $280,000. The note is in
default and now has a default interest rate of 22%. On November 30, 2017, a default penalty of $73,629 was applied as the Company
defaulted on the convertible debenture. As at November 30, 2017, the carrying value of the convertible debenture was $353,629 and
the unamortized discount on the convertible debenture was $nil.
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. At inception,
there was a debt discount related to the conversion feature of $175,427 and a loss on the derivative of $130,530. During the year
ended November 30, 2017, the Company recorded a loss on the change in fair value of the derivative liability of $277,578 (2016
- $nil). As at November 30, 2017, the Company had a derivative liability of $453,005 (2016 - $nil).
Balance, November 30, 2016
|
|
$
|
–
|
|
Conversion feature at inception
|
|
|
175,427
|
|
Loss at inception
|
|
|
130,530
|
|
Change in fair value
|
|
|
147,048
|
|
Balance, November 30, 2017
|
|
$
|
453,005
|
|
The following inputs and assumptions
were used to value the convertible debentures outstanding during the year ended November 30, 2017:
|
|
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%
|
|
|
|
0.5
|
|
As at November 30, 2017 (mark-to-market)
|
|
|
338%
|
|
|
|
1.27%
|
|
|
|
0%
|
|
|
|
0.3
|
|
GALA PHARMACEUTICAL INC.
(formerly Gala Global Inc.)
Notes to the Consolidated Financial Statements
Years ended November 30, 2017 and 2016
|
7.
|
Related Party Transactions
|
|
a)
|
As at November 30, 2017, the Company owed $48,367 (2016 - $249,835) to a company controlled by
a significant shareholder of the Company to fund payment of operating expenditures. During the year ended November 30, 2017, the
Company settled $249,835 of related party debt with the issuance of 1,387,970 common shares. Refer to Note 9(c). The remaining
amount owed is unsecured, non-interest bearing, and due on demand.
|
|
b)
|
As at November 30, 2017, the Company owed $17,000 (2016 - $nil) to the former Chief Executive Officer
of the Company for compensation and consulting services, which has been recorded in accounts payable and accrued liabilities –
related parties. The amounts owing are unsecured, non-interest bearing, and due on demand.
|
|
c)
|
As at November 30, 2017, the Company owed $25,000 (2016 - $79,333) 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 year ended November 30, 2017, the Company incurred $177,295 (2016 - $36,000)
of consulting expense relating to services provided to the Company. In August 2017, the Company settled $88,333 of related party
debt with the issuance of 490,742 common shares.
|
|
d)
|
As at November 30, 2017, the Company owed $5,625 (2016 - $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.
|
|
e)
|
As at November 30, 2017, the Company owed $18,500 (November 30, 2016 - $10,000) 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 November 30, 2017, the Company owed $2,064 (2016 - $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 November
30, 2017, accrued interest of $82 (November 30, 2016 - $15) has been included in accounts payable and accrued liabilities, related
parties.
|
|
g)
|
As at November 30, 2017, the Company owed $12,500 (2016 -$ nil) to the Chief Operating Officer
of the Company for consulting services, which has been recorded in accounts payable and accrued liabilities – related parties.
The amounts owing are unsecured, non-interest bearing, and due on demand.
|
|
h)
|
As at November 30, 2017, the Company owed $1,195 (2016 - $nil) to the Chief Executive Officer of
the Company for services, which has been recorded in accounts payable and accrued liabilities – related parties. The amounts
owing are unsecured, non-interest bearing, and due on demand.
|
|
i)
|
As at November 30, 2017, the Company owed $nil (2016 - $10,000) to the spouse of a former significant
shareholder of the Company for a note issued on September 21, 2016. Under the terms of the note, the amount due was unsecured,
bore interest at 3% per annum, and was due 180 days from the date of issuance. In July 2017, the Company issued 128,750 common
shares with a fair value of $38,625 to settle $10,000 of principal balance and $254 of accrued interest.
|
GALA PHARMACEUTICAL INC.
(formerly Gala Global Inc.)
Notes to the Consolidated Financial Statements
Years ended November 30, 2017 and 2016
|
7.
|
Related Party Transactions
(continued)
|
|
j)
|
On May 8, 2017, the Company entered into an agreement whereby the Company agreed to acquire 80%
of the issued and outstanding common stock of Controlled Environment Genomics Inc ("CEG Inc"), in exchange for a new
series of the Company’s preferred shares, and issue 5,000,000 restricted common shares in exchange for CEG's intellectual
property. In the event that CEG, Inc. becomes its own public entity, the executive shall receive 51% ownership of the new entity,
and the Company will retain the remaining 49%. As at November 30, 2017, the agreement to acquire the common stock of CEG Inc. was
cancelled and costs of $53,297 relating to the proposed acquisition was expensed as incurred.
|
|
k)
|
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 November
30, 2017, the Company recorded $165,853 as deferred compensation within shareholders’ equity. During the year ended November
30, 2017, the Company recorded $324,147 (2016 - $nil) of share based compensation expense.
|
|
l)
|
During the year ended November 30, 2017, the Company loaned $20,000 (2016- $nil) to a company controlled
by the former Chief Executive Officer of the Company for day-to-day expenses. The amount owing is unsecured, non-interest bearing,
and due on demand. As at November 30, 2017, the Company recorded an impairment charge of $20,000 due to the unlikelihood of collecting
outstanding amounts owed to the Company.
|
|
a)
|
On December 29, 2015, 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 was due 180 days from the date of issuance
and was considered to be in default. On July 21, 2017, the Company issued 965,625 common shares with a fair value of $77,250 to
settle outstanding principal amount of $20,000 and accrued interest of $966 resulting in a loss on settlement of debt of $56,284.
|
|
b)
|
On April 19, 2016, the Company issued a $3,000 promissory note to an unrelated party. Under the
terms of the note, the amount due is unsecured, bears interest at 3% per annum, and was due 180 days from the date of issuance
and was considered to be in default. On July 21, 2017, the Company issued 37,500 common shares with a fair value of $11,587 to
settle outstanding principal amount of $3,000 and accrued interest of $116 resulting in a loss on settlement of debt of $8,471.
|
|
c)
|
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 was due 180 days from the date of issuance
and is now considered in default. As at November 30, 2017, the outstanding balance of the promissory note was $22,000 (2016 - $22,000)
and accrued interest of $1,093 (2016 - $409) was recorded in accounts payable and accrued liabilities.
|
|
d)
|
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 was due 180 days from the date of issuance
and considered in default. As at November 30, 2017, the outstanding balance of the promissory note was $20,000 (2016 - $20,000)
and accrued interest of $901 (2016 - $282) was recorded in accounts payable and accrued liabilities.
|
|
e)
|
On June 23, 2016, the Company issued a $10,000 promissory note to an unrelated party. Under the
terms of the note, the amount due is unsecured, bears interest at 3% per annum, and was due 180 days from the date of issuance
and was considered in default. On July 21, 2017, the Company issued 125,000 common shares with a fair value of $38,625 to settle
outstanding principal amount of $10,000 and accrued interest of $331 resulting in a loss on settlement of debt of $28,294.
|
GALA PHARMACEUTICAL INC.
(formerly Gala Global Inc.)
Notes to the Consolidated Financial Statements
Years ended November 30, 2017 and 2016
Stock transactions
for the year ended November 30, 2017:
|
(a)
|
On January 30, 2017, the Company effected a share consolidation on a 100 old shares for 1 new share
basis. The share consolidation has been applied retroactively to the earliest period presented.
|
|
|
|
|
(b)
|
On March 22, 2017, the Company issued 490,742 common shares with a fair value of $176,667 to settle
outstanding debt of $88,333 owed to a significant shareholder of the Company. The transaction resulted in a loss on settlement
of debt of $88,334, which was recorded in the consolidated statement of operations.
|
|
|
|
|
(c)
|
On March 22, 2017, the Company issued 1,387,970 common shares with a fair value of $499,670 to
settle outstanding debt of $249,835 owed to a company controlled by a significant shareholder of the Company. The transaction resulted
in a loss on settlement of debt of $249,835, which was recorded in the consolidated statement of operations.
|
|
|
|
|
(d)
|
On
March 30, 2017, the Company issued 10,000,000 common shares with a fair value of $200,000 to a significant shareholder of the Company
for compensation services for a period of twelve months from the date of issuance. As at November 30, 2017, deferred compensation
of $65,205 has been recorded in deferred compensation and $134,795 has been expensed.
|
|
|
|
|
(e)
|
On
March 30, 2017, the Company issued 10,000,000 common shares with a fair value of $200,000 to a significant shareholder of the Company
for compensation services for a period of twelve months from the date of issuance. As at November 30, 2017, deferred compensation
of $65,205 has been recorded and $134,795 has been expensed..
|
|
|
|
|
(f)
|
On
March 30, 2017, the Company issued 1,500,000 common shares with a fair value of $30,000 to the Chief Financial Officer of the Company
for compensation services for a period of twelve months from the date of issuance. As at November 30, 2017, deferred compensation
of $9,171 has been recorded and $20,219 has been expensed.
|
|
|
|
|
(g)
|
On
March 30, 2017, the Company issued 1,500,000 common shares with a fair value of $30,000 to a director of the Company for compensation
services for a period of twelve months from the date of issuance. As at November 30, 2017, deferred compensation of $9,781 has
been recorded and $20,219 has been expensed.
|
|
|
|
|
(h)
|
On
July 6, 2017, the Company issued 1,500,000 common shares at $0.08 per common share pursuant to private placement for proceeds of
$120,000. Finder’s fees of $12,000 were paid related to this transaction which reduced additional paid in capital by the
same amount.
|
|
|
|
|
(i)
|
On June 12, 2017, the Company issued 2,000,000 common shares for consulting services over a twelve month period with a fair value of $40,000. As of November 30, 2017 prepaid expense for these shares is $21,175.
|
|
|
|
|
(j)
|
On
June 13, 2017, the Company issued 1,500,000 common shares with a fair value of $30,000 to the former Chief Operating Officer of
the Company for compensation services for a period of twelve months from the date of issuance. As at November 30, 2017, deferred
compensation of $15,881 has been recorded and $14,119 has been expensed.
|
|
|
|
|
(k)
|
On
July 21, 2017, the Company issued 553,625 common shares with a fair value of $166,088 to settle outstanding promissory notes and
accrued interest of $44,666 resulting in a loss on settlement of debt of $121,422, including 128,750 common shares with a fair
value of $38,625 to settle outstanding promissory notes and accrued interest of $10,254 resulting in a loss on settlement of debt
of $28,371 to a related party.
|
GALA PHARMACEUTICAL INC.
(formerly Gala Global Inc.)
Notes to the Consolidated Financial Statements
Years ended November 30, 2017 and 2016
9.
|
Common Shares
(continued)
|
|
(l)
|
On
September 1, 2017, the Company issued 1,500,000 common shares with a fair value of $30,000 for consulting services.
|
|
|
|
|
(m)
|
On
October 1, 2017, the Company issued 1,500,000 common shares with a fair value of $30,000 for consulting services.
|
|
|
|
|
(n)
|
On
October 20, 2017, the Company issued 250,000 common shares at $0.10 per share for proceeds of $25,000.
|
|
|
|
|
(o)
|
On
October 23, 2017, the Company issued 400,000 common shares to settle the outstanding share purchase warrants which were issued
as part of the issuance of the convertible debenture.
|
|
|
|
|
(p)
|
On
November 9, 2017, the Company issued 250,000 common shares at $0.10 per share for proceeds of $25,000.
|
|
|
|
|
(q)
|
At
November 30, 2017, the Company had 3,000,000 common shares issuable for consulting services with a fair value of $300,000, of which
$25,000 was recorded as consulting expense.
|
|
|
|
|
Stock transactions for the year ended November 30, 2016:
|
|
|
|
|
(r)
|
On
December 23, 2015, the Company issued 12,500 shares of common stock with a fair value of $25,000 to a consultant pursuant to a
consulting agreement dated May 1, 2015.
|
|
|
|
|
(s)
|
On
December 23, 2015, the Company issued 25,000 shares of common stock with a fair value of $39,063 to the Chief Financial Officer
and director of the Company pursuant to the agreement dated September 1, 2015. 12,500 shares were issued for the consultant’s
services as a director, and 12,500 shares for services as the Company’s Chief Financial Officer.
|
|
|
|
|
(t)
|
On
December 23, 2015, the Company issued 12,500 of shares of common stock with a fair value of $21,250 to the former Chief Executive
Officer of the Company for the consultant’s services as a director pursuant to the consulting agreement dated September 1,
2015.
|
|
|
|
|
(u)
|
On
December 23, 2015, the Company issued 6,250 of shares of common stock with a fair value of $10,625 to the former Chief Executive
Officer of the Company for services as the Company’s Chief Executive Officer pursuant to the consulting agreement dated June
29, 2015.
|
GALA PHARMACEUTICAL INC.
(formerly Gala Global Inc.)
Notes to the Consolidated Financial Statements
Years ended November 30, 2017 and 2016
9.
|
Common Shares
(continued)
|
|
(v)
|
On
December 23, 2015, the Company issued 12,500 of shares of common stock with a fair value of $17,500 to a consultant pursuant to
a consulting agreement dated December 14, 2015.
|
Preferred
Shares
On January 27, 2016, the Company
issued 500,000 shares of preferred stock to significant shareholders to settle debt of $72,620. Each preferred share is entitled
to receive dividends when and if declared by the Company’s board of directors, has 500 to 1 voting power and liquidation
rights in the amount of the shares; par value in accordance with the Company’s certificate of designation. Of the 500,000
shares issued, 166,666 shares were issued to a significant shareholder to settle outstanding payables to a significant shareholder
of $24,167, and the remaining 333,334 shares are issued to another significant shareholder to settle debts of $42,638, $5,009,
and $806 described at Note 4 for a total of $48,453 in outstanding principal and accrued interest.
10.
|
Share Purchase Warrants
|
On May 15, 2017, the Company
issued 486,783 share purchase warrants with an exercise price of $0.09 per share for a period of five years in conjunction with
the issuance of convertible debt. The fair value of the share purchase warrants was $105,396, calculated using the binomial option
pricing model assuming no expected dividends, volatility of 199%, expected life of 5 years, and a risk free rate of 1.05%. The
allocated relative fair value of the warrants was $74,573. The fair value of the share purchase warrants were recorded in the consolidated
statement of operations as debt discount. In October 2017, the Company issued 400,000 common shares as a settlement and return
of the outstanding share purchase warrants by the convertible note holder.
On October 23, 2017, the share
purchase warrants were cancelled and replaced with the issuance of 400,000 common shares. Refer to Note 9(o).
|
|
|
Number of
warrants
|
|
|
Weighted average exercise price
$
|
|
|
|
|
|
|
|
|
|
Balance, November 30, 2015 and 2016
|
|
|
|
–
|
|
|
|
–
|
|
Issued
|
|
|
|
486,783
|
|
|
|
0.09
|
|
Cancelled
|
|
|
|
(486,783
|
)
|
|
|
0.09
|
|
Balance, November 30, 2017
|
|
|
|
–
|
|
|
|
–
|
|
GALA PHARMACEUTICAL INC.
(formerly Gala Global Inc.)
Notes to the Consolidated Financial Statements
Years ended November 30, 2017 and 2016
11.
|
Supplemental Disclosures
|
|
|
Year ended
November 30,
2017
$
|
|
|
Year ended
November 30,
2016
$
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued for deferred compensation
|
|
|
490,000
|
|
|
|
–
|
|
Common shares issued for settlement of related party debt
|
|
|
714,962
|
|
|
|
–
|
|
Common shares issued to settle third party debt
|
|
|
127,462
|
|
|
|
–
|
|
Common shares issued to settle outstanding payables
|
|
|
–
|
|
|
|
25,000
|
|
Expenses paid by related parties that increased related party debt
|
|
|
19,500
|
|
|
|
2,064
|
|
Preferred shares issued to settle related party payables
|
|
|
–
|
|
|
|
24,167
|
|
Preferred shares issued to settle related party debt
|
|
|
–
|
|
|
|
48,453
|
|
Shares issued for prepaid expenses
|
|
|
40,000
|
|
|
|
–
|
|
Warrants issued with debt
|
|
|
74,573
|
|
|
|
–
|
|
Exercise of warrants
|
|
|
400
|
|
|
|
–
|
|
Original issue discount
|
|
|
25,000
|
|
|
|
–
|
|
Debt issuance costs
|
|
|
5,000
|
|
|
|
–
|
|
Debt conversion feature
|
|
|
175,427
|
|
|
|
–
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
|
–
|
|
|
|
–
|
|
Income tax paid
|
|
|
–
|
|
|
|
–
|
|
As at November 30, 2017, the
Company has $1,294,000 of net operating losses carried forward to offset taxable income in future years through fiscal 2036. No
tax benefit has been reported during the years ended November 30, 2017 and 2016 as the potential tax benefit is offset by a valuation
allowance as there is uncertainty as to whether the Company can be profitable in the future to utilize tax losses. Net operating
loss carryforwards for federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur
in the future, net operating losses carryfoward may be limited as to use in future years.
|
|
2017
$
|
|
|
2016
$
|
|
Net loss before taxes
|
|
|
(1,981,856
|
)
|
|
|
(170,176
|
)
|
Statutory rate
|
|
|
34%
|
|
|
|
34%
|
|
Computed expected tax recovery
|
|
|
(673,800
|
)
|
|
|
(57,900
|
)
|
Permanent differences and other
|
|
|
490,000
|
|
|
|
(68,100
|
)
|
Change in valuation allowance
|
|
|
183,800
|
|
|
|
126,000
|
|
Income tax provision
|
|
|
–
|
|
|
|
–
|
|
GALA PHARMACEUTICAL INC.
(formerly Gala Global Inc.)
Notes to the Consolidated Financial Statements
Years ended November 30, 2017 and 2016
12.
|
Income Taxes
(continued)
|
The significant components of
deferred income tax assets and liabilities at November 30, 2017 and 2016 are as follows:
|
|
2017
$
|
|
|
2016
$
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating losses carried forward
|
|
|
439,900
|
|
|
|
281,180
|
|
Accrued interest
|
|
|
5,900
|
|
|
|
500
|
|
Related party payables
|
|
|
20,900
|
|
|
|
32,000
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Accumulated depreciation above book value
|
|
|
(3,300
|
)
|
|
|
–
|
|
Deferred income tax assets
|
|
|
463,400
|
|
|
|
313,700
|
|
Valuation allowance
|
|
|
(463,400
|
)
|
|
|
(313,700
|
)
|
Net deferred income tax asset
|
|
|
–
|
|
|
|
–
|
|
|
(a)
|
On December 26, 2017, the Company received $75,000 in a promissory note from a company controlled
by a shareholder of the Company. The amounts are unsecured, non-interest bearing, and due on demand.
|
|
(b)
|
On January 1, 2018, the Company entered into a consulting agreement with a non-related party for
consulting services. Pursuant to the agreement, the consultant will receive compensation of $5,000 per month for services rendered.
In addition, the consultant will receive $2,500 per every new location the consultant manages. The Company may terminate the agreement
upon providing 10 days of written notice to the consultant.
|
|
(c)
|
On January 29, 2018, the Company completed a settlement and mutual release agreement with CEG Inc.
whereby the proposed acquisition of CEG Inc. was cancelled. As part of the settlement and mutual release agreement, the former
Chief Executive Officer of the Company will return 5,650,000 common shares of the Company and the Company will return the rights
to the intellectual property that was previously held by CEG Inc., and give machinery that was previously paid by the Company to
CEG Inc. The Company incurred $53,297 of expenses relating to the proposed acquisition, which has been recorded for the year ended
November 30, 2017
.
|
|
(d)
|
Subsequent to November 30, 2017 there were 9,500,000 shares issued for consulting services and
2,433,555 shares issued for conversion of debt.
|