UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
or
Commission File Number:
(Exact name of registrant as specified in its charter)
| | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(
Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| | |
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated filer ☐ | Accelerated filer ☐ |
| | Smaller reporting company |
| Emerging growth company |
|
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐
State the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:
CLS HOLDINGS USA, INC.
FORM 10-Q
Quarterly Period Ended February 28, 2022
TABLE OF CONTENTS
|
|
Page |
|
|
|
|
|
|
3 |
||
|
|
|
|
| AVAILABLE INFORMATION | 3 | |
|
PART I. FINANCIAL INFORMATION |
|
|
|
Item 1. |
4 |
|
|
|
Condensed Consolidated Balance Sheets as of February 28, 2022 (Unaudited) and May 31, 2021 (audited) |
4 |
|
|
5 |
|
|
|
6 |
|
|
|
7 |
|
|
|
8 |
|
|
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
31 |
|
Item 3. |
48 |
|
|
Item 4. |
48 |
|
|
|
|
|
|
PART II. OTHER INFORMATION |
|
|
|
Item 1. |
49 |
|
|
Item 1A. |
49 |
|
|
Item 2. |
49 |
|
|
Item 3. |
49 |
|
|
Item 4. |
49 |
|
|
Item 5. |
49 |
|
|
Item 6. |
49 |
|
|
|
|
|
|
50 |
||
EXPLANATORY NOTE
Unless otherwise noted, references in this report to “CLS Holdings USA, Inc.,” the “Company,” “we,” “our” or “us” means CLS Holdings USA, Inc. and its subsidiaries.
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements relate to, among other things, the impact of the COVID-19 virus on our business, the results of our initiatives to retain our employees and strengthen our relationships with our customers and community during the pandemic, the effect of our initiatives to expand market share and achieve growth during and following the pandemic, results of operations and financial performance, anticipated future events, and the effectiveness of our business practices during the pandemic. The continued spread of COVID-19 could have, and in some cases already has had, an adverse impact on our business, operations and financial results, including through disruptions in our cultivation and processing activities, supply chains and sales channels, and retail dispensary operations as well as a deterioration of general economic conditions including a possible national or global recession. Due to the uncertainties associated with the continued spread of COVID-19 and the timing of vaccinations, it is not possible to estimate its impact on our business, operations or financial results; however, the impact could be material. These forward-looking statements also relate to our ability to finance our operations, identify, finance and close potential acquisitions and joint ventures, market acceptance of our services and product offerings, our ability to protect and commercialize our intellectual property, our ability to use net operating losses to offset certain cannabis-related tax liabilities and our ability to grow our wholesale and processing businesses and joint ventures. In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “will,” “should,” “intends,” “expects,” “plans,” “goals,” “projects,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these terms or other comparable terminology.
These forward-looking statements are only predictions, are uncertain and involve substantial known and unknown risks, uncertainties and other factors which may cause our (or our industry’s) actual results, levels of activity or performance to be materially different from any expected future results, levels of activity or performance expressed or implied by these forward-looking statements.
We cannot guarantee future results, levels of activity or performance. You should not place undue reliance on these forward-looking statements, which speak only as of the date that they were made. These cautionary statements should be considered together with any written or oral forward-looking statements that we may issue in the future. Except as required by applicable law, we do not intend to update any of the forward-looking statements to conform these statements to reflect actual results, later events or circumstances or to reflect the occurrence of unanticipated events.
AVAILABLE INFORMATION
We file certain reports under the Securities Exchange Act of 1934 (the “Exchange Act”). Such filings include annual and quarterly reports. The reports we file with the Securities and Exchange Commission (“SEC”) are available on the SEC’s website at (http://www.sec.gov).
Item 1. Financial Statements.
CLS HOLDINGS USA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
|
February 28, |
May 31, |
|||||||
|
2022 |
2021 |
|||||||
|
ASSETS |
(unaudited) |
(audited) |
||||||
|
Current assets |
||||||||
|
Cash and cash equivalents |
$ | $ | ||||||
|
Accounts Receivable |
||||||||
|
Inventory |
||||||||
|
Prepaid expenses and other current assets |
||||||||
|
Total current assets |
||||||||
| Property, plant and equipment, net of accumulated depreciation of $ |
||||||||
|
Right of use assets, operating leases |
||||||||
| Intangible assets, net of accumulated amortization of $ |
||||||||
|
Goodwill |
||||||||
|
Other assets |
||||||||
|
Total assets |
$ | $ | ||||||
|
LIABILITIES AND STOCKHOLDERS' DEFICIT |
||||||||
|
Current liabilities |
||||||||
|
Accounts payable and accrued liabilities |
$ | $ | ||||||
|
Accrued interest, current |
||||||||
|
Loan payable |
||||||||
|
Lease liability - operating leases, current |
||||||||
|
Taxes Payable |
||||||||
| Convertible notes payable - current, net of discount of $ |
||||||||
|
Total current liabilities |
||||||||
|
Noncurrent liabilities |
||||||||
|
Lease liability - operating leases, non-current |
||||||||
| Notes payable, net of discount of $ |
||||||||
| Convertible notes payable - long term, net of discount of $ |
||||||||
|
Total Liabilities |
||||||||
|
Commitments and contingencies |
||||||||
|
Stockholder's deficit |
||||||||
| Preferred stock, $ |
||||||||
| Common stock, $ |
||||||||
|
Additional paid-in capital |
||||||||
|
Common stock subscribed |
||||||||
|
Accumulated deficit |
( |
) |
( |
) |
||||
|
Stockholder's deficit attributable to CLS Holdings, Inc. |
( |
) |
( |
) |
||||
|
Non-controlling interest |
( |
) |
||||||
|
Total stockholder's deficit |
( |
) |
( |
) |
||||
|
Total liabilities and stockholders' deficit |
$ | $ | ||||||
See accompanying notes to these financial statements.
CLS HOLDINGS USA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
For the |
For the |
For the |
For the |
|||||||||||||
|
Three Months Ended |
Three Months Ended |
Nine Months Ended |
Nine Months Ended |
|||||||||||||
|
February 28, 2022 |
February 28, 2021 |
February 28, 2022 |
February 28, 2021 |
|||||||||||||
|
Revenue |
$ | $ | $ | $ | ||||||||||||
|
Cost of goods sold |
||||||||||||||||
|
Gross margin |
||||||||||||||||
|
Selling, general and administrative expenses |
||||||||||||||||
|
Total operating expenses |
||||||||||||||||
|
Operating loss |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
|
Other (income) expense: |
||||||||||||||||
|
Interest expense, net |
||||||||||||||||
|
Impairment of note receivable |
||||||||||||||||
|
Gain on settlement of note receivable |
( |
) |
( |
) |
||||||||||||
|
Total other (income) expense |
( |
) |
||||||||||||||
|
Loss before income taxes |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
|
Provision for income tax |
( |
) | ( |
) |
||||||||||||
|
Net loss |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
|
Non-controlling interest |
||||||||||||||||
|
Net loss attributable to CLS Holdings, Inc. |
$ | ( |
) |
$ | ( |
) |
$ | ( |
) |
$ | ( |
) |
||||
|
Net loss per share – basic and diluted |
$ | ( |
) |
$ | ( |
) |
$ | ( |
) |
$ | ( |
) |
||||
|
Weighted average shares outstanding – basic and diluted |
||||||||||||||||
See accompanying notes to these financial statements.
CLS HOLDINGS USA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(Unaudited)
|
Common Stock |
Paid In |
Stock |
Accumulated |
Non-controlling |
||||||||||||||||||||||||
|
Amount |
Value |
Capital |
Payable |
Deficit |
interest |
Total |
||||||||||||||||||||||
|
Balance, May 31, 2020 |
$ | $ | $ | $ | ( |
) |
$ | - | $ | ( |
) |
|||||||||||||||||
|
Common stock to be issued to officer |
- | - | - | - | - | |||||||||||||||||||||||
|
Common stock issued to officer from stock payable |
( |
) |
- | - | ||||||||||||||||||||||||
|
Common stock to be issued to consultant |
- | - | - | ( |
) |
- | - | ( |
) |
|||||||||||||||||||
|
Net loss for the nine months ended February 28, 2021 |
- | - | - | - | ( |
) |
- | ( |
) |
|||||||||||||||||||
|
Balance, February 28, 2021 (unaudited) |
$ | $ | $ | $ | ( |
) |
$ | - | $ | ( |
) |
|||||||||||||||||
|
Balance, May 31, 2021 |
$ | $ | $ | $ | ( |
) |
$ | - | $ | ( |
) |
|||||||||||||||||
|
Common stock issued for conversion of debt |
- | - | ||||||||||||||||||||||||||
|
Common stock to be issued to employee |
- | - | - | - | - | |||||||||||||||||||||||
|
Fair value of warrants issued with debenture offering |
- | - | - | - | - | |||||||||||||||||||||||
|
Net loss for the nine months ended February 28, 2022 |
- | - | - | - | ( |
) |
( |
) | ( |
) |
||||||||||||||||||
|
Balance, February 28, 2022 (unaudited) |
$ | $ | $ | $ | ( |
) |
$ | ( |
) |
$ | ( |
) |
||||||||||||||||
See accompanying notes to these financial statements.
CLS HOLDINGS USA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
For the |
For the |
|||||||
|
Nine Months Ended |
Nine Months Ended |
|||||||
|
February 28, 2022 |
February 28, 2021 |
|||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
|
Net loss |
$ | ( |
) |
$ | ( |
) |
||
|
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
|
Fair value of shares cancelled |
( |
) |
||||||
|
Amortization of debt discounts |
||||||||
|
Fair value of shares vested by officers |
||||||||
|
Gain on settlement of note receivable |
( |
) |
||||||
|
Impairment of note receivable |
||||||||
|
Depreciation and amortization expense |
||||||||
|
Bad debt expense |
||||||||
|
Changes in assets and liabilities: |
||||||||
|
Accounts receivable |
( |
) |
( |
) |
||||
|
Prepaid expenses and other current assets |
( |
) |
( |
) |
||||
|
Inventory |
( |
) |
( |
) |
||||
|
Interest receivable |
||||||||
|
Right of use asset |
||||||||
|
Accounts payable and accrued expenses |
||||||||
|
Accrued interest |
||||||||
|
Funds held in escrow |
( |
) |
||||||
|
Deferred tax liability |
||||||||
|
Operating lease liability |
( |
) |
( |
) |
||||
|
Net cash used in operating activities |
( |
) |
( |
) |
||||
|
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
|
Payments to purchase property, plant and equipment |
( |
) |
( |
) |
||||
|
Cash paid for construction deposit on grow facility |
( |
) |
||||||
|
Proceeds from collection of note receivable |
||||||||
|
Net cash provided by investing activities |
||||||||
|
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
|
Proceeds from loan payable |
- | |||||||
|
Repayments of loans payable |
( |
) |
- | |||||
|
Proceeds from debenture offering |
||||||||
|
Principal payments on notes payable |
( |
) |
||||||
|
Net cash used in financing activities |
||||||||
|
Net decrease in cash and cash equivalents |
( |
) |
||||||
|
Cash and cash equivalents at beginning of period |
||||||||
|
Cash and cash equivalents at end of period |
$ | $ | ||||||
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
||||||||
|
Interest paid |
$ | $ | ||||||
|
Income taxes paid |
$ | $ | ||||||
|
NONCASH INVESTING AND FINANCING ACTIVITIES: |
||||||||
|
Capitalized interest on convertible debentures |
$ | $ | ||||||
|
Shares issued for conversion of notes payable |
$ | $ | ||||||
|
Shares issued for services issued from stock payable |
$ | $ | ||||||
|
Initial ROU asset and lease liability |
$ | $ | ||||||
|
Original issue discount on notes payable |
$ | $ | ||||||
|
Fair value of warrants issued with debenture offering |
$ | $ | ||||||
See accompanying notes to these financial statements.
CLS HOLDINGS USA, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2022
(Unaudited)
Note 1 – Nature of Business and Significant Accounting Policies
Basis of Presentation
These financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States and are expressed in US dollars. The Company has adopted a fiscal year end of May 31st.
Principals of Consolidation
The accompanying consolidated financial statements include the accounts of CLS Holdings USA, Inc., and its direct and indirect wholly owned operating subsidiaries, CLS Nevada, Inc., (“CLS Nevada”), CLS Labs, Inc. (“CLS Labs”), CLS Labs Colorado, Inc. (“CLS Colorado”), CLS Massachusetts, Inc. (“CLS Massachusetts”), and Alternative Solutions, LLC (“Alternative Solutions”), and its
Nature of Business
CLS Holdings USA, Inc. (the “Company”) was originally incorporated as Adelt Design, Inc. (“Adelt”) on March 31, 2011 to manufacture and market carpet binding art. Production and marketing of carpet binding art never commenced.
On November 12, 2014, CLS Labs acquired
On April 29, 2015, the Company, CLS Labs and CLS Merger Inc., a Nevada corporation and wholly owned subsidiary of CLS Holdings (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) and completed a merger, whereby CLS Merger Inc. merged with and into CLS Labs, with CLS Labs remaining as the surviving entity (the “Merger”). Upon the consummation of the Merger, the shares of the common stock of CLS Holdings owned by CLS Labs were extinguished and the former stockholders of CLS Labs were issued an aggregate of
The Company has been issued a U.S. patent with respect to its proprietary method of extracting cannabinoids from cannabis plants and converting the resulting cannabinoid extracts into concentrates such as oils, waxes, edibles and shatter. These concentrates may be ingested in a number of ways, including through vaporization via electronic cigarettes (“e-cigarettes”), and used for a variety of pharmaceutical and other purposes. Internal testing of this extraction method and conversion process has revealed that it produces a cleaner, higher quality product and a significantly higher yield than the cannabinoid extraction processes currently existing in the marketplace. The Company has not commercialized its patented proprietary process or otherwise earned any revenues from it. The Company plans to generate revenues through licensing, fee-for-service and joint venture arrangements related to its patented proprietary method of extracting cannabinoids from cannabis plants and converting the resulting cannabinoid extracts into saleable concentrates.
On December 4, 2017, the Company and Alternative Solutions, entered into a Membership Interest Purchase Agreement (the “Acquisition Agreement”), as amended, for the Company to acquire the Oasis LLCs from Alternative Solutions. Pursuant to the Acquisition Agreement, the Company initially contemplated acquiring all of the membership interests in the Oasis LLCs from Alternative Solutions. Just prior to closing, the parties agreed that the Company would instead acquire all of the membership interests in Alternative Solutions, the parent of the Oasis LLCs, from its members, and the membership interests in the Oasis LLCs owned by members other than Alternative Solutions.
Pursuant to the Acquisition Agreement, the Company paid a non-refundable deposit of $
On October 31, 2018, the Company, CLS Massachusetts, Inc., a Massachusetts corporation and a wholly-owned subsidiary of the Company (“CLS Massachusetts”), and In Good Health, Inc., a Massachusetts corporation (“IGH”), entered into an Option Agreement (the “IGH Option Agreement”). Under the terms of the IGH Option Agreement, CLS Massachusetts had an exclusive option to acquire all of the outstanding capital stock of IGH (the “IGH Option”) during the period beginning on the earlier of the date that is one year after the effective date of the conversion and December 1, 2019 and ending on the date that was 60 days after such date. If CLS Massachusetts exercised the IGH Option, the Company, a wholly-owned subsidiary of the Company and IGH would enter into a merger agreement (the form of which had been agreed to by the parties) (the “IGH Merger Agreement”). At the effective time of the merger contemplated by the IGH Merger Agreement, CLS Massachusetts would pay a purchase price of $
On June 14, 2021, the parties to the IGH lawsuit entered into a confidential settlement agreement to resolve the action and a secured promissory note dated and executed by IGH in favor of the Company effective on June 11, 2021 (the “IGH Settlement Note”). Pursuant to the IGH Settlement Note, IGH shall pay the Company $
On August 24, 2021, the Company formed Kealii Okamalu, LLC, a Nevada limited liability company. The Company and an additional investor each acquired a
On January 4, 2018, the former Attorney General, Jeff Sessions, rescinded the memorandum issued by former Deputy Attorney General James Cole on August 29, 2013 (as amended on February 14, 2014, the “Cole Memo”), the Cole Banking Memorandum, and all other related Obama-era DOJ cannabis enforcement guidance. While the rescission did not change federal law, as the Cole Memo and other DOJ guidance documents were not themselves laws, the rescission removed the DOJ’s formal policy that state-regulated cannabis businesses in compliance with the Cole Memo guidelines should not be a prosecutorial priority. Notably, former Attorney General Sessions’ rescission of the Cole Memo has not affected the status of the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) memorandum issued by the Department of Treasury, which remains in effect. This memorandum outlines Bank Secrecy Act-compliant pathways for financial institutions to service state-sanctioned cannabis businesses, which echoed the enforcement priorities outlined in the Cole Memo. In addition to his rescission of the Cole Memo, Attorney General Sessions issued a one-page memorandum known as the “Sessions Memorandum”. The Sessions Memorandum explains the DOJ’s rationale for rescinding all past DOJ cannabis enforcement guidance, claiming that Obama-era enforcement policies are “unnecessary” due to existing general enforcement guidance adopted in the 1980s, in chapter 9.27.230 of the U.A. Attorneys’ Manual (“USAM”). The USAM enforcement priorities, like those of the Cole Memo, are based on the use of the federal government’s limited resources and include “law enforcement priorities set by the Attorney General,” the “seriousness” of the alleged crimes, the “deterrent effect of criminal prosecution,” and “the cumulative impact of particular crimes on the community.” Although the Sessions Memorandum emphasizes that cannabis is a federally illegal Schedule I controlled substance, it does not otherwise instruct U.S. Attorneys to consider the prosecution of cannabis-related offenses a DOJ priority, and in practice, most U.S. Attorneys have not changed their prosecutorial approach to date. However, due to the lack of specific direction in the Sessions Memorandum as to the priority federal prosecutors should ascribe to such cannabis activities, there can be no assurance that the federal government will not seek to prosecute cases involving cannabis businesses that are otherwise compliant with state law.
William Barr served as United States Attorney General from February 14, 2019 to December 23, 2020. The DOJ under Mr. Barr did not take a formal position on federal enforcement of laws relating to cannabis. On March 11, 2021, United States President Biden’s nominee, Merrick Garland was sworn in as the U.S. Attorney General. During his campaign, President Biden stated a policy goal to decriminalize possession of cannabis at the federal level, but he has not publicly supported the full legalization of cannabis. It is unclear what impact, if any, the new administration will have on U.S. federal government enforcement policy on cannabis. Nonetheless, there is no guarantee that the position of the Department of Justice will not change.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles 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 amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassification
Certain amounts in the prior period have been reclassified to conform to the current period presentation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less to be cash equivalents. The Company had cash and cash equivalents of $
Allowance for Doubtful Accounts
The Company generates the majority of its revenues and corresponding accounts receivable from the sale of cannabis, and cannabis related products. The Company evaluates the collectability of its accounts receivable considering a combination of factors. In circumstances where it is aware of a specific customer’s inability to meet its financial obligations to it, the Company records a specific reserve for bad debts against amounts due in order to reduce the net recognized receivable to the amount it reasonably believe will be collected. For all other customers, the Company recognizes reserves for bad debts based on past write-off experience and the length of time the receivables are past due. The Company had $
Inventory
Inventories are stated at the lower of cost or market. Cost is determined using a perpetual inventory system whereby costs are determined by acquisition costs of individual items included in inventory. Market is determined based on net realizable value. Appropriate consideration is given to obsolescence, excessive levels, deterioration, and other factors in evaluating net realizable values. Our cannabis products consist of prepackaged purchased goods ready for resale, along with produced edibles and extracts developed under our production license.
Property, Plant and Equipment
Property and equipment is recorded at the lower of cost or estimated net recoverable amount, and is depreciated using the straight-line method over its estimated useful life. Property acquired in a business combination is recorded at estimated initial fair value. Property, plant, and equipment are depreciated using the straight-line method based on the lesser of the estimated useful lives of the assets or the lease term based upon the following life expectancy:
|
|
|
Years |
|
|
|
Office equipment |
|
|
|
|
|
Furniture & fixtures |
|
|
|
|
|
Machinery & equipment |
|
|
|
|
|
Leasehold improvements |
|
|
|
|
Repairs and maintenance expenditures are charged to operations as incurred. Major improvements and replacements, which extend the useful life of an asset, are capitalized and depreciated over the remaining estimated useful life of the asset. When assets are retired or sold, the cost and related accumulated depreciation are eliminated and any resulting gain or loss is reflected in operations.
Long-Lived Assets
The Company reviews its property and equipment and any identifiable intangibles including goodwill for impairment on an annual basis utilizing the guidance set forth in the Statement of Financial Accounting Standards Board ASC 350 “Intangibles – Goodwill and Other” and ASC 360 “Property, Plant, and Equipment.” At February 28, 2022, the net carrying value of goodwill on the Company’s balance sheet remained at $
Comprehensive Income
ASC 220-10-15 “Reporting Comprehensive Income,” establishes standards for reporting and displaying of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, ASC 220-10-15 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company does not have any items of comprehensive income in any of the periods presented.
Non-Controlling Interests
The Company reports “non-controlling interest in subsidiary” as a component of equity, separate from parent’s equity, on the Consolidated Balance Sheets. In addition, the Company’s Consolidated Statements of Operations includes “net income (loss) attributable to non-controlling interest.”
Variable Interest Entities
The Company’s consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and variable interest entities (“VIE”), where the Company is the primary beneficiary under the provisions of ASC 810, Consolidation (“ASC 810”). A VIE must be consolidated by its primary beneficiary when, along with its affiliates and agents, the primary beneficiary has both: (i) the power to direct the activities that most significantly impact the VIE’s economic performance; and (ii) the obligation to absorb losses or the right to receive the benefits of the VIE that could potentially be significant to the VIE. The Company reconsiders whether an entity is still a VIE only upon certain triggering events and continually assesses its consolidated VIEs to determine if it continues to be the primary beneficiary. See “Note 3 – Joint Ventures” for additional information on the Company’s VIEs.
Concentrations of Credit Risk
The Company maintains its cash in bank deposit accounts and other accounts, the balances of which at times may be uninsured or exceed federally insured limits. From time to time, some of the Company’s funds are also held by escrow agents; these funds may not be federally insured. The Company continually monitors its banking relationships and consequently has not experienced any losses in such accounts.
Advertising and Marketing Costs
All costs associated with advertising and promoting products are expensed as incurred. Total recognized advertising and marketing expenses were $
Research and Development
Research and development expenses are charged to operations as incurred. Total recognized research and development expenses were $
Fair Value of Financial Instruments
Pursuant to Accounting Standards Codification (“ASC”) No. 825 - Financial Instruments, the Company is required to estimate the fair value of all financial instruments included on its balance sheets. The carrying amounts of the Company’s cash and cash equivalents, notes receivable, convertible notes payable, accounts payable and accrued expenses, none of which is held for trading, approximate their estimated fair values due to the short-term maturities of those financial instruments.
A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable, either directly or indirectly.
Level 3 - Significant unobservable inputs that cannot be corroborated by market data.
Revenue Recognition
Revenue from the sale of cannabis products is recognized by Oasis at the point of sale, at which time payment is received. Management estimates an allowance for sales returns.
The Company also recognizes revenue from Serenity Wellness Products LLC and Serenity Wellness Growers LLC, d/b/a City Trees (“City Trees”). City Trees recognizes revenue from the sale of the following cannabis products and services to licensed dispensaries, cultivators and distributors within the State of Nevada:
|
● |
Premium organic medical cannabis sold wholesale to licensed retailers |
|
● |
Recreational marijuana cannabis products sold wholesale to licensed distributors and retailers |
|
● |
Extraction products such as oils and waxes derived from in-house cannabis production |
|
● |
Processing and extraction services for licensed medical cannabis cultivators in Nevada |
|
● |
High quality cannabis strains in the form of vegetative cuttings for sale to licensed medical cannabis cultivators in Nevada |
Effective June 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from commercial sales of products and licensing agreements by applying the following steps: (1) identifying the contract with a customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to each performance obligation in the contract; and (5) recognizing revenue when each performance obligation is satisfied. For the comparative periods, revenue has not been adjusted and continues to be reported under ASC 605 — Revenue Recognition. Under ASC 605, revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the performance of the service has been rendered to a customer or delivery has occurred; (3) the amount of fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably assured. There was no impact on the Company’s financial statements as a result of adopting Topic 606 for the three and nine months ended February 28, 2022 and 20201
Disaggregation of Revenue
The following table represents a disaggregation of revenue for the three and nine months ended February 28, 2022 and 2021:
|
For the Nine |
For the Nine |
|||||||
|
Months Ended |
Months Ended |
|||||||
|
February 28, 2022 |
February 28, 2021 |
|||||||
|
Cannabis Dispensary |
||||||||
|
Cannabis Production |
||||||||
| $ | $ | |||||||
|
For the Three |
For the Three |
|||||||
|
Months Ended |
Months Ended |
|||||||
|
February 28, 2022 |
February 28, 2021 |
|||||||
|
Cannabis Dispensary |
||||||||
|
Cannabis Production |
||||||||
| $ | $ | |||||||
Basic and Diluted Earnings or Loss Per Share
Basic net earnings per share is based on the weighted average number of shares outstanding during the period, while fully diluted net earnings per share is based on the weighted average number of shares of common stock and potentially dilutive securities assumed to be outstanding during the period using the treasury stock method. Potentially dilutive securities consist of options and warrants to purchase common stock, and convertible debt. Basic and diluted net loss per share are computed based on the weighted average number of shares of common stock outstanding during the period. At February 28, 2022 and 2021, the Company had the following potentially dilutive instruments outstanding: At February 28, 2022, a total of
The Company uses the treasury stock method to calculate the impact of outstanding stock options and warrants. Stock options and warrants for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on earnings per common share and, accordingly, are excluded from the calculations.
A net loss causes all outstanding stock options and warrants to be anti-dilutive. As a result, the basic and dilutive losses per common share are the same for the three and nine months ended February 28, 2022 and for the three months ended February 28, 2021. For the nine months ended February 28, 2022, the Company excluded from the calculation of fully diluted earnings per share the following instruments which were anti-dilutive: shares issuable pursuant to the conversion of notes payable and accrued interest, and shares issuable pursuant to the exercise of stock options and warrants. The Company included 170,000 shares of common stock issuable in fully diluted earnings per share for the nine months ended February 28, 2022.
Income Taxes
The Company accounts for income taxes under the asset and liability method in accordance with ASC 740. The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The components of the deferred tax assets and liabilities are classified as current and non-current based on their characteristics. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations.
Section 280E of the Internal Revenue Code, as amended, prohibits businesses from deducting certain expenses associated with trafficking controlled substances (within the meaning of Schedule I and II of the Controlled Substances Act). The IRS has invoked Section 280E in tax audits against various cannabis businesses in the U.S. that are permitted under applicable state laws. Although the IRS has issued a clarification allowing the deduction of certain expenses, the bulk of operating costs and general administrative costs are generally not permitted to be deducted. The operations of certain of the Company’s subsidiaries are subject to Section 280E. This results in permanent differences between ordinary and necessary business expenses deemed non-deductible under IRC Section 280E. Therefore, the effective tax rate can be highly variable and may not necessarily correlate with pre-tax income or loss.
Commitments and Contingencies
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims brought to such legal counsel’s attention as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed.
Recent Accounting Pronouncements
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, current U.S. GAAP requires the performance of procedures to determine the fair value at the impairment testing date of assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, the amendments under this ASU require the goodwill impairment test to be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The ASU became effective for the Company on January 1, 2020. During the year ended May 31, 2020, the Company recorded an impairment of goodwill in the amount of $
There are various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
Note 2 – Going Concern
As shown in the accompanying financial statements, the Company has incurred net losses from operations resulting in an accumulated deficit of $
Note 3 – Joint Venture and Options Transaction
In Good Health
On October 31, 2018, the Company, CLS Massachusetts, and IGH, which converted to a for-profit corporation on November 6, 2018 (the “Conversion”), entered into the IGH Option Agreement. Under the terms of the IGH Option Agreement, CLS Massachusetts had an exclusive option to acquire all of the outstanding capital stock of IGH (the “IGH Option”) during the period beginning on the earlier of the date that was one year after the effective date of the Conversion and December 1, 2019, and ending on the date that was 60 days after such date (the “Option Period”). If CLS Massachusetts exercised the IGH Option, the Company, a wholly-owned subsidiary of the Company and IGH would enter into the IGH Merger Agreement (the form of which had been agreed to by the parties). At the effective time of the merger contemplated by the IGH Merger Agreement, CLS Massachusetts would pay a purchase price of $
On October 31, 2018, as consideration for the IGH Option, the Company made a loan to IGH (the “IGH Loan”), in the principal amount of $
On June 14, 2021, the parties to the IGH lawsuit entered into a confidential settlement agreement to resolve the action and the IGH Settlement Note. Pursuant to the IGH Settlement Note, IGH shall pay the Company $
Quinn River Joint Venture
On October 20, 2021, the Company entered into a management services agreement (the “Quinn River Joint Venture Agreement”) through its
The Company is the manager of and holds a 50% ownership interest in Kealii Okamalu. Kealii Okamalu is a VIE which the Company consolidates. The Quinn River Joint Venture is not a legal entity but rather a business operated by Kealii Okamalu. The Company uses the equity method of accounting to record one-third of the profit or loss generated by the Quinn River Joint Venture, which accrues to Kealii Okamalu. Since the Company is a 50% owner of Kealii Okamalu, 50% of the profit or loss of Kealii Okamalu is recorded as minority interest in the Company’s statement of operations.
During the nine months ended February 28, 2022, Kealii Okamalu made a deposit of $
Note 4 – Accounts Receivable
Accounts receivable was $
Note 5 – Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
|
February 28, 2022 |
May 31, 2021 |
|||||||
|
Deposits |
$ | $ | ||||||
|
Prepaid expenses |
||||||||
|
Other receivable |
||||||||
|
Total |
$ | $ | ||||||
Deposits consist of amounts paid in advance for the acquisition of property and equipment. Prepaid expenses consist primarily of annual license fees charged by the State of Nevada; these fees are paid in advance, and amortized over the one-year term of the licenses.
Note 6 – Inventory
Inventory, consisting of material, overhead, labor, and manufacturing overhead, is stated at the lower of cost (first-in, first-out) or market, and consists of the following:
|
February 28, |
May 31, |
|||||||
|
2022 |
2021 |
|||||||
|
Raw materials |
$ | $ | ||||||
|
Finished goods |
||||||||
|
Total |
$ | $ | ||||||
Raw materials consist of cannabis plants and the materials that are used in our production process prior to being tested and packaged for consumption. Finished goods consist of pre-packaged materials previously purchased from other licensed cultivators and our manufactured edibles and extracts.
Note 7 – Notes Receivable
IGH Note Receivable
On October 31, 2018, in connection with an option to purchase transaction (see note 4), the Company loaned $
By letter dated February 26, 2020, the Company informed IGH that as a result of its breaches of the IGH Option, which remained uncured, an event of default had occurred under the IGH Note. The Company advised IGH that it was electing to cause the IGH Note to bear interest at the default rate of
On June 14, 2021, the parties to the IGH lawsuit entered into a confidential settlement agreement to resolve the action and the IGH Settlement Note. Pursuant to the IGH Settlement Note, IGH shall pay the Company $
Note 8 – Property, Plant and Equipment
Property, plant and equipment consisted of the following at February 28, 2022 and May 31, 2021.
|
February 28, 2022 |
May 31, 2021 |
|||||||
|
Office equipment |
$ | $ | ||||||
|
Furniture and fixtures |
||||||||
|
Machinery & Equipment |
||||||||
|
Leasehold improvements |
||||||||
|
Less: accumulated depreciation |
( |
) |
( |
) |
||||
|
Property, plant, and equipment, net |
$ | $ | ||||||
The Company made payments in the amounts of $
Depreciation of property, plant, and equipment was $
Note 9 – Right to Use Assets and Liabilities – Operating Leases
The Company has operating leases for offices and warehouses. The Company’s leases have remaining lease terms of
The Company’s lease expense for the three and nine months ended February 28, 2022 was entirely comprised of operating leases and amounted to $
The Company has recorded total right to use assets of $
On October 20, 2021, pursuant to the Quinn River Joint Venture Agreement (see note 4), the Company, through Kealii Okamalu, entered into a lease agreement (the “Quinn River Lease”) for approximately 30 acres of land for purposes of building and operating a facility to grow cannabis. The lease has a term of
Right to use assets – operating leases are summarized below:
|
February 28, 2022 |
||||
|
Amount at inception of leases |
$ | |||
|
Amount amortized |
( |
) |
||
|
Balance – February 28, 2022 |
$ | |||
Operating lease liabilities are summarized below:
|
Amount at inception of leases |
$ | |||
|
Amount amortized |
( |
) |
||
|
Balance – February 28, 2022 |
$ |
|
Warehouse and offices |
$ | |||
|
Land |
||||
|
Office equipment |
||||
|
Balance – February 28, 2022 |
$ | |||
|
Lease liability |
$ | |||
|
Less: current portion |
( |
) |
||
|
Lease liability, non-current |
$ |
Maturity analysis under these lease agreements is as follows:
|
Twelve months ended February 28, 2023 |
$ | |||
|
Twelve months ended February 28, 2024 |
||||
|
Twelve months ended February 28, 2025 |
||||
|
Twelve months ended February 28, 2026 |
||||
|
Twelve months ended February 28, 2027 |
||||
|
Thereafter |
||||
|
Total |
$ | |||
|
Less: Present value discount |
( |
) |
||
|
Lease liability |
$ |
Note 10 – Intangible Assets
Intangible assets consisted of the following at February 28, 2022 and May 31, 2021:
|
February 28, 2022 |
||||||||||||
|
Gross |
Accumulated Amortization |
Net |
||||||||||
|
Intellectual Property |
$ | $ | ( |
) |
$ | |||||||
|
License & Customer Relations |
( |
) |
||||||||||
|
Tradenames - Trademarks |
( |
) |
||||||||||
|
Non-Compete Agreements |
( |
) |
||||||||||
|
Domain Names |
( |
) |
||||||||||
|
Total |
$ | $ | ( |
) |
$ | |||||||
|
May 31, 2021 |
||||||||||||
|
Gross |
Accumulated Amortization |
Net |
||||||||||
|
Intellectual Property |
$ | $ | ( |
) |
$ | |||||||
|
License & Customer Relations |
( |
) |
||||||||||
|
Tradenames - Trademarks |
( |
) |
||||||||||
|
Non-Compete Agreements |
( |
) |
||||||||||
|
Domain Names |
( |
) |
||||||||||
|
Total |
$ | $ | ( |
) |
$ | |||||||
Total amortization expense charged to operations for the three months ended February 28, 2022 and 2021 was $
|
Amount to be amortized during the twelve months ended February 28, |
||||
|
2023 |
$ | |||
|
2024 |
||||
|
2025 |
||||
|
2026 |
||||
|
2027 |
||||
|
Thereafter |
||||
| $ |
Note 11 – Goodwill
The Company recorded goodwill in the amount of $
Goodwill Impairment Test
The Company assessed its intangible assets as of May 31, 2020 for purposes of determining if an impairment existed as set forth in ASC 350 – Intangibles – Goodwill and Other and ASC 360 – Property Plant and Equipment. Pursuant to ASC 360, the Company recorded an impairment of goodwill in the amount of $
The Company also assessed its intangible assets as of May 31, 2021 for purposes of determining if an impairment existed as set forth in ASC 350 – Intangibles – Goodwill and Other and ASC 360 – Property Plant and Equipment. Pursuant to ASC 360, the Company determined that the fair value of its intangible assets exceeded the carrying value of goodwill for the year ended May 31, 2021. As a result, no impairment was recorded during the year ended May 31, 2021. At February 28, 2022, the net amount of goodwill on the Company’s balance sheet was $
Note 12 – Other Assets
Other assets consisted of the following at February 28, 2022 and May 31, 2021:
|
February 28, |
May 31, |
|||||||
|
2022 |
2021 |
|||||||
|
Security deposits |
$ | $ | ||||||
|
Construction deposit |
||||||||
| $ | $ | |||||||
Note 13 – Accounts Payable and Accrued Liabilities
Accrued accounts payable and accrued liabilities consisted of the following at February 28, 2022 and May 31, 2021:
|
February 28, 2022 |
May 31, 2021 |
|||||||
|
Trade accounts payable |
$ | $ | ||||||
|
Accrued payroll and payroll taxes |
||||||||
|
Accrued liabilities |
||||||||
|
Total |
$ | $ | ||||||
Note 14- Loan Payable
The Company is a party to an agreement with a lender to finance short term purchases of inventory (the “Short Term Financing Agreement”) for two of its subsidiaries. On November 9, 2021, the Company received cash in the amount of $
During the three months ended February 28, 2022, the Company received cash proceeds in the amount of $
Note 15 – Convertible Notes Payable
|
February 28, 2022 |
May 31, 2021 |
|||||||
| Convertible debenture in the principal amount of $ |
$ | $ | ||||||
| Convertible debenture in the principal amount of $ |
||||||||
|
February 28, 2022 |
May 31, 2021 |
|||||||
| Convertible debenture in the principal amount of $ |
||||||||
| Convertible debenture in the principal amount of $ |
||||||||
| Convertible debenture in the principal amount of $ |
||||||||
|
February 28, 2022 |
May 31, 2021 |
|||||||
| Convertible debenture payable in the principal amount of $ |
||||||||
| Convertible debentures payable in the aggregate principal amount of $ |
||||||||
|
Total - Convertible Notes Payable |
$ | $ | ||||||
|
Less: Discount |
) |
( |
) |
|||||
|
Convertible Notes Payable, Net of Discounts |
$ | $ | ||||||
|
February 28, 2022 |
May 31, 2021 |
|||||||
| Total - Convertible Notes Payable, Net of Discounts, Current Portion, net of discount of $ |
$ | $ | ||||||
| Total - Convertible Notes Payable, Net of Discounts, Long-term Portion, net of discount of $ |
$ | $ | ||||||
|
February 28, 2022 |
February 28, 2021 |
|||||||
|
Discounts on notes payable amortized to interest expense – 3 months ended February 28, 2022 and 2021, respectively |
$ | $ | ||||||
|
Discounts on notes payable amortized to interest expense – 9 months ended February 28, 2022 and 2021, respectively |
$ | $ |
Note 16- Notes Payable
|
February 28, 2022 |
May 31, 2021 |
|||||||
| Debenture in the principal amount of $ |
$ | $ | ||||||
| Debenture in the principal amount of $ |
||||||||
|
February 28, 2022 |
May 31, 2021 |
|||||||
| Debenture in the principal amount of $ |
||||||||
| Debenture in the principal amount of $ |
||||||||
| Debenture in the principal amount of $ |
||||||||
|
February 28, 2022 |
May 31, 2021 |
|||||||
| Debenture in the principal amount of $ |
||||||||
|
Total |
||||||||
|
Original Issue Discount |
||||||||
|
Notes Payable, Gross |
||||||||
|
Less: Discount |
( |
) |
||||||
|
Notes Payable, Net of Discount |
||||||||
|
February 28, 2022 |
February 28, 2021 |
|||||||
|
Discounts on notes payable amortized to interest expense – 3 months ended February 28, 2022 and 2021, respectively |
$ | $ | ||||||
|
Discounts on notes payable amortized to interest expense – 9 months ended February 28, 2022 and 2021, respectively |
$ | $ |
Aggregate maturities of notes payable and convertible notes payable as of February 28, 2022 are as follows:
For the twelve months ended February 28,
|
2023 |
$ | |||
|
2024 |
||||
|
2025 |
||||
|
2026 |
||||
|
2027 |
||||
|
Thereafter |
||||
|
Total |
$ |
During the nine months ended February 28, 2022, the Company offered for sale a maximum of $
Note 17 – Contingent Liability
The terms of the Company’s acquisition of Alternative Solutions, included a payment of $
The full amount of the bonus payment was earned, and on May 27, 2020, the Company made a payment in the amount of $
Note 18 – Stockholders’ Equity
The Company’s authorized capital stock consists of
Nine months ended February 28, 2022
Common Stock and Warrants Issued upon Conversion of Notes Payable:
On June 17, 2021, the Company issued
During the three months ended February 28, 2022, the Company granted
Nine months ended February 28, 2021
Common Stock Issued and To Be Issued to Officers and Service Providers:
During the nine months ended February 28, 2021, the Company charged an aggregate of $
During the nine months ended February 28, 2021, the Company recognized the cancellation of a consulting contract, which resulted in a credit to operations in the amount of $
During the nine months ended February 28, 2021, the Company recognized the cancellation of a consulting contract, which resulted in a credit to operations in the amount of $
During the nine months ended February 28, 2021, the Company recognized the issuance of
Warrants
The Company values warrants using the Black-Scholes valuation model utilizing the following variables. On March 31, 2021, the Company reduced the conversion price of the Canaccord Debentures from $
In April 2021, the Company amended $
From December 1, 2021 through January 4, 2022 the Company issued $
The following table summarizes the significant terms of warrants outstanding at February 28, 2022. This table does not include the unit warrants. See Unit Warrants section below.
|
Range of exercise Prices |
|
|
Number of warrants Outstanding |
|
|
Weighted average remaining contractual life (years) |
|
|
Weighted average exercise price of outstanding Warrants |
|
|
Number of warrants Exercisable |
|
|
Weighted average exercise price of exercisable Warrants |
|
||||||
|
$ |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
Transactions involving warrants are summarized as follows. This table does not include the unit warrants. See Unit Warrants section below.
|
Number of Shares |
Weighted Average Exercise Price |
|||||||
|
Warrants outstanding at May 31, 2020 |
$ | |||||||
|
Granted |
$ | |||||||
|
Exercised |
$ | |||||||
|
Cancelled / Expired |
( |
) |
$ | |||||
|
Warrants outstanding at May 31, 2021 |
$ | |||||||
|
Granted |
$ | |||||||
|
Exercised |
$ | |||||||
|
Cancelled / Expired |
( |
) |
$ | |||||
|
Warrants outstanding at February 28, 2022 |
$ | |||||||
Unit Warrants
In February and March 2018, in connection with the Westpark offering, the Company issued five-year warrants to purchase
On June 20, 2018, in connection with the special warrant offering, the Company issued Canaccord Genuity Corp.
On December 12, 2018, in connection with the issuance of the Canaccord Debentures, the Company issued Canaccord Genuity Corp. as compensation
Because the unit warrants are exercisable for Common Stock and warrants, they are not included in the warrant tables above.
Note 19 – Fair Value of Financial Instruments
The Company has issued convertible notes containing beneficial conversion features. One of the features is a ratchet reset provision which, in general, reduces the conversion price should the Company issue equity with an effective price per share that is lower than the stated conversion price in the note. The Company accounts for the fair value of the conversion feature in accordance with ASC 815- Accounting for Derivatives and Hedging and Emerging Issues Task Force (“EITF”) 07-05- Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock (“EITF 07-05”). The Company carries the embedded derivative on its balance sheet at fair value and accounts for any unrealized change in fair value as a component of its results of operations.
The following summarizes the Company’s financial liabilities that are recorded at fair value on a recurring basis at February 28, 2022 and May 31, 2021:
|
February 28, 2022 |
||||||||||||||||
|
Level 1 |
Level 2 |
Level 3 |
Total |
|||||||||||||
|
Liabilities |
||||||||||||||||
|
Derivative liabilities |
$ | $ | $ | $ | ||||||||||||
|
May 31, 2021 |
||||||||||||||||
|
Level 1 |
Level 2 |
Level 3 |
Total |
|||||||||||||
|
Liabilities |
||||||||||||||||
|
Derivative liabilities |
$ | $ | $ | $ | ||||||||||||
Note 20 – Related Party Transactions
As of February 28, 2022 and May 31, 2021, the Company had accrued salary due to Michael Abrams, a former officer of the Company prior to his September 1, 2015 termination, in the amount of $
Note 21 – Income Taxes
The following table summarizes the Company’s income tax accrued for the three and nine months ended February 28, 2022:
|
For the Three Months Ended February 28, 2022 |
For the Nine Months Ended February 28, 2022 |
|||||||
|
Loss before provision for income taxes |
$ | ( |
) |
$ | ( |
) |
||
|
Provision for income taxes |
$ | ( |
) |
$ | ( |
) |
||
|
Effective tax rate |
% |
% |
||||||
Due to the accrual of taxes related to Section 280E of the Internal Revenue Code, as amended, the Company has an uncertain tax accrual that is currently being expensed as a change in estimate. The Company has net operating losses that it believes are available to it to offset this expense; however, there can be no assurance under current interpretations of tax laws for cannabis companies that the Company will be allowed to use these net operating losses to offset Section 280E tax expenses.
Note 22 – Commitments and Contingencies
Lease Arrangements
The Company leases several facilities for office, warehouse, and retail space. Currently lease commitments are as follows:
|
| ● | A lease that commenced in February 2019 for |
|
| ● | A lease that commenced January 2018 for |
|
| ● | A lease that commenced in February 2019 for |
|
| ● | A lease that commenced in January 2016 for |
|
| ● | A lease that commenced on October 20, 2021 for approximately |
In connection with the Company’s planned Colorado operations, on April 17, 2015, pursuant to an Industrial Lease Agreement (the “Lease”), CLS Labs Colorado leased
In August 2017, the Company’s Colorado subsidiary received a demand letter from its Colorado landlord requesting the forfeiture of the $
Note 23 – Subsequent Events
The Company has evaluated events through the date of the financial statements and has determined that there were no additional material subsequent events.
A lease for office space located at 1718 Industrial Road, Las Vegas, NV 89102 was extended again on April 1, 2022, effective September 1, 2022, until August 31, 2024. The monthly rent will increase on September 1, 2022 to $
Subsequent to February 28, 2022, the Company has issued
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
HISTORY AND OUTLOOK
We were incorporated on March 31, 2011 as Adelt Design, Inc. to manufacture and market carpet binding art. Production and marketing of carpet binding art never commenced. On November 20, 2014, we adopted amended and restated articles of incorporation, thereby changing our name to CLS Holdings USA, Inc. Effective December 10, 2014, we effected a reverse stock split of our issued and outstanding common stock at a ratio of 1-for-0.625 (the “Reverse Split”), wherein 0.625 shares of our common stock were issued in exchange for each share of common stock issued and outstanding.
On April 29, 2015, the Company, CLS Labs and the Merger Sub consummated the Merger, whereby the Merger Sub merged with and into CLS Labs, with CLS Labs remaining as the surviving entity. As a result of the Merger, we acquired the business of CLS Labs and abandoned our previous business. As such, only the financial statements of CLS Labs are included herein.
CLS Labs was originally incorporated in the state of Nevada on May 1, 2014 under the name RJF Labs, Inc. before changing its name to CLS Labs, Inc. on October 24, 2014. It was formed to commercialize a proprietary method of extracting cannabinoids from cannabis plants and converting the resulting cannabinoid extracts into concentrates such as oils, waxes, edibles and shatter. These concentrates may be ingested in a number of ways, including through vaporization via electronic cigarettes (“e-cigarettes”), and used for a variety of pharmaceutical and other purposes. Testing in conjunction with two Colorado growers of this extraction method and conversion process has revealed that it produces a cleaner, higher quality product and a significantly higher yield than the cannabinoid extraction processes currently existing in the marketplace.
On April 17, 2015, CLS Labs took its first step toward commercializing its proprietary methods and processes by entering into agreements through its wholly owned subsidiary, CLS Labs Colorado, with certain Colorado entities. During 2017, we suspended our plans to proceed with the Colorado Arrangement due to regulatory delays and have not yet determined if or when we will pursue them again.
We have been issued a U.S. patent with respect to our proprietary method of extracting cannabinoids from cannabis plants and converting the resulting cannabinoid extracts into concentrates such as oils, waxes, edibles and shatter. These concentrates may be ingested in a number of ways, including through vaporization via electronic cigarettes, and used for a variety of pharmaceutical and other purposes. Internal testing of this extraction method and conversion process has revealed that it produces a cleaner, higher quality product and a significantly higher yield than the cannabinoid extraction processes currently existing in the marketplace. We have not yet commercialized our proprietary process. We plan to generate revenues through licensing, fee-for-service and joint venture arrangements related to our proprietary method of extracting cannabinoids from cannabis plants and converting the resulting cannabinoid extracts into saleable concentrates.
We intend to monetize our extraction and conversion method and generate revenues through (i) the licensing of our patented proprietary methods and processes to others, (ii) the processing of cannabis for others, and (iii) the purchase of cannabis and the processing and sale of cannabis-related products. We plan to accomplish this through the acquisition of companies, the creation of joint ventures, through licensing agreements, and through fee-for-service arrangements with growers and dispensaries of cannabis products. We believe that we can establish a position as one of the premier cannabinoid extraction and processing companies in the industry. Assuming we do so, we then intend to explore the creation of our own brand of concentrates for consumer use, which we would sell wholesale to cannabis dispensaries. We believe that we can create a “gold standard” national brand by standardizing the testing, compliance and labeling of our products in an industry currently comprised of small, local businesses with erratic and unreliable product quality, testing practices and labeling. We also plan to offer consulting services through Cannabis Life Sciences Consulting, LLC, which will generate revenue by providing consulting services to cannabis-related businesses, including growers, dispensaries and laboratories, and driving business to our processing facilities. Finally, we intend to grow through select acquisitions in secondary and tertiary markets, targeting newly regulated states that we believe offer a competitive advantage. Our goal at this time is to become a successful regional cannabis company.
On December 4, 2017, we entered into the Acquisition Agreement with Alternative Solutions to acquire the outstanding equity interests in the Oasis LLCs. Pursuant to the Acquisition Agreement, as amended, we paid a non-refundable deposit of $250,000 upon signing, which was followed by an additional payment of $1,800,000 on February 5, 2018, for an initial 10% of Alternative Solutions and each of the subsidiaries. At the closing of our purchase of the remaining 90% of the ownership interests in Alternative Solutions and the Oasis LLCs, which occurred on June 27, 2018, we paid the following consideration: $5,995,543 in cash, a $4.0 million promissory note due in December 2019, and $6,000,000 in shares of our common stock. The cash payment of $5,995,543 was less than the $6,200,000 payment originally contemplated because we assumed an additional $204,457 of liabilities. The Oasis Note, which was repaid in full in December 2019, was secured by all of the membership interests in Alternative Solutions and the Oasis LLCs and by the assets of the Oasis LLCs. At that time, we applied for regulatory approval to own an interest in the Oasis LLCs, which approval was received on June 21, 2018. Just prior to closing, the parties agreed that we would instead acquire all of the membership interests in Alternative Solutions, the parent of the Oasis LLCs, from its members, and the membership interests in the Oasis LLCs owned by members other than Alternative Solutions. We have applied for regulatory approval to own our interest in the Oasis LLCs through Alternative Solutions under the final structure of the transaction, which is currently under review.
On October 31, 2018, the Company, CLS Massachusetts, Inc., a Massachusetts corporation and a wholly-owned subsidiary of the Company (“CLS Massachusetts”), and In Good Health, Inc., a Massachusetts corporation (“IGH”), entered into an Option Agreement (the “IGH Option Agreement”). Under the terms of the IGH Option Agreement, CLS Massachusetts had an exclusive option to acquire all of the outstanding capital stock of IGH (the “IGH Option”) during the period beginning on the earlier of the date that is one year after the effective date of the conversion and December 1, 2019 and ending on the date that was 60 days after such date. If CLS Massachusetts exercised the IGH Option, the Company, a wholly-owned subsidiary of the Company and IGH would enter into a merger agreement (the form of which has been agreed to by the parties) (the “IGH Merger Agreement”). At the effective time of the merger contemplated by the IGH Merger Agreement, CLS Massachusetts would pay a purchase price of $47,500,000, subject to reduction as provided in the IGH Merger Agreement, payable as follows: $35 million in cash, $7.5 million in the form of a five-year promissory note, and $5 million in the form of restricted common stock of the Company, plus $2.5 million as consideration for a non-competition agreement with IGH’s President, payable in the form of a five-year promissory note. IGH and certain IGH stockholders holding sufficient aggregate voting power to approve the transactions contemplated by the IGH Merger Agreement had entered into agreements pursuant to which such stockholders had, among other things, agreed to vote in favor of such transactions. On October 31, 2018, as consideration for the IGH Option, we made a loan to IGH, in the principal amount of $5,000,000, subject to the terms and conditions set forth in that certain loan agreement, dated as of October 31, 2018 between IGH as the borrower and the Company as the lender. The loan was evidenced by a secured promissory note of IGH, which bore interest at the rate of 6% per annum and was to mature on October 31, 2021. To secure the obligations of IGH to us under the loan agreement and the promissory note, the Company and IGH entered into a security agreement dated as of October 31, 2018, pursuant to which IGH granted to us a first priority lien on and security interest in all personal property of IGH. If we did not exercise the Option on or prior to the date that was 30 days following the end of the option period, the loan amount was to be reduced to $2,500,000 as a break-up fee, subject to certain exceptions set forth in the IGH Option Agreement. On August 26, 2019, the parties amended the IGH Option Agreement to, among other things, delay the closing until January 2020. By letter agreement dated January 31, 2020, the parties extended the IGH Option Agreement to February 4, 2020. On February 4, 2020, CLS Massachusetts exercised the IGH Option and IGH subsequently asserted that CLS Massachusetts’ exercise was invalid. By letter dated February 26, 2020, we informed IGH that as a result of its breaches of the IGH Option, which remained uncured, an event of default had occurred under the IGH Note. We advised IGH that we were electing to cause the IGH Note to bear interest at the default rate of 15% per annum effective February 26, 2020 and to accelerate all amounts due under the IGH Note. On February 27, 2020, IGH informed CLS Massachusetts that it did not plan to make further payments under the IGH Note on the theory that the break-up fee excused additional payments. This dispute, including whether IGH breached the IGH Option and whether CLS was entitled to collect default interest, was in litigation. During the twelve months ended May 31, 2021, we impaired the remaining amounts due under the IGH Note in the amount of $2,498,706, which included $2,497,884 in principal and $822 in accrued interest. As of November 30, 2021, the principal balance of the IGH Note was $0 and the interest receivable was $0.
On June 14, 2021, the parties to the IGH lawsuit entered into a confidential settlement agreement to resolve the action and a secured promissory note dated and executed by IGH in favor of us and effective June 11, 2021 (the “IGH Settlement Note”). Pursuant to the IGH Settlement Note, IGH shall pay us $3,000,000, $1,000,000 of which was paid on or before July 12, 2021. The remaining $2,000,000 and accrued interest is being paid in 12 equal monthly installments, which began on August 12, 2021. During the three months ended February 28, 2022, we received $522,245 under the IGH Settlement Note, which included $500,000 in principal and $22,245 in accrued interest. During the nine months ended February 28, 2022, we received $2,218,572 under the IGH Settlement Note, which included $2,166,667 in principal and $51,905 in accrued interest. As of February 28, 2022, $833,333 was due under the IGH Settlement Note. We record amounts paid under the IGH Settlement Note as gains when payments are received.
On October 20, 2021, we entered into a management services agreement (the “Quinn River Joint Venture Agreement”) through our 50% owned subsidiary, Kealii Okamalu, LLC (“Kealii Okamalu”), with CSI Health MCD LLC (“CSI”) and a commission established by the authority of the Tribal Council of the Fort McDermitt Paiute and Shoshone Tribe (the “Tribe”). The purpose of the Quinn River Joint Venture Agreement is to establish a business (the “Quinn River Joint Venture”) to grow, cultivate, process and sell cannabis and related products. The Quinn River Joint Venture Agreement has a term of 10 years plus a 10 year renewal term from the date the first cannabis crop produced is harvested and sold. Pursuant to the Quinn River Joint Venture Agreement, Kealii Okamalu will lease approximately 30 acres of the Tribe’s land located along the Quinn River at a cost of $3,500 per month and manage the design, finance and construction of a cannabis cultivation facility on such tribal lands (the “Cultivation Facility”). Kealii Okamalu will also manage the ongoing operations of the Cultivation Facility and related business, including, but not limited to, cultivation of cannabis crops, personnel staffing, product packaging, testing, marketing and sales. Packaged products will be branded as “Quinn River Farms.” We will provide 10,000 square feet of warehouse space at our Las Vegas facility, and will have preferred vendor status including the right to purchase cannabis flower and the business’s cannabis trim at favorable prices. Kealii Okamalu will contribute $6 million towards the construction of the Cultivation Facility and the working capital for the Quinn River Joint Venture. This amount will be repaid from a portion of the net income of the Quinn River Joint Venture otherwise payable to CSI and the Tribe at the rate of $750,000 per quarter for eight quarters. Kealii Okamalu will receive one-third of the net profits of the Quinn River Joint Venture.
On January 4, 2018, former Attorney General Jeff Sessions rescinded the memorandum issued by former Deputy Attorney General James Cole on August 29, 2013 (as amended on February 14, 2014, the “Cole Memo”), the Cole Banking Memorandum, and all other related Obama-era DOJ cannabis enforcement guidance. While the rescission did not change federal law, as the Cole Memo and other DOJ guidance documents were not themselves laws, the rescission removed the DOJ’s formal policy that state-regulated cannabis businesses in compliance with the Cole Memo guidelines should not be a prosecutorial priority. Notably, former Attorney General Sessions’ rescission of the Cole Memo has not affected the status of the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) memorandum issued by the Department of Treasury, which remains in effect. This memorandum outlines Bank Secrecy Act-compliant pathways for financial institutions to service state-sanctioned cannabis businesses, which echoed the enforcement priorities outlined in the Cole Memo. In addition to his rescission of the Cole Memo, Attorney General Sessions issued a one-page memorandum known as the “Sessions Memorandum”. The Sessions Memorandum explains the DOJ’s rationale for rescinding all past DOJ cannabis enforcement guidance, claiming that Obama-era enforcement policies are “unnecessary” due to existing general enforcement guidance adopted in the 1980s, in chapter 9.27.230 of the U.A. Attorneys’ Manual (“USAM”). The USAM enforcement priorities, like those of the Cole Memo, are based on the use of the federal government’s limited resources and include “law enforcement priorities set by the Attorney General,” the “seriousness” of the alleged crimes, the “deterrent effect of criminal prosecution,” and “the cumulative impact of particular crimes on the community.” Although the Sessions Memorandum emphasizes that cannabis is a federally illegal Schedule I controlled substance, it does not otherwise instruct U.S. Attorneys to consider the prosecution of cannabis-related offenses a DOJ priority, and in practice, most U.S. Attorneys have not changed their prosecutorial approach to date. However, due to the lack of specific direction in the Sessions Memorandum as to the priority federal prosecutors should ascribe to such cannabis activities, there can be no assurance that the federal government will not seek to prosecute cases involving cannabis businesses that are otherwise compliant with state law.
William Barr served as United States Attorney General from February 14, 2019 to December 23, 2020. The DOJ under Mr. Barr did not take a formal position on federal enforcement of laws relating to cannabis. On March 11, 2021, United States President Biden’s nominee, Merrick Garland was sworn in as the U.S. Attorney General. During his campaign, President Biden stated a policy goal to decriminalize possession of cannabis at the federal level, but he has not publicly supported the full legalization of cannabis. It is unclear what impact, if any, the new administration will have on U.S. federal government enforcement policy on cannabis. Nonetheless, there is no guarantee that the position of the Department of Justice will not change.
We incurred a net loss of $15,890,514 for the year ended May 31, 2021, and net losses of $1,117,530 and $1,039,903 for the three and nine months ended February 28, 2022, respectively, resulting in an accumulated deficit of $92,736,638 as of May 31, 2021, which increased to $93,767,013 as of February 28, 2022. Although we achieved net income during the first quarter of fiscal 2022, these conditions continue to raise substantial doubt about our ability to continue as a going concern.
Recent Developments – COVID-19
On March 12, 2020, Governor Steven Sisolak declared a State of Emergency related to the COVID-19 global pandemic. This State of Emergency was initiated due to the multiple confirmed and presumptive cases of COVID-19 in the State of Nevada. On March 17, 2020, pursuant to the Declaration of Emergency, Governor Sisolak released the Nevada Health Response COVID-19 Risk Mitigation Initiative (“Initiative”). This Initiative provided guidance related to the March 12 Declaration of Emergency, requiring Nevadans to stay home and all nonessential businesses to temporarily close to the public for thirty (30) days. In the Initiative, it was declared that licensed cannabis stores and medical dispensaries could remain open only if employees and consumers strictly adhered to the social distancing protocols.
In light of the Initiative, Governor Sisolak issued Declaration of Emergency Directive 003 on March 20, 2020 which mandated retail cannabis dispensaries to operate as delivery only. On April 29, 2020, Governor Sisolak issued Declaration of Emergency Directive 016 which amended the cannabis section of Directive 003 and permitted licensed cannabis dispensaries to engage in retail sales on a curbside pickup or home delivery basis pursuant to guidance from the Cannabis Compliance Board. Through Directive 016, licensed cannabis dispensaries were able to begin curbside pickup on May 1, 2020 so long as the facility adhered to protocols developed by the Cannabis Compliance Board (“CCB”).
In accordance with Directive 016, the CCB released guidelines related to curbside pickup requiring all facilities wishing to offer curbside pickup to first submit and receive approval from the CCB. Serenity Wellness Center LLC developed the required procedures and submitted and received State approval on April 30, 2020 to conduct curbside pickup sales effective May 1, 2020. Further, the City of Las Vegas required cannabis facilities to obtain a temporary 30-day curbside pickup permit. Serenity Wellness Center LLC was issued its first temporary curbside pickup permit from the City of Las Vegas on May 1, 2020. Serenity Wellness Center LLC has subsequently received a temporary curbside permit every thirty (30) days thereafter. Upon expiration every 30 days, the City of Las Vegas reviews the licensee and determines if a new temporary permit shall be issued.
On May 7, 2020, Governor Sisolak issued Declaration of Emergency Directive 018. Directive 018 worked to reopen the State of Nevada as a part of Phase One of the Nevada United: Roadmap to Recovery Plan introduced by Governor Sisolak on April 30, 2020. Directive 018 provided that, in addition to curbside pickup or home delivery, licensed cannabis dispensaries could engage in retail sales on an in-store basis effective May 9, 2020, pursuant to guidance from the CCB. The CCB required facilities wishing to engage in limited in-store retail sales to submit Standard Operating Procedures and receive approval of the same. Serenity Wellness Center LLC developed the required procedures and submitted and received State approval on May 8, 2020 to conduct limited in-store retail sales effective May 9, 2020. The City of Las Vegas did not require a separate permit for limited in-store sales.
On July 31, 2020, Governor Sisolak issued Declaration of Emergency Directive 029 reaffirming The Nevada United: Roadmap to Recovery Plan. Directive 029 stated that all directives promulgated pursuant to the March 12, 2020 Declaration of Emergency or subsections thereof set to expire on July 31, 2020, would remain in effect for the duration of the current state of emergency unless terminated prior to that date by a subsequent directive or by operation of law associated with lifting the Declaration of Emergency. Further, Directive 029, having become effective at 11:59 PM on Friday, July 31, 2020 shall remain in effect until terminated by a subsequent directive promulgated pursuant to the March 12, 2020 Declaration of Emergency, or dissolution or lifting of the Declaration of Emergency itself, to facilitate the State’s response to the COVID-19 pandemic.
COVID-19 cases increased at a significant rate in November and December 2021 with the arrival of the Omicron variant, but then sharply dropped off as we started 2022. As a result, our curbside and delivery programs have now returned to approximately 20% of total dispensary revenue. The number of transactions at our dispensary have increased recently, although the amount of each transaction decreased slightly primarily as a result of the cessation of special federal unemployment benefits.
The global pandemic of COVID-19 continues to evolve and the ways that our business may evolve to respond to the pandemic and the needs of our customers cannot be fully known.
Results of Operations for the Three Months Ended February 28, 2022 and 2021
The table below sets forth our expenses as a percentage of revenue for the applicable periods:
|
Three Months Ended |
Three Months Ended |
Nine Months Ended |
Nine Months Ended |
|||||||||||||
|
February 28, 2022 |
February 28, 2021 |
February 28, 2022 |
February 28, 2021 |
|||||||||||||
|
Revenue |
100 |
% |
100 |
% |
100 |
% |
100 |
% |
||||||||
|
Cost of Goods Sold |
48 |
% |
55 |
% |
48 |
% |
49 |
% |
||||||||
|
Gross Margin |
52 |
% |
45 |
% |
52 |
% |
51 |
% |
||||||||
|
Selling, General, and Administrative Expenses |
63 |
% |
55 |
% |
57 |
% |
58 |
% |
||||||||
|
Interest expense, net |
11 |
% |
17 |
% |
9 |
% |
17 |
% |
||||||||
|
Impairment of note receivable |
- |
% |
55 |
% |
- |
% |
19 |
% |
||||||||
|
Gain on settlement of note receivable |
9 |
% |
- |
% |
13 |
% |
- |
% |
||||||||
The table below sets forth certain statistical and financial highlights for the applicable periods:
|
Three Months Ended |
Three Months Ended |
Nine Months Ended |
Nine Months Ended |
|||||||||||||
|
February 28, 2022 |
February 28, 2021 |
February 28, 2022 |
February 28, 2021 |
|||||||||||||
|
Number of Customers Served (Dispensary) |
66,016 | 62,753 | 195,994 | 184,129 | ||||||||||||
|
Revenue |
$ | 5,588,266 | $ | 4,554,082 | $ | 16,502,978 | $ | 13,232,840 | ||||||||
|
Gross Profit |
$ | 2,887,106 | $ | 2,055,176 | $ | 8,513,161 | $ | 6,745,751 | ||||||||
|
Net Loss Attributable to CLS Holdings USA, Inc. |
$ | (992,268 |
) |
$ | (3,712,772 |
) |
$ | (910,141 |
) |
$ | (5,707,184 |
) |
||||
|
EBITDA (1) |
$ | 100,595 | $ | (2,786,327 |
) |
$ | 1,834,716 | $ | (2,958,982 |
) |
||||||
|
|
(1) |
EBITDA is a non-GAAP financial performance measures and should not be considered as alternatives to net income(loss) or any other measure derived in accordance with GAAP. This non-GAAP measure has limitations as an analytical tool and should not be considered in isolation or as substitutes for analysis of our financial results as reported in accordance with GAAP. Because not all companies use identical calculations, these presentations may not be comparable to other similarly titled measures of other companies. As required by the rules of the SEC, we provide below a reconciliation of this non-GAAP financial measure contained herein to the most directly comparable measure under GAAP. Management believes that EBITDA provides relevant and useful information, which is widely used by analysts, investors and competitors in our industry as well as by our management. By providing this non-GAAP profitability measure, management intends to provide investors with a meaningful, consistent comparison of our profitability measures for the periods presented. |
Reconciliation of net loss for the three and nine months ended February 28, 2022 and 2021 to EBITDA for the three and nine months ended February 28, 2022 and 2021:
|
Three Months Ended |
Three Months Ended |
Nine Months Ended |
Nine Months Ended |
|||||||||||||
|
February 28, 2022 |
February 28, 2021 |
February 28, 2022 |
February 28, 2021 |
|||||||||||||
|
Net Income (Loss) Attributable to CLS Holdings USA, Inc. |
$ | (992,268 |
) |
$ | (3,712,772 |
) |
$ | (910,141 |
) |
$ | (5,707,184 |
) |
||||
|
Add: |
||||||||||||||||
|
Income tax |
$ | 324,265 | $ | - | $ | 793,322 | $ | - | ||||||||
|
Interest expense, net |
$ | 589,692 | $ | 757,740 | $ | 1,416,164 | $ | 2,237,166 | ||||||||
|
Depreciation and amortization |
$ | 178,906 | $ | 168,705 | $ | 535,361 | $ | 511,036 | ||||||||
|
EBITDA |
$ | 100,595 | $ | (2,786,327 |
) |
$ | 1,834,716 | $ | (2,958.982 |
) |
||||||
Three Months Ended February 28, 2022 and February 28, 2021
Revenues
We had revenue of $5,588,266 during the three months ended February 28, 2022, an increase of $1,044,184, or 23%, compared to revenue of $4,544,082 during the three months ended February 28, 2021. Our cannabis dispensary accounted for $3,333,229, or 60%, of our revenue for the three months ended February 28, 2022, a decrease of $50,910, or 2%, compared to $3,384,139 during the three months ended February 28, 2021. Dispensary revenue decreased during the third quarter of fiscal year 2022 reflecting the absence of federal unemployment payments to taxpayers in the community. Our cannabis production accounted for $2,255,037, or 40%, of our revenue for the three months ended February 28, 2022, an increase of $1,095,094, or 94%, compared to $1,159,943 for the three months ended February 28, 2021. The increase in production revenues for the third quarter of fiscal 2022 was primarily due to our addition of a new sales director, an improvement in our product mix, the introduction of new products, operating efficiencies and the procurement of higher quality materials. The increase was also due to greater revenue from third parties for whom we manufactured and processed their products.
Cost of Goods Sold
Our cost of goods sold for the three months ended February 28, 2022 was $2,701,160, an increase of $212,254, or 9%, compared to cost of goods sold of $2,488,906 for the three months ended February 28, 2021. The increase in cost of goods sold for the three months ended February 28, 2022 was due primarily to an increase in revenue. Cost of goods sold was 48% of sales during third quarter of fiscal 2022 resulting in a gross margin of 52%; cost of goods sold was 55% for the third quarter of fiscal 2021 resulting in a gross margin of 45%. Cost of goods sold as a percentage of revenue declined due to our utilization of low-cost high volume purchasing and a shift in product mix at City Trees to increased THC distillate sales, which are no-cost sales. Gross margin for the quarter did not exceeded our target of 50%. Cost of goods sold during the third quarter of fiscal 2022 primarily consisted of $2,418,531 of product cost, $200,102 of state and local fees and taxes, and $82,527 of supplies and materials.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, or SG&A, increased by $981,189, or approximately 39%, to $3,492,691 during the three months ended February 28, 2022, compared to $2,511,502 for the three months ended February 28, 2021. The increase in SG&A expenses for the three months ended February 28, 2022 was primarily due to increases in costs associates with operating the Oasis LLCs and offering expenses associated with the 2021 Debenture Offering.
SG&A expense during the third quarter of fiscal 2022 was primarily attributable to an aggregate of $2,576,817 in costs associated with operating the Oasis LLCs, an increase of $605,110 compared to $1,971,707 during the third quarter of fiscal 2021. The major components of the $605,110 increase in SG&A associated with the operation of the Oasis LLCs during the three months ended February 28, 2022 compared to the three months ended February 28, 2021 were as follows: lease, facilities and office costs were $662,294 compared to $381,763; and payroll and related costs were $1,220,960 compared to $989,837. Lease, facilities and office costs increased due to our efforts to prepare our facilities for the new pre-roll division by purchasing equipment and implementing compliance procedures applicable to this new division. Lease, facilities and office costs also increased during the third quarter of fiscal 2022 due to costs incurred in connection with our response to COVID-19. Payroll costs increased during the third quarter of fiscal 2022 primarily due to increases in salaries of our employees related to the national labor shortage and due to an increase in the number of employees in our manufacturing division as we planned for the rollout of our pre-roll division. Payroll costs also increased due to costs incurred in connection with our response to COVID-19.
Finally, SG&A increased by an aggregate of $376,079 during the third quarter of fiscal 2022 as a result of an increase in the expenses associated with the ongoing implementation of other aspects of our business plan and our general corporate overhead to an aggregate of $915,875, from $539,796 during the third quarter of fiscal 2021. The major components of this increase compared to the third quarter of fiscal 2022 were as follows: expenses related to the 2011 Debenture Offering were $411,298; and payroll and related costs increased by $53,787. These increases were partially offset by decreases in sales and marketing in the amount of $50,795 and professional fees in the amount of $28,012 during the third quarter of fiscal 2022.
Gain on Settlement of Note Receivable
During the three months ended February 28, 2022, we recorded a gain on the settlement of the IGH Note in the amount of $522,246; there was no comparable transaction during the third quarter of the prior fiscal year. This gain on the settlement arose after IGH notified us on February 27, 2021, that it did not plan to make further payments in accordance with the terms of the IGH Note on the theory that the Break-Up Fee excused such additional payments. On June 14, 2021, the parties to the IGH lawsuit entered into a confidential settlement agreement to resolve the action and executed the $3,000,000 IGH Settlement Note. Pursuant to the IGH Settlement Note, IGH paid us $1,000,000 on or before July 21, 2021. The remaining $2,000,000 and accrued interest is being paid in 12 equal monthly installments, which commenced on August 12, 2021.
Interest Expense, Net
Our interest expense, net of interest income, was $589,692 for the three months ended February 28, 2022, a decrease of $168,048, or 22%, compared to $757,740 for the three months ended February 28, 2021. The decrease in interest expense was primarily due to a $389,767 decrease in the amortization of the discounts on debentures to $5,303 during the three months ended February 28, 2022 compared to $395,070 during the three months ended February 28, 2021. The decrease occurred because discounts on debentures in the amount $996,727 were written off in connection with the amendment of U.S. Convertible Debentures 1, 2 and 4 and the Canaccord Debentures during the fourth quarter of fiscal 2021. The decrease in net interest expense for the third quarter of fiscal 2022 was partially offset by an increase in interest expense of $65,938 in connection with our issuance of the 2021 Debentures in the principal amount of $2,500,000 (net of original issue discount of $1,875,000) in the 2021 Debenture Offering. In addition, original issue discount, associated with the 2021 Debentures, in the amount of $91,936 was amortized to interest expense during the three months ended February 28, 2022, which increased interest expense there was no comparable charge in the same period of the prior year.
Impairment of Note Receivable
During the three months ended February 28, 2021, we recorded an impairment of the IGH Note in the amount of $2,498,706; there was no comparable transaction in the comparable period of the current year. This impairment arose after IGH notified us on February 27, 2021, that it did not plan to make further payments in accordance with the terms of the IGH Note on the theory that the Break-Up Fee excused such additional payments. We vehemently disagreed with this assertion. On June 19, 2021 we entered into a settlement agreement with IGH regarding this dispute and IGH executed the $3,000,000 IGH Settlement Note, which is being paid in accordance with its terms. There are no comparable charges in the current period.
Provision for Income Taxes
We recorded a provision for income taxes in the amount of $324,265 during the three months ended February 28, 2022 compared to $0 during the three months ended February 28, 2021. We have net operating losses that we believe are available to us to offset any income tax liability that may arise under Section 280E of the Code because we are a cannabis company.
Net Loss
Our net loss for the three months ended February 28, 2022 was $997,296 compared to a net loss of $3,712,772 for the three months ended February 28, 2021, an improvement of $2,715,476, or 73%.
Non-Controlling Interest
During the three months ended February 28, 2022, the non-controlling interest in our investment in the Quinn River Joint Venture, through our subsidiary, Kealii Okamalu was $5,028. This amount is composed primarily of the cost of a land lease. There was no comparable expense during the third quarter of fiscal 2021.
Net Loss Attributable to CLS Holdings USA, Inc.
Our net loss attributable to CLS Holdings USA, Inc. for the three months ended February 28, 2022 was $992,268 compared to $3,712,772 for the three months ended February 28, 2021, an improvement of $2,720,504, or 73%.
Results of Operations for the Nine Months Ended February 28, 2022 and 2021
Revenues
We had revenue of $16,502,978 during the nine months ended February 28, 2022, an increase of $3,270,138, or 25%, compared to revenue of $13,232,840 during the nine months ended February 28, 2021. Our cannabis dispensary accounted for $10,670,203, or 65%, of our revenue for the nine months ended February 28, 2022, an increase of $467,565, or 5%, compared to $10,202,638 during the nine months ended February 28, 2021. Dispensary revenue increased during the first nine months of fiscal year 2022 because our average sales per day increased from $37,372 during the first nine months of fiscal 2021 to $39,085 during the first nine months of fiscal 2022. Our cannabis production accounted for $5,832,775, or 35%, of our revenue for the nine months ended February 28, 2022, an increase of $2,802,573 or 92%, compared to $3,030,202 for the nine months ended February 28, 2021. The increase in production revenues for the first nine months of fiscal 2022 was primarily due to an increase in our THC distillate sales of almost $1,000,000, as well as sales to 10 new dispensaries and significant increases in existing customer order size and frequency. These improvements occurred as a result of our addition of a new sales director, an improvement in our product mix, the introduction of new products, operating efficiencies and the procurement of higher quality materials. The increase was also due to greater revenue from third parties for whom we manufactured and processed their products.
Cost of Goods Sold
Our cost of goods sold for the nine months ended February 28, 2022 was $7,989,817, an increase of $1,502,728, or 23%, compared to cost of goods sold of $6,487,089 for the nine months ended February 28, 2021. The increase in cost of goods sold for the nine months ended February 28, 2022 was due primarily to an increase in revenue. Cost of goods sold was 48% of sales during the nine months ended February 28, 2022 resulting in a gross margin of 52%; cost of goods sold was 49% for the nine months ended February 28, 2021 resulting in a gross margin of 51%. Costs of goods sold as a percentage of revenue declined due to our utilization of low-cost high volume purchasing and a shift in product mix at City Trees to increased THC distillate sales, which are no cost sales. Gross margin exceeded our target of 50%. Cost of goods sold during the first nine months of fiscal 2022 primarily consisted of $7,087,380 of product cost, $565,485 of state and local fees and taxes, and $311,367 of supplies and materials.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, or SG&A, increased by $1,723,855, or approximately 22%, to $9,440,918 during the nine months ended February 28, 2022, compared to $7,717,063 for the nine months ended February 28, 2021. The increase in SG&A expenses for the nine months ended February 28, 2022 was primarily due to increases in costs associates with operating the Oasis LLCs and offering expenses associated with the 2021 Debenture Offering.
SG&A expense during the nine months ended February 28, 2022 was primarily attributable to an aggregate of $7,417,653 in costs associated with operating the Oasis LLCs, an increase of $1,509,840 compared to $5,907,813 during the first nine months of fiscal 2021. The major components of the $1,509,840 increase in SG&A associated with the operation of the Oasis LLCs during the nine months ended February 28, 2022 compared to the nine months ended February 28, 2021 were as follows: lease, facilities and office costs of $1,819,549 compared to $1,354,521; payroll and related costs of $3,363,573 compared to $2,987,897. sales, marketing, and advertising costs of $1,087,692 compared to $767,378; and travel of $242,056 compared to $33,829. Lease, facilities and office costs increased due to our efforts to prepare our facilities for the new pre-roll division by purchasing equipment and implementing compliance procedures applicable to this new division. Lease, facilities and office costs also increased during the first nine months of fiscal 2022 due to costs incurred in connection with our response to COVID-19. Payroll costs increased during the first nine months of fiscal 2022 primarily due to increases in salaries of our employees related to the national labor shortage and due to an increase in the number of employees in our manufacturing division as we planned for the rollout of our pre-roll division. Payroll costs also increased due to costs incurred in connection with our response to COVID-19. Sales and marketing costs increased during the first nine months of fiscal 2022 due to our use of a third-party marketing firm for campaigns to promote brand awareness.
Finally, SG&A increased by $213,451 during the nine months ended February 28, 2022 as a result of an increase in the expenses associated with the ongoing implementation of other aspects of our business plan and our general corporate overhead to $2,022,702, from $1,809,251 during the nine months ended February 28, 2021. The major components of this increase compared to the first nine months of fiscal 2021 were as follows: expenses related to the 2021 Debenture Offering were $411,298, and payroll and related costs increased by $143,379. Payroll and related costs increased during the first nine months of fiscal 2022 due to an increase in the number of administrative employees to support our expanding operations. These increases were partially offset by decreases in the following costs: professional fees decreased by $122,264 due to the settlement of the IGH litigation, and sales and marketing expenses decreased by $59,489 due to a decline in website design and development.
Gain on Settlement of Note Receivable
During the nine months ended February 28, 2022, we recorded a gain on the settlement of the IGH Note in the amount of $2,218,574; there was no comparable transaction during the first nine months of the prior fiscal year. This gain on the settlement arose after IGH notified us on February 27, 2021, that it did not plan to make further payments in accordance with the terms of the IGH Note on the theory that the Break-Up Fee excused such additional payments. We vehemently disagreed and litigation ensued. On June 14, 2021, the parties to the IGH lawsuit entered into a confidential settlement agreement to resolve the action and executed the $3,000,000 IGH Settlement Note. Pursuant to the IGH Settlement Note, IGH paid us $1,000,000 on or before July 21, 2021. The remaining $2,000,000 and accrued interest is being paid in 12 equal monthly installments, which commended on August 12, 2021.
Interest Expense, Net
Our interest expense, net of interest income, was $1,416,164 for the nine months ended February 28, 2022, a decrease of $821,002, or 37%, compared to $2,237,166 for the nine months ended February 28, 2021. The decrease in interest expense was primarily due to a $1,144,411 decrease in the amortization of the discounts on debentures to $40,799 during the nine months ended February 28, 2022, compared to $1,185,210 during the nine months ended February 28, 2021. The decrease occurred because the discounts on debentures in the amount $996,727 were written off in connection with the amendment of U.S. Convertible Debentures 1, 2 and 4 and the Canaccord Debentures during the fourth quarter of fiscal 2021. The decrease in net interest expense for the third quarter of fiscal 2022 was partially offset by an increase in interest expense of $65,938 in connection with our issuance of the 2021 Debentures in the principal amount of $2,500,000 (net of original issue discount of $1,875,000) in the 2021 Debenture Offering. In addition, original issue discount associated with the 2021 Debentures in the amount of $91,936 was amortized to interest expense during the three months ended February 28, 2022; there was no comparable charge in the same period of the prior year.
Impairment of Note Receivable
During the nine months ended February 28, 2021, we recorded an impairment of the IGH Note in the amount of $2,498,706; there was no comparable transaction in the comparable period of the current year. This impairment arose after IGH notified us on February 27, 2021, that it did not plan to make further payments in accordance with the terms of the IGH Note on the theory that the Break-Up Fee excused such additional payments. We vehemently disagreed with this assertion. On June 19, 2021 we entered into a settlement agreement with IGH regarding this dispute and IGH executed the $3,000,000 IGH Settlement Note, which is being paid in accordance with its terms. There are no comparable charges during the current period.
Provision for Income Taxes
We recorded a provision for income taxes in the amount of $793,322 during the nine months ended February 28, 2022 compared to $0 during the nine months ended February 28, 2021. Although we have net operating losses that we believe are available to us to offset this entire tax liability, which arises under Section 280E of the Code because we are a cannabis company, as a conservative measure, we have accrued this liability.
Net Loss
Our net loss for the nine months ended February 28, 2022 was $918,669 compared to a net loss of $5,707,184 for the nine months ended February 28, 2022, an improvement of $4,788,515, or 84%.
Non-Controlling Interest
During the nine months ended February 28, 2022, the non-controlling interest in our investment in the Quinn River Joint Venture, through our subsidiary, Kealii Okamalu was $8,528. This amount is composed primarily of the cost of a land lease. There was no comparable expense during the first nine months of fiscal 2021.
Net Loss Attributable to CLS Holdings USA, Inc.
Our net loss attributable to CLS Holdings USA, Inc. for the nine months ended February 28, 2022 was $910,141 compared to a net loss of $5,707,184 for the nine months ended February 28, 2021, an improvement of $4,797,043, or 84%.
Liquidity and Capital Resources
The following table summarizes our total current assets, liabilities and working capital at February 28, 2022 and May 31, 2021:
|
February 28, |
May 31, |
|||||||
|
2022 |
2021 |
|||||||
|
Current Assets |
$ | 6,908,563 | $ | 3,840,563 | ||||
|
Current Liabilities |
$ | 25,524,476 | $ | 4,984,485 | ||||
|
Working Capital (Deficit) |
$ | (18,615,913 |
) |
$ | (1,143,922 |
) |
||
At February 28, 2022, we had a working capital deficit of $18,615,913, an increase of $17,471,991 from the working capital deficit of $1,143,922 we had at May 31, 2021. Our working capital was decreased primarily due to the reclassification of the U.S. Convertible Debentures in the aggregate amount of $19,118,821 from long term to current liabilities during the period. Our working capital decrease was partially offset due to an increase in inventory of $1,114,556 and an increase of cash in the amount of $1,789,321, which was the result of the 2021 Debenture Offering in which we raised $2,500,000.
Our working capital needs will likely continue to increase, and if we require additional funds to meet them, we will seek additional debt or equity financing. Until the first quarter of fiscal 2022, we operated at a loss. Over the next twelve months we will likely require additional capital to pursue the implementation of our business plan, including the development of other revenue sources, such as possible acquisitions and the start-up of the Quinn River Joint Venture.
On October 20, 2021, we entered into the Quinn River Joint Venture Agreement through our 50% owned subsidiary, Kealii Okamalu, with CSI and the Tribe. Kealii Okamalu expects to loan approximately $6,000,000 to the Quinn River Joint Venture. We will invest 50% of this amount, or up to $3,000,000, for our equity interest in Kealii Okamalu. We anticipate using all of the proceeds from the 2021 Debenture Offering toward this loan. We will obtain the balance of the funds required, if any, from our general working capital or from additional debt or equity financings. The $6,000,000 loan will be repaid from the portion of the profits generated by the Quinn River Joint Venture otherwise payable to CSI and the Tribe at the rate of $750,000 per quarter for eight quarters. We expect the first harvest under the Quinn River Joint Venture to occur during the first quarter of fiscal 2023.
Although our revenues are expected to grow as we expand our operations, we only achieved net income for the first time during our first quarter of fiscal 2022 and we have experienced net losses since such time. Although we believe we have funds sufficient to sustain our operations at their current level, if we require additional cash, we expect to obtain the necessary funds as described above; however, our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of operations. To address these risks, we must, among other things, seek growth opportunities through additional debt and/or equity investments and acquisitions in our industry, successfully execute our business strategy, including our planned joint ventures, and successfully navigate the COVID-19 business environment in which we currently operate as well as any changes that may arise in the cannabis regulatory environment. We cannot assure that we will be successful in addressing such risks, and the failure to do so could have a material adverse effect on our business prospects, financial condition and results of operations.
Cash flows used in operating activities were $2,557,348 during the nine months ended February 28, 2022, an increase of $500,689, or approximately 24%, compared to $2,056,659 during the nine months ended February 28, 2021. In deriving cash flows used in operating activities from the net loss for the first nine months of each of fiscal 2022 and fiscal 2021, certain non-cash items were (deducted from) or added back to the net loss) for each such period. These amounts were ($1,539,369) and $1,757,236 for the nine months ended February 28, 2022 and 2021, respectively. For the first nine months of fiscal 2022, the most significant item deducted from net income was $2,218,574 related to the gain on settlement of the IGH Note. During the first nine months of fiscal 2021, we recognized an impairment on this note in the amount of $2,498,706. For the first nine months of fiscal 2021, the most significant item added back was amortization of discounts on the convertible debentures in the amount of $1,185,210, compared to $132,735 during the first nine months of fiscal 2022.We also added back to the respective net loss for the first nine months of each of fiscal 2022 and fiscal 2021: $535,361 and $511,036 of depreciation and amortization expense, respectively.
Finally, our cash used in operating activities was affected by changes in the components of working capital. The amounts of the components of working capital fluctuate for a variety of reasons, including management’s expectation of required inventory levels; the amount of accrued interest, both receivable and payable; the amount of prepaid expenses; the amount of accrued compensation and other accrued liabilities; our accounts payable and accounts receivable balances; and the capitalization of right of use assets and liabilities associated with operating leases. The overall net change in the components of working capital resulted in a decrease in cash from operating activities in the amount of $99,310 during the nine months ended February 28, 2022, compared to a decrease in cash from operating activities of $605,417 during the first nine months of fiscal 2021. The more significant changes for the nine months ended February 28, 2022 were as follows: inventory increased by $1,114,556, compared to an increase of $394,414 during the first nine months of the prior fiscal year because of increased inventory levels necessary to support increased sales; accounts payable and accrued expenses increased by $546,417 during the first nine months of fiscal 2022 compared to $6,865 during the first nine months of the prior fiscal year due to increased payments of trade payables and an increase in city and state sales and excise taxes due; deferred tax liability increased by $793,322 during the first nine months of fiscal 2022, compared to $0 during the same period of the prior year as we accrued potential taxes in connection with Section 280E of the tax code; and operating lease liability decreased by $213,827 during the first nine months of fiscal 2022 compared to $314,311 during the same period of the prior fiscal year as certain leases were renegotiated resulting in lower monthly amortization.
Cash flows provided by investing activities were $1,970,199 for the nine months ended February 28, 2022, an increase of $607,174, or 45%, compared to cash flow provided by investing activities of $1,363,025 during the nine months ended February 28, 2021. This increase was primarily due to our receipt of principal payments on the IGH Note in the amount of $2,218,574 during the nine months ended February 28, 2022, compared to our receipt of $1,544,291 during the nine months ended February 28, 2021.
Cash flows provided by financing activities were $2,376,470 for the nine months ended February 28, 2022, an increase of $2,376,470, or 100%, compared to cash flow used in financing activities of $0 during the nine months ended February 28, 2021. This increase was primarily due to our sale of the 2021 Debentures, which resulted in proceeds in the amount of $2,500,000, and proceeds from a loan payable in the amount of $808,800, which were partially offset by principal payments we made to repay debentures of $365,991 and payments of the loans payable in the amount of $566,339. There were no comparable transactions during the first nine months of fiscal 2021.
Third Party Debt
The table below summarizes the status of our third party debt, excluding our short term receivables-based debt facility and reflects whether such debt remains outstanding, has been repaid, or has been converted into or exchanged for our common stock:
|
Name of Note |
|
Original Principal Amount |
|
Outstanding or Repaid |
|
Payment Details |
|
|
|
|
|
|
|
|
|
|
|
Oasis Note |
|
$ |
4,000,000 |
|
Repaid |
|
Repaid |
|
|
|
|
|
|
|
|
|
|
2018 U.S. Convertible Debentures |
|
$ |
365,991 |
|
Outstanding |
|
Repaid |
|
|
|
|
|
|
|
|
|
|
Amended and Restated 2018 U.S. Convertible Debentures |
|
$ |
6,229,672 |
|
Outstanding |
|
Due October 22-25, 2022. Amount due includes capitalized interest of $697,672. |
|
|
|
|
|
|
|
|
|
|
2018 Convertible Debentures |
|
$ |
13,219,150 |
|
Outstanding |
|
Due December 2022. Amount includes capitalized interest of $1,514,006 less conversion of principal in the amount of $306,856. |
|
2021 Debenture Offering * |
$ |
2,500,000 |
Outstanding |
Due July 10, 2024. |
|||
* The terms of the 2021 Debenture provide for additional payments in the aggregate amount of not less than $375,000 per year for five years after the maturity of the 2021 Debentures.
Oasis Note
On June 27, 2018, we closed on the purchase of the remaining 90% of the membership interests of Alternative Solutions and the Oasis LLCs. The closing occurred pursuant to the Acquisition Agreement dated December 4, 2017, as amended. On such date, we made the payments to indirectly acquire the remaining 90% of the Oasis LLCs, which were equal to cash in the amount of $5,995,543, a $4.0 million promissory note due in December 2019 (the “Oasis Note”), and 22,058,823 shares of our common stock. The cash payment of $5,995,543 was less than the $6,200,000 payment originally contemplated because we assumed an additional $204,457 in liabilities. The Oasis Note bears interest at the rate of 6% per annum. The principal amount of the Oasis Note was reduced in August 2019, in accordance with the terms of the Acquisition Agreement, as a result of the settlement of the dispute between the former owners of Alternative Solutions and 4Front Advisors, a consultant to Alternative Solutions. The terms of the settlement with 4Front Advisors are confidential. The Oasis Note is secured by all of the membership interests in Alternative Solutions and the Oasis LLCs and by the assets of the Oasis LLCs. On December 31, 2019, we repaid the remaining amount of the note, which comprised $1,363,925 of principal and $370,370 of interest.
2018 U.S. Convertible Debenture Offering
Between October 22, 2018 and November 2, 2018, we entered into six subscription agreements, pursuant to which we agreed to sell, $5,857,000 in original principal amount of convertible debentures in minimum denominations of $1,000 each for an aggregate purchase price of $5,857,000.
Under the original terms, the debentures bear interest, payable quarterly, at a rate of 8% per annum, with capitalization of accrued interest on a quarterly basis for the first 18 months, by increasing the then-outstanding principal amount of the debentures. The debentures originally matured on a date that was three years following their issuance. The debentures were convertible into units at a conversion price of $0.80 per unit. Each unit consists of (i) one share of our common stock, par value $0.001 and (ii) one-half of one warrant, with each warrant exercisable for three years to purchase a share of common stock at an initial price of $1.10. The warrants also provided that we could force their exercise at any time after the bid price of our common stock exceeds $2.20 for a period of 20 consecutive business days. The debentures include a provision for the capitalization of accrued interest on a quarterly basis for the first 18 months. After capitalizing accrued interest in the aggregate amount of $738,663, the aggregate principal amount of the debentures increased to $6,595,663.
The debentures have other features, such as mandatory conversion in the event our common stock trades at a particular price over a specified period of time and required redemption in the event of a “Change in Control” of the Company. The debentures are unsecured obligations of the Company and rank pari passu in right of payment of principal and interest with all other unsecured obligations of the Company. The warrants have anti-dilution provisions that provide for an adjustment to the exercise price in the event of a future sale of our common stock at a lower price, subject to certain exceptions as set forth in the warrant.
On July 26, 2019, we entered into amendments to the debentures with four of the purchasers, pursuant to which we agreed to reduce the conversion price of the original debentures if, in general, we issue or sell common stock, or warrants or options exercisable for common stock, or any other securities convertible into common stock, in a capital raising transaction, at a consideration per share, or exercise or conversion price per share, as applicable, less than the conversion price of the original debentures in effect immediately prior to such issuance. In such case, the conversion price of the original debentures will be reduced to such issuance price. The amendments also provided that, if a dilutive issuance occurs, the warrant to be issued upon conversion will be exercisable at a price equal to 137.5% of the adjusted conversion price at the time of conversion of the debenture. If a dilutive issuance occurs, the form of warrant attached to the subscription agreement would be amended to change the Initial Exercise Price, as defined therein, to be the revised warrant exercise price.
The Debenture Amendment (as hereafter defined) was a dilutive issuance. As a result, the conversion price of the convertible debentures was automatically reduced from $0.80 per unit to $0.30 per unit and the form of warrant attached to the subscription agreement will be amended to reduce the exercise price from $1.10 per share of common stock to 137.5% of the debenture conversion price (presently $0.4125 per share of common stock).
On April 15, 2021 and April 19, 2021, we amended three of the purchasers’ debentures and subscription agreements in order to (i) reduce the conversion price of the debentures from $0.80 per unit to $0.30 per unit, and (ii) extend the maturity date of the debentures by one year to four (4) years from the execution date of the debentures. The subscription agreements, as amended, also provide that we will file a registration statement to register for resale all of the shares of common stock issuable to these three purchasers upon conversion of the debentures and the exercise of the warrants issuable upon conversion of such debentures. Each warrant issuable pursuant to the debentures is exercisable for one share of common stock at a price equal to 137.5% of the conversion price (presently $0.4125 per share) for a period of three years from the earlier of the date of issuance of the warrant or the effectiveness of a registration statement registering the warrant shares.
On October 25, 2021, we repaid three of the debentures, which comprised $365,991 of principal and $2,065 of interest.
2018 Convertible Debenture Offering
On December 12, 2018, we entered into an agency agreement with two Canadian agents regarding a private offering of up to $40 million of convertible debentures of the Company at an issue price of $1,000 per debenture (the “Canaccord Debentures”). The agents sold the convertible debentures on a commercially reasonable efforts private placement basis. Each debenture was convertible into units of the Company at the option of the holder at a conversion price of $0.80 per unit at any time prior to the close of business on the last business day immediately preceding the maturity date of the debentures, being the date that is three (3) years from the closing date of the offering (the “2018 Convertible Debenture Offering”). Each unit will be comprised of one share of common stock and a warrant to purchase one-half of a share of common stock. Each warrant was initially exercisable for one share of common stock at a price of $1.10 per warrant for a period of 36 months from the closing date.
We closed the 2018 Convertible Debenture Offering on December 12, 2018, issuing $12,012,000 million in 8% senior unsecured convertible debentures at the initial closing. At the closing, we paid the agents: (A)(i) a cash fee of $354,000 for advisory services provided to us in connection with the offering; (ii) a cash commission of $720,720, equivalent to 6.0% of the aggregate gross proceeds received at the closing of the offering; (B)(i) an aggregate of 184,375 units for advisory services; and (ii) a corporate finance fee equal to 375,375 units, which is the number of units equal to 2.5% of the aggregate gross proceeds received at the closing of the offering divided by the conversion price; and (C)(i) an aggregate of 442,500 advisory warrants; and (ii) 900,900 broker warrants, which was equal to 6.0% of the gross proceeds received at the closing of the offering divided by the conversion price. During the year ended May 31, 2020, principal in the amount of $25,856 was converted into 32,319 shares of common stock. The debentures include a provision for the capitalization of accrued interest on a quarterly basis for the first 18 months. Accrued interest in the amount of $1,514,006 was capitalized, and the principal amount of the debentures is $13,500,150.
The debentures are unsecured obligations of the Company, rank pari passu in right of payment of principal and interest and were issued pursuant to the terms of a debenture indenture, dated December 12, 2018, between the Company and Odyssey Trust Company as the debenture trustee. The debentures bear interest at a rate of 8% per annum from the closing date, payable on the last business day of each calendar quarter.
Beginning on the date that is four (4) months plus one (1) day following the closing date, we could force the conversion of all of the principal amount of the then outstanding debentures at the conversion price on not less than 30 days’ notice should the daily volume weighted average trading price, or VWAP, of our common stock be greater than $1.20 per share for the preceding 10 consecutive trading days.
Upon a change of control of the Company, holders of the debentures have the right to require us to repurchase their debentures at a price equal to 105% of the principal amount of the debentures then outstanding plus accrued and unpaid interest thereon. The debentures also contain standard anti-dilution provisions.
On March 31, 2021, the holders of the Canaccord Debentures approved the amendment of the indenture related to the Canaccord Debentures (the “Debenture Amendment”) to: (i) extend the maturity date of the Canaccord Debentures from December 12, 2021 to December 12, 2022; (ii) reduce the conversion price from $0.80 per unit (as such term is defined in the indenture) to $0.30 per unit; (iii) reduce the mandatory conversion VWAP threshold from $1.20 to $0.60 per share; and (iv) amend the definitions of “Warrant” and “Warrant Indenture” (as such terms are defined in the indenture), to reduce the exercise price of each warrant to $0.40 per share of our common stock. Simultaneously, we amended the warrant indenture to make conforming amendments and extend the expiration date of the warrants to March 31, 2024.
If, at the time of exercise of any warrant in accordance with the warrant indenture, there is no effective registration statement under the Securities Act covering the resale by the holder of a portion of the shares of common stock to be issued upon exercise of the warrant, or the prospectus contained therein is not available for the resale of the shares of common stock by the holder under the Securities Act by reason of a blackout or suspension of use thereof, then the warrants may be exercised, in part for that portion of the shares of common stock not registered for resale by the holder under an effective registration statement or in whole in the case of the prospectus not being available for the resale of such shares of common stock, at such time by means of a “cashless exercise” in which the holder shall be entitled to receive a number of shares of common stock equal to the quotient obtained by dividing [(A-B) (X)] by (A), where: A = the last volume weighted average price, or VWAP, for the trading day immediately preceding the time of delivery of the exercise form giving rise to the applicable “cashless exercise”; B = the exercise price of the warrant; and X = the number of shares of common stock that would be issuable upon exercise of the warrant in accordance with the terms of such warrant if such exercise were by means of a cash exercise rather than a cashless exercise.
Pursuant to the agency agreement, we granted the agents an option to increase the offering by an additional $6 million in principal amount of debentures, which option was not exercised by the agents prior to the closing date of the offering.
Pursuant to the agency agreement and the subscription agreements signed by investors in the offering, we granted certain registration rights to the holders of the debentures pursuant to which we agreed to prepare and file a registration statement with the SEC to register the resale by the original purchasers of the debentures of the shares of common stock issuable upon conversion of the debentures or exercise of the warrants.
2021 Debenture Offering
During November 2021, we commenced an offering of a maximum of $5,500,000 of debentures (the “2021 Debentures Offering”) and warrants to purchase shares of our common stock at an exercise price of $0.4125 per share in an aggregate amount equal to one-half of the aggregate purchase price for the 2021 Debentures (the “Debenture Warrants”) (collectively, the “2021 Debenture Offering”). The proceeds of the 2021 Debenture Offering will be used to fund our investment in the Quinn River Joint Venture.
On March 9, 2022, we conducted the final closing of the 2021 Debenture Offering. Between December 1, 2021 and January 4, 2022, we completed multiple closings of the 2021 Debenture Offering in which we sold an aggregate of $2,500,000 of 2021 Debentures and issued an aggregate of 3,030,304 Debenture Warrants to the investors. The 2021 Debentures bear interest at the rate of 15% per annum calculated on the basis of a 360 day year and mature on July 10, 2024. Commencing 36 months after issuance of the 2021 Debentures and for a period of 5 years thereafter, all note holders shall receive, on an annual basis, cash payments equal to the greater of (i) 15% of the principal amount of the notes they purchased, or (ii) such purchaser’s pro rata portion of 5% of the distributions we receive for the prior fiscal year pursuant to the terms of the Quinn River Joint Venture Agreement. The Debenture Warrants have a term of 3 years and are exercisable, in whole or in part, at any time, or from time to time, after the date of issuance.
Sales of Equity
The Canaccord Special Warrant Offering
On June 20, 2018, we executed an agency agreement with Canaccord Genuity Corp. and closed on a private offering of our Special Warrants for aggregate gross proceeds of CD$13,037,859 (USD$9,785,978). In connection therewith, we also entered into a Special Warrant Indenture and a Warrant Indenture with Odyssey Trust Company, as special warrant agent and warrant agent.
Pursuant to the offering, we issued 28,973,014 special warrants at a price of CD$0.45 (USD$0.34) per Special Warrant. Each Special Warrant was automatically exercised, for no additional consideration, into Units on November 30, 2018.
Each Unit consisted of one Unit Share and one warrant to purchase one share of common stock. Each warrant was to be exercisable at a price of CD$0.65 for three years after our common stock was listed on a recognized Canadian stock exchange, subject to adjustment in certain events. Because we did not receive a receipt from the applicable Canadian securities authorities for the qualifying prospectus by August 20, 2018, each Special Warrant entitled the holder to receive 1.1 Units (instead of one (1) Unit); provided, however, that any fractional entitlement to penalty units was rounded down to the nearest whole penalty unit.
In connection with the Special Warrant Offering, we paid a cash commission and other fees equal to CD$1,413,267 (USD$1,060,773), a corporate finance fee equal to 1,448,651 Special Warrants with a fair value of USD$1,413,300, and 2,317,842 Broker Warrants. Each Broker Warrant entitles the holder thereof to acquire one unit at a price of CD$0.45 per unit for a period of 36 months from the date that our common stock is listed on a recognized Canadian stock exchange, subject to adjustment in certain events. Our common stock commenced trading on the Canadian Stock Exchange on January 7, 2019. During the year ended May 31, 2020, we also issued investors 3,042,167 Special Warrants with a fair value of $7,142,550 as a penalty for failure to timely effect a Canadian prospectus with regard to the securities underlying the Special Warrants.
The Navy Capital Investors
Effective July 31, 2018, we entered into a subscription agreement with Navy Capital Green International, Ltd., a British Virgin Islands limited company (“Navy Capital”), pursuant to which we agreed to sell to Navy Capital, for a purchase price of $3,000,000, 7,500,000 units ($0.40 per unit), representing (i) 7,500,000 shares of our common stock, and (ii) three-year warrants to purchase an aggregate of 7,500,000 shares of our common stock (the “Navy Warrant Shares”) at an exercise price of $0.60 per share of common stock (the “Navy Capital Offering”). We valued the warrants using the Black-Scholes valuation model, and allocated gross proceeds in the amount of $1,913,992 to the common stock and $1,086,008 to the warrants. The closing occurred on August 6, 2018. In the subscription agreement, we also agreed to file, on or before November 1, 2018, a registration statement with the SEC registering the shares of common stock and Navy Warrant Shares issued to Navy Capital. If we failed to file the registration statement on or before that date, we were required to issue to Navy Capital an additional number of units equal to ten percent (10%) of the units originally subscribed for by Navy Capital (which would include additional warrants at the original exercise price). On August 29, 2019, we filed a registration statement with the SEC which included the shares of common stock and Navy Warrant Shares issued to Navy Capital. The warrant was exercisable from time to time, in whole or in part for three years. The warrant had anti-dilution provisions that provided for an adjustment to the exercise price in the event of a future issuance or sale of common stock at a lower price, subject to certain exceptions as set forth in the warrant. The warrant also provides that it is callable at any time after the bid price of our common stock exceeds 120% of the exercise price of the warrant for a period of 20 consecutive business days. This warrant expired on July 31, 2021.
Between August 8, 2018 and August 10, 2018, we entered into five subscription agreements, pursuant to which we sold, for an aggregate purchase price of $2,750,000, 6,875,000 units ($0.40 per unit), representing (i) 6,875,000 shares of our common stock, and (ii) three-year warrants to purchase an aggregate of 6,875,000 shares of our common stock at an exercise price of $0.60 per share of common stock. We valued the warrants using the Black-Scholes valuation model, and allocated gross proceeds in the amount of $1,670,650 to the common stock and $1,079,350 to the warrants. These warrants expired on August 7, 2021. The balance of the terms set forth in the subscription agreements are the same as the terms in the Navy Capital subscription agreement summarized above.
Oasis Cannabis Transaction
On December 4, 2017, we entered into the Acquisition Agreement, with Alternative Solutions for us to acquire all of the outstanding equity interests in Alternative Solutions and the Oasis LLCs. Pursuant to the Acquisition Agreement, we paid a non-refundable deposit of $250,000 upon signing, which was followed by an additional payment of $1,800,000 approximately 45 days thereafter and were to receive, upon receipt of applicable regulatory approvals, an initial 10% of each of the Oasis LLCs. Regulatory approvals were received and the 10% membership interests were transferred to us.
On June 27, 2018, we closed on the purchase of the remaining 90% of the membership interests in Alternative Solutions and the Oasis LLCs from the owners thereof (excluding Alternative Solutions). The closing consideration was as follows: $5,995,543 in cash, a $4.0 million promissory note due in December 2019, known as the Oasis Note, and $6,000,000 in shares of our common stock. The cash payment of $5,995,543 was less than the $6,200,000 payment originally contemplated because the Company assumed an additional $204,457 of liabilities.
The number of shares to be issued was computed as follows: $6,000,000 divided by the lower of $1.00 or the conversion price to receive one share of our common stock in our first equity offering of a certain minimum size that commenced in 2018, multiplied by 80%. This price was determined to be $0.272 per share. The Oasis Note was secured by a first priority security interest over our membership interests in Alternative Solutions and the Oasis LLCs, and by the assets of each of the Oasis LLCs and Alternative Solutions. We also delivered a confession of judgment to a representative of the former owners of Alternative Solutions and the Oasis LLCs (other than Alternative Solutions) that would generally become effective upon an event of default under the Oasis Note or failure to pay certain other amounts when due. We repaid the Oasis Note in full in December 2019.
At the time of closing of the Acquisition Agreement, Alternative Solutions owed certain amounts to a consultant known as 4Front Advisors, which amount was in dispute. In August 2019, we made a payment to this company to settle this dispute and the Oasis Note was reduced accordingly.
The former owners of Alternative Solutions and the Oasis LLCs (other than Alternative Solutions) became entitled to a $1,000,000 payment from us because the Oasis LLC maintained an average revenue of $20,000 per day during the 2019 calendar year. We made a payment in the amount of $850,000 to the sellers on May 27, 2020. We deposited the balance due to sellers of $150,000 with an escrow agent to hold pending the outcome of a tax audit. During the year ended May 31, 2020, the State of Nevada notified the Oasis LLCs that it would be conducting a tax audit for periods both before and after the closing of the sale to CLS. In February 2021, we finalized the tax audit, used approximately $43,000 of the escrowed amount to reimburse ourselves for the portion of the tax liability properly payable by the sellers, and returned approximately $107,000 of the escrowed amount to the sellers.
We received final regulatory approval to own the membership interests in the Oasis LLCs on December 12, 2018. We have applied for regulatory approval to own our interest in the Oasis LLCs through Alternative Solutions, which is currently under review.
Consulting Agreements
We periodically use the services of outside investor relations consultants. During the year ended May 31, 2016, pursuant to a consulting agreement, we agreed to issue 10,000 shares of common stock per month, valued at $11,600 per month, to a consultant in exchange for investor relations consulting services. The consulting agreement was terminated during the first month of its term. The parties are in discussions regarding whether any shares of our common stock have been earned and it is uncertain whether any shares will be issued. As of February 28, 2022, we included 20,000 shares of common stock, valued at $23,200 in stock payable on the accompanying balance sheets. The shares were valued based on the closing market price on the grant date.
On December 29, 2015, pursuant to a consulting agreement, we agreed to issue 25,000 shares of common stock per month, valued at $21,250, to a consultant in exchange for investor relations consulting services. The consulting agreement was terminated during the first month of its term. The parties are in discussions regarding whether any shares of our common stock have been earned and it is uncertain whether any shares will be issued. As of February 28, 2022, we had 50,000 shares of common stock, valued at $42,500 included in stock payable on the accompanying balance sheet. The shares were valued based on the closing market price on the grant date.
On August 16, 2019, we amended a consulting agreement whereby we agreed to issue up to 200,000 shares of common stock plus pay certain amounts in exchange for the consultant’s development for us of a corporate finance and investor relations campaign, which services will be provided over a six month period. We issued 100,000 shares of common stock to this consultant in full satisfaction of this agreement before this agreement was terminated.
Going Concern
Our financial statements were prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplate the realization of assets and liquidation of liabilities in the normal course of business. With the exception of the first quarter of fiscal 2022, we have incurred losses from operations since inception, and have an accumulated deficit of $93,646,779 as of February 28, 2022, compared to $92,736,638, as of May 31, 2021. We had a working capital deficit of $18,615,913 as of February 28, 2022, compared to a working capital deficit of $1,143,922 at May 31, 2021. The report of our independent auditors for the year ended May 31, 2021 contained a going concern qualification. Our ability to continue as a going concern must be considered in light of the problems, expenses, and complications frequently encountered by early stage companies.
Our ability to continue as a going concern is dependent on our ability to generate sufficient cash from operations to meet our cash needs, to borrow capital and to sell equity to support our plans to acquire operating businesses, execute on joint ventures, open processing facilities and finance ongoing operations There can be no assurance that we will be successful in our efforts to raise additional debt or equity capital and/or that cash generated by our future operations will be adequate to meet our needs. These factors, among others, indicate that we may be unable to continue as a going concern for a reasonable period of time.
Off-Balance Sheet Arrangements
We do not have any 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 that are material to investors.
Critical Accounting Estimates
Management uses various estimates and assumptions in preparing our financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Accounting estimates that are the most important to the presentation of our results of operations and financial condition, and which require the greatest use of judgment by management, are designated as our critical accounting estimates. We have the following critical accounting estimates:
|
● |
Estimates and assumptions regarding the deductibility of expenses for purposes of Section 280E of the Internal Revenue Code: Management evaluates the expenses of its manufacturing and retail operations and makes certain judgments regarding the deductibility of various expenses under Section 280E of the Internal Revenue Code based on its interpretation of this regulation and its subjective assumptions about the categorization of these expenses. |
|
● |
Estimates and assumptions used in the valuation of derivative liabilities: Management utilizes a lattice model to estimate the fair value of derivative liabilities. The model includes subjective assumptions that can materially affect the fair value estimates. |
|
● |
Estimates and assumptions used in the valuation of intangible assets. In order to value our intangible assets, management prepares multi-year projections of revenue, costs of goods sold, gross margin, operating expenses, taxes and after tax margins relating to the operations associated with the intangible assets being valued. These projections are based on the estimates of management at the time they are prepared and include subjective assumptions regarding industry growth and other matters. |
Recently Issued Accounting Standards
Accounting standards promulgated by the Financial Accounting Standards Board (the “FASB”) are subject to change. Changes in such standards may have an impact on our future financial statements. The following are a summary of recent accounting developments.
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, current U.S. GAAP requires the performance of procedures to determine the fair value at the impairment testing date of assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, the amendments under this ASU require the goodwill impairment test to be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The ASU became effective for us on January 1, 2020. The amendments in this ASU were applied on a prospective basis. During the year ended May 31, 2020, the Company recorded an impairment of goodwill in the amount of $25,185,003 pursuant to ASU No. 2017-04.
In May 2017, the FASB issued ASU No. 2017-09, Stock Compensation - Scope of Modification Accounting, which provides guidance on which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The ASU requires that an entity account for the effects of a modification unless the fair value (or calculated value or intrinsic value, if used), vesting conditions and classification (as equity or liability) of the modified award are all the same as for the original award immediately before the modification. The ASU became effective for us on January 1, 2018, and is applied to an award modified on or after the adoption date. Adoption of ASU 2017-09 did not have a material effect on the Company’s financial statements.
In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815). The amendments in Part I of this update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception.
These amendments do not have an accounting effect. For public business entities, the amendments in Part I of this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.
Effective June 1, 2018, we adopted Accounting Standards Codification (“ASC”) 606 — Revenue from Contracts with Customers. Under ASC 606, we recognize revenue from the commercial sales of products and licensing agreements by applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied. For the comparative periods, revenue has not been adjusted and continues to be reported under ASC 605 — Revenue Recognition. Under ASC 605, revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the performance of service has been rendered to a customer or delivery has occurred; (3) the amount of fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably assured. There was no impact on our financial statements as a result of adopting ASC 606.
On June 1, 2018, we adopted ASU 2017-11 and accordingly reclassified the fair value of the reset provisions embedded in convertible notes payable and certain warrants with embedded anti-dilutive provisions from liability to equity in the aggregate amount of $1,265,751.
There are various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on our consolidated financial position, results of operations or cash flows.
Item 3. Quantitative and Qualitative Disclosure about Market Risk.
This item is not applicable as we are currently considered a smaller reporting company.
Item 4. Controls and Procedures.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit pursuant to the requirements of the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, among other things, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Securities Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures
Jeffrey Binder, our Chief Executive Officer, and Andrew Glashow, our President and Chief Operating Officer (and Principal Financial and Accounting Officer), have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on the evaluation, Mr. Binder and Mr. Glashow concluded that our disclosure controls and procedures are not effective in timely alerting them to material information relating to us that is required to be included in our periodic SEC filings and ensuring that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act is accumulated and communicated to our management, including our Chief Financial Officer, or person performing similar functions, as appropriate to allow timely decisions regarding required disclosure, for the following reasons:
|
● |
We do not have an independent board of directors, an independent audit committee or adequate segregation of duties; |
|
● |
We have not established a formal written policy for the approval, identification and authorization of related party transactions; and |
|
● |
We do not have an independent body to oversee our internal controls over financial reporting and lack segregation of duties due to our limited resources. |
We plan to rectify these weaknesses by implementing an independent board of directors and hiring additional accounting personnel once we have additional resources to do so.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal controls over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 1A. Risk Factors.
This Item is not applicable as we are currently considered a smaller reporting company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
|
31.1 |
Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act |
|
|
|
|
31.2 |
Certification by the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act |
|
|
|
|
32.1 |
Certification by the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act |
|
|
|
|
32.2 |
Certification by the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act |
|
|
|
|
101.INS |
Inline XBRL Instance Document |
|
|
|
|
101.SCH |
Inline XBRL Taxonomy Extension Schema |
|
|
|
|
101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase |
|
|
|
|
101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase |
|
|
|
|
101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase |
|
|
|
|
101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase |
|
|
|
|
104 |
Cover Page Interactive Data File (formatted as Inline XBRL) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
CLS HOLDINGS USA, INC. |
|
|
|
|
|
|
|
|
Date: April 14, 2022 |
By: |
/s/ Jeffrey I. Binder |
|
|
|
|
Jeffrey I. Binder |
|
|
|
|
Chairman and Chief Executive Officer (Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
|
|
|
Date: April 14, 2022 |
By: |
/s/ Andrew Glashow |
|
|
|
|
Andrew Glashow |
|
|
|
|
President and Chief Operating Officer |
|
|
|
|
(Principal Financial and Accounting Officer) |
|