NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BUSINESS ORGANIZATION AND NATURE OF OPERATIONS
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, Inc. (“CLS Labs”) acquired 10,000,000 shares, or 55.6%, of the outstanding shares of common stock of Adelt from its founder, Larry Adelt. On that date, Jeffrey Binder, the Chairman, President and Chief Executive Officer of CLS Labs, was appointed Chairman, President and Chief Executive Officer of the Company. On November 20, 2014, Adelt adopted amended and restated articles of incorporation, thereby changing its name to CLS Holdings USA, Inc. Effective December 10, 2014, the Company effected a reverse stock split of its issued and outstanding common stock at a ratio of 1-for-0.625 (the “Reverse Split”), wherein 0.625 shares of the Company’s common stock were issued in exchange for each share of common stock issued and outstanding. As a result, 6,250,000 shares of the Company’s common stock were issued to CLS Labs in exchange for the 10,000,000 shares that it owned by virtue of the above-referenced purchase from Larry Adelt.
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 15,000,000 (post Reverse Split) shares of common stock in CLS Holdings in exchange for their shares of common stock in CLS Labs. As a result of the Merger, the Company acquired the business of CLS Labs and abandoned its previous business.
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 proprietary process or otherwise earned any revenues. The Company plans to generate revenues through licensing, fee-for-service and joint venture arrangements related to its 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, LLC (“Alternative Solutions”) entered into a Membership Interest Purchase Agreement (the “Acquisition Agreement”) for the Company to acquire the outstanding equity interests in three subsidiaries (collectively, the “Oasis LLCs”), Serenity Wellness Center LLC d/b/a/ Oasis Medical Cannabis, Serenity Wellness Growers LLC, and Serenity Wellness Products LLS, from Alternative Solutions. Pursuant to the Acquisition Agreement, the Company 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 each of the subsidiaries. The closing consideration that the Company must pay to acquire the remaining 90% of the subsidiaries, is equal to cash in the amount of $6,200,000, a $4.0 million promissory note due in December 2019, and $6,000,000 in shares of the Company’s common stock. The Oasis LLCs collectively own and operate a vertically integrated cannabis business, including one dispensary, in Las Vegas, Nevada.
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 $18,569,094 as of May 31, 2018. Further losses are anticipated in the development of the Company’s business raising substantial doubt about the Company’s ability to continue as a going concern. The ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management intends to finance operating costs over the next twelve months with loans, the proceeds from the sale of securities, and/or revenues from operations. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty.
NOTE 3 – SUMMARY OF 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 wholly owned operating subsidiaries, CLS Labs, Inc. and CLS Labs Colorado, Inc. All material intercompany transactions have been eliminated upon consolidation of these entities.
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.
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 $52,964 and $78,310 as of May 31, 2018 and 2017.
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. Computer equipment is being depreciated over a three-year period.
Concentrations of Credit Risk
The Company maintains its cash in bank deposit and other accounts, which may not be federally insured, or the balances of which at times may exceed federally insured limits. The Company continually monitors its banking relationships and consequently has not experienced any losses in such accounts.
Advertising and Marketing Costs
Advertising and marketing costs are expensed as incurred. The Company incurred no advertising and marketing costs for the years ended May 31, 2018 and 2017.
Research and Development
Research and development expenses are charged to operations as incurred. The Company incurred research and development costs of $0 and $0 for the years ended May 31, 2018 and 2017, respectively.
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, note receivable, 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.
Derivative Financial Instruments
Derivatives are recorded on the condensed consolidated balance sheet at fair value. The conversion features of certain of the convertible notes are embedded derivatives and are separately valued and accounted for on the consolidated balance sheet with changes in fair value recognized during the period of change as a separate component of other income/expense. Fair values for exchange-traded securities and derivatives are based on quoted market prices. The pricing model the Company used for determining fair value of its derivatives is the Lattice Model. Valuations derived from this model are subject to ongoing internal and external verification and review. The model uses market-sourced inputs such as interest rates and stock price volatilities. Selection of these inputs involves management’s judgment and may impact net income. The derivative component of certain of the convertible notes issued are valued at issuance, at conversion or redemption, and at each period end. The following assumptions were used for the valuation of the derivative liability related to the convertible notes that contain a derivative component:
For the year ended May 31, 2018:
- That the quoted market price of the common stock, which increased from $0.1250 as of May 31, 2017 to $0.6865 as of May 31, 2018, would fluctuate with the Company’s projected volatility;
- That the conversion price of the YAN II PN Convertible Notes would be equal to $0.40 with a full reset feature, and upon default, 75% of the lowest Volume Weighted Average Price (the “VWAP”) in the 15 consecutive trading days ending on the trading day that is immediately prior to the applicable conversion date;
-The conversion prices of the various convertible notes would be equal to the lesser of (i) $1.07, $0.80, or $0.40 (reset to $0.03125) , as the case may be, or (ii) 75% of the lowest VWAP in the 15-20 consecutive trading days ending on the trading day that is immediately prior to the application conversion date;
- That the new convertible notes issued during this period with full resets would be initially issued with conversion prices of $0.3125 and $0.40, respectively, which were not reset as a result of the WestPark Offering;;
-That an event of default at a 24% or 15% interest rate would occur 0% of the time, increasing 1.00% per month to a maximum of 25%, and that instead of a penalty, there would be an alternative conversion price;
-That the projected volatility curve from an annualized analysis for each valuation period would be based on the historical volatility of the Company and the remaining term for each convertible note. The projected volatility was in the range of 97.4% to 534.5% during the year ended May 31, 2018;
-That the Company would redeem the convertible notes, projected initially at 0% of the time and increasing monthly by 1.00% to a maximum of 10.0%;
-That the holder would automatically convert the notes at the maximum of 2 times the conversion price or the stock price if the common stock underlying the YAN II PN Convertible Notes was eligible for sale in compliance with securities laws and the Company was not in default;
-That unless an Event of Default occurred, the holder would sell, per trading day, an amount of Common Stock up to the greater of (i) $5,000 or (ii) 25% multiplied by the “Aggregate Amount,” as defined in the YAN II PN Convertible Notes.
-That the exchange agreement conversions (contingent on the payment by Glashow to Old Main) would occur based on 95% probability; otherwise, the convertible note would revert to the original terms and settlement, and that the value of the 4,500,000 potential shares would be based on the market price as of September 25, 2017, which is the date the convertible notes were re-issued, and each conversion date price.
For the year ended May 31, 2017:
- That the quoted market price of the common stock, which decreased from $0.0409 as of November 30, 2016 to $0.1250 as of May 31, 2017, would fluctuate with the Company’s projected volatility;
- That the conversion price of the amended 2016 Convertible Notes would be equal to the lesser of (i) $1.07 or $0.80; or (ii) 75% of the lowest VWAP in the 15 consecutive trading days ending on the trading day that is immediately prior to the applicable conversion date;
- That an event of default at a 24% interest rate would occur 0% of the time, increasing 1.00% per month to a maximum of 10%, and that instead of a penalty, there would be an alternative conversion price;
- That the projected volatility curve from an annualized analysis for each valuation period would be based on the historical volatility of the Company and the term remaining for each note. The projected volatility was from 265% to 407% during the year ended May 31, 2017;
- That the Company would redeem the notes expiring on September 18, 2017 (with a 130% penalty), projected initially at 50% of the time and increasing monthly by 5.0% to a maximum of 75.0% (from alternative financing being available for a redemption event to occur);
- That the holder would automatically convert the notes at the maximum of 2 times the conversion price or the stock price if the common stock underlying the 2016 Convertible Notes was eligible for sale in compliance with securities laws (assumed at September 18, 2016) and the Company was not in default; and
- That unless an Event of Default occurred, the holder would sell, per trading day, an amount of Common Stock up to the greater of (i) $5,000 or (ii) 25% multiplied by the “Aggregate Amount,” as defined in the 2016 Convertible Notes.
Revenue Recognition
The Company applies revenue recognition provisions pursuant to ASC No. 605, Revenue Recognition, which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. The guidance outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies.
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 May 31, 2018 and 2017, the Company excluded from the calculation of fully diluted shares outstanding a total of 9,929,058 (4,407,118 issuable upon the conversion of notes payable; 4,700,998 upon the exercise of warrants and 611,071 in stock payable) and 1,180,350 shares, respectively, issuable upon the conversion of notes payable because the result would have been anti-dilutive.
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 calculation.
A net loss causes all outstanding stock options and warrants to be antidilutive. As a result, the basic and dilutive losses per common share are the same for the year ended May 31, 2018 and 2017.
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.
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 August 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-15,
Statement of Cash Flows (Topic 230).
The update addresses eight specific cash flow issues and is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update will be effective for reporting periods beginning after December 15, 2017, including interim periods within the reporting period. Early adoption is permitted. The Company is currently evaluating the potential impact of the update on our financial statements.
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 becomes effective for us on January 1, 2020. The amendments in this ASU will be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed.
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 becomes effective for us on January 1, 2018, and will be applied prospectively to an award modified on or after the adoption date. Early adoption is permitted, including adoption in any interim period. The Company is currently assessing the impact that this standard will have on any awards that are modified once this standard is adopted.
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 4 – PREPAID EXPENSES
Prepaid expenses consisted of the following at May 31, 2018 and 2017:
|
|
May 31,
|
|
|
May 31,
|
|
|
|
2018
|
|
|
2017
|
|
Prepaid legal fees
|
|
$
|
1,410
|
|
|
$
|
1,410
|
|
Total
|
|
$
|
1,410
|
|
|
$
|
1,410
|
|
NOTE 5 – SECURITY DEPOSIT
The Company had a security deposit in the amount of $0 and $50,000 at May 31, 2018 and 2017, respectively. This amount consisted of a deposit to secure office and warehouse space. In August of 2017, the Company received a demand letter from the landlord requesting the forfeiture of the $50,000 security deposit, $10,000 in expenses, $15,699 in remaining rent due under the lease agreement and $30,000 to buy out the remaining amounts due under the lease; during the year ended May 31, 2018, the Company wrote-off the security deposit in the amount of $50,000.
NOTE 6 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at May 31, 2018 and 2017.
|
|
May 31,
|
|
|
May 31,
|
|
|
|
2018
|
|
|
2017
|
|
Computer equipment
|
|
$
|
2,674
|
|
|
$
|
2,674
|
|
Property and equipment, gross
|
|
|
2,674
|
|
|
|
2,674
|
|
Less: accumulated depreciation
|
|
|
(2,674
|
)
|
|
|
(1,784
|
)
|
Property and equipment, net
|
|
$
|
-
|
|
|
$
|
890
|
|
Depreciation expense totaled $890 and $892 for the years ended May 31, 2018 and 2017, respectively.
NOTE 7 – INVESTMENT IN OASIS LLCS
On December 4, 2017, the Company and Alternative Solutions, LLC (“Alternative Solutions”) entered into a Membership Interest Purchase Agreement (the “Acquisition Agreement”) for the Company to acquire the outstanding equity interests in three subsidiaries (collectively, the “Oasis LLCs”), Serenity Wellness Center LLC d/b/a/ Oasis Medical Cannabis, Serenity Wellness Growers LLC, and Serenity Wellness Products LLC, from Alternative Solutions. Pursuant to the Acquisition Agreement, the Company 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 each of the subsidiaries. As of May 31, 2018, the Company had a total investment of $2,050,000 in the Oasis LLCs (see note 16).
The closing consideration that the Company must pay to acquire the remaining 90% of the subsidiaries, is equal to cash in the amount of $6,200,000, a $4.0 million promissory note due in December 2019, and $6,000,000 in shares of the Company’s common stock.
The number of shares shall equal $6,000,000 divided by the lower of $1.00 or the conversion price to receive one share of the Company’s common stock in its next equity offering that it commences in 2018 that exceeds $6 million, multiplied by 80%. The promissory note will be secured by a first priority security interest over the assets of each of the Oasis LLCs, including the Company’s 10% equity interest in the three subsidiaries, and the Company shall deliver to Alternative Solutions a confession of judgment that will become effective in the event of any event of default under the promissory note.
Assuming the Company closes on the acquisition, in May 2020, Alternative Solutions will be entitled to a $1,000,000 payment from the Company, if the existing dispensary operated by an Oasis LLC has maintained an average revenue of $20,000 per day during the 2019 calendar year.
The sale, assignment, transfer, pledge or other disposition of any interest in the Oasis LLCs or Alternative Solutions is ineffective unless approved by the State of Nevada and any municipality in which the three subsidiaries’ operations is licensed.
As of May 31, 2018, the Company had not yet received regulatory approval to own the 10% interest in Oasis LLCs. As a result, the amount that has been paid by the Company is being held by Alternative Solutions.
NOTE 8 – NOTE RECEIVABLE
During the year ended May 31, 2015, the Company loaned $500,000 (the “Note”) to Picture Rock Holdings, LLC, a Colorado limited liability company (“PRH”). Pursuant to the Note, as amended by the parties effective June 30, 2015, October 31, 2015, April 11, 2016, and May 31, 2016, PRH will repay the principal due under the Note in twenty (20) equal quarterly installments of Twenty Five Thousand Dollars ($25,000) commencing in the month following the month in which PRH commences generating revenue at the grow facility, which commencement was originally anticipated to occur in the first quarter of 2017, and continuing until paid in full. The Company is currently unable to estimate when it will commence generating revenues at the grow facility. Interest will accrue on the unpaid principal balance of the Note at the rate of twelve percent (12%) per annum and will be paid quarterly in arrears commencing after such initial payment and continuing until paid in full. All outstanding principal and any accumulated unpaid interest due under the Note is due and payable on the five-year anniversary of the initial payment thereunder. In the event of default as defined in the agreements underlying the Note, all amounts under the Note shall be due and payable at once. During the year ended May 31, 2015, the Company recorded an impairment related to the note receivable in the amount of $500,000. This receivable is recorded on the balance sheet as of May 31, 2017 in the amount of $0, net of allowance in the amount of $500,000.
During the year ended May 31, 2018, the Company received a payment of $50,000 on the Note. As a result, the Company has reduced the impairment of the note by $50,000 reflect this payment. The receivable is recorded on the balance sheet as of May 31, 2018 in the amount of $0, net of allowance in the amount of $450,000.
NOTE 9 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consisted of the following at May 31, 2018 and May 31, 2017.
|
|
May 31,
|
|
|
May 31,
|
|
|
|
2018
|
|
|
2017
|
|
Trade payables
|
|
$
|
726,457
|
|
|
$
|
497,213
|
|
Accrued payroll and related liabilities
|
|
|
44,465
|
|
|
|
34,987
|
|
Deferred rent liability
|
|
|
55,699
|
|
|
|
49,565
|
|
Total accounts payable and accrued liabilities
|
|
$
|
826,621
|
|
|
$
|
581,765
|
|
NOTE 10 – RELATED PARTY TRANSACTIONS
For the year ended May 31, 2018:
As of May 31, 2018 and 2017, the Company owed the amount of $37,500 and $37,500, respectively, to Jeffrey Binder, its Chief Executive Officer, for accrued salary. For the twelve months ended May 31, 2018, unpaid accrued salary in the amount of $150,000
was transferred to a convertible promissory note due to Mr. Binder.
As of May 31, 2018 and 2017, the Company owed the amount of $29,167 and $0, respectively, to David Lamadrid, its President and Chief Financial Officer.
As of May 31, 2018 and 2017, the Company had accrued salary due to Alan Bonsett, a former officer of the Company prior to his October 1, 2017 separation, in the amount of $37,500 and $0, respectively.
As of May 31, 2018 and 2017, 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 $16,250.
As of May 31, 2018 and 2017, the Company had related party payables in the amount of $17,930 due to officers and directors related to expenses paid on behalf of the Company. The Company imputed interest at the rate of 6% per annum on these liabilities, and recorded imputed interest expense on these liabilities in the amounts of $1,076 and $1,075 during the twelve months ended May 31, 2018 and 2017, respectively. These interest accruals were charged to additional paid-in capital.
On March 12, 2018, the Company received conversion notices from Jeffrey I. Binder, Frank Koretsky, Newcan Investment Partners LLC and CLS CO 2016, LLC (collectively, the “Insiders”). Pursuant to the terms of the conversion notices, the following amounts of principal and accrued interest were converted to common stock of the Company:
|
|
|
|
|
|
Accrued
|
|
|
|
|
|
|
|
Principal
|
|
|
Interest
|
|
|
# Shares
|
|
Jeffrey Binder
|
|
$
|
464,698
|
|
|
$
|
43,058
|
|
|
|
(1,624,819
|
)
|
Frank Koretsky
|
|
|
-
|
|
|
|
46,626
|
|
|
|
(149,203
|
)
|
Newcan Investment Partners LLC
|
|
|
956,658
|
|
|
|
98,098
|
|
|
|
(3,375,220
|
)
|
CLS CO 2016 LLC
|
|
|
-
|
|
|
|
9,308
|
|
|
|
(29,786
|
)
|
Total
|
|
$
|
1,421,356
|
|
|
$
|
197,090
|
|
|
|
(5,179,028
|
)
|
For the year ended May 31, 2017:
As of May 31, 2017, the Company owed $37,500 to Jeffrey Binder, its President and Chief Executive Officer, for accrued salary. In July 2016, $250,000 was transferred from accrued salary to a convertible promissory note due to Mr. Binder; in February 2017, an additional $112,500 was transferred from accrued salary to a convertible promissory note due to Mr. Binder.
As of May 31, 2017, 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 $16,250.
As of May 31, 2017, the Company had amounts due to related parties of $17,930, representing expenses paid by officers and directors on behalf of the Company. The Company accrued interest at the rate of 6% per annum on these liabilities, and recorded interest expense on these liabilities in the amounts of $1,075 during the year ended May 31, 2017. This interest accrual was charged to additional paid-in capital.
On May 31, 2017, the Company entered into the Omnibus Loan Amendment Agreement (the “Omnibus Loan Agreement”) with Jeffrey I. Binder, Frank Koretsky, Newcan Investment Partners LLC and CLS CO 2016, LLC (collectively, the “Insiders”). Pursuant to the Omnibus Loan Agreement, effective May 31, 2017, the following amounts of principal and accrued interest were converted to common stock of the Company:
|
|
|
|
|
|
Accrued
|
|
|
|
|
|
|
|
Principal
|
|
|
Interest
|
|
|
# Shares
|
|
Jeffrey Binder
|
|
$
|
442,750
|
|
|
$
|
19,427
|
|
|
|
(1,848,708
|
)
|
Frank Koretsky
|
|
|
1,485,000
|
|
|
|
130,069
|
|
|
|
(6,460,276
|
)
|
Newcan Investment Partners LLC
|
|
|
460,000
|
|
|
|
7,747
|
|
|
|
(1,870,988
|
)
|
CLS CO 2016 LLC
|
|
|
150,000
|
|
|
|
9,247
|
|
|
|
(636,988
|
)
|
Total
|
|
$
|
2,537,750
|
|
|
$
|
166,490
|
|
|
|
(10,816,960
|
)
|
Related Party Notes Payable
At May 31, 2018, the Company had $143,887 in principal and $5,142 in accrued interest of convertible notes payable outstanding to Jeffrey Binder, an officer and director, David Lamadrid, an officer, and to Newcan Investment Partners, LLC, an entity wholly owned by Frank Koretsky, a director.
NOTE 11 – NOTES PAYABLE
Notes Payable
On February 7, 2018, the Company issued a note payable to Todd Blatt in the amount of $210,000. This note accrues interest at a rate of 6% per annum and is due on February 7, 2019. During the year ended May 31, 2018, the Company accrued interest in the amount of $3,901 on this note. As of May 31, 2018, the outstanding balance of this note is $210,000
On February 7, 2018, the Company issued a note payable to AJG Group in the amount of $200,000. This note accrues interest at a rate of 6% per annum and is due on February 7, 2019. During the year ended May 31, 2018, the Company made a payment of $100,000 on this note. During the year ended May 31, 2018, the Company accrued interest in the amount of $2,696 on this note. As of May 31, 2018, the outstanding balance of this note is $100,000.
Related Party Notes Payable
On May 31, 2017, the Company entered into an Omnibus Loan Amendment Agreement (the “Omnibus Loan Amendment”) with Jeffrey I. Binder, Frank Koretsky, Newcan Investment Partners LLC and CLS CO 2016, LLC (collectively, the “Insiders”). Pursuant to the Omnibus Loan Amendment, the Company agreed with the Insiders to amend certain terms of loans the Insiders made to the Company for working capital purposes, which loans were initially demand loans, and, except for loans made in 2017, were later memorialized as convertible loans (the “Insider Loans”), in exchange for the agreement of the Insiders to convert all Insider Loans where funds were advanced prior to January 1, 2017, which totaled $2,537,750, plus $166,490 of accrued interest thereon, into an aggregate of 10,816,960 shares of the Company’s common stock at $0.25 per share, and forego the issuance of warrants to purchase the Company’s common stock upon conversion. This resulted in the issuance of an additional 7,609,910 shares compared to the original number of shares issuable upon conversion of the Insider Loans prior to the Omnibus Loan Agreement. The Company valued the shares at $0.125, which was the market price of the Company’s stock at the conversion date, and charged the amount of $951,239 to loss on modification of debt during the twelve months ended May 31, 2017. The Company entered into the Omnibus Loan Amendment in order to ease the debt burden on the Company and prevent it from defaulting on the Insider Loans.
Pursuant to the Omnibus Loan Amendment, the following amendments were made to the Insider Loans: (a) the Company reduced the conversion price on the Insider Loans from between $0.75 and $1.07 per share of common stock to $0.25 per share of common stock, in those cases where the conversion price was greater than $0.25, which reduced conversion price exceeded the closing price of the common stock during the three months prior to the Omnibus Loan Amendment; (b) the Company deleted the requirement to issue warrants to purchase the Company’s common stock upon conversion of the Insider Loans; (c) the Company amended one Insider Loan to permit conversion of only the portion of the Insider Loan related to services that were provided to it prior to January 1, 2017; and (d) the Company amended the terms of the Insider Loans where funds were advanced on or after January 1, 2017, which Insider Loans were not converted into the Company’s common stock, to provide for, where not already the case, a 10% interest rate per annum, a $0.25 conversion price per share of common stock, and the deletion of the requirement that the Company issue warrants to purchase its common stock upon conversion of such Insider Loans.
On January 10, 2018, effective December 1, 2017, the Company entered into an Omnibus Amendment to Convertible Notes (the “Second Omnibus Loan Agreement”) with Jeffrey I. Binder, an officer and director of the Company, and Newcan Investment Partners LLC, an entity owned by Frank Koretsky, a director of the Company. The Second Omnibus Loan Agreement provides that the conversion price of all outstanding convertible promissory notes issued to either Mr. Binder or Newcan Investment Partners, LLC as of the date of the Agreement would be increased from $0.25 to $0.3125 per share of common stock. The remaining terms of such notes remain unchanged.
On March 12, 2018, the Company received conversion notices from the Insiders. The Company converted a total of $1,618,446, of which $1,421,356 was principal and $197,090 was accrued interest, of related party notes payable into 5,179,028 shares of common stock (see note 11).
The following tables summarize the Company’s loan balances at May 31, 2018 and 2017:
Convertible Notes Payable Related Parties:
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May 31, 2018
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May 31, 2017
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Notes payable to Jeffrey Binder, an officer and director of the Company, for advances to fund operations (the “Binder Funding Notes”). The Binder Funding Notes bear interest at a rate of 6% for loans made through November 30, 2016, and at a rate of 10% for loans made after November 30, 2016. The Binder Funding Notes have no maturity date and are due on demand. During the twelve months ended May 31, 2017, Mr. Binder advanced a total of $145,850 to the Company under the Binder Funding Notes. Also during the year ended May 31, 2017, Mr. Binder loaned the Company an additional $49,700; which was credited to the Binder Funding Notes. Also during the year ended May 31, 2017, principal in the amount of $59,750 and accrued interest in the amount of $813 was transferred out of the Binder Funding Notes and used to fund two new convertible notes payable to Mr. Binder (See Binder Convertible Notes 3 and 4 below). Also during the year ended May 31, 2017, the Company made principal payments in the aggregate amount of $61,000 under the Binder Funding Notes. During the year ended May 31, 2017, the Company accrued interest in the amount of $1,910 on the Binder Funding Notes. Effective May 31, 2017, pursuant to the Omnibus Loan Agreement, a conversion feature was added to the Binder Funding Notes whereby principal and accrued interest is convertible into common stock of the Company at a rate of $0.25 per share.
Effective December 1, 2017, pursuant to the Second Omnibus Loan Amendment, the conversion price was increased from $0.25 per share to $0.3125 per share and a discount in the amount of $35,023 related to the revaluation of the beneficial conversion feature of the Binder Funding Notes was charged to additional paid-in capital and amortized to interest expense.
During the twelve months ended May 31, 2018, Mr. Binder advanced a total of $440,579 to the Company under the Binder Funding Notes. During the year ended May 31, 2018, principal in the amount of $280,198 and accrued interest in the amount of $5,188 was transferred out of the Binder Funding Notes and used to fund four new convertible notes payable to Mr. Binder (See Binder Convertible Notes 5, 6, 7 and 8 below). Also during the year ended May 31, 2018 the Company made principal payments in the aggregate of $237,794 under the Binder Funding Notes. During the year ended May 31, 2018, the Company accrued interest in the amount of $7,364 on the Binder Funding Notes. During the year ended May 31, 2018, discounts in the amount of $385,637 related to the beneficial conversion feature of the Binder Funding Notes was charged to additional paid-in capital and amortized to interest expense.
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$
|
137
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|
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$
|
77,550
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May 31, 2018
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May 31, 2017
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Note payable to Frank Koretsky, a director of the Company, for advances to fund operations (the “Koretsky Funding Notes”). The Koretsky Funding Notes bear interest at a rate of 6% for loans made through November 30, 2016, and at a rate of 10% for loans made after November 30, 2016. The Koretsky Funding Notes have no maturity date and are due on demand. During the twelve months ended May 31, 2017, Mr. Koretsky advanced $550,000 to the Company under the Koretsky Funding Notes. Also during the twelve months ended May 31, 2017, $210,000 of principal and $1,346 of accrued interest was transferred out of the Koretsky Funding Notes and used to fund a new convertible note payable to Mr. Koretsky. Also during the twelve months ended May 31, 2017, principal and accrued interest in the amounts of $410,000 and $4,046, respectively, were transferred out of the Koretsky Funding Notes and contributed to the Newcan Funding Notes (see Newcan Funding Notes, below).
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-
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-
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Notes payable to Newcan Investment Partners, LLC (“Newcan”), an entity owned by Frank Koretsky, a director of the Company, for advances to fund operations (the “Newcan Funding Notes”). The Newcan Funding Notes bear interest at a rate of 10%. The Newcan Funding Notes have no maturity date and are due on demand. During the twelve months ended May 31, 2017, principal and interest in the amount of $410,000 and $4,046, respectively, were transferred from the Koretsky Funding Notes into the Newcan Funding Notes. Also during the year ended May 31, 2017, Newcan advanced $791,658 to the Company under the Newcan Funding Notes. Also during the year ended May 31, 2017, principal in the amount of $460,000 and accrued interest in the amount of $7,747, respectively, were transferred from the Newcan Finding Notes and used to fund the Newcan Convertible Notes 2 and 3 (see below); also during the year ended May 31, 2017, principal and accrued interest in the amounts of $120,000 and $2,121, respectively, were transferred out of the Newcan Funding Notes in order to fund the Newcan Convertible Note 3; see below. During the twelve months ended May 31, 2017, the Company accrued interest in the amount of $13,434 on this note. Effective May 31, 2017, pursuant to the Omnibus Loan Agreement, a conversion feature was added to the Newcan Funding Notes whereby principal and accrued interest is convertible into common stock of the Company at a rate of $0.25 per share.
Effective December 1, 2017, pursuant to the Second Omnibus Loan Amendment, the conversion price was increased from $0.25 per share to $0.3125 per share and a discount in the amount of $6,120 related to the revaluation of the beneficial conversion feature of the Newcan Funding Notes was charged to additional paid-in capital and amortized to interest expense.
During the twelve months ended May 31, 2018, Newcan advanced a total of $290,000 to the Company under the Newcan Funding Notes. During the year ended May 31, 2018, principal in the amount of $836,658 and accrued interest in the amount of $25,018 was transferred out of the Newcan Funding Notes and used to fund four new convertible notes payable to Newcan (See Newcan Convertible Notes 4, 5, 6 and 7 below). During the year ended May 31, 2018, the Company accrued interest in the amount of $16,681 on the Newcan Funding Notes. During the year ended May 31, 2018, discounts in the amount of $210,120 related to the beneficial conversion feature of the Newcan Funding Notes was charged to additional paid-in capital and amortized to interest expense.
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75,000
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621,658
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Total – Demand Convertible Notes Payable, Related Parties
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$
|
75,137
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|
|
$
|
699,208
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Current portion
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|
$
|
75,137
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|
|
$
|
699,208
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|
Long term portion
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$
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-
|
|
|
$
|
-
|
|
Convertible Notes Payable:
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May 31, 2018
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May 31, 2017
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Unsecured convertible note issued to Jeffrey Binder, an officer and director of the Company, dated April 8, 2016 and due April 1, 2019 (the “Binder Convertible Note 2. This note bears interest at the rate of 6% per annum through February 29, 2017 and 10% per annum thereafter. No payments are required until April 1, 2017, at which time all accrued interest becomes due and payable. Commencing on July 1, 2017, the first of eight principal payments in the amount of $5,313 will be due; subsequent principal payments will due on the first day of each October, January, April, and July until paid in full. This note and accrued interest under the note may be converted, in whole or in part, into one “Unit” for each $1.07 converted, with each Unit consisting of one (1) share of common stock and a five-year warrant to purchase (1) share of common stock at a price of $1.07 per share. The Company recognized a discount of $37,840 on the value of the beneficial conversion feature at the time of issuance.
Pursuant to the Omnibus Loan Agreement, on May 31, 2017, (i) the conversion rate of the Binder Convertible Note 2 was changed to $0.25 per share, and principal and accrued interest in the amounts of $42,500 and $3,583, respectively, were converted into a total of 184,332 shares of common stock; and (ii) the requirement to issue warrants upon conversion was deleted. During the twelve months ended May 31, 2017, the remaining discount on the Binder Convertible Note 2 in the amount of $35,260 was charged to operations, and the Company accrued interest in the amount of $4,287.
Unsecured convertible note issued to Jeffrey Binder, an officer and director of the Company, dated July 20, 2016 and due July 1, 2019 (the “Binder Convertible Note 3”). This note bears interest at the rate of 10% per annum. No payments are required until July 1, 2017, at which time all accrued interest becomes due and payable. Commencing on October 1, 2017, the first of eight principal payments in the amount of $32,844 will become due; subsequent principal payments will become due on the first day of each, January, April, July and October until paid in full. This note and accrued interest under the note may be converted, in whole or in part, into one “Unit” for each $1.07 converted, with each Unit consisting of one (1) share of common stock and a five-year warrant to purchase (1) share of common stock at a price of $1.07 per share.
Pursuant to the Omnibus Loan Agreement, on May 31, 2017, (i) the conversion rate of the Binder Convertible Note 3 was changed to $0.25 per share, and principal and accrued interest in the amounts of $262,750 and $11,972, respectively, were converted into a total of 1,098,888 shares of common stock; and (ii) the requirement to issue warrants upon conversion was deleted. During the twelve months ended May 31, 2017, the Company accrued interest in the amount of $22,742 on the Binder Convertible Note 3.
Unsecured convertible note issued to Jeffrey Binder, an officer and director of the Company, dated March 31, 2017 (the “Binder Convertible Note 4”). The Binder Convertible Note 4 was funded with the conversion of $112,500 of unpaid accrued salary due to Mr. Binder and $47,000 of advances Mr. Binder made to the Company under the Binder Funding Notes. This note bears interest at the rate of 10% per annum. No interest payments are required until April 1, 2018, at which time all accrued interest becomes due and payable. Commencing on July 1, 2018, the first of eight principal payments in the amount of $19,938 will become due; subsequent principal payments will become due on the first day of each October, January, April, and July until paid in full. This note and accrued interest under the note may be converted, in whole or in part, into one “Unit” for each $0.25 converted, with each Unit consisting of one (1) share of common stock and a five-year warrant to purchase (1) share of common stock at a price of $0.25 per share.
Pursuant to the Omnibus Loan Agreement, on May 31, 2017, the requirement to issue warrants upon conversion was deleted, and principal in the amount of $87,500 was converted into a total of 350,000 shares of common stock. The remaining principal balance of $72,000 will be due in eight quarterly payments in the amount of $9,000 commencing July 1, 2018; subsequent principal payments will become due on the first day of each October, January, April, and July until paid in full. During the twelve months ended May 31, 2017, the Company accrued interest in the amount of $2,666 on the Binder Convertible Note 4.
Effective December 1, 2017, pursuant to the Second Omnibus Loan Amendment, the conversion price was increased from $0.25 per share to $0.3125 per share and a discount was recorded in the amount of $29,376 related to the revaluation of the beneficial conversion feature of the Binder Convertible Note 4; this discount was amortized to interest expense during the year ended May 31, 2018
.
During the twelve months ended May 31, 2018 and 2017, interest in the amount of $5,622 and $2,666 was accrued on Binder Convertible Note 4, respectively.
During the year ended May 31, 2018, the Binder Convertible Note 4 in the amount of $81,000, of which $72,000 was principal and $9,000 was accrued interest, was converted into 259,200 shares of common stock.
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$
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-
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|
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$
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72,000
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May 31, 2018
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May 31, 2017
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Unsecured convertible note issued to Newcan, an entity owned by Frank Koretsky, a director of the Company, dated March 31, 2017 (the “Newcan Convertible Note 1”). The Newcan Convertible Note 1 was funded with the conversion of $120,000 of advances made to the Company under the Newcan Funding Notes. This note bears interest at the rate of 10% per annum. No interest payments are required until April 1, 2018, at which time all accrued interest becomes due and payable. Commencing on July 1, 2018, the first of eight principal payments in the amount of $15,000 will become due; subsequent principal payments will become due on the first day of each October, January, April, and July until paid in full. This note and accrued interest under the note may be converted, in whole or in part, into one “Unit” for each $0.25 converted, with each Unit consisting of one (1) share of common stock and a five-year warrant to purchase (1) share of common stock at a price of $0.25 per share. During the twelve months ended May 31, 2017, the Company accrued interest in the amount of $2,005 on the Koretsky Convertible Note 4. Pursuant to the Omnibus Loan Agreement, on May 31, 2017, the requirement to issue warrants upon conversion was deleted.
Effective December 1, 2017, pursuant to the Second Omnibus Loan Amendment, the conversion price was increased from $0.25 per share to $0.3125 per share and a discount was recorded in the amount of $48,960 related to the revaluation of the beneficial conversion feature of the Newcan Convertible Note 1; this discount was amortized during the year ended May 31, 2018.
During the twelve months ended May 31, 2018 and 2017, interest in the amount of $9,370 and $2,005 was accrued on Newcan Convertible Note 1, respectively.
During the year ended May 31, 2018, the Newcan Convertible Note 1 in the amount of $133,496, of which $120,000 was principal and $13,496 was accrued interest, was converted into 427,187 shares of common stock.
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-
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120,000
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Unsecured convertible note issued to Jeffrey Binder, an officer and director of the Company, dated August 23, 2017 in the original principal amount of $115,050 (the “Binder Convertible Note 5”). The Binder Convertible Note 5 was funded with the conversion of $37,500 of unpaid accrued salary due to Mr. Binder and $77,550 of advances Mr. Binder made to the Company under the Binder Funding Notes. This note bears interest at the rate of 10% per annum. No interest payments are required until October 1, 2018, at which time all accrued interest becomes due and payable. Commencing on January 2, 2019, the first of eight principal payments in the amount of $14,381 will become due; subsequent principal payments will become due on the first day of each April, July, October, and January until paid in full. This note and accrued interest under the note may be converted, in whole or in part, into one share of common stock for each $0.25 converted. The Company recognized a discount of $46,020 on the Binder Convertible Note 5 related to the value of the beneficial conversion feature at the time of issuance; this discount was amortized during the twelve months ended May 31, 2018.
Effective December 1, 2017, pursuant to the Second Omnibus Loan Amendment, the conversion price was increased from $0.25 per share to $0.3125 per share, and the discount balance in the amount of $41,859 was charged to interest expense. A new discount was recorded in the amount of $46,940 related to the value of the repriced conversion feature of Binder Convertible Note 5; this discount was amortized to interest expense during the twelve months ended May 31, 2018.
During the twelve months ended May 31, 2018 and 2017, interest in the amount of $6,336 and $0 was accrued on Binder Convertible Note 5, respectively, and 2,246 of accrued interest was transferred from the Binder Funding Notes.
During the year ended May 31, 2018, the Binder Convertible Note 5 in the amount of $123,632, of which $115,050 was principal and $8,582 was accrued interest, was converted into 395,622 shares of common stock.
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-
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-
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May 31, 2018
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May 31, 2017
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Unsecured convertible note issued to Jeffrey Binder, an officer and director of the Company, dated August 23, 2017 in the original principal amount of $72,767 (the “Binder Convertible Note 6”). The Binder Convertible Note 6 was funded with the conversion of $25,000 of unpaid accrued salary due to Mr. Binder and $47,767 of advances Mr. Binder made to the Company under the Binder Funding Notes. This note bears interest at the rate of 10% per annum. No interest payments are required until October 1, 2018, at which time all accrued interest becomes due and payable. Commencing on January 2, 2019, the first of eight principal payments in the amount of $9,096 will become due; subsequent principal payments will become due on the first day of each April, July, October, and January until paid in full. This note and accrued interest under the note may be converted, in whole or in part, into one share of common stock for each $0.25 converted. The Company recognized a discount of $29,107 on the Binder Convertible Note 6 related to the value of the beneficial conversion feature at the time of issuance; this discount was amortized during the twelve months ended May 31, 2018.
Effective December 1, 2017, pursuant to the Second Omnibus Loan Amendment, the conversion price was increased from $0.25 per share to $0.3125 per share, and the discount balance in the amount of $26,475 was charged to interest expense. A new discount was recorded in the amount of $29,689 related to the value of the repriced conversion feature of Binder Convertible Note 6; this discount was amortized to interest expense during the twelve months ended May 31, 2018.
During the twelve months ended May 31, 2018 and 2017, interest in the amount of $4,007 and $0 was accrued on Binder Convertible Note 6, respectively, and 1,384 of accrued interest was transferred from the Binder Funding Notes.
During the year ended May 31, 2018, the Binder Convertible Note 6 in the amount of $78,158, of which $72,767 was principal and $5,391 was accrued interest, was converted into 250,160 shares of common stock.
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-
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-
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Unsecured convertible note issued to Newcan, an entity owned by Frank Koretsky, a director of the Company, dated August 23, 2017 in the original principal amount of $621,658 (the “Newcan Convertible Note 4”). The Newcan Convertible Note 4 was funded with the conversion of $621,658 of advances Newcan made to the Company under the Newcan Funding Notes. This note bears interest at the rate of 10% per annum. No interest payments are required until October 1, 2018, at which time all accrued interest becomes due and payable. Commencing on January 2, 2019, the first of eight principal payments in the amount of $69,074 will become due; subsequent principal payments will become due on the first day of each April, July, October, and January until paid in full. This note and accrued interest under the note may be converted, in whole or in part, into one share of common stock for each $0.25 converted. The Company recognized a discount of $248,663 on the Newcan Convertible Note 4 related to the value of the beneficial conversion feature at the time of issuance.
Effective December 1, 2017, pursuant to the Second Omnibus Loan Amendment, the conversion price was increased from $0.25 per share to $0.3125 per share, and the discount balance in the amount of $226,181 was charged to interest expense. A new discount was recorded in the amount of $253,636 related to the value of the repriced conversion feature of Newcan Convertible Note 4; this discount was amortized to interest expense during the twelve months ended May 31, 2018.
During the twelve months ended May 31, 2018 and 2017, interest in the amount of $34,234 and $0 was accrued on Newcan Convertible Note 4, respectively, and $23,198 of accrued interest was transferred from the Newcan Funding Notes.
During the year ended May 31, 2018, the Newcan Convertible Note 4 in the amount of $679,090, of which $621,658 was principal and $57,432 was accrued interest, was converted into 2,173,088 shares of common stock.
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-
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-
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May 31, 2018
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May 31, 2017
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Unsecured convertible note issued to Newcan, an entity owned by Frank Koretsky, a director of the Company, dated August 23, 2017 in the original principal amount of $70,000 (the “Newcan Convertible Note 5”). The Newcan Convertible Note 5 was funded with the conversion of $70,000 of advances Newcan made to the Company under the Newcan Funding Notes. This note bears interest at the rate of 10% per annum. No interest payments are required until October 1, 2018, at which time all accrued interest becomes due and payable. Commencing on January 2, 2019, the first of eight principal payments in the amount of $8,750 will become due; subsequent principal payments will become due on the first day of each April, July, October, and January until paid in full. This note and accrued interest under the note may be converted, in whole or in part, into one share of common stock for each $0.25 converted. The Company recognized a discount of $28,000 on the Newcan Convertible Note 5 related to the value of the beneficial conversion feature at the time of issuance.
Effective December 1, 2017, pursuant to the Second Omnibus Loan Amendment, the conversion price was increased from $0.25 per share to $0.3125 per share, and the discount balance in the amount of $25,468 was charged to interest expense. A new discount was recorded in the amount of $28,560 related to the value of the repriced conversion feature of Newcan Convertible Note 5; this discount was amortized to interest expense during the twelve months ended May 31, 2018.
During the twelve months ended May 31, 2018 and 2017, interest in the amount of $3,855 and $0 was accrued on Newcan Convertible Note 5, respectively, and $148 of accrued interest was transferred from the Newcan Funding Notes.
During the year ended May 31, 2018, the Newcan Convertible Note 5 in the amount of $74,003, of which $70,000 was principal and $4,003 was accrued interest, was converted into 236,810 shares of common stock.
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-
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-
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Unsecured convertible note issued to Newcan, an entity owned by Frank Koretsky, a director of the Company, dated October 9, 2017 in the original amount of $30,000 (the “Newcan Convertible Note 6”). The Newcan Convertible Note 6 was funded with the conversion of $30,000 of advances Newcan made to the Company under the Newcan Funding Notes. This note bears interest at the rate of 10% per annum. No interest payments are required until January 2, 2019, at which time all accrued interest becomes due and payable. Commencing on April 1, 2019, the first of eight principal payments in the amount of $3,750 will become due; subsequent principal payments will become due on the first day of each July, October, January and April until paid in full. This note and accrued interest under the note may be converted, in whole or in part, into one share of common stock for each $0.25 converted. The Company recognized a discount of $15,808 on the Newcan Convertible Note 6 related to the value of the beneficial conversion feature at the time of issuance.
Effective December 1, 2017, pursuant to the Second Omnibus Loan Amendment, the conversion price was increased from $0.25 per share to $0.3125 per share, and the discount balance in the amount of $11,430 was charged to interest expense. A new discount was recorded in the amount of $12,240 related to the value of the repriced conversion feature of Newcan Convertible Note 6; this discount was amortized to interest expense during the twelve months ended May 31, 2018.
During the twelve months ended May 31, 2018 and 2017, interest in the amount of 1,266 and $0 was accrued on Newcan Convertible Note 6, respectively.
During the year ended May 31, 2018, the Newcan Convertible Note 6 in the amount of $31,414, of which $30,000 was principal and $1,414 was accrued interest, was converted into 100,525 shares of common stock.
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-
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-
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May 31, 2018
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May 31, 2017
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Unsecured convertible note issued to Jeffery Binder, an officer and director of the Company, dated October 9, 2017 in the original principal amount of $39,521 (the “Binder Convertible Note 7”). The Binder Convertible Note 7 was funded with the conversion of $12,500 of unpaid accrued salary due to Mr. Binder and $27,021 of advances Mr. Binder made to the Company under the Binder Funding Notes. This note bears interest at the rate of 10% per annum. No interest payments are required until January 2, 2019, at which time all accrued interest becomes due and payable. Commencing April 1, 2019, the first of eight principal payments in the amount of $4,940 will become due, subsequent payments will become due on the first day of each July, October, January and April until paid in full. This note and accrued interest under the note may be converted, in whole or in part, into one share of common stock for each $0.25 converted. The Company recognized a discount of $12,000 on the Binder Convertible Note 7 related to the value of the beneficial conversion feature at the time of issuance.
Effective December 1, 2017, pursuant to the Second Omnibus Loan Amendment, the conversion price was increased from $0.25 per share to $0.3125 per share, and the discount balance in the amount of $15,058 was charged to interest expense. A new discount was recorded in the amount of $16,125 related to the value of the repriced conversion feature of Binder Convertible Note 7; this discount was amortized to interest expense during the twelve months ended May 31, 2018.
During the twelve months ended May 31, 2018 and 2017, interest in the amount of $1,667 and $0 was accrued on Binder Convertible Note 7, respectively.
During the year ended May 31, 2018, the Binder Convertible Note 7 in the amount of $41,310, of which $39,521 was principal and $1,789 was accrued interest, was converted into 132,192 shares of common stock.
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-
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-
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|
|
Unsecured convertible note issued to Newcan, an entity owned by Frank Koretsky, a director of the Company, dated, January 5, 2018 in the original amount of $115,000 (the “Newcan Convertible Note 7”). The Newcan Convertible Note 7 was funded with the conversion of $115,000 of advances Newcan made to the Company under the Newcan Funding Notes. This note bears interest at the rate of 10% per annum. No interest payments are required until April 1, 2019, at which time all of the accrued interest becomes due and payable. Commencing on July 1, 2019, the first of eight principal payments in the amount of $14,375 will become due; subsequent principal payments will become due on the first day of each October, January, April and July until paid in full. This note and accrued interest under the note may be converted, in whole or in part, into one share of common stock for each $0.3125 converted. The Company recognized a discount of $115,000 on the Newcan Convertible Note 7 related to the value of the beneficial conversion feature at the time of issuance. During the twelve months ended May 31, 2018, the Company amortized this discount to interest expense.
During the twelve months ended May 31, 2018 and 2017, interest in the amount of $2,079 and $0 was accrued on Newcan Convertible Note 7, respectively, and $1,014 of accrued interest was transferred from the Newcan Funding Notes.
During the year ended May 31, 2018, the Newcan Convertible Note 7 in the amount of $118,093, of which $115,000 was principal and $3,093 was accrued interest, was converted into 377,898 shares of common stock.
|
|
|
-
|
|
|
|
-
|
|
|
|
May 31, 2018
|
|
|
May 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Unsecured convertible note issued to Jeffery Binder, an officer and director of the Company, dated January 5, 2018 in the original principal amount of $165,360 (the “Binder Convertible Note 8”). The Binder Convertible Note 8 was funded with the conversion of $37,500 of unpaid accrued salary due to Mr. Binder and $127,860 of advances Mr. Binder made to the Company under the Binder Funding Notes. This note bears interest at the rate of 10% per annum. No interest payments are required until April 1, 2019, at which time all accrued interest becomes due and payable. Commencing July 1, 2019, the first of eight principal payments in the amount of $20,670 will become due; subsequent payments will become due on the first day of each October, January, April and July until paid in full. This note and accrued interest under the note may be converted, in whole or in part, into one share of common stock for each $0.3125 converted. The Company recognized a discount of $165,360 on the Binder Convertible Note 8 related to the value of the beneficial conversion feature at the time of issuance. During the twelve months ended May 31, 2018, the Company amortized this discount to interest expense.
During the twelve months ended May 31, 2018 and 2017, interest in the amount of $2,990 and $0 was accrued on Binder Convertible Note 8, respectively, and $1,437 of accrued interest was transferred from the Binder Funding Notes.
During the year ended May 31, 2018, the Binder Convertible Note 8 in the amount of $168,787, of which $165,360 was principal and $4,427 was accrued interest, was converted into 543,318 shares of common stock.
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Convertible promissory note payable to David Lamadrid (the “Lamadrid Note”) dated February 20, 2018 in the principal amount of $31,250 and bearing interest at a rate of 8% per annum. The Lamadrid Note is due eighteen months from the date of issue. Mr. Lamadrid may, at his option, convert all or a portion of the Lamadrid Note and accrued but unpaid interest into shares of common stock at a conversion price of $0.3125 per share. The Lamadrid Note also contains a reset feature, whereby, absent certain exceptions, if the Company issues equity securities at an effective price less than $0.3125 per share of common stock, the conversion price of the Lamadrid Note will be reset to such lower price. The Company recognized a discount of $31,250 on the Lamadrid Note related to the beneficial conversion feature at the time of issuance. During the twelve months ended May 31, 2018, $942 of this discount was charged to operations. During the twelve months ended May 31, 2018, the Company accrued interest in the amount of $685 on this note.
|
|
|
31,250
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Unsecured convertible note issued to Jeffery Binder, an officer and director of the Company, dated April 6, 2018 in the original principal amount of $37,500 (the “Binder Convertible Note 9”). The Binder Convertible Note 9 was funded with the conversion of $37,500 of unpaid accrued salary due to Mr. Binder. This note bears interest at the rate of 10% per annum. No interest payments are required until July 1, 2019, at which time all accrued interest becomes due and payable. Commencing October 1, 2019, the first of eight principal payments in the amount of $4,688 will become due; subsequent payments will become due on the first day of each January, April, July and October until paid in full. This note and accrued interest under the note may be converted, in whole or in part, into one share of common stock for each $0.3125 converted. The Company recognized a discount of $37,500 on the Binder Convertible Note 9 related to the value of the beneficial conversion feature at the time of issuance. During the twelve months ended May 31, 2018, the Company amortized $1,890 of this discount to interest expense.
During the twelve months ended May 31, 2018 and 2017, interest in the amount of $565 and $0 was accrued on Binder Convertible Note 9, respectively.
|
|
|
37,500
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total – Convertible Notes Payable, Related Parties
|
|
$
|
68,750
|
|
|
$
|
192,000
|
|
Less: Discount
|
|
|
(65,918
|
)
|
|
|
-
|
|
Convertible Notes Payable, Related Parties, Net of Discounts
|
|
$
|
2,832
|
|
|
$
|
192,000
|
|
|
|
|
|
|
|
|
|
|
Convertible Notes Payable, Related Parties, Net of Discounts, Current Portion
|
|
$
|
2,832
|
|
|
$
|
-
|
|
Convertible Notes Payable, Related Parties, Net of Discounts, Long-term Portion
|
|
|
-
|
|
|
|
192,000
|
|
|
|
May 31, 2018
|
|
|
May 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Convertible promissory note issued to an unaffiliated third party due April 29, 2018 (the “April 2015 Note”). During the twelve months ended May 31, 2015, the lender loaned the Company the amount of $200,000 pursuant to this note. The April 2015 Note bears interest at a rate of 15% per annum. On the first anniversary of this note, the all then accrued interest became due. Thereafter, the Company is required to make eight equal payments of principal together with accrued interest, quarterly in arrears, commencing on July 1, 2016 until paid in full. The note and any accrued unpaid interest is convertible into common stock of the Company. For each dollar converted, the note holder shall receive two shares of common stock and one three-year warrant to purchase 1.33 shares of common stock at $0.75 per share. The Company recognized a discount of $200,000 on the April 2015 Note related to the value of the beneficial conversion feature at the time of issuance. During the twelve months ended May 31, 2016, $66,667 of this discount was charged to operations. During the year ended May 31, 2017, the Company repaid principal in the amount of $100,000 and interest in the amount of $53,837 on this note. Also during the year ended May 31, 2017, the Company charged $100,545 of the discount to operations, and accrued interest in the amount of $22,440 on the April 2015 Note.
On September 20, 2017, the Company entered into an Exchange Agreement, whereby it agreed to exchange the April 2015 Note for 1,500,000 shares of its common stock. The holder of the April 2015 Note had previously sold it for $105,219, which represented the balance due by the Company, to StarForce Media, Inc., an entity that is not affiliated with the Company. The Company recognized a loss on this exchange in the amount of $404,082, which was charged to operations during the twelve months ended May 31, 2018. The Company also expensed the remaining discount in the amount of $18,155 to interest expense during the twelve months ended May 31, 2018.
During the twelve months ended May 31, 2018, the Company accrued interest in the amount of $4,603 on the April 2015 Note.
|
|
$
|
-
|
|
|
$
|
100,000
|
|
|
|
May 31, 2018
|
|
|
May 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Convertible promissory note payable to Old Main Capital, LLC (“Old Main”) dated March 18, 2016 and bearing interest at a rate of 8% (the “8% Note”). The 8% Note was issued for Old Main’s commitment to enter into an equity line transaction with the Company and prepare all of the related transaction documents. Old Main may, at its option, convert all or a portion of the note and accrued but unpaid interest into shares of common stock at a conversion price of $1.07 per share (post Reverse-Split) (the “8% Fixed Conversion Price”). The 8% Fixed Conversion Price is subject to adjustment if, at any time while this note is outstanding, the Company should issue any equity security with an effective price per share that is lower than the 8% Fixed Conversion Price (the “8% Base Conversion Price”), other than certain exempt issuances. In such an instance, the 8% Fixed Conversion Price will be lowered to match the 8% Base Conversion Price. The shares underlying the 8% Note are subject to a registration rights agreement. At the earlier of September 18, 2016 or two trading days after this registration statement becomes effective, the Company must begin to redeem 1/6th of the face amount of the note and any accrued but unpaid interest on a monthly basis. Such amortization payment may be made, at its option, in cash or, subject to certain conditions, in common stock pursuant to a conversion rate equal to the lower of (a) $1.07 (post Reverse-Split) or (b) 75% of the lowest daily volume weighted average price of the common stock in the twenty consecutive trading days ending on the trading day that is immediately prior to the applicable conversion date. The Company recognized a discount of $172,108 on the value of the embedded derivative.
On November 28, 2016, the 8% Note was amended converting the note from an installment note to a “balloon” note, with all principal and accrued interest due on March 18, 2017. In addition, the Fixed Conversion Price was changed to a variable conversion price equal to the lesser of the prior Fixed Conversion Price or 75% of the lowest VWAP in the fifteen trading days ending on the trading day immediately prior to the conversion date. The November 28, 2016 amendment required an extinguishment analysis of the 8% Note resulting in gain on extinguishment of debt in the amount of $81,496 for the nine months ended February 28, 2017. The gain on extinguishment of debt was included in additional paid-in capital at February 28, 2017. The 8% Note was revalued as of the November 28, 2016 amendment and the Company recognized a discount of $169,476 on the value of the embedded derivative.
On March 27, 2017, the Company entered into a further amendment to the 8% Note, whereby the Company agreed to increase the outstanding amount due under the 8% Note as of March 18, 2017 by 5%, or $10,000. In exchange for doing so, Old Main agreed to extend the maturity of the 8% Note until July 1, 2017 and to suspend conversions under the 8% Note until July 1, 2017. Also during the year ended May 31, 2017, the Company accrued interest in the amount of $17,207 on the 8% Note.
On July 6, 2017, the 8% Note was further amended, whereby the maturity date was extended to July 15, 2017 and the outstanding balance was increased by $15,750. On August 23, 2017, the 8% Note was amended again to extend the maturity date to September 15, 2017.
On September 23, 2017, but effective on September 15, 2017, the 8% note was further orally amended, and the outstanding balance was increased by $96,862. The Company recognized the modification of this note as an extinguishment of debt and recognized a gain on the extinguishment of $144,851. The Company also recognized a discount on the modified note of $300,435, which was fully charged to operations during the three months ended November 30, 2017. On September 25, 2017, but effective September 15, 2017, the Company entered into an Exchange Agreement, whereby it agreed to exchange the 8% Note for 4,500,000 shares of its common stock. Old Main, the original holder of the 8% Note, had previously sold it for $382,496. The balance due by the Company under the 8% Note at the time it was sold was $322,612. The Company recognized a loss on this exchange in the amount of $1,113,883, which was charged to operations during the twelve months ended May 31, 2018.
During the twelve months ended May 31, 2018, the Company accrued interest in the amount of $5,587, on the 8% Note, and $30,411 of the discount was amortized to interest expense during the twelve months ended May 31, 2018.
|
|
|
-
|
|
|
|
210,000
|
|
|
|
May 31, 2018
|
|
|
May 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Senior Convertible promissory note payable to FirstFire Global Opportunities Fund, LLC (the “FirstFire Note”) dated November 15, 2017 and bearing interest at a rate of 5% per annum. The lender loaned the Company $330,000 and the FirstFire Note has an original issue discount of $33,000. The FirstFire Note is due seven months from the date of issue. FirstFire may, at its option, convert all or a portion of the FirstFire Note and accrued but unpaid interest into shares of common stock at a conversion price of $0.40 per share (the “FirstFire Fixed Conversion Price”) for the first 180 calendar days after the issue date. After the 180
th
day, the conversion price shall equal the lower of (i) the FirstFire Fixed Conversion Price, or (ii) 75% multiplied by the lowest traded price of the common stock during the twenty (20) consecutive trading day period immediately preceding the trading day that the Company received a notice of conversion. During the twelve months ended May 31, 2018, a dilutive issuance occurred. As a result, the FirstFire Fixed Conversion Price was reduced to $0.3125 per share. The Company recognized a discount of $363,000 on the FirstFire Note related to the beneficial conversion feature at the time of issuance. During the twelve months ended May 31, 2018, this discount was charged to operations. During the twelve months ended May 31, 2018, the Company accrued interest in the amount of $9,000 on this note.
On May 9, 2018, the Company entered into an Amendment to the FirstFire Note, whereby the Company agreed to make a $50,000 payment on or before May 14, 2018 and a $450,000 payment on or before May 31, 2018 to repay the FirstFire Note in full. The Company also agreed to issue an additional warrant to purchase 25,000 shares of the Company’s common stock. In exchange, the note holder agreed that it would not convert the FirstFire Note until after May 31, 2018. During the twelve months ended May 31, 2018, the Company made payments of $500,000 on this note, which amounts repaid the FirstFire Note in full.
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Convertible promissory note payable to Darling Capital, LLC (the “Darling Note”) dated February 5, 2018 and bearing interest at a rate of 8% per annum. The lender loaned the Company $500,000 and the Darling Note has an original issue discount of $50,000. The Darling Note is due eighteen months from the date of issue. Darling may, at its option, convert all or a portion of the Darling Note and accrued but unpaid interest into shares of common stock at a conversion price of $0.3125 per share. The Darling Note also contains a reset feature, whereby, absent certain exceptions, if the Company issues equity securities at an effective price less than $0.3125 per share of common stock, the conversion price of the Darling Note will be reset to such lower price. The Company recognized a discount of $550,000 on the Darling Note related to the beneficial conversion feature at the time of issuance. During the twelve months ended May 31, 2018, $40,427 of this discount was charged to operations. During the twelve months ended May 31, 2018, the Company accrued interest in the amount of $13,863 on this note.
|
|
|
550,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Convertible promissory note payable to Efrat Investments, LLC (the “Efrat Note”) dated February 12, 2018 and bearing interest at a rate of 8% per annum. The lender loaned the Company $50,000 and the Efrat Note has an original issue discount of $5,000. The Efrat Note is due eighteen months from the date of issue. Efrat may, at its option, convert all or a portion of the Efrat Note and accrued but unpaid interest into shares of common stock at a conversion price of $0.3125 per share. The Efrat Note also contains a reset feature, whereby, absent certain exceptions, if the Company issues equity securities at an effective price less than $0.3125 per share of common stock, the conversion price of the Efrat Note will be reset to such lower price. The Company recognized a discount of $55,000 on the Efrat Note related to the beneficial conversion feature at the time of issuance. During the twelve months ended May 31, 2018, $2,974 of this discount was charged to operations. During the twelve months ended May 31, 2018, the Company accrued interest in the amount of $1,302 on this note.
|
|
|
55,000
|
|
|
|
-
|
|
|
|
May 31, 2018
|
|
|
May 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Convertible promissory note payable to YA II PN, Ltd. (the “YA II PN Note”) dated May 14, 2018 and bearing an interest rate of 8% per annum. The lender loaned the Company $750,000, and the note is due November 14, 2019. YA II PN may, at its option convert all or a portion of the YA II PN Note and accrued but unpaid interest into shares of common stock at a conversion price of $0.40 per share. The YA II PN Note also contains a reset feature, whereby, absent certain exceptions, if the Company issues equity securities at an effective price less than $0.40 per share of common stock, the conversion price of the YA II PN Note will be reset to such lower price. The Company recognized a discount of $750,000 related to the beneficial conversion feature at the time of issuance. During the twelve months ended May 31, 2018, $23,224 of this discount was charged to operations. During the twelve months ended May 31, 2018, the Company accrued interest in the amount of $2,795 on this note.
|
|
|
750,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Unsecured convertible note issued to Jay Lasky (the “Lasky Note”), dated May 3, 2018 in the original principal amount of $25,000. This note bears interest at the rate of 10% per annum. No interest payments are required until July 1, 2019, at which time all accrued interest becomes due and payable. Commencing October 1, 2019, the first of eight principal payments in the amount of $3,125 will become due; subsequent payments will become due on the first day of each January, April, July and October until paid in full. The Lasky Note and accrued interest under the note may be converted, in whole or in part, into one share of common stock for each $0.40 converted. The Company recognized a discount of $7,301 on the Lasky Note related to the beneficial conversion feature at the time of issuance. During the twelve months ended May 31, 2018, $149 of this discount was charged to operations. During the twelve months ended May 31, 2018, the Company accrued interest in the amount of $192 on this note.
|
|
|
25,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total - Convertible Notes Payable
|
|
$
|
1,380,000
|
|
|
$
|
310,000
|
|
Less: Discount
|
|
|
(1,295,527
|
)
|
|
|
(57,644
|
)
|
Convertible Notes Payable, Net of Discounts
|
|
$
|
84,473
|
|
|
$
|
252,356
|
|
|
|
|
|
|
|
|
|
|
Total - Convertible Notes Payable, Net of Discounts, Current Portion
|
|
$
|
43,401
|
|
|
$
|
252,356
|
|
Total - Convertible Notes Payable, Net of Discounts, Long-term Portion
|
|
$
|
41,072
|
|
|
$
|
-
|
|
Discounts on notes payable amortized to interest expense
|
|
$
|
2,534,104
|
|
|
$
|
2,274,519
|
|
Beneficial Conversion Features
The 8% Note, FirstFire Note, Darling Note, Efrat Note, Lamadrid Note and YA II PN Note contain conversion features that create derivative liabilities. The pricing model the Company uses for determining fair value of its derivatives is the Lattice Model. Valuations derived from this model are subject to ongoing internal and external verification and review. The model uses market-sourced inputs such as interest rates and stock price volatilities. Selection of these inputs involves management’s judgment and may impact net income. The derivative components of the Notes were valued at issuance, at conversion, at restructure, and at each period end.
Certain of the Company’s other convertible notes payable contain beneficial conversion features that are not derivatives, but which require valuation in order to determine the discount to the related convertible note payable. The value of these conversion features is calculated using the intrinsic value method, whereby the amount of the discount is calculated as the difference between the conversion price and the market price of the underlying common stock at the date of issuance multiplied by the number of shares issuable.
The value of these conversion features is calculated using the Black-Scholes valuation model. The following table illustrates certain key information regarding the conversion option valuation assumptions under the Black-Scholes valuation model at May 31, 2018 and 2017:
|
|
May 31,
|
|
|
|
2018
|
|
|
2017
|
|
Volatility
|
|
|
97.4% to 534.5
|
%
|
|
|
64% to 138
|
%
|
Dividends
|
|
|
-
|
|
|
|
-
|
|
Risk-free interest rates
|
|
|
1.93% to 2.62
|
%
|
|
|
0.86% to 1.19
|
%
|
Term (years)
|
|
|
0.4997 to 3.1622
|
|
|
|
1.25 to 3
|
|
NOTE 12 – STOCKHOLDERS’ EQUITY
The Company’s authorized capital stock consists of 250,000,000 shares of common stock, par value $0.0001 per share and 20,000,000 shares of preferred stock, par value $0.001 per share. The Company had 50,128,972 and 32,582,944 shares of common stock issued and outstanding as of May 31, 2018 and 2017, respectively.
The Company recorded imputed interest of $1,076 and $1,075 during the year ended May 31, 2018 and 2017 on related party payables due to a director and officer of the Company.
Common Stock
Year ended May 31, 2018:
Stock Issued for Services
On July 13, 2017, the Company issued 24,000 shares of common stock to a consultant in exchange for a $6,000 accrued liability for services previously provided. This resulted in a gain on the settlement of accounts payable in the amount of $3,480.
On March 2, 2018, the Company issued 350,000 shares of common stock to a consultant pursuant to the terms of a consulting agreement. The shares issued for services were valued on the date of grant at $261,800.
On February 8, 2018, the Company agreed to issue 31,250 shares of common stock to a consultant. The shares were valued at $25,313, and are recorded on the balance sheet as stock payable. These shares have not been issued as of May 31, 2018.
During the year ended May 31, 2018, the Company agreed to issue 600,000 shares of common stock to an officer. These shares were valued at $213,321, and are recorded on the balance sheet as stock payable. These shares have not been issued as of May 31, 2018.
Stock Issued upon Note Conversion
On March 12, 2018, pursuant to the Omnibus Loan Agreement, related party convertible noteholders converted principal and interest in the aggregate amount of $1,421,356 and $197,090, respectively, into a total of 5,179,028 shares of common stock.
Stock Issued for Note Exchange
On September 20, 2017, the Company entered into an Exchange Agreement, whereby it agreed to exchange the April 2015 Note for 1,500,000 shares of its common stock valued at $510,000. The holder of the April 2015 Note had previously sold it for $105,219, which represented the balance due by the Company, to StarForce Media, Inc., an entity that is not affiliated with the Company. The Company recognized a loss on this exchange in the amount of $404,082, which was charged to operations during the year ended May 31, 2018.
On September 25, 2017, the Company entered into an Exchange Agreement, whereby it agreed to exchange the 8% Note for 4,500,000 shares of its common stock valued at $1,844,035. The Company recognized a loss on this exchange in the amount of $989,032, which was charged to operations during the year ended May 31, 2018.
Stock Issued with Note
On November 15, 2017, the Company issued 250,000 shares of restricted Common Stock, valued at $95,000, as a commitment fee to a convertible note holder.
Stock Issued in Offering
On December 7, 2017, the Company commenced a private offering of its securities, the terms of which were amended on January 17, 2018 (the “WestPark Offering”). The Company offered for sale a minimum of 800,000 units and a maximum of 4,000,000 units at a price of $1.25 per unit. Each unit consisted of four shares of common stock and one warrant to purchase common stock at $0.75 per share.
On February 7, 2018, the Company received gross proceeds of $1,087,500 from the WestPark Offering, of which $146,975 were expenses, resulting in net proceeds of $940,525, from the sale of 870,000 units.
On February 21, 2018, the Company received additional gross proceeds of $100,000 from the WestPark Offering, of which $28,100 were expenses, resulting in net proceeds of $71,900, from the sale of 80,000 units.
On February 28, 2018, the Company received additional gross proceeds of $81,250 from the WestPark Offering, of which $12,148 were expenses, resulting in net proceeds of $69,102, from the sale of 65,000 units.
On March 29, 2018, the Company received additional gross proceeds of $441,563 from the WestPark Offering, of which $62,172 were expenses, resulting in net proceeds of $379,390, from the sale of 353,250 units.
During the year ended May 31, 2018, the Company incurred offering costs of $249,397. The offering costs were charged to additional paid in capital during the year ended May 31, 2018.
Additional Paid-in-Capital
During the year ended May 31, 2018, the Company recorded a discounts on convertible notes payable relating to the beneficial conversion feature in the amount of $1,758,741.
During the year ended May 31, 2018, the Company recorded a settlement of derivative liabilities in the amount of $442,775.
Year ended May 31, 2017:
Stock Issued for Services
In May 2017, the Company agreed to issue 25,000 shares of common stock with a fair value of $3,250 to a service provider. At May 31, 2017, these shares had not been issued, and the amount of $3,250 is included in stock payable on the Company’s balance sheet.
Additional Paid-in-Capital
In March 2017, the Company entered into a modification agreement regarding the 8% Promissory Note due to Old Main, and the derivative liability in the amount of $70,143 related to the conversion feature of this note was charged to additional paid-in capital.
In May 2017, the Company paid the 10% Notes due to Old Main, and the derivative liability in the amount of $145,268 related to the conversion feature of this note was charged to additional paid-in capital.
Stock Issued upon Note Conversions
From December 21, 2016, through March 14, 2017, Old Main, holder of the 2016 Convertible Notes, converted an aggregate of $137,500 of principal, in eight transactions, into 1,685,981 shares of common stock. As a result of the conversions, the Company charged the amount $143,325 to additional paid-in capital related to settlement of derivative liability. See note 10.
On May 31, 2017, pursuant to the Omnibus Loan Agreement, four related party convertible noteholders converted principal and interest in the aggregate amount of $2,537,750 and $166,490, respectively, into a total of 10,816,960 shares of common stock. As a result of the conversions, the Company charged the amount $951,239 to loss on modification of debt.
Warrants
On November 15, 2017, in connection with the Company’s sale of a convertible debenture, the Company issued FirstFire Global Opportunities Fund, LLC (“FirstFire”) a three-year common stock purchase warrant to purchase 350,000 shares of the Company’s common stock at an initial exercise price of $0.75 per share. These warrants were valued at $123,950 and were charged to operations during the twelve months ended May 31, 2018.
On February 9, 2018, in connection with the Company’s sale of a convertible debenture, the Company issued Darling Capital, LLC (“Darling”) a three-year common stock purchase warrant to purchase 400,000 shares of the Company’s common stock at an initial exercise price of $0.75 per share. These warrants were valued at $313,128 and were charged to operations during the twelve months ended May 31, 2018.
On February 16, 2018, in connection with the Company’s sale of a convertible debenture, the Company issued Efrat Investments, LLC (“Efrat”) a three-year common stock purchase warrant to purchase 40,000 shares of the Company’s common stock at an initial exercise price of $0.75 per share. These warrants were valued at $32,076 and were charged to operations during the twelve months ended May 31, 2018.
On February 26, 2018, in connection with the Company’s sale of a convertible debenture, the Company issued David Lamadrid a three-year common stock purchase warrant to purchase 25,000 shares of the Company’s common stock at an initial exercise price of $0.75 per share. These warrants were valued at $18,794 and were charged to operations during the twelve months ended May 31, 2018.
On March 2, 2018, the Company issued three-year common stock purchase warrants to purchase an aggregate of 412,500 shares of the Company’s common stock at an exercise price of $0.75 per share to consultants. These warrants were value at $294,173 and were changed to operations during the twelve months ended May 31, 2018.
On March 29, 2018, the Company issued three-year common stock purchase warrants to purchase an aggregate of 353,250 shares of the Company’s common stock at an exercise price of $0.75 per share, to investors in the WestPark Offering.
On May 9, 2018, in connection with the Amendment to the FirstFire Note, the Company amended the FirstFire three-year common stock purchase warrant to provide that the holder could purchase an additional 25,000 shares of the Company’s common stock at an initial exercise price of $0.75 per share. These additional warrants were valued to $15,977 and were charge to operations during the twelve months ended May 31, 2018.
On May 14, 2018, in connections with the Company’s sale of a convertible debenture, the Company issued YA II PN, Ltd. a five-year common stock purchase warrant to purchase 1,875,000 shares of the Company’s common stock at an initial exercise price of $0.60 per share. These warrants were valued at $1,300,545 and were charged to operations during the twelve months ended May 31, 2018.
As of May 31, 2018, the Company was obligated to issue a five-year warrant to purchase 205,238 of the Company’s units at an exercise price of $1.25 per unit (the “Unit Warrants”) to WestPark Capital, Inc., the placement agent for the WestPark Offering. Each unit consists of four shares of common stock and one warrant to purchase a share of common stock for $0.75 per share. The Unit Warrants are part of the placement agent’s compensation pursuant to the placement agent agreement. The Unit Warrant were valued at $503,655, which amount was charged to operations during the twelve months ended May 31, 2018.
The following table summarizes the significant terms of warrants outstanding at May 31, 2018. These warrants were granted as part of financing agreements. This table includes the 205,238 Unit Warrants:
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
average
|
|
|
average
|
|
|
|
|
|
|
average
|
|
Range of
|
|
|
Number of
|
|
|
remaining
|
|
|
exercise
|
|
|
|
|
|
|
exercise
|
|
exercise
|
|
|
warrants
|
|
|
contractual
|
|
|
price of
|
|
|
Number of
|
|
|
price of
|
|
Prices
|
|
|
Outstanding
|
|
|
life (years)
|
|
|
outstanding Warrants
|
|
|
warrants Exercisable
|
|
|
exercisable Warrants
|
|
$
|
0.75
|
|
|
|
2,825,988
|
|
|
|
3.33
|
|
|
$
|
0.75
|
|
|
|
2,825,988
|
|
|
$
|
0.75
|
|
|
0.60
|
|
|
|
1,875,000
|
|
|
|
4.96
|
|
|
|
0.60
|
|
|
|
1,875,000
|
|
|
|
0.60
|
|
|
|
|
|
|
4,700,988
|
|
|
|
3.98
|
|
|
|
0.69
|
|
|
|
4,700,988
|
|
|
|
0.69
|
|
Transactions involving warrants are summarized as follows:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Warrants outstanding at May 31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
4,700,988
|
|
|
$
|
0.69
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
Cancelled / Expired
|
|
|
-
|
|
|
$
|
-
|
|
Warrants outstanding at May 31, 2018
|
|
|
4,700,988
|
|
|
$
|
0.69
|
|
NOTE 13 – INCOME TAXES
The Company accounts for income taxes under FASB ASC 740-10, which provides for an asset and liability approach of accounting for income taxes. Under this approach, deferred tax assets and liabilities are recognized based on anticipated future tax consequences, using currently enacted tax laws, attributed to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts calculated for income tax purposes.
As of May 31, 2018 and 2017, the Company had incurred a net operating loss and, accordingly, no provision for income taxes has been recorded. In addition, no benefit for income taxes has been recorded due to the uncertainty of the realization of any tax assets.
The tax effects of the temporary differences that give rise to the Company’s estimated deferred tax assets and liabilities are as follows:
|
|
May 31,
|
|
|
May 31,
|
|
|
|
2018
|
|
|
2017
|
|
Federal and state statutory rate
|
|
|
34
|
%
|
|
|
34
|
%
|
Net operating loss carry forwards
|
|
|
2,790,481
|
|
|
|
1,386,438
|
|
Valuation allowance for deferred tax assets
|
|
|
(2,790,481
|
)
|
|
|
(1,386,438
|
)
|
Net deferred tax assets
|
|
|
-
|
|
|
|
-
|
|
As of May 31, 2018 and 2017, the Company had net operating loss carry forwards of approximately $2,790,481 and $1,386,438 available to offset future taxable income. The net operating loss carry forwards, if not utilized, will begin to expire in 2037.
Based on the available objective evidence, including the Company’s history of losses, management believes it is more likely than not that the net deferred tax assets will not be fully realizable. Accordingly, the Company has provided for a full valuation allowance against its net deferred tax assets at May 31, 2018 and 2017. The Company had no uncertain tax positions as of May 31, 2018.
NOTE 14 – COMMITMENTS AND CONTINGENCIES
Lease Arrangement
In connection with the Colorado Arrangement, on April 17, 2015, pursuant to an Industrial Lease Agreement (the “Lease”), CLS Labs Colorado leased 14,392 square feet of warehouse and office space (the “Leased Real Property”) in a building in Denver, Colorado where certain intended activities, including growing, extraction, conversion, assembly and packaging of cannabis and other plant materials, are permitted by and in compliance with state, city and local laws, rules, ordinances and regulations. The Lease had an initial term of seventy-two (72) months and provided CLS Labs Colorado with two options to extend the term of the lease by up to an aggregate of ten (10) additional years. In August 2017, as a result of the Company’s decision to suspend its proposed operations in Colorado, CLS Labs Colorado asked its landlord to be relieved from its obligations under the Lease, but the parties have not yet reached an agreement on how to proceed.
In August 2017, the Company’s Colorado subsidiary received a demand letter from its Colorado landlord requesting the forfeiture of the $50,000 security deposit, $10,000 in expenses, $15,699 in remaining rent due under the lease agreement and $30,000 to buy out the remaining amounts due under the lease. These expenses, which are a liability of the Company’s Colorado subsidiary, have been accrued on the balance sheet as of May 31, 2018.
Employment Agreements
CLS Labs and Jeffrey Binder entered into a five-year employment agreement effective October 1, 2014. Under the agreement, Mr. Binder serves as CLS Labs’ Chairman and Chief Executive Officer and is entitled to receive an annual salary of $150,000. Under the agreement, Mr. Binder is also entitled to receive a performance bonus equal to 2% of CLS Labs’ annual EBITDA, up to a maximum annual cash compensation of $1 million (including his base salary), and annual stock options, exercisable at the fair market value of CLS Labs’ common stock on the date of grant, in an amount equal to 2% of its annual EBITDA up to $42.5 million and 4% of its annual EBITDA in excess of $42.5 million. On April 28, 2015, CLS Labs and the Company entered into an addendum to Mr. Binder’s employment agreement whereby Mr. Binder agreed that following the merger of CLS Labs and a subsidiary of the Company, in addition to his obligations to CLS Labs, he would serve the Company and its subsidiaries in such roles as the Company may request. In exchange, the Company agreed to assume the obligations of CLS Labs to grant Mr. Binder annual stock options, as referenced above. Mr. Binder continues to receive an annual salary of $150,000 from CLS Labs for serving as its Chairman, President and Chief Executive Officer. Mr. Binder has deferred all of the salary payable to him under his employment agreement through February 28, 2018. On July 20, 2016, March 31, 2017, August 23, 2017, October 9, 2017, January 5, 2018 and April 6, 2018, the Company issued Mr. Binder convertible notes in exchange for $250,000, $112,500, $62,500, $39,521, $37,500 and $37,500 respectively, in deferred salary, among other amounts owed to Mr. Binder by the Company. As of May 31, 2018 and May 31, 2017, the Company had accrued compensation due to Mr. Binder in the amount of 37,500 and $37,500.
Effective August 1, 2015, the Company and Alan Bonsett entered into a five-year employment agreement. Pursuant to the agreement, Mr. Bonsett commenced serving as the Company’s Chief Operating Officer on August 15, 2015. Under the agreement, Mr. Bonsett is entitled to receive an annual salary of $150,000. Further, he is entitled to receive a performance bonus equal to 2% of the Company’s annual EBITDA, up to a maximum annual cash compensation of $1 million (including his base salary), and annual stock options, exercisable at the fair market value of the Company’s common stock on the date of grant, in an amount equal to 2% of its annual EBITDA up to $42.5 million and 4% of its annual EBITDA in excess of $42.5 million. Additionally, Mr. Bonsett received a one-time signing bonus of 250,000 (post Reverse-Split) shares of restricted common stock of the Company, valued at $327,500, which became fully vested one year from the effective date of the agreement. Mr. Bonsett, as an owner of Picture Rock Holdings, LLC (“PRH”), will indirectly receive the benefits of the Colorado Arrangement discussed in Note 12. The business to be operated by PRH pursuant to the Colorado Arrangement has not yet produced revenues. Mr. Bonsett agreed to defer his salary effective July 1, 2017; at May 31, 2018, the Company had accrued compensation due to Mr. Bonsett in the amount of $37,500. On October 1, 2017, the Company and Mr. Bonsett, the Company’s Chief Operating Officer, mutually agreed to end his employment with the Company. Mr. Bonsett may provide consulting services to the Company in the future on an as needed basis.
Effective November 30, 2017, the Company and Mr. Lamadrid entered into a one-year employment agreement. Pursuant to the agreement, Mr. Lamadrid commenced serving as the Company’s President and Chief Financial Officer on December 1, 2017. Under the agreement, Mr. Lamadrid is entitled to receive an annual salary of $175,000. Further, he is entitled to receive a performance bonus equal to 2% of the Company’s annual EBITDA, and annual restricted stock awards of the Company’s common stock in an amount equal to 3% of its annual EBITDA. Additionally, Mr. Lamadrid is entitled to a one-time signing bonus of 500,000 shares of restricted common stock of the Company, which shall become fully vested one year from the effective date of the agreement.
At May 31, 2018 and 2017, 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 $16,250.
NOTE 15 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The following summarizes the Company’s derivative financial liabilities that are recorded at fair value on a recurring basis at May 31, 2018 and 2017.
|
|
May 31, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,265,751
|
|
|
$
|
1,265,751
|
|
|
|
May 31, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
95,276
|
|
|
$
|
95,276
|
|
The estimated fair values of the Company’s derivative liabilities are as follows:
|
|
Derivative
|
|
|
|
Liability
|
|
Liabilities Measured at Fair Value
|
|
|
|
|
|
|
|
|
|
Balance as of May 31, 2016
|
|
$
|
418,537
|
|
|
|
|
|
|
Issuances
|
|
|
600,564
|
|
|
|
|
|
|
Convert or Redeem
|
|
|
(612,850
|
)
|
|
|
|
|
|
Revaluation gain
|
|
|
(310,975
|
)
|
|
|
|
|
|
Balance as of May 31, 2017
|
|
$
|
95,276
|
|
|
|
|
|
|
Issuances
|
|
|
3,671,505
|
|
|
|
|
|
|
Convert or Redeem
|
|
|
(2,696,755
|
)
|
|
|
|
|
|
Revaluation loss
|
|
|
195,725
|
|
|
|
|
|
|
Balance as of May 31, 2018
|
|
$
|
1,265,751
|
|
NOTE 16 – SUBSEQUENT EVENTS
On June 12, 2018, the Company received a conversion notice from a note holder requesting the conversion of $550,000 in principal and $15,000 of accrued interest into 1,808,000 shares of common stock.
On June 20, 2018, the Company executed an agency agreement with Canaccord Genuity Corp. and closed on a private offering of its special warrants for aggregate gross proceeds of CD$13,037,859 (USD$9,988,173). In connection therewith, the Company 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, the Company issued 28,973,019 special warrants at a price of CD$0.45 (USA$0.34) per special warrant. Each special warrant is automatically exercisable, for no additional consideration, into units of the Company on the earlier of: (i) the date that is five business days following the date on which the Company obtains a receipt from the applicable securities regulatory authorities in each of the jurisdictions in Canada in which the special warrants were sold for a final prospectus qualifying the distribution of the units, which is intended to be no later than August 31, 2018, and (ii) the date that is four months and one day after the completion of the Company's acquisition of all of the membership interests in Alternative Solutions, LLC, known as Oasis Cannabis.
Upon exercise of the special warrants, each unit shall consist of one share of the Company's common stock and one warrant to purchase one share of common stock. Each warrant will be exercisable at a price of CD$0.65 for three years after the Company's common stock is listed on a recognized Canadian stock exchange, subject to adjustment in certain events. If the Company has not received a receipt from the applicable Canadian securities authorities for the qualifying prospectus by August 19, 2018, the unexercised special warrant will thereafter generally entitle the holder to receive 1.1 units instead of one unit of the Company.
In connection with the offering, the Company paid a cash commission equal to CD$1,043,028 (USD$799,053), a corporate finance fee equal to 1,448,651 special warrants, and 2,317,842 compensation warrants. Each compensation 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 the Company's common stock is listed on a recognized Canadian stock exchange, subject to adjustment in certain events.
On June 27, 2018, the Company closed on the purchase of the remaining 90% of the membership interests of Alternative Solutions and its three operating subsidiaries (the “Oasis LLCs”). The closing occurred pursuant to the Acquisition Agreement dated December 4, 2017, as amended. On such date, the Company made the payments to indirectly acquire the remaining 90% of the Oasis LLCs, which were equal to cash in the amount of $6,200,000, a $4.0 million promissory note due in December 2019 (the “Oasis Note”), and 22,058,823 shares of its common stock. The Oasis Note bears interest at the rate of 6% per annum. The Oasis Note may be prepaid at any time without penalty. 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. The Company also applied for regulatory approval to own the additional 90% in membership interests in the Oasis LLCs, which it expects to receive in due course. The change of ownership in the Oasis LLCs to the Company will be recorded upon receipt of such regulatory approvals.
On July 24, 2018, the Company awarded Star Associates, LLC, a limited liability company owned by Andrew Glashow, a director of the Company, a cash payment in the amount of $250,000 and 700,000 restricted shares of the Company’s common stock in recognition of Mr. Glashow’s efforts, through Star Associates, in successfully assisting the Company in negotiating and obtaining the financing necessary to acquire Alternative Solutions, LLC.
On July 24, 2018, the Company and Mr. David Lamadrid, its President and Chief Financial Officer, mutually agreed to terminate the employment agreement dated December 1, 2017 between the Company and Mr. Lamadrid (the "Employment Agreement") effective July 13, 2018. Mr. Lamadrid resigned as President and Chief Financial Officer effective as of July 13, 2018. The parties further agreed that neither party would have any further obligations under the Employment Agreement after such date. The Company also agreed to release Mr. Lamadrid from his non-competition obligations under the Confidentiality, Non-Compete and Property Rights Agreement dated November 30, 2017 between the parties (the "Confidentiality Agreement"). The balance of the terms of the Confidentiality Agreement remain in full force and effect.
On July 27, 2018, the Company announced the appointment of Frank J. Tarantino as its Chief Financial Officer, effective August 1, 2018. In connection with his employment, the Company awarded Mr. Tarantino 25,000 shares of restricted common stock, which vests four months after the date he commenced his employment with the Company.
Mr. Benjamin Sillitoe was appointed to serve as the Chief Executive Officer of CLS Nevada, Inc. commencing on July 1, 2018. On July 31, 2018, CLS Nevada, Inc. and Mr. Sillitoe entered into a one-year employment agreement. Under the agreement, Mr. Sillitoe is entitled to receive an annual salary of $150,000. Further, he is entitled to receive a performance bonus equal to 2% of CLS Nevada, Inc.’s annual EBITDA, and annual restricted stock awards of the Company’s common stock in an amount equal to 3% of CLS Nevada, Inc.’s annual EBITDA. Additionally, Mr. Sillitoe is entitled to a one-time signing bonus of 500,000 shares of restricted common stock of the Company, which shall become fully vested one year from the effective date of this agreement assuming Mr. Sillitoe remains employed by the Company on such date. Effective July 1, 2018, and in connection with the employment agreement, Mr. Sillitoe and the Company entered into a Confidentiality, Non-Compete and Proprietary Rights Agreement. Pursuant thereto, Mr. Sillitoe agreed (i) not to compete with the Company or CLS Nevada, Inc. during the term of his employment and, unless he is terminated without cause, for a period of one year thereafter, (ii) not to release or disclose the Company’s or CLS Nevada, Inc.’s confidential information, and (iii) to assign the rights to all work product to the CLS Nevada, Inc., among other terms.
Mr. Don Decatur was appointed to serve as CLS Nevada, Inc.’s Chief Operating Officer commencing on July 1, 2018. CLS Nevada, Inc. and Mr. Decatur entered into a one-year employment agreement on July 31, 2018. Under the agreement, Mr. Decatur is entitled to receive an annual salary of $150,000. Further, he is entitled to receive a performance bonus equal to 2% of CLS Nevada, Inc.’s annual EBITDA, and annual restricted stock awards of the Company’s common stock in an amount equal to 3% of CLS Nevada, Inc.’s annual EBITDA. Additionally, Mr. Decatur is entitled to a one-time signing bonus of 50,000 shares of restricted common stock of the Company, which shall become fully vested one year from the effective date of the agreement assuming Mr. Decatur remains employed by the Company on such date. Effective July 1, 2018, and in connection with the employment agreement, Mr. Decatur and the Company entered into a Confidentiality, Non-Compete and Proprietary Rights Agreement. Pursuant thereto, Mr. Decatur agreed (i) not to compete with the Company or CLS Nevada, Inc during the term of his employment and, unless he is terminated without cause, for a period of one year thereafter, (ii) not to release or disclose the Company’s or CLS Nevada, Inc.’s confidential information, and (iii) to assign the rights to all work product to CLS Nevada, Inc., among other terms.
Effective July 31, 2018, the Company, entered into a subscription agreement with Navy Capital Green International, Ltd., a British Virgin Islands limited company (“Navy Capital”), pursuant to which the Company 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 the Company’s Common Stock, and (ii) three-year warrants to purchase an aggregate of 7,500,000 shares of our Common Stock (the “Warrant Shares”) at an exercise price of $0.60 per share of Common Stock. The closing occurred on August 6, 2018. In the subscription agreement, the Company also agreed to file, on or before November 1, 2018, a registration statement with the SEC registering the shares of Common Stock and Warrant Shares issued to Navy Capital. If the Company fails to file the registration statement on or before that date, the Company must issue to Navy Capital an additional number of units equal to ten percent (10%) of the units originally subscribed for by Navy Capital (which will include additional warrants at the original exercise price). The warrant is exercisable from time to time, in whole or in part for three years. The warrant has anti-dilution provisions that provide for an adjustment to the exercise price in the event of a future 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 the Company’s Common Stock exceeds 120% of the exercise price of the warrant for a period of 20 consecutive business days.
On August 6, 2018, the Company issued a convertible promissory note to Newcan, an entity owned by Frank Koretsky, a director of the Company, in the amount of $75,000.00 (the “Newcan Convertible Note 8”), to finalize the terms of repayment with respect to a certain loan made to the Company by Newcan on May 4, 2018. The Newcan Convertible Note 8 is unsecured and bears interest at the rate of 10% per annum. No payments are required until October 1, 2019, at which time all accrued interest becomes due and payable. Principal will be paid in eight equal quarterly installments, together with interest accrued thereon, beginning on January 1, 2020. The Notes may be prepaid by the Company with no penalty at any time upon thirty days written notice. The holder of the Newcan Convertible Note 9 may, at any time prior to payment or prepayment in full, convert all principal and accrued interest thereunder, in whole or in part, into securities of the Company. For each $0.40 converted, the holder will receive one share of the Company’s Common Stock.
Between August 8, 2018 and August 10, 2018, the Company entered into five subscription agreements, pursuant to which the Company 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 the Company’s Common Stock, and (ii) three-year warrants to purchase an aggregate of 6,875,000 shares of the Company’s Common Stock (the “Warrant Shares”) at an exercise price of $0.60 per share of Common Stock. The subscription agreements require the Company to file, on or before November 1, 2018, a registration statement with the SEC registering the shares of Common Stock and Warrant Shares issued to the Navy Capital Investors. If the Company fails to file the registration statement on or before that date, the Company must issue to the Navy Capital Investors an additional number of units equal to ten percent (10%) of the units originally subscribed for by each Navy Capital Investor (which will include additional warrants at the original exercise price). The warrants are exercisable from time to time, in whole or in part for three years. The warrants have anti-dilution provisions that provide for an adjustment to the exercise price in the event of a future sale of Common Stock at a lower price, subject to certain exceptions as set forth in the warrant. The warrants also provide that they are callable at any time after the bid price of the Company’s Common Stock exceeds 120% of the exercise price of the warrants for a period of 20 consecutive business days.
CLS Holdings USA, Inc.
Unaudited Interim Consolidated Financial Statements
For the Three and Nine Month Periods Ended February 28, 2019 and 2018
CLS HOLDINGS USA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
February 28,
|
|
|
May 31,
|
|
|
|
2019
|
|
|
2018
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
11,972,015
|
|
|
$
|
52,964
|
|
Accounts receivable
|
|
|
295,013
|
|
|
|
-
|
|
Inventory
|
|
|
605,796
|
|
|
|
-
|
|
Prepaid expenses and other current assets
|
|
|
712,739
|
|
|
|
1,410
|
|
Redemption premium in transit
|
|
|
964,788
|
|
|
|
-
|
|
Total current assets
|
|
|
14,550,351
|
|
|
|
54,374
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
|
-
|
|
|
|
2,050,000
|
|
Note receivable
|
|
|
5,150,000
|
|
|
|
-
|
|
Interest receivable
|
|
|
99,618
|
|
|
|
-
|
|
Property, plant and equipment, net of accumulated depreciation of $494,439 and $2,674
|
|
|
1,547,164
|
|
|
|
-
|
|
Intangible assets, net of accumulated amortization of $62,856 and $828
|
|
|
1,577,344
|
|
|
|
898
|
|
Goodwill
|
|
|
25,742,899
|
|
|
|
-
|
|
Other assets
|
|
|
160,450
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
48,827,826
|
|
|
$
|
2,105,272
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
1,394,353
|
|
|
$
|
826,621
|
|
Accrued compensation, related party
|
|
|
53,750
|
|
|
|
120,417
|
|
Due to related party
|
|
|
17,930
|
|
|
|
17,930
|
|
Accrued interest
|
|
|
558,401
|
|
|
|
24,748
|
|
Accrued interest, related party
|
|
|
6,305
|
|
|
|
5,143
|
|
Notes payable, net of discount of $100,536 and $0
|
|
|
3,899,464
|
|
|
|
310,000
|
|
Notes payable, related parties
|
|
|
-
|
|
|
|
75,137
|
|
Deferred rent obligation
|
|
|
137,707
|
|
|
|
-
|
|
Convertible notes payable, net of discount of $351,883 and $561,599
|
|
|
398,117
|
|
|
|
43,401
|
|
Contingent liability
|
|
|
678,111
|
|
|
|
-
|
|
Derivative liability
|
|
|
-
|
|
|
|
1,265,751
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
7,144,138
|
|
|
|
2,689,148
|
|
|
|
|
|
|
|
|
|
|
Noncurrent liabilities
|
|
|
|
|
|
|
|
|
Accrued interest, long-term
|
|
|
-
|
|
|
|
-
|
|
Convertible notes payable - Long Term, net of discount of $7,678,852 and $65,918
|
|
|
10,190,148
|
|
|
|
41,072
|
|
Convertible notes payable, related parties, net of discount of $0 and $733,928
|
|
|
-
|
|
|
|
2,832
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
17,334,286
|
|
|
|
2,733,052
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Stockholder's equity
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 20,000,000 shares authorized; no shares issued
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.0001 par value; 250,000,000 shares authorized; 125,814,107 and 50,128,972 shares issued and outstanding at February 28, 2019 and May 31, 2018, respectively
|
|
|
12,583
|
|
|
|
5,013
|
|
Additional paid-in capital
|
|
|
73,890,916
|
|
|
|
17,628,717
|
|
Common stock subscribed
|
|
|
346,784
|
|
|
|
307,584
|
|
Accumulated deficit
|
|
|
(42,756,743
|
)
|
|
|
(18,569,094
|
)
|
Total stockholder's equity (deficit)
|
|
|
31,493,540
|
|
|
|
(627,780
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity (deficit)
|
|
$
|
48,827,826
|
|
|
$
|
2,105,272
|
|
See accompanying notes to these financial statements.
CLS HOLDINGS USA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
For the Three
|
|
|
For the Three
|
|
|
For the Nine
|
|
|
For the Nine
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
February 28, 2019
|
|
|
February 28, 2018
|
|
|
February 28, 2019
|
|
|
February 28, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,372,790
|
|
|
$
|
-
|
|
|
$
|
5,529,053
|
|
|
$
|
-
|
|
Cost of goods sold
|
|
|
1,438,424
|
|
|
|
-
|
|
|
|
3,245,035
|
|
|
|
-
|
|
Gross margin
|
|
|
934,366
|
|
|
|
-
|
|
|
|
2,284,018
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
5,102,871
|
|
|
|
1,214,971
|
|
|
|
23,472,037
|
|
|
|
1,831,554
|
|
Total operating expenses
|
|
|
5,102,871
|
|
|
|
1,214,971
|
|
|
|
23,472,037
|
|
|
|
1,831,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(4,168,505
|
)
|
|
|
(1,214,971
|
)
|
|
|
(21,188,019
|
)
|
|
|
(1,831,554
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
662,961
|
|
|
|
1,434,314
|
|
|
|
2,999,630
|
|
|
|
2,316,145
|
|
Gain on settlement of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,480
|
)
|
Loss on modification of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
29,145
|
|
Loss on note exchange
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
404,082
|
|
Loss on extinguishment of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
989,032
|
|
Change in fair value of derivative
|
|
|
-
|
|
|
|
(148,227
|
)
|
|
|
-
|
|
|
|
25,863
|
|
Total other expense
|
|
|
662,961
|
|
|
|
1,286,087
|
|
|
|
2,999,630
|
|
|
|
3,760,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before income taxes
|
|
|
(4,831,466
|
)
|
|
|
(2,501,058
|
)
|
|
|
(24,187,649
|
)
|
|
|
(5,592,341
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(4,831,466
|
)
|
|
$
|
(2,501,058
|
)
|
|
$
|
(24,187,649
|
)
|
|
$
|
(5,592,341
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share - basic
|
|
$
|
(0.04
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share - diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic
|
|
|
124,346,650
|
|
|
|
39,126,944
|
|
|
|
95,132,835
|
|
|
|
35,654,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - diluted
|
|
|
124,346,650
|
|
|
|
39,126,944
|
|
|
|
95,132,835
|
|
|
|
35,654,299
|
|
See accompanying notes to these financial statements.
CLS HOLDINGS USA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid In
|
|
|
Stock
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Amount
|
|
|
Value
|
|
|
Capital
|
|
|
Payable
|
|
|
Deficit
|
|
|
Total
|
|
Balance, May 31, 2017
|
|
|
32,852,944
|
|
|
$
|
3,286
|
|
|
$
|
7,032,836
|
|
|
$
|
68,950
|
|
|
$
|
(8,991,610
|
)
|
|
$
|
(1,886,538
|
)
|
Common stock issued to consultant for services
|
|
|
374,000
|
|
|
|
37
|
|
|
|
264,283
|
|
|
|
25,313
|
|
|
|
-
|
|
|
|
289,633
|
|
Common stock issued for debt exchange
|
|
|
6,000,000
|
|
|
|
600
|
|
|
|
2,353,437
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,354,037
|
|
Common stock issued as commitment fees
|
|
|
250,000
|
|
|
|
25
|
|
|
|
94,975
|
|
|
|
-
|
|
|
|
-
|
|
|
|
95,000
|
|
Common stock issued to officer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
213,321
|
|
|
|
-
|
|
|
|
213,321
|
|
Common stock issued for cash, net of issuance costs
|
|
|
5,473,000
|
|
|
|
547
|
|
|
|
1,460,368
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,460,915
|
|
Common stock issued for conversion of debt
|
|
|
5,179,028
|
|
|
|
518
|
|
|
|
1,617,928
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,618,446
|
|
Warrants issued with debt
|
|
|
-
|
|
|
|
-
|
|
|
|
1,804,470
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,804,470
|
|
Settlement of derivative liability
|
|
|
|
|
|
|
|
|
|
|
442,775
|
|
|
|
|
|
|
|
|
|
|
|
442,775
|
|
Placement agent warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
503,655
|
|
|
|
-
|
|
|
|
-
|
|
|
|
503,655
|
|
Warrants issued to consultants
|
|
|
-
|
|
|
|
-
|
|
|
|
294,173
|
|
|
|
-
|
|
|
|
-
|
|
|
|
294,173
|
|
Discount on notes from beneficial conversion feature
|
|
|
-
|
|
|
|
-
|
|
|
|
1,758,741
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,758,741
|
|
Imputed interest
|
|
|
-
|
|
|
|
-
|
|
|
|
1,076
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,076
|
|
Net loss - 12 months
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(9,577,484
|
)
|
|
|
(9,577,484
|
)
|
Balance, May 31, 2018
|
|
|
50,128,972
|
|
|
$
|
5,013
|
|
|
$
|
17,628,717
|
|
|
$
|
307,584
|
|
|
$
|
(18,569,094
|
)
|
|
$
|
(627,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for conversion of debt
|
|
|
3,697,511
|
|
|
|
370
|
|
|
|
1,295,320
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,295,690
|
|
Common stock issued in connection with Oasis acquisition
|
|
|
22,058,823
|
|
|
|
2,206
|
|
|
|
15,438,970
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,441,176
|
|
Common stock issued to consultant
|
|
|
731,250
|
|
|
|
73
|
|
|
|
515,240
|
|
|
|
(25,313
|
)
|
|
|
-
|
|
|
|
490,000
|
|
Common stock issued to officer
|
|
|
600,000
|
|
|
|
60
|
|
|
|
263,940
|
|
|
|
(213,320
|
)
|
|
|
-
|
|
|
|
50,680
|
|
Common stock to be issued to officer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
277,833
|
|
|
|
-
|
|
|
|
277,833
|
|
Common stock issued for cash
|
|
|
14,375,000
|
|
|
|
1,438
|
|
|
|
5,748,562
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,750,000
|
|
Special Warrants issued for cash
|
|
|
-
|
|
|
|
-
|
|
|
|
9,785,978
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,785,978
|
|
Cashless exercise of warrant
|
|
|
129,412
|
|
|
|
13
|
|
|
|
(13
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrant issued due to penalty
|
|
|
-
|
|
|
|
-
|
|
|
|
941,972
|
|
|
|
-
|
|
|
|
-
|
|
|
|
941,972
|
|
Warrants issued as compensation for offering
|
|
|
-
|
|
|
|
-
|
|
|
|
2,369,830
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,369,830
|
|
Units issued as compensation for offering
|
|
|
559,750
|
|
|
|
56
|
|
|
|
557,279
|
|
|
|
|
|
|
|
|
|
|
|
557,335
|
|
Warrants issued to placement agent
|
|
|
-
|
|
|
|
-
|
|
|
|
1,413,300
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,413,300
|
|
Special warrant issued due to penalty
|
|
|
-
|
|
|
|
-
|
|
|
|
7,142,550
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,142,550
|
|
Common stock issued for exercise of special warrants
|
|
|
33,463,838
|
|
|
|
3,347
|
|
|
|
(3,347
|
)
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Cashless exercise of warrant
|
|
|
19,551
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Common stock shares issued for settlement
|
|
|
50,000
|
|
|
|
5
|
|
|
|
47,495
|
|
|
|
-
|
|
|
|
-
|
|
|
|
47,500
|
|
Foreign currency transaction loss on equity offering
|
|
|
-
|
|
|
|
-
|
|
|
|
403,588
|
|
|
|
-
|
|
|
|
-
|
|
|
|
403,588
|
|
Discount on notes from beneficial conversion feature
|
|
|
-
|
|
|
|
-
|
|
|
|
9,039,096
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,039,096
|
|
Reclassification of derivative upon adoption of ASU 2017-11
|
|
|
-
|
|
|
|
-
|
|
|
|
1,265,751
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,265,751
|
|
Derivative valuation of reset event
|
|
|
-
|
|
|
|
-
|
|
|
|
35,883
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35,883
|
|
Imputed interest
|
|
|
-
|
|
|
|
-
|
|
|
|
807
|
|
|
|
-
|
|
|
|
-
|
|
|
|
807
|
|
Net loss - 9 months
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(24,187,649
|
)
|
|
|
(24,187,649
|
)
|
Balance, February 28, 2019
|
|
|
125,814,107
|
|
|
$
|
12,583
|
|
|
$
|
73,890,916
|
|
|
$
|
346,784
|
|
|
$
|
(42,756,743
|
)
|
|
$
|
31,493,540
|
|
CLS HOLDINGS USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
For the Nine
|
|
|
For the Nine
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
February 28, 2019
|
|
|
February 28, 2018
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(24,187,649
|
)
|
|
$
|
(5,592,341
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Imputed interest
|
|
|
807
|
|
|
|
804
|
|
Change in fair value of derivative
|
|
|
-
|
|
|
|
25,863
|
|
Warrants issued to placement agent
|
|
|
3,783,130
|
|
|
|
610,414
|
|
Warrants and Special Warrants issued to penalty
|
|
|
8,084,522
|
|
|
|
-
|
|
Units issued to placement agent
|
|
|
557,335
|
|
|
|
|
|
Non-cash offering costs of equity financing
|
|
|
403,588
|
|
|
|
-
|
|
Fair value of shares vested by officers
|
|
|
328,513
|
|
|
|
55,000
|
|
Fair value of shares issued to consultants
|
|
|
490,000
|
|
|
|
-
|
|
Fair value of shares issued in settlement
|
|
|
47,500
|
|
|
|
-
|
|
Loss on modification of debt
|
|
|
-
|
|
|
|
29,145
|
|
(Gain) loss on note exchange
|
|
|
-
|
|
|
|
404,082
|
|
Loss on extinguishment of debt
|
|
|
-
|
|
|
|
989,032
|
|
Gain on settlement of Account Payable
|
|
|
-
|
|
|
|
(3,480
|
)
|
Expense from derivative triggering event
|
|
|
12,659
|
|
|
|
-
|
|
Amortization of debt discounts
|
|
|
2,481,674
|
|
|
|
1,391,110
|
|
Amortization of deferred financing costs
|
|
|
-
|
|
|
|
22,569
|
|
Depreciation and amortization expense
|
|
|
184,068
|
|
|
|
993
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(259,576
|
)
|
|
|
-
|
|
Interest receivable
|
|
|
(99,618
|
)
|
|
|
-
|
|
Inventory
|
|
|
(199,843
|
)
|
|
|
-
|
|
Prepaid expenses
|
|
|
(608,090
|
)
|
|
|
(11,188
|
)
|
Other assets
|
|
|
-
|
|
|
|
50,000
|
|
Redemption premium in transit
|
|
|
(964,788
|
)
|
|
|
(46,000
|
)
|
Accounts payable and accrued expenses
|
|
|
(353,832
|
)
|
|
|
937,895
|
|
Accrued compensation
|
|
|
(16,667
|
)
|
|
|
167,584
|
|
Due to related parties
|
|
|
(50,000
|
)
|
|
|
-
|
|
Accrued interest, related party
|
|
|
5,943
|
|
|
|
87,966
|
|
Accrued interest
|
|
|
588,312
|
|
|
|
21,045
|
|
Deferred rent liability
|
|
|
1,667
|
|
|
|
(49,565
|
)
|
Net cash used in operating activities
|
|
|
(9,770,345
|
)
|
|
|
(909,072
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Payments to purchase property, plant and equipment
|
|
|
(735,234
|
)
|
|
|
-
|
|
Payments to acquire note receivable
|
|
|
(5,150,000
|
)
|
|
|
-
|
|
Payment for investment in Alternative Solutions, net of cash received of $14,612
|
|
|
(5,982,710
|
)
|
|
|
(2,050,000
|
)
|
Net cash used in investing activities
|
|
|
(11,867,944
|
)
|
|
|
(2,050,000
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds from related party convertible notes payable
|
|
|
-
|
|
|
|
601,070
|
|
Proceeds from related party notes payable
|
|
|
211,700
|
|
|
|
-
|
|
Proceeds from notes payable
|
|
|
-
|
|
|
|
410,000
|
|
Proceeds from convertible notes payable
|
|
|
18,369,000
|
|
|
|
880,000
|
|
Principal payments on notes payable
|
|
|
(310,000
|
)
|
|
|
-
|
|
Principal payments on related party notes payable
|
|
|
(211,838
|
)
|
|
|
-
|
|
Principal payments on convertible notes payable
|
|
|
(37,500
|
)
|
|
|
-
|
|
Proceeds from sale of equity
|
|
|
15,535,978
|
|
|
|
1,012,425
|
|
Net cash provided by financing activities
|
|
|
33,557,340
|
|
|
|
2,903,495
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
11,919,051
|
|
|
|
(55,577
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
52,964
|
|
|
|
78,310
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
11,972,015
|
|
|
$
|
22,733
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
8,964
|
|
|
$
|
-
|
|
Income taxes paid
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Convertible note issued for unpaid accrued salary
|
|
$
|
75,000
|
|
|
$
|
112,500
|
|
Related party notes payable reclassified as related party convertible notes payable
|
|
$
|
-
|
|
|
$
|
1,116,856
|
|
Beneficial conversion feature on convertible notes
|
|
$
|
9,039,096
|
|
|
$
|
1,681,946
|
|
Note payable exchanged for common stock
|
|
$
|
1,295,690
|
|
|
$
|
936,478
|
|
Shares issued for settlement of accounts payable
|
|
$
|
-
|
|
|
$
|
6,000
|
|
Discount on convertible notes payable due to derivative
|
|
|
-
|
|
|
$
|
1,321,862
|
|
Charge to paid-in capital for par value of shares issued in cashless exercise of warrants
|
|
$
|
3,362
|
|
|
$
|
-
|
|
Reclassify derivative liability to paid-in capital upon adoption of ASU 2017-11
|
|
$
|
1,265,751
|
|
|
$
|
-
|
|
Shares issued for services from stock payable
|
|
$
|
25,313
|
|
|
$
|
-
|
|
See accompanying notes to these financial statements.
CLS HOLDINGS USA, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2019
(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.
Principals of Consolidation
The accompanying consolidated financial statements include the accounts of CLS Holdings USA, Inc., and its 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”). Alternative Solutions is the sole owner of the following three entities (collectively, the “Oasis LLCs”): Serenity Wellness Center, LLC (“Serenity Wellness Center”); Serenity Wellness Products, LLC (“Serenity Wellness Products”); and Serenity Wellness Growers, LLC (“Serenity Wellness Growers”). All material intercompany transactions have been eliminated upon consolidation of these entities.
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, Inc. (“CLS Labs”) acquired 10,000,000 shares, or 55.6%, of the outstanding shares of common stock of Adelt from its founder, Larry Adelt. On that date, Jeffrey Binder, the Chairman, President and Chief Executive Officer of CLS Labs, was appointed Chairman, President and Chief Executive Officer of the Company. On November 20, 2014, Adelt adopted amended and restated articles of incorporation, thereby changing its name to CLS Holdings USA, Inc. Effective December 10, 2014, the Company effected a reverse stock split of its issued and outstanding common stock at a ratio of 1-for-0.625 (the “Reverse Split”), wherein 0.625 shares of the Company’s common stock were issued in exchange for each share of common stock issued and outstanding. As a result, 6,250,000 shares of the Company’s common stock were issued to CLS Labs in exchange for the 10,000,000 shares that it owned by virtue of the above-referenced purchase from Larry Adelt.
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 15,000,000 (post Reverse Split) shares of common stock in CLS Holdings in exchange for their shares of common stock in CLS Labs. As a result of the Merger, the Company acquired the business of CLS Labs and abandoned its previous business.
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 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 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, LLC 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 $250,000 upon signing, which was followed by an additional payment of $1,800,000 paid in February 2018, for an initial 10% of each of the Oasis LLCs. At that time, the Company applied for regulatory approval to own an interest in the Oasis LLCs, which approval was received. On June 27, 2018, the Company 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 its common stock (the “Purchase Price Shares”) (collectively, the “Closing Consideration”). 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 Company used the proceeds of a Canadian private securities offering to fund the cash portion of the Closing Consideration. The Company then applied for regulatory approval to own the additional 90% in membership interests in the Oasis LLCs, which it received on December 12, 2018. The Company has adopted a fiscal year end of May 31st.
On October 31, 2018, the Company, CLS Massachusetts,, and In Good Health, Inc. (“IGH”), a Massachusetts not-for-profit corporation, which converted to a for-profit corporation on November 6, 2018 (the “Conversion”), entered into an Option Agreement (the “Option Agreement”). Under the terms of the Option Agreement, CLS Massachusetts has an exclusive option to acquire all of the outstanding capital stock of IGH (the “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 is 60 days after such date (the “Option Period”). (See note 4). On October 31, 2018, as consideration for the Option, the Company made a loan to IGH (the “IGH Loan”), in the principal amount of $5,000,000 (the “IGH Loan Amount”), 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 “IGH Loan Agreement”) (see note 9). The IGH Loan is evidenced by a secured promissory note of IGH (the “IGH Note Receivable”), which bears interest at the rate of 6% per annum and matures on October 31, 2021.
On September 13, 2018, we entered into a non-binding letter of intent (the “CannAssist LOI”) with CannAssist, LLC, a Massachusetts limited liability company (“CannAssist”), setting forth the terms and conditions upon which we propose to form an 80/20 joint venture with CannAssist, of which we would own 80%. CannAssist plans to build out a recreationally licensed cultivation grow facility in Leicester, Massachusetts (the “Leicester Facility”). The planned Leicester Facility is in possession of its host community agreement and has applied for a recreational license and is awaiting state approval. We intend to use a portion of the net proceeds of our 2018 Convertible Debenture Offering to fund construction activities at the Leicester Facility. We have not entered into any definitive agreements regarding the transactions contemplated by the CannAssist LOI, and there is no guarantee that these transactions will close
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.
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 $11,972,015 and $52,964 as of February 28, 2019 and May 31, 2018, respectively.
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 no bad debts expense during the three and nine months ended February 28, 2019 and 2018.
Segment Reporting
Under FASB ASC 280-10-50, the Company operates two business segments: Cannabis Dispensary Segment, and Cannabis Production Segment, and will evaluate additional segment disclosure requirements as it expands its operations.
Inventory
Inventories are stated at the lower of cost or market. Cost is determined on a standard cost basis that approximates the first-in, first-out (FIFO) method. 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 consists 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 the estimated useful lives. Computer equipment is being depreciated over a three-year period.
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 with the exception of the amortization of the cost of two major video productions. A music video and reality/lifestyle video were both produced in 2017. The remaining amount that hasn’t been expensed is listed on the schedule in Note 7. Total recognized advertising and promotion expenses were $381,082 and $26,549 for the three months ended February 28, 2019 and 2018, respectively; total recognized advertising and promotion expenses were $1,134,322 and $31,797 for the nine months ended February 28, 2019 and 2018, respectively.
Research and Development
Research and development expenses are charged to operations as incurred. The Company incurred no research and development costs for the three and nine months ended February 28, 2019 and 2018, respectively.
Income Taxes
The Company accounts for income taxes using the asset and liability method, which requires the establishment of deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided to the extent deferred tax assets may not be recoverable after consideration of the future reversal of deferred tax liabilities, tax planning strategies, and projected future taxable income.
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 amount of the Company’s cash and cash equivalents, note receivable, notes payable, accounts payable and accrued expenses, none of which is held for trading, approximates 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.
Derivative Financial Instruments
Derivatives are recorded on the condensed consolidated balance sheet at fair value. The conversion features of the convertible notes are embedded derivatives and are separately valued and accounted for on the consolidated balance sheet with changes in fair value recognized during the period of change as a separate component of other income/expense. Fair values for exchange-traded securities and derivatives are based on quoted market prices. The pricing model the Company uses for determining the fair value of its derivatives is the Lattice Model. Valuations derived from this model are subject to ongoing internal and external verification and review. The model uses market-sourced inputs such as interest rates and stock price volatilities. Selection of these inputs involves management’s judgment and may impact net income (see note 17). On June 1, 2018, the Company 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.
Revenue Recognition
Revenue is primarily generated through the Company’s subsidiary, Serenity Wellness Center LLC, d/b/a Oasis Cannabis (“Oasis”). Oasis operates a 24-hour cannabis dispensary that recognizes revenue from the sale of medical and recreational cannabis products within the State of Nevada.
Revenue from the sale of cannabis products is recognized by our subsidiary 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 recognizes revenue from the sale of the following cannabis products and services to licensed dispensaries within the State of Nevada:
|
●
|
Premium organic medical cannabis sold wholesale to licensed retailers
|
|
●
|
Recreational marijuana cannabis products sold wholesale to 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 the commercial sales of products, licensing agreements and contracts to perform pilot studies 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, 2019.
Basic and Diluted 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 is computed based on the weighted average number of shares of common stock outstanding during the period.
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 calculation.
A net loss causes all outstanding stock options and warrants to be antidilutive. As a result, the basic and dilutive losses per common share are the same for the three and nine months ended February 28, 2019 and 2018.
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 assesses 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
Accounting standards promulgated by the Financial Accounting Standards Board (“FASB”) are subject to change. Changes in such standards may have an impact on the Company’s future financial statements. The following is a summary of recent accounting developments.
In August 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-15,
Statement of Cash Flows (Topic 230).
The update addresses eight specific cash flow issues and is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update is effective for reporting periods beginning after December 15, 2017, including interim periods within the reporting period. Early adoption is permitted. The Company does not believe the implementation of this update has had a material impact on its financial statements.
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 becomes effective for the Company on January 1, 2020. The amendments in this ASU will be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed.
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 the Company on January 1, 2018, and will be applied prospectively to an award modified on or after the adoption date. The Company does not believe that this standard has had a material effect on its financial statements.
Effective June 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the commercial sales of products, licensing agreements and contracts to perform pilot studies 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 the Company’s financial statements as a result of adopting Topic 606.
Management does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the accompanying unaudited condensed consolidated financial statements.
Adoption of Accounting Standards
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.
Those 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.
On June 1, 2018, the Company 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.
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 $42,756,743 as of February 28, 2019. The Company’s auditors stated in their opinion on the Company’s financial statements for the year ended May 31, 2018 that there was substantial doubt about the Company’s ability to continue as a going concern, and that further losses were anticipated in the development of the Company’s business raising substantial doubt about the Company’s ability to continue as a going concern. The ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. The Company began generating revenue from operations with the Acquisition of Alternative Solutions on June 27, 2018 (note 3). Management intends to finance operating costs over the next twelve months with loans, the proceeds from the sale of securities, and/or revenues from operations. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty.
Note 3 – Acquisition of Alternative Solutions, LLC
On June 27, 2018, the Company closed on the purchase of all of the membership interests in Alternative Solutions and its three operating subsidiaries (collectively, the “Oasis LLCs”) from the members of such entities (other than Alternative Solutions). The Oasis LLCs operate a fully integrated cannabis business in Las Vegas, Nevada, including a grow; extraction, conversion and processing facility; and a retail dispensary. The closing occurred pursuant to a Membership Interest Purchase Agreement (the “Acquisition Agreement”) entered into between the Company and Alternative Solutions on December 4, 2017, as amended. 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. The revised structure of the transaction is referenced in the Oasis Note, which modified the Acquisition Agreement.
Pursuant to the Acquisition Agreement, the Company paid a non-refundable deposit of $250,000 upon signing, which was followed by an additional payment of $1,800,000 paid in February 2018, for an initial 10% of each of the Oasis LLCs. At that time, the Company applied for regulatory approval to own an interest in the Oasis LLCs, which approval was received. On June 27, 2018, the Company 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 (see note 14), (the “Oasis Note”), and 22,058,823 shares of its common stock (see note 16), (the “Purchase Price Shares”) (collectively, the “Closing Consideration”). 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 Company used the proceeds of a Canadian private securities offering to fund the cash portion of the Closing Consideration (see note 16). The Company then applied for regulatory approval to own the additional 90% in membership interests in the Oasis LLCs, which it received on December 12, 2018.
The number of Purchase Price Shares was equal to 80% of the offering price of the Company’s common stock in its last equity offering, which price was $0.34 per share. The Oasis Note is secured by a first priority security interest over the membership interests in Alternative Solutions and the Oasis LLCs, as well as by the assets of the Oasis LLCs. The Company also delivered a confession of judgment to a representative of the sellers that will become effective, in general, if the Company defaults under the Oasis Note.
A claim has been made that Oasis owes certain amounts to a consultant; Oasis disputes this claim. If the Company makes any payments in connection with this claim post-closing, generally speaking, the Company will be entitled to deduct the present value of such payments from the principal amount due under the Oasis Note. This claim has been accrued on the Company’s balance sheet as of February 28, 2019.
The sellers are also entitled to a $1,000,000 payment from the Company on May 30, 2020 if the Oasis LLCs have maintained an average revenue of $20,000 per day during the 2019 calendar year. The fair value of this contingent consideration was $678,111 as determined by the Company’s outside valuation consultants. This amount is recorded as contingent liability on the Company’s balance sheet at February 28, 2019.
The acquisition date estimated fair value of the consideration transferred totaled $27,975,650, which consisted of the following:
Initial purchase price
|
|
$
|
2,050,000
|
|
Cash paid in connection with transaction
|
|
|
5,995,543
|
|
Note payable
|
|
|
3,810,820
|
|
Contingent consideration
|
|
|
678,111
|
|
Common stock
|
|
|
15,441,176
|
|
Total purchase price
|
|
$
|
27,975,650
|
|
|
|
|
|
|
Net tangible assets
|
|
$
|
595,151
|
|
Intangible assets
|
|
|
1,637,600
|
|
Goodwill
|
|
|
25,742,899
|
|
Total purchase price
|
|
$
|
27,975,650
|
|
The above estimated fair value of the intangible assets is based on a preliminary purchase price allocation prepared by a third party valuation expert. During the preliminary purchase price allocation period, which may be up to one year from the business combination date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. After the preliminary purchase price allocation period, the Company may record adjustments to assets acquired or liabilities assumed subsequent to the purchase price allocation period in its operating results in the period in which the adjustments were determined.
Pro forma results
The following table sets forth the unaudited pro forma results of the Company as if the acquisition of the Oasis LLCs was effective on the first day of each of the three and nine months periods presented. These combined results are not necessarily indicative of the results that may have been achieved had the companies always been combined.
|
|
Three months ended February 28,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenues
|
|
$
|
2,372,790
|
|
|
$
|
1,827,999
|
|
Net loss
|
|
$
|
(12,850,356
|
)
|
|
$
|
(10,839,019
|
)
|
Basic net loss per share
|
|
$
|
(0.10
|
)
|
|
$
|
(0.17
|
)
|
Diluted net loss per share
|
|
$
|
(0.10
|
)
|
|
$
|
(0.17
|
)
|
Weighted average shares - basic
|
|
|
124,346,650
|
|
|
|
62,460,767
|
|
Weighted average shares - diluted
|
|
|
124,346,650
|
|
|
|
62,460,767
|
|
|
|
Nine months ended February 28,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenues
|
|
$
|
6,299,932
|
|
|
$
|
5,139,455
|
|
Net loss
|
|
$
|
(24,402,155
|
)
|
|
$
|
(14,632,294
|
)
|
Basic net loss per share
|
|
$
|
(0.26
|
)
|
|
$
|
(0.25
|
)
|
Diluted net loss per share
|
|
$
|
(0.26
|
)
|
|
$
|
(0.25
|
)
|
Weighted average shares - basic
|
|
|
95,132,835
|
|
|
|
58,988,122
|
|
Weighted average shares - diluted
|
|
|
95,132,835
|
|
|
|
58,988,122
|
|
Note 4 – Joint Venture and Option Transaction
In Good Health
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. (“IGH”), a Massachusetts not-for-profit corporation, which converted to a for-profit corporation on November 6, 2018 (the “Conversion”), entered into an Option Agreement (the “Option Agreement”). Under the terms of the Option Agreement, CLS Massachusetts has an exclusive option to acquire all of the outstanding capital stock of IGH (the “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 is 60 days after such date (the “Option Period”). If CLS Massachusetts exercises the Option, the Company, a wholly-owned subsidiary of the Company and IGH will 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 will 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 have entered into agreements pursuant to which such stockholders have, among other things, agreed to vote in favor of such transactions.
On October 31, 2018, as consideration for the Option, the Company made a loan to IGH (the “IGH Loan”), in the principal amount of $5,000,000 (the “IGH Loan Amount”), 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 “IGH Loan Agreement”) (see note 9). The IGH Loan is evidenced by a secured promissory note of IGH (the “IGH Note Receivable”), which bears interest at the rate of 6% per annum and matures on October 31, 2021.
To secure the obligations of IGH to the Company under the Loan Agreement and the IGH Note Receivable, the Company and IGH entered into a Security Agreement dated as of October 31, 2018 (the “IGH Security Agreement”), pursuant to which IGH granted to the Company a first priority lien on and security interest in all personal property of IGH.
If the Company does not exercise the Option on or prior to the date that is 30 days following the end of the Option Period, the Loan Amount will be reduced to $2,500,000 as a break-up fee (the “Break-Up Fee”), except in the event of a Purchase Exception (as defined in the Option Agreement), in which case the Break-Up Fee will not apply and there will be no reduction to the Loan Amount.
CannAssist
On September 13, 2018, we entered into a non-binding letter of intent (the “CannAssist LOI”) with CannAssist, LLC, a Massachusetts limited liability company (“CannAssist”), setting forth the terms and conditions upon which we propose to form an 80/20 joint venture with CannAssist, of which we would own 80%. CannAssist plans to build out a recreationally licensed cultivation grow facility in Leicester, Massachusetts (the “Leicester Facility”). The planned Leicester Facility is in possession of its host community agreement and has applied for a recreational license and is awaiting state approval. We intend to use a portion of the net proceeds of our 2018 Convertible Debenture Offering to fund construction activities at the Leicester Facility. We have not entered into any definitive agreements regarding the transactions contemplated by the CannAssist LOI, and there is no guarantee that these transactions will close.
On November 7, 2018, we amended the CannAssist LOI to extend the termination date to January 15, 2019 and further amended it effective January 15, 2019 to extend the termination date to July 1, 2019.
Note 5 – Accounts Receivable
Accounts receivable was $295,013 and $0 at February 28, 2019 and May 31, 2018, respectively. No allowance for doubtful accounts was necessary during the three and nine months ended February 28, 2019 and 2018.
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,
|
|
|
|
2019
|
|
|
2018
|
|
Raw materials
|
|
$
|
295,822
|
|
|
$
|
-
|
|
Finished goods
|
|
|
309,974
|
|
|
|
-
|
|
Total
|
|
$
|
605,796
|
|
|
$
|
-
|
|
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 – Prepaid Expenses and Other Current Assets
Prepaid expenses consisted of the following at February 28, 2019 and May 31, 2018:
|
|
February 28,
|
|
|
May 31,
|
|
|
|
2019
|
|
|
2018
|
|
Prepaid insurance
|
|
$
|
14,218
|
|
|
$
|
-
|
|
Prepaid license fees
|
|
|
130,412
|
|
|
|
-
|
|
Prepaid legal fees
|
|
|
16,410
|
|
|
|
1,410
|
|
Prepaid fixed assets
|
|
|
460,901
|
|
|
|
|
|
Prepaid rent
|
|
|
6,961
|
|
|
|
|
|
Deposits on inventory
|
|
|
83,837
|
|
|
|
-
|
|
Total
|
|
$
|
712,739
|
|
|
$
|
1,410
|
|
Note 8 – Redemption Premium in Transit
During the three months ended February 28, 2019, the Company executed a redemption notice with respect to two of the convertible notes payable to redeem all outstanding principal, accrued interest and redemption premiums thereunder. The total amount due to the note holder is $964,788, which includes $250,000 in principal, $62,500 in redemption premium and $2,630 in accrued interest for one note, and $500,000 in principal, $125,000 in redemption premium and $24,658 in accrued interest for the other note. The redemption date is March 1, 2019, and the redemption amount is shown as a current asset on the Company’s balance sheet as of February 28, 2019.
Note 9 – Notes Receivable
PRH Note Receivable
During the year ended May 31, 2015, the Company loaned $500,000 (the “PRH Note”) to Picture Rock Holdings, LLC, a Colorado limited liability company (“PRH”). Pursuant to the PRH Note, as amended by the parties effective June 30, 2015, October 31, 2015, April 11, 2016, and May 31, 2016, PRH was expected to repay the principal due under the PRH Note in twenty (20) equal quarterly installments of Twenty Five Thousand Dollars ($25,000) commencing in the month following the month in which PRH commenced generating revenue at the grow facility, which commencement was originally anticipated to occur in the first quarter of 2017, and continuing until paid in full. We suspended our plans to operate in Colorado due to regulatory delays and have not yet determined when we will pursue them again. Interest will accrue on the unpaid principal balance of the PRH Note at the rate of twelve percent (12%) per annum and will be paid quarterly in arrears commencing after such initial payment and continuing until paid in full. All outstanding principal and any accumulated unpaid interest due under the PRH Note is due and payable on the five-year anniversary of the initial payment thereunder. In the event of default as defined in the agreements underlying the PRH Note, all amounts under the PRH Note shall be due and payable at once. During the year ended May 31, 2015, the Company recorded an impairment related to the note receivable in the amount of $500,000.
During the year ended May 31, 2018, the Company received a payment of $50,000 on the PRH Note. As a result, the Company has reduced the impairment of the note by $50,000 to reflect this payment. The receivable is recorded on the balance sheet as of February 28, 2019 in the amount of $0, net of allowance in the amount of $450,000.
IGH Note Receivable
On October 31, 2018, in connection with an option to purchase transaction (see note 4), the Company loaned $5,000,000 (the “IGH Note) to In Good Health, Inc., a Massachusetts not-for-profit corporation (“IGH”); on November 6, 2018, IGH converted to a for-profit corporation. This Note bears interest at the rate of 6% per annum. On March 1, 2020 (the “Initial Payment Date”), all accrued interest shall be added to the outstanding principal due hereunder and such amount shall be payable in eight equal quarterly installments, commencing on the Initial Payment Date, together with interest accruing after the Initial Payment Date. The IGH Note shall mature and all outstanding principal, accrued interest and any other amounts due hereunder, shall become due and payable in full on the third anniversary of the IGH Note. The IGH Note was issued in connection with a loan agreement and security agreement between the Company and IGH, and an option agreement between the Company and IGH, among others (the “IGH Option Agreement”), in both cases dated as of October 31, 2018 and the other agreements and documents executed and/or delivered in connection therewith (collectively the “IGH Loan Documents”), and is secured by the collateral described in the IGH Loan Documents and by such other collateral as may in the future be granted to the Company to secure the IGH Note. During the three months and nine ended February 28, 2019, the Company recorded interest income in the amount of $73,973 and $98,631, respectively, in connection with the IGH Note. At February 28, 2019, principal in the amount of $5,000,000 and interest receivable in the amount of $96,631 due under the IGH Note are classified as non-current assets on the Company’s balance sheet.
CannAssist Note Receivable
On January 29, 2019, the Company made a line of credit loan to CannAssist (the “CanAssist Note”), in the principal amount of up to $500,000. Any draws on the line of credit in excess of $150,000 will only be made in the sole discretion of the Company. The Loan bears interest at the rate of 8% per annum and is personally guaranteed by the two equity owners of CannAssist. Payments on the loan will commence on July 1, 2019 and the Note will mature on December 1, 2019. At February 28, 2019, the principal amount of $150,000 and interest receivable in the amount of $987 due under the CannAssist Note are classified as non-current assets on the Company’s balance sheet.
Note 10 – Property, Plant and Equipment
Property, plant and equipment consisted of the following at February 28, 2019 and May 31, 2018.
|
|
February 28,
|
|
|
May 31,
|
|
|
|
2019
|
|
|
2018
|
|
Office equipment
|
|
|
1,217,563
|
|
|
|
2,674
|
|
Furniture and fixtures
|
|
|
59,617
|
|
|
|
-
|
|
Leasehold improvements
|
|
$
|
764,423
|
|
|
$
|
-
|
|
Less: accumulated depreciation
|
|
|
(494,439
|
)
|
|
|
(2,674
|
)
|
Property, plant, and equipment, net
|
|
$
|
1,547,164
|
|
|
$
|
-
|
|
During the nine months ended February 28, 2019, the Company acquired property, plant, and equipment with an aggregate fair value of $933,142 with the acquisition of Alternative Solutions, LLC. See note 3.
Depreciation of property, plant, and equipment was $45,045 and $223 for the three months ended February 28, 2019 and 2018 respectively. Depreciation of property, plant, and equipment was $121,212 and $669 for the nine months ended February 28, 2019 and 2018 respectively.
Note 11 – Intangible Assets
Intangible assets consisted of the following at February 28, 2019 and May 31, 2018.
February 28, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
Intellectual Property
|
|
$
|
319,600
|
|
|
$
|
(15,981
|
)
|
|
$
|
303,619
|
|
License & Customer Relations
|
|
|
990,000
|
|
|
|
(24,750
|
)
|
|
|
965,250
|
|
Tradenames - Trademarks
|
|
|
301,000
|
|
|
|
(15,051
|
)
|
|
|
285,949
|
|
Non-compete Agreements
|
|
|
27,000
|
|
|
|
(6,750
|
)
|
|
|
20,250
|
|
Domain Names
|
|
|
2,600
|
|
|
|
(324
|
)
|
|
|
2,276
|
|
Total
|
|
$
|
1,640,020
|
|
|
$
|
(62,856
|
)
|
|
$
|
1,577,344
|
|
May 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
Intellectual Property
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
License & Customer Relations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Tradenames - Trademarks
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Non-compete Agreements
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Domain names
|
|
|
1,726
|
|
|
|
(828
|
)
|
|
|
898
|
|
Total
|
|
$
|
1,726
|
|
|
$
|
(828
|
)
|
|
$
|
898
|
|
Total amortization expense charged to operations for the three months ended February 28, 2019 and 2018 was $20,952 and $108, respectively. Total amortization expense charged to operations for the nine months ended February 28, 2019 and 2018 was $62,856 and $324, respectively.
Amount to be amortized during the twelve months ended February 28,
|
|
|
|
|
2019
|
|
$
|
27,379
|
|
2020
|
|
|
164,103
|
|
2021
|
|
|
164,103
|
|
2022
|
|
|
164,103
|
|
2023
|
|
|
164,103
|
|
Thereafter
|
|
|
893,553
|
|
|
|
$
|
1,577,344
|
|
Note 12 – Other Assets
Other assets included the following as of February 28, 2019 and May 31, 2018, respectively:
|
|
February 28,
|
|
|
May 31,
|
|
|
|
2019
|
|
|
2018
|
|
Security deposits
|
|
|
160,450
|
|
|
|
-
|
|
|
|
$
|
160,450
|
|
|
$
|
-
|
|
Note 13 – Accounts Payable and Accrued Liabilities
Accrued expenses consisted of the following at February 28, 2019 and May 31, 2018:
|
|
February 28,
|
|
|
May 31,
|
|
|
|
2019
|
|
|
2018
|
|
Trade accounts payable
|
|
$
|
655,518
|
|
|
$
|
726,457
|
|
Accrued payroll and payroll taxes
|
|
|
281,584
|
|
|
|
44,465
|
|
Accrued liabilities
|
|
|
457,251
|
|
|
|
-
|
|
Deferred rent liability
|
|
|
-
|
|
|
|
55,699
|
|
Total
|
|
$
|
1,394,353
|
|
|
$
|
826,621
|
|
Note 14 – Notes Payable and Convertible Notes Payable
Notes Payable
|
|
February 28,
|
|
|
May 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
On February 7, 2018, the Company issued a note payable to Todd Blatt in the amount of $210,000 the “Blatt Note”). This note accrues interest at a rate of 6% per annum and is due on February 7, 2019. During the nine months ended February 28, 2019, the Company accrued interest in the amount of $1,726 on the Blatt Note. On July 20, 2018, the Company made principal and interest payments in the amount of $210,000 and $5,627, respectively, on the Blatt Note.
|
|
$
|
-
|
|
|
$
|
210,000
|
|
|
|
|
|
|
|
|
|
|
On February 7, 2018, the Company issued a note payable to AJG Group in the amount of $200,000 the “AJG Note”). This note accrues interest at a rate of 6% per annum and is due on February 7, 2019. During the nine months ended February 28, 2019, the Company accrued interest in the amount of $641 on the AJG Note. On July 9, 2018, the Company made principal and interest payments in the amount of $100,000 and $3,337, respectively, on the AJG Note.
|
|
|
-
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
The Company issued a secured note payable to Serenity Wellness Enterprises, LLC, as nominee (“Oasis Note”). dated June 27, 2018 in the principal amount of $4,000,000 and bearing interest at a rate of 6% per annum pursuant to the Membership Interest Purchase Agreement with Alternative Solutions. The note is due on December 4, 2019, but may be prepaid at any time without penalty. 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.
The Company recognized an original issue discount of $189,180 on the Oasis Note. During the nine months ended February 28, 2019, $88,644 of this discount was charged to operations. During the nine months ended February 28, 2019, the Company accrued interest in the amount of $164,000 on the Oasis Note.
|
|
|
4,000,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total – Notes Payable
|
|
$
|
4,000,000
|
|
|
$
|
310,000
|
|
Less: Discount
|
|
|
(100,536
|
)
|
|
|
-
|
|
Notes Payable, Net of Discounts
|
|
$
|
3,899,464
|
|
|
$
|
310,000
|
|
Current portion
|
|
$
|
3,899,464
|
|
|
$
|
310,000
|
|
Long term portion
|
|
$
|
-
|
|
|
$
|
-
|
|
Related Party Convertible Demand Notes Payable
On May 31, 2017, the Company entered into an Omnibus Loan Amendment Agreement (the “Omnibus Loan Amendment”) with Jeffrey I. Binder, Frank Koretsky, Newcan Investment Partners LLC and CLS CO 2016, LLC (collectively, the “Insiders”). Pursuant to the Omnibus Loan Amendment, the Company agreed with the Insiders to amend certain terms of loans the Insiders made to the Company for working capital purposes, which loans were initially demand loans, and, except for loans made in 2017, were later memorialized as convertible loans (the “Insider Loans”), in exchange for the agreement of the Insiders to convert all Insider Loans where funds were advanced prior to January 1, 2017, which totaled $2,537,750, plus $166,490 of accrued interest thereon, into an aggregate of 10,816,960 shares of the Company’s common stock at $0.25 per share, and forego the issuance of warrants to purchase the Company’s common stock upon conversion. This resulted in the issuance of an additional 7,609,910 shares compared to the original number of shares issuable upon conversion of the Insider Loans prior to the Omnibus Loan Amendment. The Company valued the shares at $0.125, which was the market price of the Company’s stock at the conversion date, and charged the amount of $951,239 to loss on modification of debt during the twelve months ended May 31, 2017. The Company entered into the Omnibus Loan Amendment in order to ease the debt burden on the Company and prevent it from defaulting on the Insider Loans.
Pursuant to the Omnibus Loan Amendment, the following amendments were made to the Insider Loans: (a) the Company reduced the conversion price on the Insider Loans from between $0.75 and $1.07 per share of common stock to $0.25 per share of common stock, in those cases where the conversion price was greater than $0.25, which reduced conversion price exceeded the closing price of the common stock during the three months prior to the Omnibus Loan Amendment; (b) the Company deleted the requirement to issue warrants to purchase the Company’s common stock upon conversion of the Insider Loans; (c) the Company amended one Insider Loan to permit conversion of only the portion of the Insider Loan related to services that were provided to it prior to January 1, 2017; and (d) the Company amended the terms of the Insider Loans where funds were advanced on or after January 1, 2017, which Insider Loans were not converted into the Company’s common stock, to provide for, where not already the case, a 10% interest rate per annum, a $0.25 conversion price per share of common stock, and the deletion of the requirement that the Company issue warrants to purchase its common stock upon conversion of such Insider Loans.
On January 10, 2018, effective December 1, 2017, the Company entered into an Omnibus Amendment to Convertible Notes (the “Second Omnibus Loan Agreement”) with Jeffrey I. Binder, an officer and director of the Company, and Newcan Investment Partners LLC, an entity owned by Frank Koretsky, a director of the Company. The Second Omnibus Loan Agreement provides that the conversion price of all outstanding convertible promissory notes issued to either Mr. Binder or Newcan Investment Partners, LLC as of the date of the Agreement would be increased from $0.25 to $0.3125 per share of common stock. The remaining terms of such notes remain unchanged.
The following tables summarize the Company’s loan balances at February 28, 2019 and May 31, 2018:
|
|
February 28,
|
|
|
May 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Notes payable to Jeffrey Binder, an officer and director of the Company, for advances to fund operations (the “Binder Funding Notes”). The Binder Funding Notes bear interest at a rate of 10% per annum, have no maturity date and are due on demand. Effective May 31, 2017, pursuant to the Omnibus Loan Amendment, a conversion feature was added to the Binder Funding Notes whereby principal and accrued interest is convertible into common stock of the Company at a rate of $0.25 per share.
Effective December 1, 2017, pursuant to the Second Omnibus Loan Amendment, the conversion price was increased from $0.25 per share to $0.3125 per share and a discount in the amount of $35,023 related to the revaluation of the beneficial conversion feature of the Binder Funding Notes was charged to additional paid-in capital and amortized to interest expense.
During the twelve months ended May 31, 2018, Mr. Binder advanced a total of $440,579 to the Company under the Binder Funding Notes. During the year ended May 31, 2018, principal in the amount of $280,198 and accrued interest in the amount of $5,188 was transferred out of the Binder Funding Notes and used to fund four new convertible notes payable to Mr. Binder, which were converted or repaid as of May 31, 2018. Also during the year ended May 31, 2018 the Company made principal payments in the aggregate of $237,794 under the Binder Funding Notes. During the year ended May 31, 2018, the Company accrued interest in the amount of $7,364 on the Binder Funding Notes. During the year ended May 31, 2018, discounts in the amount of $385,637 related to the beneficial conversion feature of the Binder Funding Notes was charged to additional paid-in capital and amortized to interest expense.
During the nine months ended February 28, 2019, Mr. Binder advanced a total of $211,700 to the Company under the Binder Funding Notes. During the nine months ended February 28, 2019, the Company made principal payments to in the amount of $211,837 under the Binder Funding Notes. During the nine months ended February 28, 2019, the Company accrued interest in the amount of $1,710 on the Binder Funding Notes. During the nine months ended February 28, 2019, discounts in the aggregate amount of $211,702 related to the beneficial conversion feature of the Binder Funding Notes were charged to additional-paid in capital and amortized to interest expense.
|
|
$
|
-
|
|
|
$
|
137
|
|
|
|
February 28,
2019
|
|
|
May 31,
2018
|
|
|
|
|
|
|
|
|
|
|
Notes payable to Newcan Investment Partners, LLC (“Newcan”), an entity owned by Frank Koretsky, a director of the Company, for advances to fund operations (the “Newcan Funding Notes”). The Newcan Funding Notes bear interest at a rate of 10% per annum, have no maturity date and are due on demand. Effective May 31, 2017, pursuant to the Omnibus Loan Agreement, a conversion feature was added to the Newcan Funding Notes whereby principal and accrued interest is convertible into common stock of the Company at a rate of $0.25 per share.
Effective December 1, 2017, pursuant to the Second Omnibus Loan Amendment, the conversion price was increased from $0.25 per share to $0.3125 per share and a discount in the amount of $6,120 related to the revaluation of the beneficial conversion feature of the Newcan Funding Notes was charged to additional paid-in capital and amortized to interest expense.
During the twelve months ended May 31, 2018, Newcan advanced a total of $290,000 to the Company under the Newcan Funding Notes. During the year ended May 31, 2018, principal in the amount of $836,658 and accrued interest in the amount of $25,018 was transferred out of the Newcan Funding Notes and used to fund four new convertible notes payable to Newcan, which were converted or repaid as of May 31, 2018.). During the year ended May 31, 2018, the Company accrued interest in the amount of $16,681 on the Newcan Funding Notes. During the year ended May 31, 2018, discounts in the amount of $210,120 related to the beneficial conversion feature of the Newcan Funding Notes was charged to additional paid-in capital and amortized to interest expense.
During the nine months ended February 28, 2019, principal in the amount of $75,000 and accrued interest in the amount of $1,931 was transferred out of the Newcan Funding Notes and used to create a new convertible note payable to Newcan (“Newcan Convertible Note 8”). During the nine months ended February 28, 2019, the Company accrued interest in the amount of $1,377 on the Newcan Funding Notes.
|
|
|
-
|
|
|
|
75,000
|
|
|
|
|
|
|
|
|
|
|
Total – Demand Convertible Notes Payable, Related Parties
|
|
$
|
-
|
|
|
$
|
75,137
|
|
Total – Demand Convertible Notes Payable, Related Parties - Current portion
|
|
$
|
-
|
|
|
$
|
75,137
|
|
Total – Demand Convertible Notes Payable, Related Parties - Long term portion
|
|
$
|
-
|
|
|
$
|
-
|
|
Convertible Notes Payable, Related Parties
|
|
February 28,
2019
|
|
|
May 31,
2018
|
|
|
|
|
|
|
|
|
|
|
Convertible promissory note payable to David Lamadrid (the “Lamadrid Note”) dated February 20, 2018 in the principal amount of $31,250 and bearing interest at a rate of 8% per annum. The Lamadrid Note is due eighteen months from the date of issue. Mr. Lamadrid may, at his option, convert all or a portion of the Lamadrid Note and accrued but unpaid interest into shares of common stock at a conversion price of $0.3125 per share. The Lamadrid Note also contains a reset feature, whereby, absent certain exceptions, if the Company issues equity securities at an effective price less than $0.3125 per share of common stock, the conversion price of the Lamadrid Note will be reset to such lower price. The Company recognized a discount of $31,250 on the Lamadrid Note related to the beneficial conversion feature at the time of issuance. During the twelve months ended May 31, 2018, $942 of this discount was charged to operations. During the twelve months ended May 31, 2018, the Company accrued interest in the amount of $685 on this note.
During the nine months ended February 28, 2019, interest in the amount of $562 was accrued on the Lamadrid note. During the nine months ended February 28, 2019, the Lamadrid Note, in the amount of $32,497, of which $31,250 was principal and $1,247 was accrued interest, was converted into 103,989 shares of common stock. During the nine months ended February 28, 2019 the remaining discount in the amount of $30,308 was charged to operations.
|
|
$
|
-
|
|
|
$
|
31,250
|
|
|
|
|
|
|
|
|
|
|
Unsecured convertible note issued to Jeffery Binder, an officer and director of the Company, dated April 6, 2018 in the original principal amount of $37,500 (the “Binder Convertible Note 9”). The Binder Convertible Note 9 was funded with the conversion of $37,500 of unpaid accrued salary due to Mr. Binder. This note bears interest at the rate of 10% per annum. No interest payments are required until July 1, 2019, at which time all accrued interest becomes due and payable. Commencing October 1, 2019, the first of eight principal payments in the amount of $4,688 will become due; subsequent payments will become due on the first day of each January, April, July and October until paid in full. This note and accrued interest under the note may be converted, in whole or in part, into one share of common stock for each $0.3125 converted. The Company recognized a discount of $37,500 on the Binder Convertible Note 9 related to the value of the beneficial conversion feature at the time of issuance. During the twelve months ended May 31, 2018, the Company amortized $1,890 of this discount to interest expense.
During the twelve months ended May 31, 2018 and 2017, interest in the amount of $565 and $0 was accrued on Binder Convertible Note 9, respectively.
During the nine months ended February 28, 2019, interest in the amount of $699 was accrued on the Binder Convertible Note 9. During the nine months ended February 28, 2019, the Company made a principal payment in the amount of $37,500 on the Binder Convertible Note 9. During the nine months ended February 28, 2019 the remaining discount in the amount of $35,610 was charged to operations.
|
|
|
-
|
|
|
|
37,500
|
|
|
|
February 28,
2019
|
|
|
May 31,
2018
|
|
|
|
|
|
|
|
|
|
|
Unsecured convertible note issued to Newcan, an entity owned by Frank Koretsky, a director of the Company, dated, August 6, 2018 in the original amount of $75,000 (the “Newcan Convertible Note 8”). The Newcan Convertible Note 8 was funded with the conversion of $75,000 of advances Newcan made to the Company under the Newcan Funding Notes. This note bears interest at the rate of 10% per annum. No interest payments are required until October 1, 2019, at which time all of the accrued interest becomes due and payable. Commencing on January 1, 2020, the first of eight principal payments in the amount of $9,375 will become due; subsequent principal payments will become due on the first day of each April, July, October, and January until paid in full. This note and accrued interest under the note may be converted, in whole or in part, into one share of common stock for each $0.40 converted. The Company recognized a discount of $58,594 on the Newcan Convertible Note 8 related to the value of the beneficial conversion feature at the time of issuance.
During the nine months ended February 28, 2019, the Company accrued interest expense in the amount of $1,603 on this note. During the nine months ended February 28, 2019, the note holder converted $78,534, of which $75,000 was principal and $3,534 was accrued interest into 196,336 shares of common stock. Also during the nine months ended February 28, 2019, the remaining discount in the amount of $57,322 was charged to operations.
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total – Convertible Notes Payable, Related Parties
|
|
$
|
-
|
|
|
$
|
68,750
|
|
Less: Discount
|
|
|
-
|
|
|
|
(65,918
|
)
|
Convertible Notes Payable, Related Parties, Net of Discounts
|
|
$
|
-
|
|
|
$
|
2,832
|
|
|
|
|
|
|
|
|
|
|
Convertible Notes Payable, Related Parties, Net of Discounts, Current Portion
|
|
$
|
-
|
|
|
$
|
2,832
|
|
Convertible Notes Payable, Related Parties, Net of Discounts, Long-term Portion
|
|
|
-
|
|
|
|
-
|
|
Convertible Notes Payable
|
|
February 28,
2019
|
|
|
May 31,
2018
|
|
|
|
|
|
|
|
|
|
|
Convertible promissory note payable to Darling Capital, LLC (the “Darling Note”) dated February 5, 2018 and bearing interest at a rate of 8% per annum. The lender loaned the Company $500,000 and the Darling Note has an original issue discount of $50,000. The Darling Note is due eighteen months from the date of issue. Darling may, at its option, convert all or a portion of the Darling Note and accrued but unpaid interest into shares of common stock at a conversion price of $0.3125 per share. The Darling Note also contains a reset feature, whereby, absent certain exceptions, if the Company issues equity securities at an effective price less than $0.3125 per share of common stock, the conversion price of the Darling Note will be reset to such lower price. The Company recognized a discount of $550,000 on the Darling Note related to the beneficial conversion feature at the time of issuance. During the twelve months ended May 31, 2018, $40,427 of this discount was charged to operations. During the twelve months ended May 31, 2018, the Company accrued interest in the amount of $13,863 on this note.
During the nine months ended February 28, 2019, the Company accrued interest in the amount of $1,447 on this note. During the nine months ended February 28, 2019, the holder of the Darling Note converted $565,000, of which $550,000 was principal and $15,000 was accrued interest, into 1,808,000 shares of common stock. Also, during the nine months ended February 28, 2019, the remaining discount in the amount of $509,573 was charged to operations.
|
|
$
|
-
|
|
|
$
|
550,000
|
|
|
|
|
|
|
|
|
|
|
Convertible promissory note payable to Efrat Investments, LLC (the “Efrat Note”) dated February 12, 2018 and bearing interest at a rate of 8% per annum. The lender loaned the Company $50,000 and the Efrat Note has an original issue discount of $5,000. The Efrat Note is due eighteen months from the date of issue. Efrat may, at its option, convert all or a portion of the Efrat Note and accrued but unpaid interest into shares of common stock at a conversion price of $0.3125 per share. The Efrat Note also contains a reset feature, whereby, absent certain exceptions, if the Company issues equity securities at an effective price less than $0.3125 per share of common stock, the conversion price of the Efrat Note will be reset to such lower price. The Company recognized a discount of $55,000 on the Efrat Note related to the beneficial conversion feature at the time of issuance. During the twelve months ended May 31, 2018, $2,974 of this discount was charged to operations. During the twelve months ended May 31, 2018, the Company accrued interest in the amount of $1,302 on this note.
During the nine months ended February 28, 2019, the Company accrued interest in the amount of $898 on this note. During the nine months ended February 28, 2019, the holder of the Efrat Note converted $57,200, of which $55,000 was principal and $2,200 was accrued interest into 183,040 shares of common stock. Also during the nine months ended February 28, 2019, the remaining discount in the amount of $52,026 was charged to operations.
|
|
|
-
|
|
|
|
55,000
|
|
|
|
February 28,
2019
|
|
|
May 31,
2018
|
|
|
|
|
|
|
|
|
|
|
Convertible promissory note payable to YA II PN, Ltd. (the “YA II PN Note”) dated May 14, 2018 and bearing interest at a rate of 8% per annum. The lender loaned the Company $750,000, and the note is due on November 14, 2019. YA II PN may, at its option, convert all or a portion of the YA II PN Note and accrued but unpaid interest into shares of common stock at a conversion price of $0.40 per share. The YA II PN Note also contains a reset feature, whereby, absent certain exceptions, if the Company issues equity securities at an effective price less than $0.40 per share of common stock, the conversion price of the YA II PN Note will be reset to such lower price. The Company recognized a discount of $750,000 related to the beneficial conversion feature at the time of issuance. Commencing on December 1, 2018, absent certain exceptions, the first of eight payments in the amount of $93,750 will become due; subsequent payments will become due on the first day of each of the following months until paid in full. During the twelve months ended May 31, 2018, $23,224 of this discount was charged to operations. During the twelve months ended May 31, 2018, the Company accrued interest in the amount of $2,795 on this note.
During the nine months ended February 28, 2019, a reset event occurred. As a result, the conversion price of the YA II PN Note was reduced to $0.34 per share of common stock. This was considered a material modification of the note; the remaining balance of the discount to the note in the amount of $699,628 was charged to interest expense, a new discount in the amount of $750,000 was charged to additional paid-in capital, and $620,052 of the new discount was amortized to interest expense. Also during the nine months ended February 28, 2019, the Company accrued interest expense in the amount of $39,068 on the YA II PN Note. During the nine months ended February 28, 2019, the holder of the YA II PN Note converted principal in the amount of $500,000 and accrued interest in the amount of $36,274 into 1,340,684 shares of common stock.
|
|
|
250,000
|
|
|
|
750,000
|
|
|
|
|
|
|
|
|
|
|
Unsecured convertible note issued to Jay Lasky (the “Lasky Note”), dated May 3, 2018 in the original principal amount of $25,000. This note bears interest at the rate of 10% per annum. No interest payments are required until July 1, 2019, at which time all accrued interest becomes due and payable. Commencing on October 1, 2019, the first of eight principal payments in the amount of $3,125 will become due; subsequent payments will become due on the first day of each January, April, July and October until paid in full. The Lasky Note and accrued interest under the note may be converted, in whole or in part, into one share of common stock for each $0.40 converted. The Company recognized a discount of $7,301 on the Lasky Note related to the beneficial conversion feature at the time of issuance. During the twelve months ended May 31, 2018, $149 of this discount was charged to operations. During the twelve months ended May 31, 2018, the Company accrued interest in the amount of $192 on this note.
During the nine months ended February 28, 2019, $7,152 of the discount was charged to operations. Also during the nine months ended February 28, 2019, the Company accrued interest in the amount of $993 on this note. During the nine months ended February 28, 2019, the holder of the Lasky Note converted $26,185, of which $25,000 was principal and $1,185 was accrued interest, into 65,462 shares of common stock.
|
|
|
-
|
|
|
|
25,000
|
|
|
|
February 28,
2019
|
|
|
May 31,
2018
|
|
|
|
|
|
|
|
|
|
|
Convertible promissory note payable to YA II PN, Ltd. (the “YA II PN Note 2”) dated July 20, 2018 and bearing interest at a rate of 8% per annum. The lender loaned the Company $500,000, and the note is due on November 14, 2019. YA II PN may, at its option, convert all or a portion of the YA II PN Note 2 and accrued but unpaid interest into shares of common stock at a conversion price of $0.40 per share. The YA II PN Note 2 also contains a reset feature, whereby, absent certain exceptions, if the Company issues equity securities at an effective price less than $0.40 per share of common stock, the conversion price of the YA II PN Note 2 will be reset to such lower price. The Company recognized a discount of $362,500 related to the beneficial conversion feature at the time of issuance. Commencing on December 1, 2018, absent certain exceptions, the first of eight payments in the amount of 62,500 will become due; subsequent payments will become due on the first day of each of the following months until paid in full. During the nine months ended February 28, 2019, $167,713 of this discount was charged to operations. Also during the nine months ended February 28 2019, the Company accrued interest in the amount of $29,041 on this note.
|
|
|
500,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Convertible debenture in the principal amount of $4,000,000 (the “U.S. Convertible Debenture 1”) dated October 31, 2018, which bears interest, payable quarterly, at a rate of 8% per annum, with interest during the first eighteen months following issuance being payable by increasing the then-outstanding principal amount of the U.S. Convertible Debenture 1. The U.S. Convertible Debenture 1 matures on a date that is three years following issuance. The U.S. Convertible Debenture 1 is convertible into units (the “Convertible Debenture Units”) at a conversion price of $0.80 per Convertible Debenture Unit. Each Convertible Debenture Unit consists of (i) one share of the Company’s common stock, and (ii) one-half of one warrant, with each warrant exercisable for three years to purchase a share of common stock at a price of $1.10. The U.S. Convertible Debenture 1 has other features, such as mandatory conversion in the event the 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 U.S. Convertible Debenture 1 is an unsecured obligation of the Company and ranks
pari passu
in right of payment of principal and interest with all other unsecured obligations of the Company. The Company recorded a discount in the amount of $3,254,896 on the U.S. Convertible Debenture 1. During the nine months ended February 28, 2019, $217 of this discount was charged to operations. During the nine months ended February 28, 2019, the Company accrued interest in the amount of $105,205 on the U.S. Convertible Debenture 1.
|
|
|
4,000,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Convertible debenture in the principal amount of $1,000,000 (the “U.S. Convertible Debenture 2”) dated October 31, 2018, which bears interest, payable quarterly, at a rate of 8% per annum, with interest during the first eighteen months following issuance being payable by increasing the then-outstanding principal amount of the U.S. Convertible Debenture 2. The U.S. Convertible Debenture 2 matures on a date that is three years following issuance. The U.S. Convertible Debenture 2 is convertible into Convertible Debenture Units at a conversion price of $0.80 per Convertible Debenture Unit. Each Convertible Debenture Unit consists of (i) one share of the Company’s common stock, and (ii) one-half of one warrant, with each warrant exercisable for three years to purchase a share of common stock at a price of $1.10. The U.S. Convertible Debenture 2 has other features, such as mandatory conversion in the event the 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 U.S. Convertible Debenture 2 is an unsecured obligation of the Company and ranks
pari passu
in right of payment of principal and interest with all other unsecured obligations of the Company. The Company recorded a discount in the amount of $813,724 on the U.S. Convertible Debenture 2. During the nine months ended February 28, 2019, $52 of this discount was charged to operations. During the nine months ended February 28, 2019, the Company accrued interest in the amount of $26,301 on the U.S. Convertible Debenture 2.
|
|
|
1,000,000
|
|
|
|
-
|
|
|
|
February 28,
2019
|
|
|
May 31,
2018
|
|
|
|
|
|
|
|
|
|
|
Convertible debenture in the principal amount of $100,000 (the “U.S. Convertible Debenture 3”) dated October 24, 2018, which bears interest, payable quarterly, at a rate of 8% per annum, with interest during the first eighteen months following issuance being payable by increasing the then-outstanding principal amount of the U.S. Convertible Debenture 3. The U.S. Convertible Debenture 3 matures on a date that is three years following issuance. The U.S. Convertible Debenture 3 is convertible into Convertible Debenture Units at a conversion price of $0.80 per Convertible Debenture Unit. Each Convertible Debenture Unit consists of (i) one share of the Company’s common stock, and (ii) one-half of one warrant, with each warrant exercisable for three years to purchase a share of common stock at a price of $1.10. The U.S. Convertible Debenture 3 has other features, such as mandatory conversion in the event the 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 U.S. Convertible Debenture 3 is an unsecured obligation of the Company and ranks
pari passu
in right of payment of principal and interest with all other unsecured obligations of the Company. The Company recorded a discount in the amount of $75,415 on the U.S. Convertible Debenture 3. During the nine months ended February 28, 2019, $60 of this discount was charged to operations. During the nine months ended February 28, 2019, the Company accrued interest in the amount of $2,784 on the U.S. Convertible Debenture 3.
|
|
|
100,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Convertible debenture in the principal amount of $532,000 (the “U.S. Convertible Debenture 4”) dated October 25, 2018, which bears interest, payable quarterly, at a rate of 8% per annum, with interest during the first eighteen months following issuance being payable by increasing the then-outstanding principal amount of the U.S. Convertible Debenture 4. The U.S. Convertible Debenture 4 matures on a date that is three years following issuance. The U.S. Convertible Debenture 4 is convertible into Convertible Debenture Units at a conversion price of $0.80 per Convertible Debenture Unit. Each Convertible Debenture Unit consists of (i) one share of the Company’s common stock, and (ii) one-half of one warrant, with each warrant exercisable for three years to purchase a share of common stock at a price of $1.10. The U.S. Convertible Debenture 4 has other features, such as mandatory conversion in the event the 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 U.S. Convertible Debenture 4 is an unsecured obligation of the Company and ranks
pari passu
in right of payment of principal and interest with all other unsecured obligations of the Company. The Company recorded a discount in the amount of $416,653 on the U.S. Convertible Debenture 4. During the nine months ended February 28, 2019, $87 of this discount was charged to operations. During the nine months ended February 28, 2019, the Company accrued interest in the amount of $14,692 on the U.S. Convertible Debenture 4.
|
|
|
532,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Convertible debenture in the principal amount of $150,000 (the “U.S. Convertible Debenture 5”) dated October 26, 2018, which bears interest, payable quarterly, at a rate of 8% per annum, with interest during the first eighteen months following issuance being payable by increasing the then-outstanding principal amount of the U.S. Convertible Debenture 5. The U.S. Convertible Debenture 5 matures on a date that is three years following issuance. The U.S. Convertible Debenture 5 is convertible into Convertible Debenture Units at a conversion price of $0.80 per Convertible Debenture Unit. Each Convertible Debenture Unit consists of (i) one share of the Company’s common stock, and (ii) one-half of one warrant, with each warrant exercisable for three years to purchase a share of common stock at a price of $1.10. The U.S. Convertible Debenture 5 has other features, such as mandatory conversion in the event the 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 U.S. Convertible Debenture 5 is an unsecured obligation of the Company and ranks
pari passu
in right of payment of principal and interest with all other unsecured obligations of the Company. The Company recorded a discount in the amount of $120,100 on the U.S. Convertible Debenture 5. During the nine months ended February 28, 2019, $67 of this discount was charged to operations. During the nine months ended February 28, 2019, the Company accrued interest in the amount of $4,110 on the U.S. Convertible Debenture 5.
|
|
|
150,000
|
|
|
|
-
|
|
|
|
February 28,
2019
|
|
|
May 31,
2018
|
|
|
|
|
|
|
|
|
|
|
Convertible debenture payable in the principal amount of $75,000 (the “U.S. Convertible Debenture 6”) dated October 26, 2018, which bears interest, payable quarterly, at a rate of 8% per annum, with interest during the first eighteen months following issuance being payable by increasing the then-outstanding principal amount of the U.S. Convertible Debenture 6. The U.S. Convertible Debenture 6 matures on a date that is three years following issuance. The U.S. Convertible Debenture 6 is convertible into Convertible Debenture Units at a conversion price of $0.80 per Convertible Debenture Unit. Each Convertible Debenture Unit consists of (i) one share of the Company’s common stock, and (ii) one-half of one warrant, with each warrant exercisable for three years to purchase a share of common stock at a price of $1.10. The U.S. Convertible Debenture 6 has other features, such as mandatory conversion in the event the 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 U.S. Convertible Debenture 6 is an unsecured obligation of the Company and ranks
pari passu
in right of payment of principal and interest with all other unsecured obligations of the Company. The Company recorded a discount in the amount of $60,049 on the U.S. Convertible Debenture 6. During the nine months ended February 28, 2019, $57 of this discount was charged to operations. During the nine months ended February 28, 2019, the Company accrued interest in the amount of $2,055 on the U.S. Convertible Debenture 6.
|
|
|
75,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Convertible debentures payable in the aggregate principal amount of $12,012,000 (the “Canaccord Debentures”) dated December 12, 2018, which bears interest, payable quarterly, at a rate of 8% per annum, with interest during the first eighteen months following issuance being payable by increasing the then-outstanding principal amount of the Canaccord Debentures. The Canaccord Debentures mature on a date that is three years following issuance. The Canaccord Debentures are convertible into Convertible Debenture Units at a conversion price of $0.80 per Convertible Debenture Unit. Each Convertible Debenture Unit consists of (i) one share of the Company’s common stock, and (ii) one-half of one warrant, with each warrant exercisable for three years to purchase a share of common stock at a price of $1.10. The Canaccord Debentures have other features, such as mandatory conversion in the event the 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 Canaccord 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 Company recorded a discount in the amount of $2,938,690 on the Canaccord Debentures. During the nine months ended February 28, 2019, $136 of this discount was charged to operations. During the nine months ended February 28, 2019, the Company accrued interest in the amount of $205,356 on the Canaccord Debentures.
|
|
|
12,012,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total - Convertible Notes Payable
|
|
$
|
18,619,000
|
|
|
$
|
1,380,000
|
|
Less: Discount
|
|
|
(8,030,735
|
)
|
|
|
(1,295,527
|
)
|
Convertible Notes Payable, Net of Discounts
|
|
$
|
10,588,265
|
|
|
$
|
84,473
|
|
|
|
|
|
|
|
|
|
|
Total - Convertible Notes Payable, Net of Discounts, Current Portion
|
|
$
|
398,117
|
|
|
$
|
43,401
|
|
Total - Convertible Notes Payable, Net of Discounts, Long-term Portion
|
|
$
|
10,190,148
|
|
|
$
|
41,072
|
|
Discounts on notes payable amortized to interest expense – 3 months ended February 28, 2019 and 2018, respectively
|
|
$
|
337,347
|
|
|
$
|
818,254
|
|
Discounts on notes payable amortized to interest expense – 9 months ended February 28, 2019 and 2018, respectively
|
|
$
|
2,481,674
|
|
|
$
|
1,391,110
|
|
Beneficial Conversion Features
The Darling Note, Efrat Note, Lamadrid Note and YA II PN Notes contain conversion features that create derivative liabilities. The pricing model the Company uses for determining fair value of its derivatives is the Lattice Model. Valuations derived from this model are subject to ongoing internal and external verification and review. The model uses market-sourced inputs such as interest rates and stock price volatilities. Selection of these inputs involves management’s judgment and may impact net income. The derivative components of the notes were valued at issuance, at conversion, at restructure, and at each period end.
Certain of the Company’s other convertible notes payable contain beneficial conversion features that are not derivatives, but which require valuation in order to determine the discount to the related convertible note payable. The value of these conversion features is calculated using the intrinsic value method, whereby the amount of the discount is calculated as the difference between the conversion price and the market price of the underlying common stock at the date of issuance multiplied by the number of shares issuable.
Note 15 – Contingent Liability
The terms of the Company’s acquisition of Alternative Solutions, LLC include a payment of $1,000,000 contingent upon the Oasis LLCs achieving certain revenue targets. (see note 3). The fair value of this contingent consideration at the time of the Acquisition Agreement was $678,111 as determined by the Company’s outside valuation consultants. Management has reviewed the value of the contingent consideration, and has concluded that no adjustment is necessary at February 28, 2019.
Note 16 – Stockholders’ Equity
The Company’s authorized capital stock consists of 250,000,000 shares of common stock, par value $0.0001 per share and 20,000,000 shares of preferred stock, par value $0.001 per share. The Company had 125,814,107 and 50,128,972 shares of common stock issued and outstanding as of February 28, 2019, and May 31, 2018, respectively.
The Company recorded imputed interest of $268 and $265 during the three months ended February 28, 2019 and 2018 on related party payables due to a director and officer of the Company. The Company recorded imputed interest of $807 and $804 during the nine months ended February 28, 2019 and 2017 on related party payables due to a director and officer of the Company, and charged this amount to additional paid-in capital.
Stock Issued upon Conversion of Notes Payable
During the nine months ended February 28, 2019, Darling Capital, holder of a convertible promissory note, converted a total of $565,000, which consisted of $550,000 of principal and $15,000 of accrued interest, into 1,808,000 shares of common stock.
During the nine months ended February 28, 2019, Efrat Investments, holder of a convertible promissory note, converted a total of $57,200, which consisted of $55,000 of principal and $2,200 of accrued interest, into 183,040 shares of common stock.
During the nine months ended February 28, 2019, David Lamadrid, holder of a convertible promissory note, converted a total of $32,497, which consisted of $31,250 of principal and $1,247 of accrued interest, into 103,989 shares of common stock.
During the nine months ended February 28, 2019, Jay Lasky, holder of a convertible promissory note, converted a total of $26,185, which consisted of $25,000 of principal and $1,185 of accrued interest, into 65,462 shares of common stock.
During the nine months ended February 28, 2019, Newcan, holder of a convertible promissory note, converted a total of $78,534, which consisted of $75,000 of principal and $3,534 of accrued interest, into 196,336 shares of common stock.
During the nine months ended February 28, 2019, YA II PN, holder of a convertible promissory note, converted a total of $280,247, which consisted of $250,000 of principal and $30,247 of accrued interest, into 700,616 shares of common stock.
During the nine months ended February 28, 2019, YA II PN, holder of a convertible promissory note, converted a total of $256,027 which consisted of $250,000 of principal and $6,027 of accrued interest, into 640,068 shares of common stock.
Stock Issued for Services
On July 24, 2018, the Company awarded Star Associates, LLC, a limited liability company owned by Andrew Glashow, a director of the Company, a cash payment in the amount of $250,000 and 700,000 shares of the Company’s restricted common stock in recognition of Mr. Glashow’s efforts, through Star Associates, in successfully assisting the Company in negotiating and obtaining the financing necessary to acquire Alternative Solutions. The shares were valued at $490,000 and were charged to operations during the nine months ended February 28, 2019.
On June 24, 2018, pursuant to the terms of a severance agreement between the Company and David Lamadrid, the Company issued 600,000 shares of restricted common stock to Mr. Lamadrid. These shares were valued at $264,000, $213,320 of which was previously expensed and the remaining $50,680 of which was charged to operations during the nine months ended February 28, 2019.
On September 11, 2018, the Company issued 31,250 shares of common stock with a fair value of $25,310 in exchange for legal services previously rendered to the Company. These shares were accrued on February 8, 2018, and were issued from stock payable.
Stock Issued for Acquisition
On June 27, 2018, the Company issued 22,058,823 shares of its common stock pursuant to the terms of the Alternative Solutions, LLC Acquisition Agreement. These shares were valued at $15,441,176. (See note 3).
Special Warrants Issued in Offering
On June 20, 2018, the Company executed an Agency Agreement with Canaccord Genuity Corp. and closed on a private offering of its special warrants for aggregate gross proceeds of C$13,037,859 (USD$9,785,978). Pursuant to the offering, the Company issued 28,973,020 special warrants at a price of C$0.45 (USD$0.34) per special warrant. Each special warrant was automatically exercisable, for no additional consideration, into units of the Company on the earlier of: (i) the date that was five business days following the date on which the Company obtained a receipt from the applicable securities regulatory authorities in each of the jurisdictions in Canada in which the special warrants were sold for a final prospectus qualifying the distribution of the units, which was intended to be no later than November 30, 2018, and (ii) the date that was four months and one day after the completion of the Company's acquisition of all of the membership interests in Alternative Solutions, LLC, known as Oasis Cannabis.
In connection with the offering, the Company paid Canaccord Genuity Corp. a cash commission equal to C$1,043,028 (USD$799,053), a corporate finance fee equal to 1,448,651 special warrants, and 2,317,842 compensation broker warrants valued at $1,495,373. Each compensation broker warrant entitles the holder thereof to acquire one unit at a price of C$0.45 per unit for a period of 36 months from the date that the Company's common stock is listed on a recognized Canadian stock exchange, subject to adjustment in certain events. The 1,448,651 special warrants that were issued were valued at $1,413,300 and were charged to operations during the three months ended August 31, 2018.
Upon exercise of the special warrants, each unit was to consist of one share of the Company's common stock and one warrant to purchase one share of common stock. Each warrant was to be exercisable at a price of C$0.65 for three years after the Company's common stock was listed on a recognized Canadian stock exchange, subject to adjustment in certain events.
Because the Company did not receive a receipt from the applicable Canadian securities authorities for the qualifying prospectus by August 20, 2018, the unexercised special warrants were adjusted to entitle the holders to receive 1.1 units instead of one unit of the Company. This resulted in the issuance of an additional 3,042,167 units. This penalty was valued at $7,142,550 and was charged to operations during the three months ended August 31, 2018.
On February 28, 2019, all of the special warrants were automatically converted into 33,465,110 shares of common stock and warrants to purchase 33,465,110 shares of common stock for CD$0.65 per share.
Stock Issued in Navy Capital Offering
On July 31, 2018, the Company entered into a Subscription Agreement with Navy Capital Green International, Ltd, (the “Navy Capital Offering”) for 7,500,000 units at a price of $0.40 per unit, or an aggregate amount of $3,000,000. The units collectively represent (i) 7,500,000 shares of common stock, and (ii) three-year warrants to purchase an aggregate of 7,500,000 shares of common stock at an exercise price of $0.60 per share of common stock.
In connection with the Navy Capital Offering, between August 8, 2018 and August 10, 2018, the Company entered into five subscription agreements for a total of 6,875,000 units at a price of $0.40 per unit, or an aggregate purchase price of $2,750,000. The units collectively represent (i) 6,875,000 shares of common stock, and (ii) three-year warrants to purchase an aggregate of 6,875,000 shares of common stock at an exercise price of $0.60 per share of common stock.
Stock Issued to Officers
On July 27, 2018, the Company granted 25,000 shares of restricted common stock to its Chief Financial Officer. These shares vested four months after issuance. The shares were valued at $17,500, and were amortized over the vesting period. As of February 28, 2019, these shares had not been issued. As of February 28, 2019, $17,500 had been charged to operations, and is carried as Common Stock Subscribed on the Company’s balance sheet at February 28, 2019.
On July 31, 2018, the Company granted the Chief Executive Officer of CLS Nevada, Inc. a one-time signing bonus of 500,000 shares of restricted common stock, which shall become fully vested one year from the effective date of his employment agreement. These shares were valued at $350,000 and will be amortized over the vesting period. As of February 28, 2019, $236,667 had been charged to operations, and is carried as Common Stock Subscribed on the Company’s balance sheet at February 28, 2019.
On July 31, 2018, the Company granted the Chief Operating Officer of CLS Nevada, Inc. a one-time signing bonus of 50,000 shares of restricted common stock, which shall become fully vested one year from the effective date of his employment agreement. These shares were valued at $35,000 and will be amortized over the vesting period. As of February 28, 2019, $23,667 had been charged to operations, and is carried as Common Stock Subscribed on the Company’s balance sheet at February 28, 2019.
Stock Issued upon Cashless Exercise of Warrants
On August 14, 2018, the Company issued 129,412 shares of common stock for the cashless conversion of 350,000 warrants at an exercise price of $0.75 per share.
On September 6, 2018, the Company issued 13,684 shares of common stock upon the cashless exercise of 40,000 warrants at an exercise price of $0.75 per share.
On November 14, 2018, the Company issued 5,867 shares of common stock upon the cashless exercise of 25,000 warrants at an exercise price of $0.75 per share.
Stock Issued for Settlement
On November 1, 2018, the Company issued 50,000 shares of common stock with a fair value of $47,500 pursuant to a legal settlement. There was no gain or loss associated with this transaction.
Stock Issued for Compensation for Debenture Offering
On December 12, 2018, in connection with the issuance of the Canaccord Debentures, the Company issued 559,750 units as compensation for advisory and agent fees. Each unit is comprised of one share of common stock and one-half of one common stock purchase warrant at an exercise price of $1.10 per whole share of common stock. As a result, the Company issued 559,750 shares of common stock as compensation for agent and advisory services. These shares were valued at $376,152, and this amount was charged to operations during the three months ended February 28, 2019.
Additional Paid-in Capital
During the nine months ended February 28, 2019, the Company recorded discounts on two convertible notes payable relating to beneficial conversion features in the aggregate amount of $362,500 on the YA II PN Note 2, and $58,594 on the Newcan Convertible Note 8. Also, during the nine months ended February 28, 2019, a reset event occurred with regard to the YAII PN Note.
During the nine months ended February 28, 2019, the Company recorded an original issue discount on the Serenity Wellness Note in the amount of $81,961.
On June 1, 2018, the Company adopted ASU 2017-11 and accordingly reclassified the fair value of the reset provisions embedded in the previously issued convertible notes payable and certain warrants with embedded anti-dilutive provisions from liability to additional paid-in capital in the aggregate amount of $1,265,751. On June 20, 2018, a reset event occurred in connection with the YA II PN Note (see note 14), and the Company charged the change in fair value of the conversion feature in the amount of $35,833 to additional paid-in capital. This was considered a material modification of the note, and the Company created a new discount to this note in the amount of $750,000, which was charged to additional paid-in capital.
During the nine months ended February 28, 2019, the Company recorded discounts on six convertible debentures relating to beneficial conversion features as follows: a discount of $3,254,863 was recorded on the U.S. Convertible Debenture 1; a discount of $813,696 was recorded on the U.S. Convertible Debenture 2; a discount of $75,395 was recorded on the U.S. Convertible Debenture 3; a discount of $416,627 was recorded on the U.S. Convertible Debenture 4; a discount of $120,078 was recorded on the U.S. Convertible Debenture 5; a discount of $60,030 was recorded on the U.S. Convertible Debenture 6; and a discount of $2,938,690 was recorded on the Canaccord Debentures.
Warrants
On June 27, 2018, the Company incurred a penalty in connection with the WestPark Offering due to the late filing of the registration statement that included the resale of the securities that were sold in such offering. As a result of the penalty, the Company issued three-year common stock warrants to purchase an aggregate of 1,368,250 shares of the Company’s common stock at an exercise price of $0.50 per share. In addition, the Company reduced the exercise price of the common stock purchase warrants previously issued to the investors in the WestPark Offering from $0.75 per share to $0.50 per share. The fair value of the penalty was $941,972; this amount was charged to operations during the three months ended August 31, 2018.
On June 20, 2018, in connection with the special warrant offering, the Company issued Canaccord Genuity Corp. 2,317,842 three-year broker warrants at an exercise price of C$0.45 per share as compensation. Each warrant entitles the holder to purchase one unit, which consists of one share of common stock and a warrant to purchase one share of common stock, for C$0.65 per share. These warrants were valued at $1,495,373, and this amount was charged to operations during the three months ended August 31, 2018.
On July 20, 2018, in connection with the Company’s sale of a convertible debenture, the Company issued to YA II PN, Ltd. a five-year common stock purchase warrant to purchase 1,250,000 shares of the Company’s common stock at an initial exercise price of $0.60 per share.
On August 6, 2018, the Company issued three-year common stock purchase warrants to purchase an aggregate of 7,500,000 shares of the Company’s common stock at an exercise price of $0.60 per share, to investors in the Navy Capital Offering.
On August 8, 2018, the Company issued three-year common stock purchase warrants to purchase an aggregate of 6,875,000 shares of the Company’s common stock at an exercise price of $0.60 per share, to investors in the Navy Capital Offering.
On December 12, 2018, in connection with the issuance of the Canaccord Debentures, the Company issued Canaccord Genuity Corp. 1,074,720 three-year agent and advisory warrants at an exercise price of $0.80 per share as compensation. The Company, in connection with the issuance of the Canaccord Debentures, issued National Bank Financials Inc. 268,680 three-year agent and advisory warrants at an exercise price of $0.80 per share as compensation. These warrants were valued at $874,457, and this amount was charged to operations during the three months ended February 28, 2019.
On December 12, 2018, in connection with the issuance of the Canaccord Debentures, the Company issued 559,750 units as compensation for advisory and agent fees. Each unit is comprised of one share of common stock and one-half of one common stock purchase warrant at an exercise price of $1.10 per whole share of common stock. As a result, the Company issued 223,900 three-year agent and advisory warrants to Canaccord Genuity Corp. and 55,975 three-year agent and advisory warrants to National Bank Financials Inc. These warrants were valued at $181,183, and this amount was charged to operations during the three months ended February 28, 2019.
The following table summarizes the significant terms of warrants outstanding at February 28, 2019. These warrants were granted as part of financing agreements. This table does not include the special warrants; see Special Warrant 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
|
|
$
|
0.49
|
|
|
|
35,782,952
|
|
|
|
2.73
|
|
|
$
|
0.49
|
|
|
|
35,782,952
|
|
|
$
|
0.49
|
|
|
0.50
|
|
|
|
2,736,500
|
|
|
|
2.98
|
|
|
|
0.50
|
|
|
|
2,736,500
|
|
|
|
0.50
|
|
|
0.60
|
|
|
|
17,500,000
|
|
|
|
2.76
|
|
|
|
0.60
|
|
|
|
17,500,000
|
|
|
|
0.60
|
|
|
0.75
|
|
|
|
1,042,738
|
|
|
|
2.37
|
|
|
|
0.75
|
|
|
|
1,042,738
|
|
|
|
0.75
|
|
|
0.80
|
|
|
|
1,343,400
|
|
|
|
2.79
|
|
|
|
0.80
|
|
|
|
1,343,400
|
|
|
|
0.80
|
|
|
1.10
|
|
|
|
279,875
|
|
|
|
2.79
|
|
|
|
1.10
|
|
|
|
279,875
|
|
|
|
1.10
|
|
|
|
|
|
|
58,685,465
|
|
|
|
2.74
|
|
|
$
|
0.53
|
|
|
|
58,685,465
|
|
|
$
|
0.53
|
|
Transactions involving warrants are summarized as follows. This table does not include the special warrants; see Special Warrant section below.
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Warrants outstanding at May 31, 2018
|
|
|
4,700,988
|
|
|
$
|
0.62
|
|
Granted
|
|
|
54,399,477
|
|
|
$
|
0.53
|
|
Exercised
|
|
|
(415,000
|
)
|
|
$
|
0.75
|
|
Cancelled / Expired
|
|
|
-
|
|
|
$
|
-
|
|
Warrants outstanding at February 28, 2019
|
|
|
58,685,465
|
|
|
$
|
0.53
|
|
Special Warrants
On June 20, 2018, the Company sold 28,973,019 special warrants for net proceeds of US$9,785,978. Each special warrant was automatically exercisable, for no additional consideration, into units of the Company on the earlier of: (i) the date that was five business days following the date on which the Company obtained a receipt from the applicable securities regulatory authorities in each of the jurisdictions in Canada in which the special warrants were sold for a final prospectus qualifying the distribution of the units, which was intended to be no later than November 30, 2018, and (ii) the date that was four months and one day after the completion of the Company's acquisition of all of the membership interests in Alternative Solutions, known as Oasis Cannabis, which was June 28, 2018.
All of the special warrants were automatically exercised for units on November 30, 2018. Each unit consists of one share of the Company’s common stock and one three-year warrant to purchase one share of common stock at a price of C$0.65.
Note 17 – Fair Value of Financial Instruments
The Company has issued convertible notes containing beneficial conversion features to Darling, Efrat, David Lamadrid and YA II PN. 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 Company also has a contingent liability in connection with the acquisition of Alternative Solutions, (see note 3).
The following summarizes the Company’s financial liabilities that are recorded at fair value on a recurring basis at February 28, 2019 and May 31, 2018:
|
|
February 28, 2019
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
678,111
|
|
|
$
|
678,111
|
|
|
|
May 31, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,265,751
|
|
|
$
|
1,265,751
|
|
The estimated fair values of the Company’s derivative liabilities are as follows:
|
|
Derivative
|
|
|
|
Liability
|
|
Liabilities Measured at Fair Value
|
|
|
|
|
|
|
|
|
|
Balance as of May 31, 2018
|
|
$
|
1,265,751
|
|
|
|
|
|
|
Transfers out due to the adoption of ASU 2017-11 effective June 1, 2018
|
|
|
(1,265,751
|
)
|
|
|
|
|
|
Balance as of February 28, 2019
|
|
$
|
-
|
|
Note 18 – Commitments and Contingencies
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 14,392 square feet of warehouse and office space (the “Leased Real Property”) in a building in Denver, Colorado where certain intended activities, including growing, extraction, conversion, assembly and packaging of cannabis and other plant materials, are permitted by and in compliance with state, city and local laws, rules, ordinances and regulations. The Lease had an initial term of seventy-two (72) months and provided CLS Labs Colorado with two options to extend the term of the lease by up to an aggregate of ten (10) additional years. In August 2017, as a result of the Company’s decision to suspend its proposed operations in Colorado, CLS Labs Colorado asked its landlord to be relieved from its obligations under the Lease, but the parties have not yet reached an agreement on how to proceed.
In August 2017, the Company’s Colorado subsidiary received a demand letter from its Colorado landlord requesting the forfeiture of the $50,000 security deposit, $10,000 in expenses, $15,699 in remaining rent due under the lease agreement and $30,000 to buy out the remaining amounts due under the lease. These expenses, which are a liability of the Company’s Colorado subsidiary, have been accrued on the balance sheet as of February 28, 2019.
Employment Agreements
CLS Labs and Jeffrey Binder entered into a five-year employment agreement effective October 1, 2014. Under the agreement, Mr. Binder serves as CLS Labs’ Chairman and Chief Executive Officer and is entitled to receive an annual salary of $150,000. Under the agreement, Mr. Binder is also entitled to receive a performance bonus equal to 2% of CLS Labs’ annual EBITDA, up to a maximum annual cash compensation of $1 million (including his base salary), and annual stock options, exercisable at the fair market value of CLS Labs’ common stock on the date of grant, in an amount equal to 2% of its annual EBITDA up to $42.5 million and 4% of its annual EBITDA in excess of $42.5 million. On April 28, 2015, CLS Labs and the Company entered into an addendum to Mr. Binder’s employment agreement whereby Mr. Binder agreed that following the merger of CLS Labs and a subsidiary of the Company, in addition to his obligations to CLS Labs, he would serve the Company and its subsidiaries in such roles as the Company may request. In exchange, the Company agreed to assume the obligations of CLS Labs to grant Mr. Binder annual stock options, as referenced above. Mr. Binder continues to receive an annual salary of $150,000 from CLS Labs for serving as its Chairman, President and Chief Executive Officer. On July 20, 2016, March 31, 2017, August 23, 2017, October 9, 2017, January 5, 2018 and April 6, 2018, the Company issued Mr. Binder convertible notes in exchange for $250,000, $112,500, $62,500, $39,521, $37,500 and $37,500 respectively, in deferred salary, among other amounts owed to Mr. Binder by the Company. As of February 28, 2019 and May 31, 2018, the Company had accrued compensation due to Mr. Binder in the amount of $0 and $37,500.
Effective August 1, 2015, the Company and Alan Bonsett entered into a five-year employment agreement. Pursuant to the agreement, Mr. Bonsett commenced serving as the Company’s Chief Operating Officer on August 15, 2015. Under the agreement, Mr. Bonsett was entitled to receive an annual salary of $150,000. Further, he was entitled to receive a performance bonus equal to 2% of the Company’s annual EBITDA, up to a maximum annual cash compensation of $1 million (including his base salary), and annual stock options, exercisable at the fair market value of the Company’s common stock on the date of grant, in an amount equal to 2% of its annual EBITDA up to $42.5 million and 4% of its annual EBITDA in excess of $42.5 million. Additionally, Mr. Bonsett received a one-time signing bonus of 250,000 (post Reverse-Split) shares of restricted common stock of the Company, valued at $327,500, which became fully vested one year from the effective date of the agreement. Mr. Bonsett, as an owner of Picture Rock Holdings, LLC (“PRH”), was expected to indirectly receive the benefits of the Colorado operations discussed above. Mr. Bonsett agreed to defer his salary effective July 1, 2017; at February 28, 2019, the Company had accrued compensation due to Mr. Bonsett in the amount of $37,500. On October 1, 2017, the Company and Mr. Bonsett, the Company’s Chief Operating Officer, mutually agreed to end his employment with the Company. Mr. Bonsett may provide consulting services to the Company in the future on an as needed basis.
Effective November 30, 2017, the Company and Mr. Lamadrid entered into a one-year employment agreement. Pursuant to the agreement, Mr. Lamadrid commenced serving as the Company’s President and Chief Financial Officer on December 1, 2017. Under the agreement, Mr. Lamadrid was entitled to receive an annual salary of $175,000. Further, he was entitled to receive a performance bonus equal to 2% of the Company’s annual EBITDA, and annual restricted stock awards of the Company’s common stock in an amount equal to 3% of its annual EBITDA. Additionally, Mr. Lamadrid was entitled to a one-time signing bonus of 500,000 shares of restricted common stock of the Company, which were to become fully vested one year from the effective date of the agreement. On July 24, 2018, the Company and Mr. Lamadrid mutually agreed to terminate the employment agreement. Mr. Lamadrid resigned as President and Chief Financial Officer effective as of July 13, 2018. In connection with a severance agreement between the Company and Mr. Lamadrid, the Company paid certain amounts and issued 600,000 shares of common stock to Mr. Lamadrid, and the parties further agreed that neither party would have any further obligations under the Employment Agreement or otherwise after such date.
On July 31, 2018, the Company and Mr. Sillitoe entered into a one-year employment agreement. Pursuant to the agreement, Mr. Sillitoe commenced serving as the Chief Executive Officer of CLS Nevada, Inc. effective July 1, 2018. Under the agreement, Mr. Sillitoe is entitled to receive an annual salary of $150,000. Further, he is entitled to receive a performance bonus equal to 2% of the annual EBITDA of CLS Nevada, Inc., and annual restricted stock awards of the Company’s common stock in an amount equal to 3% of the annual EBITDA of CLS Nevada, Inc. Additionally, Mr. Sillitoe is entitled to a one-time signing bonus of 500,000 shares of restricted common stock, which shall become fully vested one year from the effective date of his employment agreement assuming Mr. Sillitoe remains employed by the Company on such date. As of February 28, 2019 and May 31, 2018, the Company had accrued compensation due to Mr. Sillitoe in the amount of $31,806 and $0.
The Company and Mr. Decatur entered into a one-year employment agreement on July 31, 2018. Pursuant to the agreement, Mr. Decatur commenced serving as the Chief Operating Officer of CLS Nevada, Inc. on July 1, 2018. Under the agreement, Mr. Decatur is entitled to receive an annual salary of $150,000. Further, he is entitled to receive a performance bonus equal to 2% of the annual EBITDA of CLS Nevada, Inc., and annual restricted stock awards of the Company’ common stock in an amount equal to 3% of the annual EBITDA of CLS Nevada, Inc. Additionally, Mr. Decatur is entitled to a one-time signing bonus of 50,000 shares of restricted common stock, which shall become fully vested one year from the effective date of his employment agreement assuming Mr. Decatur remains employed by the Company on such date.
At February 28, 2019 and May 31, 2018, 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 $16,250.
Note 19 – Related Party Transactions
As of February 28, 2019 and May 31, 2018, the Company owed the amount of $0 and $37,500, respectively, to Jeffrey Binder, its Chief Executive Officer, for accrued salary.
As of February 28, 2019 and May 31, 2018, the Company had accrued salary due to Alan Bonsett, a former officer of the Company prior to his October 1, 2017 separation, in the amount of $37,500 and $37,500, respectively.
As of February 28, 2019 and May 31, 2018, 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 $16,250.
As of February 28, 2019 and May 31, 2018, the Company had related party payables in the amount of $17,930 due to officers and directors related to expenses paid on behalf of the Company. The Company imputed interest at the rate of 6% per annum on these liabilities, and recorded imputed interest expense on these liabilities in the amounts of $268 and $265 during the three months ended February 28, 2019 and 2018, respectively. These interest accruals were charged to additional paid-in capital.
On July 27, 2018, the Company granted 25,000 shares of restricted common stock to its Chief Financial Officer. These share vested four months after issuance. The shares were valued at $17,500, and were amortized over the vesting period. As of February 28, 2019, these shares had not been issued. As of February 28, 2019, $17,500 had been charged to operations.
On July 31, 2018, the Company granted the Chief Executive Officer of CLS Nevada, Inc. a one-time signing bonus of 500,000 shares of restricted common stock, which shall become fully vested one year from the effective date of his employment agreement. These shares were valued at $355,000 and will be amortized over the vesting period. As of February 28, 2019, $236,667 had been charged to operations.
On July 31, 2018, the Company granted the Chief Operating Officer of CLS Nevada, Inc. a one-time signing bonus of 50,000 shares of restricted common stock, which shall become fully vested one year from the effective date of his employment agreement. These shares were valued at $35,000 and will be amortized over the vesting period. As of February 28, 2019, $23,667 had been charged to operations.
On July 24, 2018, the Company awarded Star Associates, LLC, a limited liability company owned by Andrew Glashow, a director of the Company, a cash payment in the amount of $250,000 and 700,000 shares of restricted common stock in recognition of Mr. Glashow’s efforts, through Star Associates, in successfully assisting the Company in negotiating and obtaining the financing necessary to acquire Alternative Solutions. The shares were valued at $490,000 and were charged to operations during the nine months ended February 28, 2019.
Note 20 – Subsequent Events
Mr. Glashow, a director of the Company since 2017, was appointed to serve as President and Chief Operating Officer commencing on March 1, 2019. The Company and Mr. Mr. Glashow entered into a two-year employment agreement and Mr. Glashow commenced serving as the Company’s President and Chief Operating Officer. Under the agreement, Mr. Glashow is entitled to receive an annual salary of $175,000. Further, he is entitled to receive a performance bonus equal to 1% of our annual EBITDA, and annual restricted stock awards in an amount equal to 1% of our annual EBITDA. Additionally, Mr. Glashow is entitled to a one-time signing bonus of 500,000 shares of our restricted common stock, half of which shall vest on March 1, 2020, and half of which shall vest on March 1, 2021.
Effective March 1, 2019, the Company executed a redemption notice with respect to two of the convertible notes payable to redeem all outstanding principal, accrued interest and redemption premiums thereunder. The total amount due to the note holder is $964,788, which includes $250,000 in principal, $62,500 in redemption premium and $2,630 in accrued interest for one note, and $500,000 in principal, $125,000 in redemption premium and $24,658 in accrued interest for the other note.
On March 11, 2019, the Company, through its wholly-owned subsidiary, CLS Massachusetts, Inc., entered into a membership interest purchase agreement with CannAssist, LLC. Pursuant to the terms of the Purchase Agreement, CLS Massachusetts agreed to purchase 80% of the membership interests in CannAssist for a purchase price of $25 million, which will be utilized to fund the build-out of CannAssist’s recreational cannabis grow facility at its leased premises and for initial working capital.
ALTERNATIVE SOLUTIONS L.L.C.
(A Nevada Corporation)
AUDITED
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Alternative Solutions, LLC.
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of Alternative Solutions, LLC (the Company) as of December 31, 2017 and 2016, and the related consolidated statements of operations, changes in partner’s capital, and cash flows for each of the years in the two-year period ended December 31, 2017, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
The accompanying consolidated financial statements have been prepared assuming that the Company will continues as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company suffered a net loss from operations and has a net capital deficiency, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ M&K CPAS, PLLC
We have served as the Company’s auditor since 2017.
Houston, TX
May 25, 2018
ALTERNATIVE SOLUTIONS L.L.C.
CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
332,060
|
|
|
$
|
919,879
|
|
Accounts receivable
|
|
|
47,529
|
|
|
|
-
|
|
Inventory
|
|
|
307,881
|
|
|
|
73,785
|
|
Prepaid expenses
|
|
|
197,409
|
|
|
|
49,627
|
|
Total current assets
|
|
|
884,879
|
|
|
|
1,043,291
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
198,500
|
|
|
|
407,500
|
|
Property and equipment, net
|
|
|
992,091
|
|
|
|
883,989
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,075,470
|
|
|
$
|
2,334,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND PARTNERS' CAPITAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
395,202
|
|
|
$
|
41,564
|
|
Accrued expenses
|
|
|
550,030
|
|
|
|
381,326
|
|
Deferred rent obligation
|
|
|
134,041
|
|
|
|
85,177
|
|
Convertible notes payable
|
|
|
200,000
|
|
|
|
625,000
|
|
Short term loans, related parties
|
|
|
57,557
|
|
|
|
57,557
|
|
Total current liabilities
|
|
|
1,336,830
|
|
|
|
1,190,624
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,336,830
|
|
|
|
1,190,624
|
|
|
|
|
|
|
|
|
|
|
Partners capital:
|
|
|
|
|
|
|
|
|
Class A partner, 2,644,653 Units
|
|
|
(1,309,293
|
)
|
|
|
(263,756
|
)
|
Class B partner, 101,851 Units
|
|
|
775,128
|
|
|
|
431,594
|
|
Class C partner, 301,415 Units
|
|
|
1,022,805
|
|
|
|
976,318
|
|
Unallocated contribution
|
|
|
250,000
|
|
|
|
-
|
|
Total partners' capital
|
|
|
738,640
|
|
|
|
1,144,156
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and partners' capital
|
|
$
|
2,075,470
|
|
|
$
|
2,334,780
|
|
The accompanying notes are an integral part of these financial statements.
ALTERNATIVE SOLUTIONS L.L.C.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
For the Years
|
|
|
|
Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
4,546,210
|
|
|
$
|
1,263,262
|
|
Cost of goods sold
|
|
|
2,878,110
|
|
|
|
1,085,115
|
|
Gross Profit
|
|
|
1,668,100
|
|
|
|
178,147
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
2,666,602
|
|
|
|
1,419,948
|
|
Professional fees
|
|
|
134,336
|
|
|
|
93,285
|
|
Guaranteed payments to members
|
|
|
110,000
|
|
|
|
89,250
|
|
Depreciation and amortization
|
|
|
155,474
|
|
|
|
125,770
|
|
Total operating expenses
|
|
|
3,066,412
|
|
|
|
1,728,253
|
|
|
|
|
|
|
|
|
|
|
Net operating loss
|
|
|
(1,398,312
|
)
|
|
|
(1,550,106
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(94,204
|
)
|
|
|
(147,000
|
)
|
Loss on early extinguishment of loan receivable, related party
|
|
|
-
|
|
|
|
(375,630
|
)
|
Total other income (expense)
|
|
|
(94,204
|
)
|
|
|
(522,630
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,492,516
|
)
|
|
$
|
(2,072,736
|
)
|
The accompanying notes are an integral part of these financial statements.
ALTERNATIVE SOLUTIONS L.L.C.
CONSOLIDATED
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
For the years ended December 31, 2017 and 2016
|
|
Unallocated
|
|
|
Class A
|
|
|
Class B
|
|
|
Class C
|
|
|
|
|
|
|
|
Advance
|
|
|
Partners
|
|
|
Partners
|
|
|
Partners
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners' capital at December 31, 2015
|
|
$
|
-
|
|
|
$
|
(76,615
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(76,615
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contributions, 13,590 Class A LLC Units
|
|
|
-
|
|
|
|
63,303
|
|
|
|
-
|
|
|
|
-
|
|
|
|
63,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt exchanged, 1,457 Class A LLC Units
|
|
|
-
|
|
|
|
1,615,204
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,615,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt converted, 86,777 Class B LLC Units
|
|
|
-
|
|
|
|
-
|
|
|
|
500,000
|
|
|
|
-
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscriptions, 206,484 Class C LLC Units
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,115,000
|
|
|
|
1,115,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year ended December 31, 2016
|
|
|
-
|
|
|
|
(1,865,648
|
)
|
|
|
(68,406
|
)
|
|
|
(138,682
|
)
|
|
|
(2,072,736
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners' capital at December 31, 2016
|
|
$
|
-
|
|
|
$
|
(263,756
|
)
|
|
$
|
431,594
|
|
|
$
|
976,318
|
|
|
$
|
1,144,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contributions, -0- Class A LLC Units
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt converted, 64,931 Class B LLC Units
|
|
|
-
|
|
|
|
-
|
|
|
|
425,000
|
|
|
|
-
|
|
|
|
425,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscriptions, 30,000 Class C LLC Units
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
162,000
|
|
|
|
162,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year ended December 31, 2017
|
|
|
-
|
|
|
|
(1,295,537
|
)
|
|
|
(81,466
|
)
|
|
|
(115,513
|
)
|
|
|
(1,492,516
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners' capital at December 31, 2017
|
|
$
|
250,000
|
|
|
$
|
(1,309,293
|
)
|
|
$
|
775,128
|
|
|
$
|
1,022,805
|
|
|
$
|
738,640
|
|
The accompanying notes are an integral part of these financial statements.
ALTERNATIVE SOLUTIONS L.L.C.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For the Years
|
|
|
|
Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,492,516
|
)
|
|
$
|
(2,072,736
|
)
|
Adjustments to reconcile net loss
|
|
|
|
|
|
|
|
|
to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
155,474
|
|
|
|
125,770
|
|
Loss on early extinguishment of loan receivable, related party
|
|
|
-
|
|
|
|
375,630
|
|
Decrease (increase) in assets:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(47,529
|
)
|
|
|
-
|
|
Notes receivable
|
|
|
(40,000
|
)
|
|
|
239,176
|
|
Inventory
|
|
|
(234,096
|
)
|
|
|
25,947
|
|
Prepaid expenses
|
|
|
(147,782
|
)
|
|
|
13,404
|
|
Other assets
|
|
|
249,000
|
|
|
|
(48,000
|
)
|
Increase (decrease) in liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
353,638
|
|
|
|
(37,873
|
)
|
Accrued expenses
|
|
|
168,704
|
|
|
|
321,158
|
|
Deferred rent obligations
|
|
|
48,864
|
|
|
|
79,613
|
|
Net cash used in operating activities
|
|
|
(986,243
|
)
|
|
|
(977,911
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(263,576
|
)
|
|
|
(118,167
|
)
|
Net cash used in investing activities
|
|
|
(263,576
|
)
|
|
|
(118,167
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Cash contributions from partners
|
|
|
662,000
|
|
|
|
1,178,303
|
|
Proceeds from convertible notes payable, related party
|
|
|
-
|
|
|
|
100,000
|
|
Proceeds received from short term loans, related party
|
|
|
-
|
|
|
|
901,125
|
|
Repayments on short term loans, related party
|
|
|
-
|
|
|
|
(239,200
|
)
|
Net cash provided by financing activities
|
|
|
662,000
|
|
|
|
1,940,228
|
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH
|
|
|
(587,819
|
)
|
|
|
844,150
|
|
CASH AT BEGINNING OF PERIOD
|
|
|
919,879
|
|
|
|
75,729
|
|
|
|
|
|
|
|
|
|
|
CASH AT END OF PERIOD
|
|
$
|
332,060
|
|
|
$
|
919,879
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL INFORMATION:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
100,987
|
|
|
$
|
156,473
|
|
Income taxes paid
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Convertible debt converted to capital
|
|
$
|
425,000
|
|
|
$
|
500,000
|
|
Related party debt exchanged for capital
|
|
$
|
-
|
|
|
$
|
1,615,204
|
|
The accompanying notes are an integral part of these financial statements.
ALTERNATIVE SOLUTIONS L.L.C.
Notes
to Consolidated Financial Statements
Note 1 – Basis of Presentation and Significant Accounting Policies
Business
Alternative Solutions L.L.C. (“Alternative Solutions”) is a partnership that was formed under the laws of the State of Nevada on April 14, 2014. Alternative Solutions oversees various wholly-owned subsidiaries involved in the cannabis market in, and around, Las Vegas Nevada. Including, Serenity Wellness Center LLC (“SWC”), doing business as Oasis Cannabis (“Oasis”), an adult-use retail and medical cannabis dispensary, Community Oasis LLC, a licensed art gallery and multipurpose community facility adjacent to Oasis Cannabis, Serenity Wellness Products LLC (“SWP”), a cannabis production company, and Serenity Wellness Growers LLC (“SWG”), a cannabis cultivation company. All wholly-owned subsidiaries are in the form of Nevada domestic limited liability companies.
Basis of Presentation
Our consolidated financial statements are prepared using the accrual method of accounting as generally accepted in the United States of America (U.S. GAAP) and the rules of the Securities and Exchange Commission (SEC).
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the following entities, all of which are under common control and ownership:
|
|
State of
|
|
|
|
Abbreviated
|
Name of Entity
(1)
|
|
Incorporation
|
|
Relationship
|
|
Reference
|
Alternative Solutions L.L.C.
(2)
|
|
Nevada
|
|
Parent
|
|
Alternative Solutions
|
Serenity Wellness Center LLC
|
|
Nevada
|
|
Subsidiary
|
|
SWC
|
DBA/ Oasis Cannabis
|
|
Nevada
|
|
DBA
|
|
Oasis
|
Serenity Wellness Products LLC
|
|
Nevada
|
|
Subsidiary
|
|
SWP
|
DBA/ City Trees
|
|
Nevada
|
|
DBA
|
|
City Trees
|
Serenity Wellness Growers LLC
|
|
Nevada
|
|
Subsidiary
|
|
SWG
|
DBA/ City Trees
|
|
Nevada
|
|
Subsidiary
|
|
City Trees
|
(1)
Each entity is in the form of a domestic limited liability company.
(2)
Alternative Solutions L.L.C. is the parent company of each wholly-owned subsidiary.
The consolidated financial statements herein contain the operations of the wholly-owned subsidiaries listed above. All significant inter-company transactions have been eliminated in the preparation of these financial statements. The parent company, Alternative Solutions, and subsidiaries noted above, will be collectively referred to herein as the “Company”, “Alternative Solutions” or “Oasis”. The Company's headquarters are located in Las Vegas, Nevada and substantially all of its current customers are within the United States, more specifically, Las Vegas, Nevada.
These statements reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management are necessary for fair presentation of the information contained therein.
Segment Reporting
Under FASB ASC 280-10-50, the Company operates as a single segment and will evaluate additional segment disclosure requirements as it expands its operations.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
ALTERNATIVE SOLUTIONS L.L.C.
Notes to Consolidated Financial Statements
Note 1 – Basis of Presentation and Significant Accounting Policies (Continued)
Cash and Cash Equivalents
The Company maintains cash balances in non-interest-bearing accounts, which do not currently exceed federally insured limits. For the purpose of the statements of cash flows, all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents.
Allowance for Doubtful Accounts
We generate the majority of our revenues and corresponding accounts receivable from the sale cannabis, and cannabis related products. We evaluate the collectability of our accounts receivable considering a combination of factors. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations to us, we record a specific reserve for bad debts against amounts due in order to reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we recognize reserves for bad debts based on past write-off experience and the length of time the receivables are past due. We had no debts expense during the years ended December 31, 2017 and 2016, respectively.
Inventory
Inventories are stated at the lower of cost or market. Cost is determined on a standard cost basis that approximates the first-in, first-out (FIFO) method. Market is determined based on net realizable value. Appropriate consideration is given to obsolescence, excessive levels, deterioration, and other factors in evaluating net realizable value. Our cannabis products consist of prepackaged purchased goods ready for resale, and cannabis flower grown in-house under our cultivation license, along with produced edibles and extracts developed under our production license.
Fair Value of Financial Instruments
Under FASB ASC 820-10-05, the Financial Accounting Standards Board establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This Statement reaffirms that fair value is the relevant measurement attribute. The adoption of this standard did not have a material effect on the Company’s financial statements as reflected herein. The carrying amounts of cash, prepaid expenses and accrued expenses reported on the balance sheet are estimated by management to approximate fair value primarily due to the short term nature of the instruments.
Basic and Diluted Loss Per Share
The basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing the net loss adjusted on an “as if converted” basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For the periods presented, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of diluted net loss per common share.
Deferred Rent Obligation
The Company has entered into operating lease agreements for its dispensary/corporate office and grow facility which contain provisions for future rent increases. In accordance with generally accepted accounting principles, the Company records monthly rent expense equal to the total of the payments due over the lease term, divided by the number of months of the lease terms. The difference between rent expense recorded and the amount paid is credited or charged to “Deferred rent obligation,” which is reflected as a separate line item in the accompanying Balance Sheets.
Revenue Recognition
Sales on fixed price contracts are recorded when services are earned, the earnings process is complete or substantially complete, and the revenue is measurable and collectability is reasonably assured. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company defers any revenue from sales in which payment has been received, but the earnings process has not occurred. Amounts billed in advance of the period in which service is rendered are recorded as a liability under “Deferred revenues”.
ALTERNATIVE SOLUTIONS L.L.C.
Notes to Consolidated Financial Statements
Note 1 – Basis of Presentation and Significant Accounting Policies (Continued)
Advertising and Promotion
All costs associated with advertising and promoting products are expensed as incurred with the exception of the amortization of the cost of two major video productions. A music video and reality/lifestyle video were both produced in 2017. The remaining amount that hasn’t been expensed is listed on the schedule in Note 5. Total recognized advertising and promotion expenses were $351,841 and $180,227 for the years ended December 31, 2017 and 2016, respectively.
Stock-Based Compensation
Under FASB ASC 718-10-30-2, all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. The Company had no stock based compensation expense for the years ended December 31, 2017 and 2016, respectively.
Recent Accounting Pronouncements
Effective January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the commercial sales of products, licensing agreements and contracts to perform pilot studies 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 the Company’s financial statements as a result of adopting Topic 606 for the years ended December 31, 2018 and 2017.
In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2017-09
, Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting.
ASU 2017-09, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. Per ASU 2017-9, an entity should account for the effects of a modification unless all the following are met: (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification, (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified, and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in ASU 2017-9. ASU 2017-9 is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. The adoption of
ASU 2017-9
is not expected to have a material impact on the Company’s financial statements or related disclosures.
No other new accounting pronouncements, issued or effective during the years ended December 31, 2017 and 2016, have had or are expected to have a significant impact on the Company’s financial statements.
ALTERNATIVE SOLUTIONS L.L.C.
Notes to Consolidated Financial Statements
Note 2 – Going Concern
As shown in the accompanying financial statements, the Company has insufficient cash on hand, a working capital deficit of $451,951 and incurred net losses from operations resulting in an accumulated deficit of $4,765,331 that has been distributed to the partners’ capital accounts, and used $986,243 of cash from operations during the year ended December 31, 2017. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company is currently seeking additional sources of capital to fund short term operations. The Company, however, is dependent upon its ability to secure equity and/or debt financing and there are no assurances that the Company will be successful; therefore, without sufficient financing it would be unlikely for the Company to continue as a going concern.
The financial statements do not include any adjustments that might result from the outcome of any uncertainty as to the Company’s ability to continue as a going concern. The financial statements also do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
Note 3 – Fair Value of Financial Instruments
Under FASB ASC 820-10-5, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under GAAP, certain assets and liabilities must be measured at fair value, and FASB ASC 820-10-50 details the disclosures that are required for items measured at fair value.
The Company has certain financial instruments that must be measured under the new fair value standard. The Company’s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:
Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 - Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.
ALTERNATIVE SOLUTIONS L.L.C.
Notes to Consolidated Financial Statements
Note 3 – Fair Value of Financial Instruments (Continued)
The following schedule summarizes the valuation of financial instruments at fair value on a recurring basis in the balance sheets as of December 31, 2017 and 2016, respectively:
|
|
Fair Value Measurements at December 31, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
332,060
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total assets
|
|
|
332,060
|
|
|
|
-
|
|
|
|
-
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible note payable, related parties
|
|
|
-
|
|
|
|
200,000
|
|
|
|
-
|
|
Notes payable, related parties
|
|
|
-
|
|
|
|
57,557
|
|
|
|
-
|
|
Total liabilities
|
|
|
-
|
|
|
|
257,557
|
|
|
|
-
|
|
|
|
$
|
332,060
|
|
|
$
|
(257,557
|
)
|
|
$
|
-
|
|
|
|
Fair Value Measurements at December 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
919,879
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total assets
|
|
|
919,879
|
|
|
|
-
|
|
|
|
-
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible note payable, related parties
|
|
|
-
|
|
|
|
625,000
|
|
|
|
-
|
|
Notes payable, related parties
|
|
|
-
|
|
|
|
57,557
|
|
|
|
-
|
|
Total liabilities
|
|
|
-
|
|
|
|
682,557
|
|
|
|
-
|
|
|
|
$
|
919,879
|
|
|
$
|
(682,557
|
)
|
|
$
|
-
|
|
The fair values of our related party debts are deemed to approximate book value, and are considered Level 2 inputs as defined by ASC Topic 820-10-35.
There were no transfers of financial assets or liabilities between Level 1, Level 2 and Level 3 inputs for the years ended December 31, 2017 and 2016.
Note 4 – Accounts Receivable
Accounts receivable was $47,529 and $-0- at December 31, 2017 and 2016, respectively. No allowance for doubtful accounts was necessary during the years ended December 31, 2017 and 2016, respectively.
Note 5 – Inventory
Inventories, consisting of material, overhead, labor, and manufacturing overhead, are stated at the lower of cost (first-in, first-out) or market and consist of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Raw materials
|
|
$
|
41,375
|
|
|
$
|
-
|
|
Finished goods
|
|
|
266,506
|
|
|
|
73,785
|
|
|
|
$
|
307,881
|
|
|
$
|
73,785
|
|
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.
ALTERNATIVE SOLUTIONS L.L.C.
Notes to Consolidated Financial Statements
Note 6 – Prepaid Expenses
Prepaid expenses included the following as of December 31, 2017 and 2016, respectively:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Prepaid insurance
|
|
$
|
11,119
|
|
|
$
|
-
|
|
Prepaid advertising
|
|
|
113,017
|
|
|
|
-
|
|
Prepaid license fees
|
|
|
61,961
|
|
|
|
43,683
|
|
Prepaid general and administrative expenses
|
|
|
11,312
|
|
|
|
5,944
|
|
|
|
$
|
197,409
|
|
|
$
|
49,627
|
|
Note 7 – Other Assets
Other assets included the following as of December 31, 2017 and 2016, respectively:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Advance to ATM Provider
|
|
$
|
40,000
|
|
|
$
|
-
|
|
State and City Bonds
|
|
|
-
|
|
|
|
250,000
|
|
Security deposits
|
|
|
158,500
|
|
|
|
157,500
|
|
|
|
$
|
198,500
|
|
|
$
|
407,500
|
|
Note 8 – Property and Equipment
Property and equipment consist of the following at December 31, 2017 and 2016, respectively:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Office equipment
|
|
$
|
191,424
|
|
|
$
|
136,696
|
|
Furniture and fixtures
|
|
|
18,991
|
|
|
|
16,385
|
|
Website development costs
|
|
|
2,324
|
|
|
|
2,324
|
|
Leasehold improvements
|
|
|
1,063,281
|
|
|
|
857,039
|
|
Total
|
|
|
1,276,020
|
|
|
|
1,012,444
|
|
Less accumulated depreciation
|
|
|
(283,929
|
)
|
|
|
(128,455
|
)
|
Property and equipment, net
|
|
$
|
992,091
|
|
|
$
|
883,989
|
|
Depreciation and amortization expense totaled $155,474 and $125,770 for the years ended December 31, 2017 and 2016, respectively.
Note 9 – Accrued Expenses
Accrued expenses included the following as of December 31, 2017 and 2016, respectively:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Accrued state and city taxes
|
|
$
|
173,456
|
|
|
$
|
62,881
|
|
Accrued payroll and payroll taxes
|
|
|
84,919
|
|
|
|
20,007
|
|
Accrued interest
|
|
|
16,655
|
|
|
|
23,438
|
|
Accrued consulting fees
|
|
|
275,000
|
|
|
|
275,000
|
|
|
|
$
|
550,030
|
|
|
$
|
381,326
|
|
Accrued consulting fees consist of an estimated fee that we may be required to pay to settle a disputed contract. This settlement, when and if, it occurs may very well not be settled within the next twelve months, despite being currently recognized as a current liability.
ALTERNATIVE SOLUTIONS L.L.C.
Notes to Consolidated Financial Statements
Note 10 – Convertible Notes Payable
Convertible notes payable consist of the following at December 31, 2017 and 2016, respectively:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
On January 6, 2016, we entered into a Subscription Agreement with Jeffrey Sloane (“First Sloane Note”) for $100,000, consisting of an unsecured promissory note convertible into Class B LLC Units at the option of the Subscriber only between January 1, 2019 and February 28, 2019, subject to the execution of the Company’s operating agreement and pursuant to the State and local jurisdictions’ authorization. The Note bears interest at 15%, due and payable on November 30, 2023, and the principal is convertible into Class B LLC Units of the Company at a price based upon a total Company valuation of twenty million dollars ($20,000,000). Interest is to be paid quarterly, in arrears.
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
|
|
|
|
|
|
|
|
On December 18, 2015, we entered into a Subscription Agreement with Archie Perry (“Second Perry Note”) for $100,000, consisting of an unsecured promissory note convertible into Class B LLC Units at the option of the Subscriber only between January 1, 2019 and February 28, 2019, subject to the execution of the Company’s operating agreement and pursuant to the State and local jurisdictions’ authorization. The Note bears interest at 15%, due and payable on November 30, 2023, and the principal is convertible into Class B LLC Units of the Company at a price based upon a total Company valuation of twenty million dollars ($20,000,000). Interest is to be paid quarterly, in arrears.
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
On November 30, 2015, we entered into a Subscription Agreement with Jeffrey Hellman (“Second Hellman Note”) for $100,000, consisting of an unsecured promissory note convertible into Class B LLC Units at the option of the Subscriber only between January 1, 2019 and February 28, 2019, subject to the execution of the Company’s operating agreement and pursuant to the State and local jurisdictions’ authorization. The Note bears interest at 15%, due and payable on November 30, 2023, and the principal is convertible into Class B LLC Units of the Company at a price based upon a total Company valuation of twenty million dollars ($20,000,000). Interest is to be paid quarterly, in arrears.
|
|
|
-
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
On September 10, 2015, we entered into a Subscription Agreement with Archie Perry (“First Perry Note”) for $300,000, consisting of an unsecured promissory note convertible into Class B LLC Units at the option of the Subscriber only between January 1, 2019 and February 28, 2019, subject to the execution of the Company’s operating agreement and pursuant to the State and local jurisdictions’ authorization. The Note bears interest at 15%, due and payable on November 30, 2023, and the principal is convertible into Class B LLC Units of the Company at a price based upon a total Company valuation of twenty million dollars ($20,000,000). Interest is to be paid quarterly, in arrears.
|
|
|
-
|
|
|
|
-
|
|
ALTERNATIVE SOLUTIONS L.L.C.
Notes to Consolidated Financial Statements
Note 10 – Convertible Notes Payable (Continued)
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
On June 29, 2015, we entered into a Subscription Agreement with MYJ Holdings, LLC (“First MYJ Note”) for $100,000, consisting of an unsecured promissory note convertible into Class B LLC Units at the option of the Subscriber only between January 1, 2019 and February 28, 2019, subject to the execution of the Company’s operating agreement and pursuant to the State and local jurisdictions’ authorization. The Note bears interest at 15%, due and payable on November 30, 2023, and the principal is convertible into Class B LLC Units of the Company at a price based upon a total Company valuation of twenty million dollars ($20,000,000). Interest is to be paid quarterly, in arrears.
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
On June 23, 2015, we entered into a Subscription Agreement with Jeffrey Hellman (“First Hellman Note”) for $125,000, consisting of an unsecured promissory note convertible into Class B LLC Units at the option of the Subscriber only between January 1, 2019 and February 28, 2019, subject to the execution of the Company’s operating agreement and pursuant to the State and local jurisdictions’ authorization. The Note bears interest at 15%, due and payable on November 30, 2023, and the principal is convertible into Class B LLC Units of the Company at a price based upon a total Company valuation of twenty million dollars ($20,000,000). Interest is to be paid quarterly, in arrears.
|
|
|
-
|
|
|
|
125,000
|
|
|
|
|
|
|
|
|
|
|
On June 10, 2015, we entered into a Subscription Agreement with the Nevins Family Trust (“First Nevins Note”) for $200,000, consisting of an unsecured promissory note convertible into Class B LLC Units at the option of the Subscriber only between January 1, 2019 and February 28, 2019, subject to the execution of the Company’s operating agreement and pursuant to the State and local jurisdictions’ authorization. The Note bears interest at 15%, due and payable on November 30, 2023, and the principal is convertible into Class B LLC Units of the Company at a price based upon a total Company valuation of twenty million dollars ($20,000,000). Interest is to be paid quarterly, in arrears.
|
|
|
-
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
On June 5, 2015, we entered into a Subscription Agreement with Sandra (Smith) Johnson (“First Johnson Note”) for $100,000, consisting of an unsecured promissory note convertible into Class B LLC Units at the option of the Subscriber only between January 1, 2019 and February 28, 2019, subject to the execution of the Company’s operating agreement and pursuant to the State and local jurisdictions’ authorization. The Note bears interest at 15%, due and payable on November 30, 2023, and the principal is convertible into Class B LLC Units of the Company at a price based upon a total Company valuation of twenty million dollars ($20,000,000). Interest is to be paid quarterly, in arrears.
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
Convertible notes payable
|
|
$
|
200,000
|
|
|
$
|
625,000
|
|
The notes have been presented as current liabilities as they are expected to be converted or repaid within the next twelve months pursuant to the pending acquisition by CLS Holdings USA, Inc. The Company recorded interest expense pursuant to the stated interest rates on the convertible notes in the amount of $87,110 and $140,024 for the years ended December 31, 2017 and 2016, respectively.
ALTERNATIVE SOLUTIONS L.L.C.
Notes to Consolidated Financial Statements
Note 11 – Short Term Loans, Related Parties
Notes payable, related parties consist of the following at December 31, 2017 and 2016, respectively:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
On various dates, the Company received non-interest bearing, unsecured loan advances, due on demand from Todd Swanson, one of the Company’s partners. Aggregate proceeds of $573,270 and $950,000 were contributed to capital on August 31, 2016 and January 1, 2016, respectively.
|
|
$
|
10,000
|
|
|
$
|
10,000
|
|
|
|
|
|
|
|
|
|
|
On various dates, the Company received non-interest bearing, unsecured loan advances, due on demand from Deb Freeman, one of the Company’s partners. Aggregate proceeds of $31,098 and $60,836 were contributed to capital on August 31, 2016 and January 1, 2016, respectively.
|
|
|
47,557
|
|
|
|
47,557
|
|
|
|
|
|
|
|
|
|
|
Short term loans, related parties
|
|
$
|
57,557
|
|
|
$
|
57,557
|
|
Note 12 – Changes in Partners’ Capital
Alternative Solutions is a Limited Liability Company organized under the partnership laws of the State of Nevada on April 14, 2014. The original operating agreement authorized to issue up to 5,000 Common Units. A total of 1,000 Units were awarded to four original members, with one (1) additional unit awarded for each one thousand dollars ($1,000) of capital contributed thereafter. Debra Freeman served as the initial Managing Member, and Todd Swanson, Ben Sillitoe and Gary Schnitzer were subsequently added, by amendment, as Managing Members, with Todd Swanson designated as the Principal Manager. The operating agreement, as most recently amended on August 31, 2016, authorizes the issuance of up to 5,000,000 Common Units, which can be divided into multiple types, classes or series. The current capital structure carries three membership classes, as follows:
|
-
|
Class A LLC Units: Carries voting rights equal to the percentage of LLC Interest held by such Member.
|
|
-
|
Class B LLC Units: May be added by a Super Majority vote of Class A Members (Members holding 66 2/3% or more). Class B Members carry no voting rights and are not subject to dilution prior to March 1, 2019.
|
|
-
|
Class C LLC Units: May be added by a Super Majority vote of Class A Members, and carry no voting rights.
|
Unallocated Advance (2017)
On December 4, 2017, the Company received a non-refundable contribution of $250,000 pursuant to the Membership Interest Purchase Agreement with CLS Holdings USA, Inc. The ownership contribution will be allocated at the scheduled closing in 2018.
Class A LLC Units Contributed (2017)
During the year ended December 31, 2017, Class A Members contributed a total of $250,000 in cash. The Class A Members agreed not to add new Units to their ownership percentage so as to not dilute minority interests.
Class A LLC Units Contributed (2016)
During the year ended December 31, 2016, Class A Members contributed a total of $63,303 in cash, representing 13,590 Units.
Class A LLC Units Contributed via Debt Exchange (2016)
During the year ended December 31, 2016, two Class A Members exchanged an aggregate $1,615,204 of outstanding debt for a total of 1,457 Class A LLC Units.
ALTERNATIVE SOLUTIONS L.L.C.
Notes to Consolidated Financial Statements
Note 12 – Changes in Partners’ Capital (Continued)
Class B LLC Units Contributed via Debt Conversion (2017)
On November 22, 2017, a Convertible Noteholder converted $200,000 of outstanding debt for 30,556 Class B LLC Units, based on a total Company valuation of $20,000,000, as approved by a super majority of voting members. The debt conversion resulted in a gain of $34,998 over the $165,002 fair value of the units converted. The related party gain was recognized back against equity and had no effect on the Company’s Statements of Operations. The Class B LLC Units are not subject to dilution prior to March 1, 2019.
On November 22, 2017, another Convertible Noteholder converted $225,000 of outstanding debt for 34,375 Class B LLC Units, based on a total Company valuation of $20,000,000, as approved by a super majority of voting members. The debt conversion resulted in a gain of $39,375 over the $185,625 fair value of the units converted. The related party gain was recognized back against equity and had no effect on the Company’s Statements of Operations. The Class B LLC Units are not subject to dilution prior to March 1, 2019.
Class B LLC Units Contributed via Debt Conversion (2016)
On August 15, 2016, a Convertible Noteholder converted $400,000 of outstanding debt for 69,422 Class B LLC Units, based on a total Company valuation of $15,000,000, as approved by a super majority of voting members. The debt conversion resulted in a gain of $25,121 over the $374,879 fair value of the units converted. The related party gain was recognized back against equity and had no effect on the Company’s Statements of Operations. The Class B LLC Units are not subject to dilution prior to March 1, 2019.
On August 15, 2016, another Convertible Noteholder converted $100,000 of outstanding debt for 17,355 Class B LLC Units, based on a total Company valuation of $15,000,000, as approved by a super majority of voting members. The debt conversion resulted in a gain of $6,283 over the $93,717 fair value of the units converted. The related party gain was recognized back against equity and had no effect on the Company’s Statements of Operations. The Class B LLC Units are not subject to dilution prior to March 1, 2019.
Class C LLC Units Contributed (2017)
On March 16, 2017, a new Class C Member contributed $162,000 in cash, representing 30,000 Units.
Class C LLC Units Contributed (2016)
During the year ended December 31, 2016, a total of seven new partners contributed an aggregate $1,115,000 of capital for an aggregate 206,484 Class C LLC Units.
Note 13 – Loss on Early Extinguishment of Loan Receivable, Related Party
On various dates between August 1, 2014 and August 25, 2016, the Company paid an aggregate total of $525,630 on the acquisition of property on behalf of SWC Real Estate, LLC, an entity under the control of Todd Swanson, the Company’s managing member. On August 25, 2016, the Company and Mr. Swanson agreed to modify the loan to the estimated present value of the property, resulting in a loss of $375,630 recognized during the year ended December 31, 2016, as presented in other expense within the Statements of Operations. Commensurate with the modification of the loan receivable, Mr. Swanson repaid the balance of $150,000.
Note 14 – Income Taxes
The Company is a partnership for tax purposes and all taxable gains and losses are passed through to the individual partners, therefore there is no tax asset or liability to be presented by the Company.
ALTERNATIVE SOLUTIONS L.L.C.
Notes to Consolidated Financial Statements
Note 15 – Future Minimum Lease Payments
Effective January 1, 2015, we leased our office/dispensary space in Las Vegas, Nevada under a 5-year operating lease expiring December 31, 2019, and is renewable for an additional five years upon expiration. The lease provides for increases in future minimum annual rental payments based on defined annual increases beginning with monthly payments of $7,500 and culminating in a monthly payment of $8,441 in 2019. The total amount of rental payments due over the lease term is being charged to rent expense according to the straight-line method over the term of the lease. The difference between rent expense recorded and the amount paid was credited or charged to “Deferred rent obligation,” in the accompanying Balance Sheets. The deferred rent obligation attributable to this lease was $8,512 and $8,429 at December 31, 2017 and 2016, respectively.
Effective January 11, 2016, SWG leased a commercial building for its cannabis production and cultivation business in North Las Vegas. The 5-year operating lease expires on February 28, 2021, and is renewable for another 5 year term. The lease provides for increases in future minimum annual rental payments based on defined annual increases beginning with monthly payments of $22,000 and culminating in a monthly payment of $29,000 in 2021. The total amount of rental payments due over the lease term is being charged to rent expense according to the straight-line method over the term of the lease. The difference between rent expense recorded and the amount paid will be credited or charged to “Deferred rent obligation,” in the Balance Sheets. The deferred rent obligation attributable to this lease was $125,529 and $76,748 at December 31, 2017 and 2016, respectively.
Future minimum lease payments required under operating leases according to our fiscal year-end are as follows:
Year Ending
|
|
|
|
|
December 31,
|
|
Amount
|
|
2018
|
|
$
|
356,345
|
|
2019
|
|
|
401,296
|
|
2020
|
|
|
348,000
|
|
2021
|
|
|
58,000
|
|
Thereafter
|
|
|
-
|
|
|
|
$
|
1,163,641
|
|
Rent expense was $389,520 and $329,218 for the years ended December 31, 2017 and 2016, respectively.
Note 16 – Subsequent Events
During the first quarter of 2018, the Company received $1,800,000 pursuant to the Membership Interest Purchase Agreement with CLS Holdings USA, Inc., in consideration for ten percent (10%) of the ownership interests in Alternative Solutions and its subsidiaries. The ownership change has been submitted to the State of Nevada for approval and the parties are awaiting approval pursuant to the terms of the sale.
On May 23, 2018, the Class A Members voted to use $100,000 of the $1,800,000 deposit for working capital to support ongoing operations and to finance growth in wholesale inventory.
ALTERNATIVE
SOLUTIONS L.L.C.
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2018 and 2017
ALTERNATIVE SOLUTIONS L.L.C.
CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
ASSETS
|
|
(Unaudited)
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
14,612
|
|
|
$
|
332,060
|
|
Accounts receivable
|
|
|
35,437
|
|
|
|
47,529
|
|
Inventory
|
|
|
405,953
|
|
|
|
307,881
|
|
Prepaid expenses
|
|
|
105,188
|
|
|
|
197,409
|
|
Total current assets
|
|
|
561,190
|
|
|
|
884,879
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
158,500
|
|
|
|
198,500
|
|
Property and equipment, net
|
|
|
933,143
|
|
|
|
992,091
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,652,833
|
|
|
$
|
2,075,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND PARTNERS' CAPITAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
342,293
|
|
|
$
|
395,202
|
|
Accrued expenses
|
|
$
|
579,349
|
|
|
$
|
550,030
|
|
Deferred rent obligation
|
|
$
|
136,040
|
|
|
$
|
134,041
|
|
Convertible notes payable
|
|
|
-
|
|
|
$
|
200,000
|
|
Short term loans, related parties
|
|
|
-
|
|
|
$
|
57,557
|
|
Total current liabilities
|
|
$
|
1,057,682
|
|
|
$
|
1,336,830
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
1,057,682
|
|
|
$
|
1,336,830
|
|
|
|
|
|
|
|
|
|
|
Partners capital:
|
|
|
|
|
|
|
|
|
Class A partner, 2,644,653 Units
|
|
|
-
|
|
|
$
|
(1,309,293
|
)
|
Class B partner, 101,851 Units
|
|
|
-
|
|
|
$
|
775,128
|
|
Class C partner, 301,415 Units
|
|
|
-
|
|
|
$
|
1,022,805
|
|
Partner's Capital, CLS
|
|
$
|
595,151
|
|
|
$
|
250,000
|
|
Total partners' capital
|
|
$
|
595,151
|
|
|
$
|
738,640
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and partners' capital
|
|
$
|
1,652,833
|
|
|
$
|
2,075,470
|
|
See accompanying notes to financial statements.
ALTERNATIVE SOLUTIONS L.L.C.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
For the Three Months
|
|
|
For the Six Months
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,672,483
|
|
|
$
|
428,060
|
|
|
$
|
3,679,327
|
|
|
$
|
765,374
|
|
Cost of goods sold
|
|
|
1,025,439
|
|
|
|
251,258
|
|
|
|
2,291,857
|
|
|
|
448,907
|
|
Gross Profit
|
|
|
647,044
|
|
|
|
176,802
|
|
|
|
1,387,470
|
|
|
|
316,467
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
898,840
|
|
|
|
494,737
|
|
|
|
1,671,802
|
|
|
|
861,486
|
|
Professional fees
|
|
|
26,550
|
|
|
|
15,067
|
|
|
|
63,835
|
|
|
|
28,174
|
|
Guaranteed payments to members
|
|
|
28,333
|
|
|
|
18,600
|
|
|
|
58,333
|
|
|
|
40,500
|
|
Depreciation and amortization
|
|
|
43,804
|
|
|
|
38,691
|
|
|
|
87,046
|
|
|
|
71,491
|
|
Total operating expenses
|
|
|
997,527
|
|
|
|
567,095
|
|
|
|
1,881,016
|
|
|
|
1,001,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss
|
|
|
(350,483
|
)
|
|
|
(390,293
|
)
|
|
|
(493,546
|
)
|
|
|
(685,184
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(7,500
|
)
|
|
|
(23,438
|
)
|
|
|
(15,000
|
)
|
|
|
(46,875
|
)
|
Loss on early extinguishment of debt
|
|
|
(15,000
|
)
|
|
|
-
|
|
|
|
(15,000
|
)
|
|
|
-
|
|
Total other income (expense)
|
|
|
(22,500
|
)
|
|
|
(23,438
|
)
|
|
|
(30,000
|
)
|
|
|
(46,875
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(372,983
|
)
|
|
$
|
(413,731
|
)
|
|
$
|
(523,546
|
)
|
|
$
|
(732,059
|
)
|
See accompanying notes to financial statements.
ALTERNATIVE SOLUTIONS L.L.C.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Ended June 30,
For the Six Months
(Unaudited)
|
|
For the Six Months
|
|
|
|
Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(523,546
|
)
|
|
$
|
(732,059
|
)
|
Adjustments to reconcile net loss
|
|
|
|
|
|
|
|
|
to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
87,046
|
|
|
$
|
71,491
|
|
Loss on early extinguishment of debt
|
|
$
|
15,000
|
|
|
|
-
|
|
Decrease (increase) in assets:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
12,092
|
|
|
$
|
(78,442
|
)
|
Notes receivable
|
|
$
|
40,000
|
|
|
|
-
|
|
Inventory
|
|
$
|
(98,072
|
)
|
|
$
|
(192,319
|
)
|
Prepaid expenses
|
|
$
|
92,221
|
|
|
$
|
(195,708
|
)
|
Other assets
|
|
|
-
|
|
|
$
|
249,000
|
|
Increase (decrease) in liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
(52,909
|
)
|
|
$
|
78,317
|
|
Accrued expenses
|
|
$
|
36,819
|
|
|
$
|
(13,883
|
)
|
Deferred rent obligations
|
|
$
|
1,999
|
|
|
$
|
24,432
|
|
Net cash used in operating activities
|
|
$
|
(389,350
|
)
|
|
$
|
(789,171
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
$
|
(28,098
|
)
|
|
$
|
(249,920
|
)
|
Net cash used in investing activities
|
|
$
|
(28,098
|
)
|
|
$
|
(249,920
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Cash contributions from partners
|
|
$
|
1,800,000
|
|
|
$
|
167,775
|
|
Cash distributions from partners
|
|
$
|
(1,700,000
|
)
|
|
|
-
|
|
Net cash provided by financing activities
|
|
$
|
100,000
|
|
|
$
|
167,775
|
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH
|
|
$
|
(317,448
|
)
|
|
$
|
(871,316
|
)
|
CASH AT BEGINNING OF PERIOD
|
|
$
|
332,060
|
|
|
$
|
919,879
|
|
|
|
|
|
|
|
|
|
|
CASH AT END OF PERIOD
|
|
$
|
14,612
|
|
|
$
|
48,563
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL INFORMATION:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
31,655
|
|
|
$
|
46,875
|
|
Income taxes paid
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Repayment of convertible notes payable from proceeds of partnership sale
|
|
$
|
222,500
|
|
|
$
|
-
|
|
Repayment of short term loans from proceeds of partnership sale
|
|
$
|
57,557
|
|
|
$
|
-
|
|
See accompanying notes to financial statements.
ALTERNATIVE SOLUTIONS L.L.C.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 – Basis of Presentation
Basis of Presentation
The interim condensed consolidated financial statements of Alternative Solutions L.L.C. included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to not make the information presented misleading.
These statements reflect all adjustments, which in the opinion of management, are necessary for fair presentation of the information contained therein. Except as otherwise disclosed, all such adjustments are of a normal recurring nature. It is suggested that these interim condensed consolidated financial statements be read in conjunction with the financial statements of the Company for the year ended December 31, 2017 and notes thereto. The Company follows the same accounting policies in the preparation of interim reports.
Our consolidated financial statements are prepared using the accrual method of accounting as generally accepted in the United States of America (U.S. GAAP) and the rules of the SEC.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the following entities, all of which are under common control and ownership:
|
|
State of
|
|
|
|
Abbreviated
|
Name of Entity
(1)
|
|
Incorporation
|
|
Relationship
|
|
Reference
|
Alternative Solutions L.L.C.
(2)
|
|
Nevada
|
|
Parent
|
|
Alternative Solutions
|
Serenity Wellness Center LLC
|
|
Nevada
|
|
Subsidiary
|
|
SWC
|
DBA/ Oasis Cannabis
|
|
Nevada
|
|
DBA
|
|
Oasis
|
Serenity Wellness Products LLC
|
|
Nevada
|
|
Subsidiary
|
|
SWP
|
DBA/ City Trees
|
|
Nevada
|
|
DBA
|
|
City Trees
|
Serenity Wellness Growers LLC
|
|
Nevada
|
|
Subsidiary
|
|
SWG
|
DBA/ City Trees
|
|
Nevada
|
|
Subsidiary
|
|
City Trees
|
(1)
Each entity is in the form of a domestic limited liability company.
(2)
Alternative Solutions L.L.C. is the parent company of each wholly-owned subsidiary.
The consolidated financial statements herein contain the operations of the wholly-owned subsidiaries listed above. All significant inter-company transactions have been eliminated in the preparation of these financial statements. The parent company, Alternative Solutions, and subsidiaries noted above, will be collectively referred to herein as the “Company”, “Alternative Solutions” or “Oasis”. The Company's headquarters are located in Las Vegas, Nevada and substantially all of its current customers are within the United States, more specifically, Las Vegas, Nevada.
These statements reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management are necessary for fair presentation of the information contained therein.
Fair Value of Financial Instruments
Under FASB ASC 820-10-05, the Financial Accounting Standards Board establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This Statement reaffirms that fair value is the relevant measurement attribute. The adoption of this standard did not have a material effect on the Company’s financial statements as reflected herein. The carrying amounts of cash, prepaid expenses and accrued expenses reported on the balance sheet are estimated by management to approximate fair value primarily due to the short term nature of the instruments.
ALTERNATIVE SOLUTIONS L.L.C.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 – Basis of Presentation and Significant Accounting Policies (Continued)
Cash in Excess of FDIC Insured Limits
The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. Accounts are guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to $250,000, under current regulations. The Company had $1,550,000 of funds in excess of FDIC insured limits at various times during the year, but not any as of June 30, 2018. The Company has not experienced any losses in such accounts.
Inventory
Inventories are stated at the lower of cost or market. Cost is determined on a standard cost basis that approximates the first-in, first-out (FIFO) method. Market is determined based on net realizable value. Appropriate consideration is given to obsolescence, excessive levels, deterioration, and other factors in evaluating net realizable value. Our cannabis products consist of prepackaged purchased goods ready for resale, and cannabis flower grown in-house under our cultivation license, along with produced edibles and extracts developed under our production license.
Deferred Rent Obligation
The Company has entered into operating lease agreements for its dispensary/corporate office and grow facility which contain provisions for future rent increases. In accordance with generally accepted accounting principles, the Company records monthly rent expense equal to the total of the payments due over the lease term, divided by the number of months of the lease terms. The difference between rent expense recorded and the amount paid is credited or charged to “Deferred rent obligation,” which is reflected as a separate line item in the accompanying Balance Sheets.
Revenue Recognition
Effective January 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the commercial sales of products, licensing agreements and contracts to perform pilot studies 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 the Company’s financial statements as a result of adopting Topic 606 for the six months ended June 30, 2018 and 2017, or the twelve months ended December 31, 2017.
Revenue is primarily generated through our subsidiary, Serenity Wellness LLC, DBA/ Oasis Cannabis. Oasis operates a 24-hour cannabis dispensary that recognizes revenue from the sale of cannabis products within the state of Nevada.
Revenue from the sale of our cannabis products is recognized by our subsidiary 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, DBA/ City Trees. City Trees recognizes revenue from the sale of the following cannabis products and services to licensed dispensaries within the state of Nevada:
|
●
|
Premium organic medical cannabis sold wholesale to licensed retailers
|
|
●
|
Recreational marijuana cannabis products sold wholesale to 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
|
ALTERNATIVE SOLUTIONS L.L.C.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 – Basis of Presentation (Continued)
Advertising and Promotion
All costs associated with advertising and promoting products are expensed as incurred with the exception of the amortization of the cost of two major video productions. A music video and reality/lifestyle video were both produced in 2017. The remaining amount that has not been expensed is listed on the schedule in Note 5. Total recognized advertising and promotion expenses were $288,725 and $99,951 for the six months ended June 30, 2018 and 2017, respectively, and $351,841 and $180,227 for the years ended December 31, 2017 and 2016, respectively.
Recent Accounting Pronouncements
In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The new guidance is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. The amendment provides guidance on accounting for the impact of the Tax Cuts and Jobs Act (the “Tax Act”) and allows entities to complete the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. The Tax Act has several significant changes that impact all taxpayers, including a transition tax, which is a one-time tax charge on accumulated, undistributed foreign earnings. The calculation of accumulated foreign earnings requires an analysis of each foreign entity’s financial results going back to 1986. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The guidance permits entities to reclassify tax effects stranded in Accumulated Other Comprehensive Income as a result of tax reform to retained earnings. This new guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2018. Early adoption is permitted in annual and interim periods and can be applied retrospectively or in the period of adoption. The Company is currently in the process of evaluating the impact of adoption on its consolidated financial statements.
Effective January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from the commercial sales of products, licensing agreements and contracts to perform pilot studies 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 the Company’s financial statements as a result of adopting Topic 606 for the six months ending June 30, 2018 and the year ended December 31, 2017.
ALTERNATIVE SOLUTIONS L.L.C.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 – Basis of Presentation (Continued)
Recent Accounting Pronouncements (Continued)
In May 2017, the FASB issued Accounting Standard Update (“ASU”) 2017-09
, Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting.
ASU 2017-09, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. Per ASU 2017-9, an entity should account for the effects of a modification unless all the following are met: (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification, (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified, and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in ASU 2017-9. ASU 2017-9 is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. The adoption of
ASU 2017-9
is not expected to have a material impact on the Company’s financial statements or related disclosures.
No other new accounting pronouncements, issued or effective during the six months ended June 30, 2018, have had or are expected to have a significant impact on the Company’s financial statements.
Note 2 – Going Concern
As shown in the accompanying financial statements, the Company incurred net losses from operations resulting in an accumulated deficit of $5,288,877 that has been distributed to the partners’ capital accounts, and used $389,350 of cash from operations during the six months ended June 30, 2018. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company is currently seeking additional sources of capital to fund short term operations. The Company, however, is dependent upon its ability to secure equity and/or debt financing and there are no assurances that the Company will be successful; therefore, without sufficient financing it would be unlikely for the Company to continue as a going concern.
The financial statements do not include any adjustments that might result from the outcome of any uncertainty as to the Company’s ability to continue as a going concern. The financial statements also do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
Note 3 – Change in Ownership
On June 27, 2018, CLS Holdings USA, Inc. (“CLS”) closed on the purchase of all of the membership interests in Alternative Solutions and its three operating subsidiaries (collectively, the “Oasis LLCs”) from the members of such entities (other than Alternative Solutions). The closing occurred pursuant to a Membership Interest Purchase Agreement (the “Acquisition Agreement”) entered into between CLS and Alternative Solutions on December 4, 2017, as amended.
Pursuant to the Acquisition Agreement, CLS paid a non-refundable deposit of $250,000 upon signing, which was followed by an additional payment of $1,800,000 paid in February 2018, for an initial 10% of each of the Oasis LLCs. At that time, CLS applied for regulatory approval to own an interest in the Oasis LLCs, which approval was subsequently received. On June 27, 2018, CLS made the remaining payments to indirectly acquire the remaining 90% of the Oasis LLCs, which were equal to cash in the amount of $6,200,000, a $4.0 million promissory note due in December 2019 (the “Oasis Note”), and 22,058,823 shares of its common stock (the “Purchase Price Shares”) (collectively, the “Closing Consideration”). CLS then applied for regulatory approval to own the additional 90% in membership interests in the Oasis LLCs, which we expect to receive in due course. The change of ownership in the Oasis LLCs to CLS will be recorded with the State upon receipt of such regulatory approvals. The closing was executed for accounting purposes as of June 30, 2018.
ALTERNATIVE SOLUTIONS L.L.C.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 4 – Fair Value of Financial Instruments
Under FASB ASC 820-10-5, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under GAAP, certain assets and liabilities must be measured at fair value, and FASB ASC 820-10-50 details the disclosures that are required for items measured at fair value.
The Company has certain financial instruments that must be measured under the new fair value standard. The Company’s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:
Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 - Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.
The following schedule summarizes the valuation of financial instruments at fair value on a recurring basis in the balance sheets as of March 31, 2018 and December 31, 2017, respectively:
|
|
Fair Value Measurements at June 30, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
14,612
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total assets
|
|
|
14,612
|
|
|
|
-
|
|
|
|
-
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Total liabilities
|
|
|
-
|
|
|
|
257,557
|
|
|
|
-
|
|
|
|
$
|
14,612
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
Fair Value Measurements at December 31, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
332,060
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Total assets
|
|
|
332,060
|
|
|
|
-
|
|
|
|
-
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible note payable, related parties
|
|
|
-
|
|
|
|
200,000
|
|
|
|
-
|
|
Notes payable, related parties
|
|
|
-
|
|
|
|
57,557
|
|
|
|
-
|
|
Total liabilities
|
|
|
-
|
|
|
|
257,557
|
|
|
|
-
|
|
|
|
$
|
332,060
|
|
|
$
|
(257,557
|
)
|
|
$
|
-
|
|
The fair values of our related party debts are deemed to approximate book value, and are considered Level 2 inputs as defined by ASC Topic 820-10-35.
There were no transfers of financial assets or liabilities between Level 1 and Level 2 inputs for the six months ended June 30, 2018 and the year ended December 31, 2017.
ALTERNATIVE SOLUTIONS L.L.C.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 5 – Accounts Receivable
Accounts receivable was $35,437 and $47,529 at June 30, 2018 and December 31, 2017, respectively. No allowance for doubtful accounts was necessary during the six months ended June 30, 2018 and the year ended December 31, 2017, respectively.
Note 5 – Inventory
Inventories, consisting of material, overhead, labor, and manufacturing overhead, are stated at the lower of cost (first-in, first-out) or market and consist of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Raw materials
|
|
$
|
91,084
|
|
|
$
|
41,375
|
|
Finished goods
|
|
|
314,869
|
|
|
|
266,506
|
|
|
|
$
|
405,953
|
|
|
$
|
307,881
|
|
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 6 – Prepaid Expenses
Prepaid expenses included the following as of June 30, 2018 and December 31, 2017, respectively:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Prepaid insurance
|
|
$
|
8,604
|
|
|
$
|
11,119
|
|
Prepaid advertising
|
|
|
46,092
|
|
|
|
113,017
|
|
Prepaid license fees
|
|
|
48,417
|
|
|
|
61,961
|
|
Prepaid general and administrative expenses
|
|
|
2,075
|
|
|
|
11,312
|
|
|
|
$
|
105,188
|
|
|
$
|
197,409
|
|
Note 7 – Other Assets
Other assets included the following as of June 30, 2018 and December 31, 2017, respectively:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Advance to ATM Provider
|
|
$
|
-
|
|
|
$
|
40,000
|
|
Security deposits
|
|
|
158,500
|
|
|
|
158,500
|
|
|
|
$
|
158,500
|
|
|
$
|
198,500
|
|
ALTERNATIVE SOLUTIONS L.L.C.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 9 – Property and Equipment
Property and equipment consist of the following at June 30, 2018 and December 31, 2017, respectively:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Office equipment
|
|
$
|
196,521
|
|
|
$
|
191,424
|
|
Furniture and fixtures
|
|
|
19,491
|
|
|
|
18,991
|
|
Website development costs
|
|
|
2,324
|
|
|
|
2,324
|
|
Leasehold improvements
|
|
|
1,085,782
|
|
|
|
1,063,281
|
|
Total
|
|
|
1,304,118
|
|
|
|
1,276,020
|
|
Less accumulated depreciation
|
|
|
(370,975
|
)
|
|
|
(283,929
|
)
|
Property and equipment, net
|
|
$
|
933,143
|
|
|
$
|
992,091
|
|
Depreciation and amortization expense totaled $87,046 and $71,491 for the six months ended June 30, 2018 and 2017, respectively.
Note 10 – Accrued Expenses
Accrued expenses included the following as of June 30, 2018 and December 31, 2017, respectively:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Accrued state and city taxes
|
|
$
|
225,899
|
|
|
$
|
173,456
|
|
Accrued payroll and payroll taxes
|
|
|
78,450
|
|
|
|
84,919
|
|
Accrued interest
|
|
|
-
|
|
|
|
16,655
|
|
Accrued consulting fees
|
|
|
275,000
|
|
|
|
275,000
|
|
|
|
$
|
579,349
|
|
|
$
|
550,030
|
|
Accrued consulting fees consist of an estimated fee that we may be required to pay to settle a disputed contract. This settlement, when and if, it occurs may very well not be settled within the next twelve months, despite being currently recognized as a current liability.
ALTERNATIVE SOLUTIONS L.L.C.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 11 – Convertible Notes Payable
Convertible notes payable consist of the following at June 30, 2018 and December 31, 2017, respectively:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
On January 6, 2016, we entered into a Subscription Agreement with Jeffrey Sloane (“First Sloane Note”) for $100,000, consisting of an unsecured promissory note convertible into Class B LLC Units at the option of the Subscriber only between January 1, 2019 and February 28, 2019, subject to the execution of the Company’s operating agreement and pursuant to the State and local jurisdictions’ authorization. The Note bears interest at 15%, due and payable on November 30, 2023, and the principal is convertible into Class B LLC Units of the Company at a price based upon a total Company valuation of twenty million dollars ($20,000,000). Interest is to be paid quarterly, in arrears. A total of $111,250 was repaid on June 27, 2018 out of the proceeds of the sale to CLS Holdings USA in satisfaction of $100,000 of principal and $3,750 of accrued interest, resulting in a $7,500 loss on early extinguishment of debt.
|
|
$
|
-
|
|
|
$
|
100,000
|
|
|
|
|
|
|
|
|
|
|
On June 5, 2015, we entered into a Subscription Agreement with Sandra (Smith) Johnson (“First Johnson Note”) for $100,000, consisting of an unsecured promissory note convertible into Class B LLC Units at the option of the Subscriber only between January 1, 2019 and February 28, 2019, subject to the execution of the Company’s operating agreement and pursuant to the State and local jurisdictions’ authorization. The Note bears interest at 15%, due and payable on November 30, 2023, and the principal is convertible into Class B LLC Units of the Company at a price based upon a total Company valuation of twenty million dollars ($20,000,000). Interest is to be paid quarterly, in arrears. A total of $111,250 was repaid on June 27, 2018 out of the proceeds of the sale to CLS Holdings USA in satisfaction of $100,000 of principal and $3,750 of accrued interest, resulting in a $7,500 loss on early extinguishment of debt.
|
|
|
-
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
Convertible notes payable
|
|
$
|
-
|
|
|
$
|
200,000
|
|
The Company recorded interest expense pursuant to the stated interest rates on the convertible notes in the amount of $15,000 and $46,875 for the six months ended June 30, 2018 and 2017, respectively.
On June 27, 2018, the Company repaid a total of $222,500 of convertible notes, consisting of $200,000 of principal, $7,500 of interest and an additional $15,000 recognized as a loss on early extinguishment of the debt, out of the proceeds received by the partners from CLS Holdings USA, Inc. commensurate with the Membership Interest Purchase Agreement with CLS Holdings USA, Inc.
ALTERNATIVE SOLUTIONS L.L.C.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 12 – Short Term Loans, Related Parties
Notes payable, related parties consist of the following at June 30, 2018 and December 31, 2017, respectively:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
On various dates, the Company received non-interest bearing, unsecured loan advances, due on demand from Todd Swanson, one of the Company’s partners. Aggregate proceeds of $573,270 and $950,000 were contributed to capital on August 31, 2016 and January 1, 2016, respectively. A total of $10,000 of outstanding principal was repaid on June 27, 2018 out of the proceeds of the sale to CLS Holdings USA, Inc.
|
|
$
|
-
|
|
|
$
|
10,000
|
|
|
|
|
|
|
|
|
|
|
On various dates, the Company received non-interest bearing, unsecured loan advances, due on demand from Deb Freeman, one of the Company’s partners. Aggregate proceeds of $31,098 and $60,836 were contributed to capital on August 31, 2016 and January 1, 2016, respectively. A total of $47,557 of outstanding principal was repaid on June 27, 2018 out of the proceeds of the sale to CLS Holdings USA, Inc.
|
|
|
-
|
|
|
|
47,557
|
|
|
|
|
|
|
|
|
|
|
Short term loans, related parties
|
|
$
|
-
|
|
|
$
|
57,557
|
|
Note 13 – Changes in Partners’ Capital
Alternative Solutions is a Limited Liability Company organized under the partnership laws of the State of Nevada on April 14, 2014. The original operating agreement authorized to issue up to 5,000 Common Units. A total of 1,000 Units were awarded to four original members, with one (1) additional unit awarded for each one thousand dollars ($1,000) of capital contributed thereafter. Debra Freeman served as the initial Managing Member, and Todd Swanson, Ben Sillitoe and Gary Schnitzer were subsequently added, by amendment, as Managing Members, with Todd Swanson designated as the Principal Manager. The operating agreement, as most recently amended on August 31, 2016, authorizes the issuance of up to 5,000,000 Common Units, which can be divided into multiple types, classes or series. The current capital structure carries three membership classes, as follows:
|
-
|
Class A LLC Units: Carries voting rights equal to the percentage of LLC Interest held by such Member.
|
|
-
|
Class B LLC Units: May be added by a Super Majority vote of Class A Members (Members holding 66 2/3% or more). Class B Members carry no voting rights and are not subject to dilution prior to March 1, 2019.
|
|
-
|
Class C LLC Units: May be added by a Super Majority vote of Class A Members, and carry no voting rights.
|
Unallocated Advance
In February 2018, the Company received $1,800,000 pursuant to the Membership Interest Purchase Agreement with CLS Holdings USA, Inc., in consideration for ten percent (10%) of the ownership interests in Alternative Solutions and its subsidiaries. The ownership change was submitted to the State of Nevada for approval and subsequently approved by the State pursuant to the terms of the sale.
Distributions
On June 27, 2018, the Company’s Managing Member was paid a distribution of $1,700,000 pursuant to the closing of the Membership Interest Purchase Agreement with CLS Holdings USA, Inc.
Transfer of Ownership
As disclosed in Note 3, above, on June 27, 2018, CLS closed on the remaining purchase of 100% of the membership interests in Alternative Solutions and its three operating subsidiaries from the members of such entities (other than Alternative Solutions), at which time, the entities became single member LLCs. The entities are also going to adopt the parent Company’s fiscal year-end of May 31
st
.
ALTERNATIVE SOLUTIONS L.L.C.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 14 – Income Taxes
The Company is a partnership for tax purposes and all taxable gains and losses are passed through to the individual partners, therefore there is no tax asset or liability to be presented by the Company.
Note 15 – Subsequent Events
As of the date of this filing, there have been no subsequent events to report.
Unaudited
Pro Forma Financial Information of the Company
And Alternative Solutions for the 12-Month Period Ended May 31, 2018
On June 27, 2018, the Company completed the purchase of all of the membership interests in Alternative Solutions and the Oasis LLCs from the members of such entities. The closing occurred pursuant to a Membership Interest Purchase Agreement entered into between the Company and Alternative Solutions on December 4, 2017, as amended (the “Acquisition Agreement”). 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 (the “Oasis Acquisition”). The revised structure of the transaction is referenced in the Oasis Note, which modified the Acquisition Agreement.
The total cost of the Oasis Acquisition was $27,297,539. The consideration for and in connection with the Oasis Acquisition consisted of: (a) A cash payment in the amount of $8,045,543; (b) a note payable with a fair value of $3,810,820 (net of original issue discount of $189,180); and (c) 22,058,823 shares of the Company’s common stock with a fair value of $15,441,176.
The following unaudited pro forma condensed combined balance sheet at May 31, 2018 and the unaudited pro forma condensed combined statements of operations for the year ended May 31, 2018 presented herein are based on the historical financial statements of The Company and its subsidiaries, and Alternative Solutions, LLC and subsidiaries, after giving effect to the Oasis Acquisition of all of the assets and liabilities of Alternative Solutions, LLC and its subsidiaries by the Company
The unaudited condensed combined pro forma balance sheet data assumes that the Acquisition took place on May 31, 2018 and combines unaudited consolidated balance sheets of the Company and Alternative Solutions, LLC as of May 31, 2018.
The unaudited pro forma condensed combined statement of operations for the year ended May 31, 2018 combines the historical consolidated statement of operations of the Company and Alternative Solutions, LLC for the year ended May 31, 2018. The unaudited pro forma condensed combined statement of operations for the fiscal year ended May 31, 2018 give effect to the Oasis Acquisition as if it occurred on June 1, 2017.
The unaudited pro forma condensed combined financial statements include adjustments, which are based upon preliminary estimates, to reflect the allocation of the purchase price to the acquired assets and assumed liabilities of Alternative solutions, LLC. The final allocation of the purchase price will be determined after the completion of the Oasis Acquisition and will be based upon actual net tangible and intangible assets acquired as well as liabilities assumed. The preliminary purchase price allocation for Alternative Solutions, LLC is subject to revision as more detailed analysis is completed and additional information on the fair values of its assets and liabilities becomes available. Any change in the fair value of the net assets of Alternative Solutions, LLC will change the amount of the purchase price allocable to goodwill. Final purchase accounting adjustments may differ materially from the pro forma adjustments presented here.
The unaudited pro forma condensed combined financial statements do not give effect to the potential impact of current financial conditions, regulatory matters or any anticipated synergies, operating efficiencies or cost savings that may be associated with the Oasis Acquisition. The unaudited pro forma condensed combined financial data also does not include any integration costs, cost overlap or estimated future transaction costs, except for fixed contractual transaction costs that the companies expect to incur as a result of the Oasis Acquisition.
The historical financial information has been adjusted to give effect to events that are directly attributable to the Oasis Acquisition, factually supportable and, with respect to the statements of operations, expected to have a continuing impact on the results of the combined company. This unaudited pro forma combined financial information should be read in conjunction with the historical financial statements and accompanying notes of Alternative Solutions, LLC (contained elsewhere in this Prospectus), and the historical financial statements and accompanying footnotes of the Company appearing in its periodic SEC filings and elsewhere in this Prospectus. The adjustments that are included in the following unaudited pro forma combined financial statements are described in the notes below, which include the numbered notes that are marked in those financial statements.
Unaudited
Pro Forma Condensed Combined Balance Sheet
As of May 31, 2018
ASSETS
|
|
CLS Holdings USA, Inc.
|
|
|
Alternative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
Solutions, LLC
|
|
|
Pro forma
|
|
|
|
|
|
Pro forma
|
|
|
|
Subsidiaries
|
|
|
and Subsidiaries
|
|
|
Adjustments
|
|
|
Note
|
|
|
Combined
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
52,964
|
|
|
$
|
1,716,235
|
|
|
$
|
430,000
|
|
|
D
|
|
|
$
|
2,199,199
|
|
Accounts Receivable
|
|
|
-
|
|
|
|
18,126
|
|
|
|
-
|
|
|
|
|
|
|
18,126
|
|
Inventory
|
|
|
-
|
|
|
|
411,658
|
|
|
|
-
|
|
|
|
|
|
|
411,658
|
|
Prepaid expenses
|
|
|
1,410
|
|
|
|
192,244
|
|
|
|
-
|
|
|
|
|
|
|
193,654
|
|
Total current assets
|
|
|
54,374
|
|
|
|
2,338,263
|
|
|
|
|
|
|
|
|
|
|
2,822,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
|
2,050,000
|
|
|
|
-
|
|
|
|
15,441,176
|
|
|
A
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
5,995,543
|
|
|
D
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,810,820
|
|
|
H
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,297,539
|
)
|
|
I
|
|
|
|
|
|
Other assets
|
|
|
-
|
|
|
|
160,318
|
|
|
|
-
|
|
|
|
|
|
|
160,318
|
|
Property and equipment, net
|
|
|
-
|
|
|
|
945,959
|
|
|
|
-
|
|
|
I
|
|
|
|
945,959
|
|
Intangible assets
|
|
|
898
|
|
|
|
-
|
|
|
|
1,637,600
|
|
|
I
|
|
|
|
1,638,498
|
|
Goodwill
|
|
|
-
|
|
|
|
-
|
|
|
|
25,742,899
|
|
|
I
|
|
|
|
25,742,899
|
|
Total assets
|
|
$
|
2,105,272
|
|
|
$
|
3,444,540
|
|
|
|
|
|
|
|
|
|
$
|
31,310,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND PARTNERS' CAPITAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
826,621
|
|
|
|
925,360
|
|
|
|
(443,179
|
)
|
|
I
|
|
|
|
1,308,802
|
|
Accrued compensation, related party
|
|
|
120,417
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
120,417
|
|
Due to related party
|
|
|
17,930
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
17,930
|
|
Accrued interest
|
|
|
24,748
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
24,748
|
|
Accrued interest, related party
|
|
|
5,143
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
5,143
|
|
Notes payable, related parties
|
|
|
75,137
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
75,137
|
|
Notes payable
|
|
|
310,000
|
|
|
|
-
|
|
|
|
3,810,820
|
|
|
H
|
|
|
|
4,120,820
|
|
Convertible notes payable, net of discount
|
|
|
43,401
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
43,401
|
|
Deferred rent obligation
|
|
|
-
|
|
|
|
135,707
|
|
|
|
-
|
|
|
|
|
|
|
135,707
|
|
Convertible notes payable
|
|
|
-
|
|
|
|
200,000
|
|
|
|
-
|
|
|
|
|
|
|
200,000
|
|
Short term loans, related parties
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
-
|
|
Derivative liability
|
|
|
1,265,751
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
1,265,751
|
|
Contingent liability
|
|
|
-
|
|
|
|
-
|
|
|
|
678,111
|
|
|
M
|
|
|
|
678,111
|
|
Total current liabilities
|
|
|
2,689,148
|
|
|
|
1,261,067
|
|
|
|
|
|
|
|
|
|
|
7,995,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes payable, related parties, long term, net of discount
|
|
|
2,832
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
2,832
|
|
Convertible notes payable, long term, net of discount
|
|
|
41,072
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
41,072
|
|
Total liabilities
|
|
|
2,733,052
|
|
|
|
1,261,067
|
|
|
|
|
|
|
|
|
|
|
8,039,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners' capital
|
|
|
|
|
|
|
2,183,473
|
|
|
|
(2,183,473
|
)
|
|
N
|
|
|
|
-
|
|
Common Stock
|
|
|
5,013
|
|
|
|
-
|
|
|
|
2,206
|
|
|
A
|
|
|
|
7,289
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
B
|
|
|
|
|
|
Additional paid-in capital
|
|
|
17,628,717
|
|
|
|
-
|
|
|
|
15,438,970
|
|
|
A
|
|
|
|
50,736,353
|
|
|
|
|
|
|
|
|
|
|
|
|
489,930
|
|
|
B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,785,978
|
|
|
D
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,359,152
|
|
|
E
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,329,736
|
|
|
F
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,703,870
|
|
|
G
|
|
|
|
|
|
Stock payable
|
|
|
307,584
|
|
|
|
-
|
|
|
|
69,458
|
|
|
C
|
|
|
|
377,042
|
|
Accumulated deficit
|
|
|
(18,569,094
|
)
|
|
|
-
|
|
|
|
(9,281,150
|
)
|
|
B,C,D,E,F,G,I
|
|
|
|
(27,850,244
|
)
|
Total equity
|
|
|
(627,780
|
)
|
|
|
2,183,473
|
|
|
|
|
|
|
|
|
|
|
23,270,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
2,105,272
|
|
|
$
|
3,444,540
|
|
|
|
|
|
|
|
|
|
$
|
31,310,311
|
|
Unaudited
Pro Forma Condensed Combined Statement of Operations
For the Year Ended May 31, 2018
|
|
CLS Holdings USA, Inc.
|
|
|
Alternative
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
Solutions, LLC
|
|
|
Pro forma
|
|
|
|
Pro forma
|
|
|
|
Subsidiaries
|
|
|
and Subsidiaries
|
|
|
Adjustments
|
|
Note
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
7,258,443
|
|
|
|
|
|
|
|
$
|
7,258,443
|
|
Cost of goods sold
|
|
|
-
|
|
|
|
4,586,221
|
|
|
|
|
|
|
|
|
4,586,221
|
|
Gross profit
|
|
|
-
|
|
|
|
2,672,222
|
|
|
|
|
|
|
|
|
2,672,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, general, and administrative expenses
|
|
|
3,116,040
|
|
|
|
3,877,117
|
|
|
|
125,060
|
|
J
|
|
|
7,118,217
|
|
Total operating expenses
|
|
|
3,116,040
|
|
|
|
3,877,117
|
|
|
|
|
|
|
|
|
7,118,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss
|
|
|
(3,116,040
|
)
|
|
|
(1,204,895
|
)
|
|
|
|
|
|
|
|
(4,445,995
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
4,709,940
|
|
|
|
67,641
|
|
|
|
372,606
|
|
K
|
|
|
5,150,187
|
|
Gain on settlement of debt
|
|
|
(3,480
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
(3,480
|
)
|
Loss on modification of debt
|
|
|
29,145
|
|
|
|
-
|
|
|
|
|
|
|
|
|
29,145
|
|
Loss on note exchange
|
|
|
404,082
|
|
|
|
-
|
|
|
|
|
|
|
|
|
404,082
|
|
Loss on extinguishment of debt
|
|
|
989,032
|
|
|
|
-
|
|
|
|
|
|
|
|
|
989,032
|
|
Prepayment Penalty
|
|
|
137,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
137,000
|
|
Change in fair value of derivative
|
|
|
195,725
|
|
|
|
-
|
|
|
|
|
|
|
|
|
195,725
|
|
Total other expense
|
|
|
6,461,444
|
|
|
|
67,641
|
|
|
|
|
|
|
|
|
6,901,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,577,484
|
)
|
|
$
|
(1,272,536
|
)
|
|
|
|
|
|
|
$
|
(11,347,686
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share - basic and diluted
|
|
$
|
(0.24
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,058,823
|
|
A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
700,000
|
|
B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
575,000
|
|
C
|
|
|
|
|
Weighted average shares outstanding - basic and diluted
|
|
|
39,224,613
|
|
|
|
|
|
|
|
33,463,868
|
|
L
|
|
|
96,022,304
|
|
Note
1 – Basis of Pro Forma Presentation
The accompanying unaudited pro forma condensed combined financial statements are based on the historical condensed consolidated financial statements of the Company and Alternative Solutions, LLC, as adjusted to give effect to the Oasis Acquisition of Alternative Solutions, LLC by the Company The unaudited pro forma condensed consolidated statement of income for the year ended May 31, 2018 gives effect to the Oasis Acquisition of Alternative Solutions, LLC as if it had occurred on June 1, 2017. The unaudited pro forma condensed consolidated balance sheet as of May 31, 2018 gives effect to the Oasis Acquisition of Alternative Solutions, LLC as if it occurred on May 31, 2018.
The unaudited pro forma combined financial information is based on the assumption that the Oasis Acquisition is accounted for using the acquisition accounting method in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 805, Business Combinations, and includes all adjustments that are directly attributable to the transactions, and are factually supportable regardless of whether they have continuing impact or are nonrecurring. In accordance with ASC 805, the Company allocated the purchase price of the Oasis Acquisition to the tangible assets, liabilities, and identifiable intangible assets acquired based on their estimated fair values. The excess of the purchase price over those fair values is recorded as goodwill. During the measurement period, as additional information becomes available about facts and circumstances that existed as of acquisition date, the Company may further revise its preliminary valuation of assets acquired and liabilities assumed with the corresponding offset to goodwill. After the measurement period, which could be up to one year after the initial transaction date, the Company may record subsequent adjustments to its statement of operations.
The unaudited pro forma combined financial information does not give effect to the potential impact of current financial conditions, regulatory matters, operating efficiencies or other savings or expenses that may be associated with the Oasis Acquisition. The unaudited pro forma condensed combined financial information also does not include any future integration costs. The unaudited pro forma condensed combined financial information has been prepared by management for illustrative purposes only in accordance with Article 11 of SEC Regulation S-X and is not necessarily indicative of the combined financial position or results of operations in future periods or the results that actually would have been realized had the Company and Alternative Solutions, LLC been reporting operations on a consolidated basis during the specified periods presented.
Note 2 – Pro Forma Adjustments
The pro forma condensed combined financial information is based upon the historical consolidated financial statements of the Company and Alternative Solutions, LLC and certain adjustments that the Company believes are reasonable to give effect to the Oasis Acquisition. These adjustments are based upon currently available information and certain assumptions, and therefore the actual adjustments will likely differ from the pro forma adjustments. The pro forma condensed combined financial statements were prepared using the acquisition method of accounting for the business combination.
The following pro forma adjustments are included in the unaudited pro forma condensed combined balance sheet and statements of operations:
A – Common stock issued in connection with the Oasis Acquisition.
B – Common stock issued to consultant for assisting with the Oasis Acquisition.
C – Common stock to be issued to certain officers of the Oasis LLCs.
D – Special warrants sold for cash in connection with the Oasis Acquisition. Each special warrant is exercisable, for no additional consideration, into one share of common stock and one three-year warrant to purchase one share of common stock at a price of C$0.65 per shares. Each special warrant is automatically exercisable on the earlier of: (i) the date that is five business days following the date on which the Company obtains a receipt from the applicable securities regulatory authorities in each of the jurisdictions in Canada in which the special warrants were sold for a final prospectus qualifying the distribution of the units, and (ii) November 30, 2018. The special warrants are deemed exercised for purposes of the pro forma statement of operations.
E - Special warrants issued to a placement agent in connection with the Oasis Acquisition. These warrants have the same terms as the special warrants described in note D, above. The placement agent special warrants are deemed exercised for purposes of the pro forma statement of operations.
F – Warrants issued as compensation to a placement agent in connection with the Oasis Acquisition.
G – Special warrants issued due to a registration statement filing penalty in connection with the Oasis Acquisition. These warrants have the same terms as the special warrants described in note D, above. These special warrants are deemed exercised for purposes of the pro forma statement of operations.
H – Note payable issued in connection with the Oasis Acquisition.
I – Acquired in connection with the Oasis Acquisition.
J – Amortization of intangible assets acquired in the Oasis Acquisition.
K – Interest and amortization of discount on note payable issued in connection with the Oasis Acquisition.
L – Exercise of special warrants issued in connection with the Oasis Acquisition, including special warrants sold for cash, special warrants issued to the placement agent, and special warrants issued for a registration statement filing penalty. These warrants are automatically exercisable for no additional consideration.
M – Fair value of contingent consideration payable in connection with the Oasis Acquisition.
N – Elimination of the equity of Alternative Solutions, LLC and Subsidiaries.
CLS HOLDINGS USA, INC.
PROSPECTUS
31,192,324 Shares of Common Stock
____________, 2019
Until ____________, 2019, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS