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 patented proprietary process or otherwise earned any revenues from it. The Company plans to generate revenues through licensing, fee-for-service and joint venture arrangements related to its patented proprietary method of extracting cannabinoids from cannabis plants and converting the resulting cannabinoid extracts into saleable concentrates.
On December 4, 2017, the Company and Alternative Solutions, entered into a Membership Interest Purchase Agreement (the “Acquisition Agreement”), as amended, for the Company to acquire the Oasis LLCs from Alternative Solutions. Pursuant to the Acquisition Agreement, the Company initially contemplated acquiring all of the membership interests in the Oasis LLCs from Alternative Solutions. Just prior to closing, the parties agreed that the Company would instead acquire all of the membership interests in Alternative Solutions, the parent of the Oasis LLCs, from its members, and the membership interests in the Oasis LLCs owned by members other than Alternative Solutions.
Pursuant to the Acquisition Agreement, the Company paid a non-refundable deposit of $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.
On October 31, 2018, the Company, CLS Massachusetts, Inc., a Massachusetts corporation and a wholly-owned subsidiary of the Company (“CLS Massachusetts”), and In Good Health, Inc., a Massachusetts corporation (“IGH”), entered into an Option Agreement (the “IGH Option Agreement”). Under the terms of the IGH Option Agreement, CLS Massachusetts had an exclusive option to acquire all of the outstanding capital stock of IGH (the “IGH Option”) during the period beginning on the earlier of the date that is one year after the effective date of the conversion and December 1, 2019 and ending on the date that was 60 days after such date. If CLS Massachusetts exercised the IGH Option, the Company, a wholly-owned subsidiary of the Company and IGH would enter into a merger agreement (the form of which had been agreed to by the parties) (the “IGH Merger Agreement”). At the effective time of the merger contemplated by the IGH Merger Agreement, CLS Massachusetts would pay a purchase price of $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 entered into agreements pursuant to which such stockholders, among other things, agreed to vote in favor of such transactions. On October 31, 2018, as consideration for the IGH Option, the Company made a loan to IGH, in the principal amount of $5,000,000, subject to the terms and conditions set forth in that certain loan agreement, dated as of October 31, 2018 between IGH as the borrower and the Company as the lender. The loan was evidenced by a secured promissory note of IGH, which bore interest at the rate of 6% per annum and was to mature on October 31, 2021. To secure the obligations of IGH to the Company under the loan agreement and the promissory note, the Company and IGH entered into a security agreement dated as of October 31, 2018, pursuant to which IGH granted to the Company a first priority lien on and security interest in all personal property of IGH. If the Company did not exercise the Option on or prior to the date that is 30 days following the end of the option period, the loan amount would be reduced to $2,500,000 as a break-up fee, subject to certain exceptions set forth in the IGH Option Agreement. On August 26, 2019, the parties amended the IGH Option Agreement to, among other things, delay closing until January 2020. By letter agreement dated January 31, 2020, the Company, CLS Massachusetts and IGH extended the IGH Option Agreement to February 4, 2020. On February 4, 2020, CLS Massachusetts exercised the IGH Option. By letter dated February 26, 2020, the Company informed IGH that as a result of its breaches of the IGH Option, which remained uncured, an event of default had occurred under the IGH Note. The Company advised IGH that it was electing to cause the IGH Note to bear interest at the default rate of 15% per annum effective February 26, 2020 and to accelerate all amounts due under the Note. This dispute, including whether IGH breached the IGH Option and whether CLS is entitled to collect default interest, is now in litigation. At May 31, 2021, the Company had collected a total of $2,901,569 of principal and $220,196 of interest on the IGH Note. On February 27, 2021, IGH notified the Company that it did not plan to make further payments under the IGH Note on the theory that the Break-Up Fee (as defined below) excused additional payments. The Company vehemently disagrees with this assertion, which remains in litigation. The Company has requested permission from the court to file an amended complaint to accelerate the due date of all remaining amounts under the IGH Note and receive default interest as a result of IGH’s breach of the IGH Note, as well as to add a fraud count to the complaint. During the twelve months ended May 31, 2021, the Company impaired the remaining amounts due under the IGH Note in the amount of $2,498,706, which includes $2,497,884 in principal and $822 in accrued interest. As of May 31, 2021, the principal balance of the IGH Note was $0 and the interest receivable was $0.
On June 14, 2021, the parties to the IGH lawsuit entered into a confidential settlement agreement to resolve the action and a secured promissory note dated and executed by IGH in favor of the Company effective on June 11, 2021. Pursuant to the promissory note, IGH shall pay the Company $3,000,000, $500,000 of which was due and payable on or before June 21, 2021. A second payment of $500,000 was due and payable on or before July 12, 2021. The remaining $2,000,000 and accrued interest shall be paid in 12 equal, monthly installments beginning on August 12, 2021, pursuant to the terms of the promissory note.
On January 29, 2019, the Company made a line of credit loan to CannAssist, LLC (“CannAssist”), in the principal amount of up to $500,000, subject to the terms and conditions set forth in that certain Loan Agreement, dated as of January 29, 2019 between CannAssist as the Borrower and the Company as the Lender (the “CannAssist Loan Agreement”). 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 was evidenced by a secured promissory note of CannAssist (the “CannAssist Note”), which bore interest at the rate of 8% per annum and was personally guaranteed by the two equity owners of CannAssist. To secure the obligations of CannAssist to the Company under the CannAssist Loan Agreement and the CannAssist Note, the Company and CannAssist entered into a security agreement dated as of January 29, 2019, pursuant to which CannAssist granted to the Company a first priority lien on and security interest in all personal property of CannAssist.
On March 11, 2019, the Company, through its wholly-owned subsidiary, CLS Massachusetts, entered into a membership interest purchase agreement (the “CannAssist Purchase Agreement”) with CannAssist, each of the members of CannAssist, and David Noble, as the members’ representative, to acquire an 80% ownership interest in CannAssist. After conducting diligence, the parties decided to terminate the CannAssist Purchase Agreement effective August 26, 2019.
On August 26, 2019, the Company and CannAssist entered into an agreement to amend the CannAssist Note. Pursuant to the amendment, there were no additional advances under the CannAssist Note beyond the $150,000 advanced on February 4, 2019, and the $175,000 advanced on June 24, 2019. In addition, the CannAssist Note became due and payable in full on or before February 28, 2020. See note 8. On December 23, 2019, the Company received payment in full on the CannAssist loan in the amount of $342,567, which was made up of $325,000 of principal and $17,567 of interest. At May 31, 2021, the Company was owed $0 pursuant to the CannAssist Note.
On January 4, 2018, the former Attorney General, Jeff Sessions, rescinded the memorandum issued by former Deputy Attorney General James Cole on August 29, 2013 (as amended on February 14, 2014, the “Cole Memo”), the Cole Banking Memorandum, and all other related Obama-era DOJ cannabis enforcement guidance. While the rescission did not change federal law, as the Cole Memo and other DOJ guidance documents were not themselves laws, the rescission removed the DOJ’s formal policy that state-regulated cannabis businesses in compliance with the Cole Memo guidelines should not be a prosecutorial priority. Notably, former Attorney General Sessions’ rescission of the Cole Memo has not affected the status of the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) memorandum issued by the Department of Treasury, which remains in effect. This memorandum outlines Bank Secrecy Act-compliant pathways for financial institutions to service state-sanctioned cannabis businesses, which echoed the enforcement priorities outlined in the Cole Memo. In addition to his rescission of the Cole Memo, Attorney General Sessions issued a one-page memorandum known as the “Sessions Memorandum”. The Sessions Memorandum explains the DOJ’s rationale for rescinding all past DOJ cannabis enforcement guidance, claiming that Obama-era enforcement policies are “unnecessary” due to existing general enforcement guidance adopted in the 1980s, in chapter 9.27.230 of the U.A. Attorneys’ Manual (“USAM”). The USAM enforcement priorities, like those of the Cole Memo, are based on the use of the federal government’s limited resources and include “law enforcement priorities set by the Attorney General,” the “seriousness” of the alleged crimes, the “deterrent effect of criminal prosecution,” and “the cumulative impact of particular crimes on the community.” Although the Sessions Memorandum emphasizes that cannabis is a federally illegal Schedule I controlled substance, it does not otherwise instruct U.S. Attorneys to consider the prosecution of cannabis-related offenses a DOJ priority, and in practice, most U.S. Attorneys have not changed their prosecutorial approach to date. However, due to the lack of specific direction in the Sessions Memorandum as to the priority federal prosecutors should ascribe to such cannabis activities, there can be no assurance that the federal government will not seek to prosecute cases involving cannabis businesses that are otherwise compliant with state law.
William Barr served as United States Attorney General from February 14, 2019 to December 23, 2020. The DOJ under Mr. Barr did not take a formal position on federal enforcement of laws relating to cannabis. On March 11, 2021, United States President Biden’s nominee, Merrick Garland was sworn in as the U.S. Attorney General. During his campaign, President Biden stated a policy goal to decriminalize possession of cannabis at the federal level, but he has not publicly supported the full legalization of cannabis. It is unclear what impact, if any, the new administration will have on U.S. federal government enforcement policy on cannabis. Nonetheless, there is no guarantee that the position of the Department of Justice will not change.
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 $92,736,638 as of May 31, 2021. 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 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 direct and indirect wholly owned operating subsidiaries, CLS Nevada, Inc., (“CLS Nevada”), CLS Labs, Inc. (“CLS Labs”), CLS Labs Colorado, Inc. (“CLS Colorado”), CLS Massachusetts, Inc. (“CLS Massachusetts”), and Alternative Solutions, LLC (“Alternative Solutions”). 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.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassification
Certain amounts in the prior period have been reclassified to conform to the current period presentation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less to be cash equivalents. The Company had cash and cash equivalents of $1,665,263 and $2,925,568 as of May 31, 2021 and 2020.
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 believes 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 $15,798 and $108,392 in bad debt expense during the years ended May 31, 2021 and 2020, respectively.
Inventory
Inventories are stated at the lower of cost or market. Cost is determined using a perpetual inventory system whereby costs are determined by acquisition costs of individual items included in inventory. Market is determined based on net realizable value. Appropriate consideration is given to obsolescence, excessive levels, deterioration, and other factors in evaluating net realizable values. Our cannabis products consist of prepackaged purchased goods ready for resale, along with produced edibles and extracts developed under our production license.
Property, Plant, and Equipment
Property and equipment is recorded at the lower of cost or estimated net recoverable amount, and is depreciated using the straight-line method over its estimated useful life. Property acquired in a business combination is recorded at estimated initial fair value. Property, plant, and equipment are depreciated using the straight-line method based on the lesser of the estimated useful lives of the assets or the lease term based upon the following life expectancy:
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Years
|
|
|
Office equipment
|
|
|
3 to 5 |
|
|
Furniture & fixtures
|
|
|
3 to 7 |
|
|
Machinery & equipment
|
|
|
3 to 10 |
|
|
Leasehold improvements
|
|
Term of lease |
|
Repairs and maintenance expenditures are charged to operations as incurred. Major improvements and replacements, which extend the useful life of an asset, are capitalized and depreciated over the remaining estimated useful life of the asset. When assets are retired or sold, the cost and related accumulated depreciation are eliminated and any resulting gain or loss is reflected in operations.
Long-Lived Assets
The Company reviews its property and equipment and any identifiable intangibles including goodwill for impairment on an annual basis utilizing the guidance set forth in the Statement of Financial Accounting Standards Board ASC 350 “Intangibles – Goodwill and Other” and ASC 360 “Property, Plant, and Equipment.” As a result of the impairment test, it was determined that the net carrying value of goodwill exceeded the fair value by $25,185,003, and the Company recorded an impairment charge to operations during the year ended May 31, 2020 in the amount of $25,185,003. At May 31, 2021, the net carrying value of goodwill on the Company’s balance sheet remained at $557,896.
Comprehensive Income
ASC 220-10-15 “Reporting Comprehensive Income,” establishes standards for reporting and displaying of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, ASC 220-10-15 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company does not have any items of comprehensive income in any of the periods presented.
Concentrations of Credit Risk
The Company maintains its cash in bank deposit accounts and other accounts, the balances of which at times may be uninsured or exceed federally insured limits. From time to time, some of the Company’s funds are also held by escrow agents; these funds may not be federally insured. The Company continually monitors its banking relationships and consequently has not experienced any losses in such accounts.
Advertising and Marketing Costs
All costs associated with advertising and promoting products are expensed as incurred. Total recognized advertising and marketing expenses were $1,237,326 and $836,000 for the years ended May 31, 2021 and 2020, respectively.
Research and Development
Research and development expenses are charged to operations as incurred. The Company incurred research and development costs of $37,122 and $0 for the years ended May 31, 2021 and 2020, 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, notes receivable, convertible notes payable, accounts payable and accrued expenses, none of which is held for trading, approximate their estimated fair values due to the short-term maturities of those financial instruments.
A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable, either directly or indirectly.
Level 3 - Significant unobservable inputs that cannot be corroborated by market data.
Revenue Recognition
Revenue from the sale of cannabis products is recognized by Oasis at the point of sale, at which time payment is received. Management estimates an allowance for sales returns.
The Company also recognizes revenue from Serenity Wellness Products LLC and Serenity Wellness Growers LLC, d/b/a City Trees (“City Trees”). City Trees recognizes revenue from the sale of the following cannabis products and services to licensed dispensaries within the State of Nevada:
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●
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Premium organic medical cannabis sold wholesale to licensed retailers
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●
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Recreational marijuana cannabis products sold wholesale to licensed distributors and retailers
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●
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Extraction products such as oils and waxes derived from in-house cannabis production
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●
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Processing and extraction services for licensed medical cannabis cultivators in Nevada
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●
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High quality cannabis strains in the form of vegetative cuttings for sale to licensed medical cannabis cultivators in Nevada
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Effective June 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from commercial sales of products and licensing agreements by applying the following steps: (1) identifying the contract with a customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to each performance obligation in the contract; and (5) recognizing revenue when each performance obligation is satisfied. For the comparative periods, revenue has not been adjusted and continues to be reported under ASC 605 — Revenue Recognition. Under ASC 605, revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the performance of the service has been rendered to a customer or delivery has occurred; (3) the amount of fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably assured. There was no impact on the Company’s financial statements as a result of adopting Topic 606 for the years ended May 31, 2021 and 2020.
Disaggregation of Revenue
The following table represents a disaggregation of revenue for the years ended May 31, 2021 and 2020:
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2021
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|
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2020
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|
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Cannabis Dispensary
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|
$ |
14,595,115 |
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|
$ |
9,365,105 |
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|
Cannabis Production
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|
|
4,696,972 |
|
|
|
2,552,524 |
|
| |
|
$ |
19,292,087 |
|
|
$ |
11,917,629 |
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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, 2021 and 2020, the Company excluded from the calculation of fully diluted shares outstanding the following shares because the result would have been anti-dilutive: At May 31, 2021 a total of 129,623,809 shares (53,997,645 issuable upon the exercise of warrants, 7,676,974 issuable upon the exercise of unit warrants, 67,106,559 issuable upon the conversion of convertible notes payable and accrued interest, and 70,000 in stock to be issued). At May 31, 2020 a total of 88,130,526 shares (54,835,145 issuable upon the exercise of warrants, 7,676,974 issuable upon the exercise of unit warrants, 25,131,739 issuable upon the conversion of convertible notes payable and accrued interest, and 486,668 in stock to be issued).
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 years ended May 31, 2021 and 2020.
Income Taxes
The Company accounts for income taxes under the asset and liability method in accordance with ASC 740. The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The components of the deferred tax assets and liabilities are classified as current and non-current based on their characteristics. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations.
Section 280E of the Internal Revenue Code, as amended, prohibits businesses from deducting certain expenses associated with trafficking controlled substances (within the meaning of Schedule I and II of the Controlled Substances Act). The IRS has invoked Section 280E in tax audits against various cannabis businesses in the U.S. that are permitted under applicable state laws. Although the IRS has issued a clarification allowing the deduction of certain expenses, the bulk of operating costs and general administrative costs are generally not permitted to be deducted. The operations of certain of the Company’s subsidiaries are subject to Section 280E. This results in permanent differences between ordinary and necessary business expenses deemed non-deductible under IRC Section 280E. Therefore, the effective tax rate can be highly variable and may not necessarily correlate with pre-tax income or loss.
Commitments and Contingencies
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims brought to such legal counsel’s attention as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed.
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Codification (“ASC”) No. 2016-02, Leases (Topic 842): Accounting for Leases. This update requires that lessees recognize right-of-use assets and lease liabilities that are measured at the present value of the future lease payments at the lease commencement date. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will largely remain unchanged and shall continue to depend on its classification as a finance or operating lease. The Company has performed a comprehensive review in order to determine what changes were required to support the adoption of this new standard. The Company adopted the ASU and related amendments on June 1, 2019 and has elected certain practical expedients permitted under the transition guidance. The Company has elected the optional transition method that allows for a cumulative-effect adjustment in the period of adoption and will not restate prior periods. Under the new guidance, the majority of the Company’s leases continue to be classified as operating. During the first quarter of fiscal 2020, the Company completed its implementation of its processes and policies to support the new lease accounting and reporting requirements. This resulted in an initial increase in both its total assets of $2,703,821 and total liabilities in the amount of $2,675,310.
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, current U.S. GAAP requires the performance of procedures to determine the fair value at the impairment testing date of assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, the amendments under this ASU require the goodwill impairment test to be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The ASU became effective for the Company on January 1, 2020. During the year ended May 31, 2020, the Company recorded an impairment of goodwill in the amount of $25,185,003 pursuant to ASU No. 2017-04.
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 – JOINT VENTURE AND OPTIONS TRANSACTION
In Good Health
On October 31, 2018, the Company, CLS Massachusetts, and IGH, which converted to a for-profit corporation on November 6, 2018 (the “Conversion”), entered into the IGH Option Agreement. Under the terms of the IGH Option Agreement, CLS Massachusetts had an exclusive option to acquire all of the outstanding capital stock of IGH (the “IGH Option”) during the period beginning on the earlier of the date that 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 exercised the IGH Option, the Company, a wholly-owned subsidiary of the Company and IGH would enter into the IGH Merger Agreement (the form of which had been agreed to by the parties). At the effective time of the merger contemplated by the IGH Merger Agreement, CLS Massachusetts would pay a purchase price of $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 entered into agreements pursuant to which such stockholders, among other things, agreed to vote in favor of such transactions.
On October 31, 2018, as consideration for the IGH Option, the Company made a loan to IGH (the “IGH Loan”), in the principal amount of $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”). The IGH Loan was evidenced by a secured promissory note of IGH (the “IGH Note”), which bore interest at the rate of 6% per annum and was scheduled to mature on October 31, 2021. The Company recorded interest income in the amounts of $149,972 and $296,450 on the IGH Loan during the twelve months ended May 31, 2021 and 2020, respectively. On March 1, 2020, the Company capitalized interest in the amount of $399,453 into the principal amount due. During the years ended May 31, 2021 and 2020, the Company capitalized interest in the amount of $0 and $399,453, respectively, on the IGH Note. During the year ended May 31, 2021, the Company received payments on the IGH Note in the amount of $1,696,765. The Company applied these payments as follows; $1,544,291 as a repayment of principal and $152,473 as a repayment of accrued interest. During the year ended May 31, 2020, the Company received payments on the IGH Note in the amount of $1,425,000. The Company applied these payments as follows; $1,357,278 as a repayment of principal and $67,722 as a repayment of accrued interest.
To secure the obligations of IGH to the Company under the IGH Loan Agreement and the IGH Note, 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 did not exercise the IGH Option on or prior to the date that was 30 days following the end of the Option Period, the IGH Loan Amount would 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 IGH Option Agreement), in which case the Break-Up Fee would not apply and there would be no reduction to the Loan Amount.
On August 26, 2019, the parties amended the IGH Option to, among other things, extend the Option Period and delay closing until January 2020. By letter agreement dated January 31, 2020, the Company, CLS Massachusetts and IGH extended the IGH Option Agreement to February 4, 2020. On February 4, 2020, CLS Massachusetts exercised the IGH Option. By letter dated February 26, 2020, the Company informed IGH that as a result of its breaches of the IGH Option, which remained uncured, an event of default had occurred under the IGH Note. The Company advised IGH that it was electing to cause the IGH Note to bear interest at the default rate of 15% per annum effective February 26, 2020 and to accelerate all amounts due under the Note.
On March 3, 2020, the Company filed a claim for declaratory relief, among other things, requesting the court declare that CLS Massachusetts had validly exercised the IGH Option and instruct IGH to comply with its diligence requests and ultimately execute a merger agreement with CLS and CLS Massachusetts. The dispute regarding whether CLS Massachusetts properly exercised the IGH Option arose after CLS Massachusetts delivered a notice of exercise to IGH and IGH subsequently asserted that CLS Massachusetts’ exercise was invalid.
On February 27, 2021, IGH notified the Company that it did not plan to make further payments under the IGH Note on the theory that the Break-Up Fee excused additional payments. The Company vehemently disagreed with this assertion. During the twelve months ended May 31, 2021, the Company impaired the remaining amounts due under the IGH Note in the amount of $2,498,706, which includes $2,497,884 in principal and $822 in accrued interest. As of May 31, 2021, the principal balance of the IGH Note was $0 and the interest receivable was $0.
On June 14, 2021, the parties to the IGH lawsuit entered into a confidential settlement agreement to resolve the action and a secured promissory note dated and executed by IGH in favor of the Company effective on June 11, 2021. Pursuant to the promissory note, IGH shall pay the Company $3,000,000, $500,000 of which was due and payable on or before June 21, 2021. A second payment of $500,000 was due and payable on or before July 12, 2021. The remaining $2,000,000 and accrued interest shall be paid in 12 equal, monthly installments beginning on August 12, 2021, pursuant to the terms of the promissory note. Subsequent to May 31, 2021, the Company received the first three payments due under the confidential settlement agreement in the aggregate amount of $1,167,000. See note 23.
CannAssist
On January 29, 2019, the Company made a line of credit loan to CannAssist in the principal amount of up to $500,000, subject to the terms and conditions set forth in the CannAssist Loan Agreement. 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 is evidenced by the CannAssist Note, which bears interest at the rate of 8% per annum and is personally guaranteed by the two equity owners of CannAssist. On June 24, 2019, the Company advanced the sum of $175,000 to CannAssist, increasing the balance due to the Company under the CannAssist Note to $325,000. The Company recorded interest income in the amount of $0 and $14,673 on the loan during the years ended May 31, 2021 and 2020, respectively.
To secure the obligations of CannAssist to the Company under the CannAssist Loan Agreement and the CannAssist Note, the Company and CannAssist entered into a security agreement dated as of January 29, 2019, pursuant to which CannAssist granted to the Company a first priority lien on and security interest in all personal property of CannAssist.
On March 11, 2019, the Company, through its wholly-owned subsidiary, CLS Massachusetts, entered into the CannAssist Purchase Agreement with CannAssist, each of the members of CannAssist, and David Noble, as the members’ representative.
On August 26, 2019, the Company and CannAssist amended the CannAssist Note. Pursuant to the amendment, there will be no additional advances under the CannAssist Note beyond the $150,000 advanced on February 4, 2019, and the $175,000 advanced on June 24, 2019. In addition, the CannAssist Note was to become due and payable in full on or before February 28, 2020. Finally, the Company and CannAssist terminated the CannAssist Purchase Agreement.
On December 23, 2019, the Company received payment in full on the CannAssist loan in the amount of $342,567, which comprises $325,000 of principal and $17,567 of interest.
NOTE 5 – ACCOUNTS RECEIVABLE
Accounts receivable was $684,935 and $161,409 at May 31, 2021 and 2020, respectively. The Company had bad debt expense of $15,798 during the year ended May 31, 2021. The Company had bad debt expense of $0 for the year ended May 31, 2021, and $108,392 during the year ended May 31, 2020, including $101,512 in connection with a receivable from a credit card company.
NOTE 6 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following at May 31, 2021 and 2020:
| |
|
May 31,
|
|
|
May 31,
|
|
| |
|
2021
|
|
|
2020
|
|
|
Deposits
|
|
$ |
2,244 |
|
|
|
2,315 |
|
|
Prepaid expenses
|
|
|
250,069 |
|
|
|
231,777 |
|
|
Other receivables
|
|
|
10,000 |
|
|
|
- |
|
|
Total
|
|
$ |
262,313 |
|
|
$ |
234,092 |
|
Deposits consist of amounts paid in advance for the acquisition of property and equipment. Prepaid expenses consist primarily of annual license fees charged by the State of Nevada; these fees are paid in advance, and amortized over the one year term of the licenses.
During the year ended May 31, 2020, the Company applied deposits in the amount of $281,966 to the acquisition of fixed assets.
NOTE 7 – 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:
| |
|
May 31,
|
|
|
May 31,
|
|
| |
|
2021
|
|
|
2020
|
|
|
Raw materials
|
|
$ |
344,085 |
|
|
$ |
134,697 |
|
|
Finished goods
|
|
|
883,967 |
|
|
|
440,545 |
|
|
Total
|
|
$ |
1,228,052 |
|
|
$ |
575,242 |
|
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 8 – NOTES RECEIVABLE
PRH Note Receivable
During the year ended May 31, 2015, the Company loaned $500,000 pursuant to a promissory note (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. The Company suspended its plans to operate in Colorado due to regulatory delays and has not yet determined when it 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 PRH Note by $50,000 to reflect this payment. The receivable is recorded on the balance sheet as of May 31, 2021 and 2020 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 pursuant to the IGH Note to IGH. On November 6, 2018, IGH converted to a for-profit corporation. The IGH Note bears interest at the rate of 6% per annum. On March 1, 2020 (the “Initial Payment Date”), all accrued interest was added to the outstanding principal due thereunder and such amount is payable in eight equal quarterly installments, commencing on the Initial Payment Date, together with interest accruing after the Initial Payment Date. The IGH Note was to mature and all outstanding principal, accrued interest and any other amounts due thereunder, was 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 the IGH Option Agreement between the Company and IGH, among others, in both cases dated as of October 31, 2018 and the other IGH Loan Documents, and was secured by the collateral described in the IGH Loan Documents and by such other collateral as may in the future have been granted to the Company to secure the IGH Note. During the years ended May 31, 2021 and 2020, the Company recorded interest income in the amounts of $149,972 and $296,250, respectively, in connection with the IGH Note. During the years ended May 31, 2021 and 2020, the Company capitalized interest in the amount of $0 and $399,453, respectively, on the IGH Note. During the year ended May 31, 2021, the Company received payments on the IGH Note in the total amount of $1,696,765. The Company applied these payments as follows; $1,544,291 as a repayment of principal and $152,473 as a repayment of accrued interest.
By letter dated February 26, 2020, the Company informed IGH that as a result of its breaches of the IGH Option, which remained uncured, an event of default had occurred under the IGH Note. The Company advised IGH that it was electing to cause the IGH Note to bear interest at the default rate of 15% per annum effective February 26, 2020 and to accelerate all amounts due under the Note.
On February 27, 2021, IGH notified the Company that it did not plan to make further payments under the IGH Note on the theory that the Break-Up Fee excused additional payments. The Company vehemently disagreed with this assertion. During the twelve months ended May 31, 2021, the Company impaired the remaining amounts due under the IGH Note in the amount of $2,498,706, which includes $2,497,884 in principal and $822 in accrued interest. As of May 31, 2021, the principal balance of the IGH Note was $0 and the interest receivable was $0.
On June 14, 2021, the parties to the IGH lawsuit entered into a confidential settlement agreement to resolve the action and a secured promissory note dated and executed by IGH in favor of the Company effective on June 11, 2021. Pursuant to the promissory note, IGH shall pay the Company $3,000,000, $500,000 of which was due and payable on or before June 21, 2021. A second payment of $500,000 was due and payable on or before July 12, 2021. The remaining $2,000,000 and accrued interest shall be paid in 12 equal, monthly installments beginning on August 12, 2021, pursuant to the terms of the promissory note.
CannAssist Note Receivable
On January 29, 2019, the Company made a line of credit loan to CannAssist pursuant to the CannAssist Note, in the principal amount of up to $500,000. The loan bore interest at the rate of 8% per annum and was personally guaranteed by the two equity owners of CannAssist. Payments on the loan were to commence on July 1, 2019 and the CannAssist Note was to mature on December 1, 2019. On August 26, 2019, the Company and CannAssist amended the CannAssist Note. Pursuant to the amendment, among other things, the CannAssist Note shall become due and payable in full on or before February 28, 2020. During the years ended May 31, 2020 and 2019, the Company recorded interest income in the amount of $14,673 and $4,011 on the CannAssist Note. On December 23, 2019, the Company received payment in full on the CannAssist loan in the amount of $342,567, which comprises $325,000 of principal and $17,567 of interest. At May 31, 2021 and 2020, the principal amount of $0 and interest receivable in the amount of $0 due under the CannAssist Note were classified as current assets on the Company’s balance sheet.
NOTE 9 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at May 31, 2021 and 2020:
| |
|
May 31,
|
|
|
May 31,
|
|
| |
|
2021
|
|
|
2020
|
|
|
Office equipment
|
|
$ |
120,068 |
|
|
$ |
94,887 |
|
|
Furniture & fixtures
|
|
|
145,103 |
|
|
|
144,025 |
|
|
Machinery & equipment
|
|
|
1,823,094 |
|
|
|
1,741,830 |
|
|
Leasehold improvements
|
|
|
2,822,017 |
|
|
|
2,662,967 |
|
|
Less: accumulated depreciation
|
|
|
(1,434,614 |
)
|
|
|
(868,200 |
)
|
|
Property and equipment, net
|
|
$ |
3,475,668 |
|
|
$ |
3,775,509 |
|
The Company made payments in the amounts of $269,437 and $1,923,338 for property and equipment during the years ended May 31, 2021 and 2020, respectively. The Company also reclassified from deposits to property, plant and equipment the amounts of $0 and $281,966 during the years ended May 31, 2021 and 2020, respectively. During the year ended May 31, 2020, the Company disposed of fixed assets with a net book value of $16,817 and recorded a loss on disposal of fixed assets in that amount. There was no such comparable transaction during the year ended May 31, 2021.
Depreciation expense totaled $569,278 and $323,279 for the years ended May 31, 2021 and 2020, respectively.
NOTE 10 – RIGHT TO USE ASSETS AND LIABILITIES – OPERATING LEASES
The Company has operating leases for offices and warehouses. The Company’s leases have remaining lease terms of 1 year to 4 years, some of which include options to extend.
The Company’s lease expense for the year ended May 31, 2021 was entirely comprised of operating leases and amounted to $495,114. The Company’s right of use (“ROU”) asset amortization for the year ended May 31, 2021 was $341,035. The difference between the lease expense and the associated ROU asset amortization consists of interest.
The Company has recorded total right to use assets of $2,703,821 and liabilities in the amount of $2,675,310 through May 31, 2020, resulting in a gain in the amount of $28,511. During the year ended May 31, 2020, the Company entered into agreements to amend certain of its operating leases. The lease of the dispensary and administrative offices at 1800 Industrial Road was extended from June 30, 2023 to February 28, 2030, and the lease of the offices at 1718 Industrial Road was extended from August 31, 2020 to August 31, 2022. During the year ended May 31, 2021, the Company entered into an agreement to extend the lease of its cultivation and processing facility at 203 E. Mayflower Avenue through February 28, 2030; a gain in the amount of $14,889 was recorded on this transaction. The modification resulted in an increase to right of use assets in the amount of $1,187,615 and an increase in lease liabilities in the amount of $1,172,726.
Right to use assets – operating leases are summarized below:
| |
|
May 31,
2021
|
|
|
Amount at inception of leases
|
|
$ |
3,891,437 |
|
|
Amount amortized
|
|
|
(1,641,428 |
)
|
|
Balance – May 31, 2021
|
|
$ |
2,250,009 |
|
Operating lease liabilities are summarized below:
|
Amount at inception of leases
|
|
$ |
3,848,038 |
|
|
Amount amortized
|
|
|
(1,581,619 |
)
|
|
Balance – May 31, 2021
|
|
$ |
2,266,419 |
|
| |
|
May 31,
2021
|
|
|
Warehouses and offices
|
|
$ |
2,250,009 |
|
|
Lease liability
|
|
$ |
2,266,419 |
|
|
Less: current portion
|
|
|
(287,125 |
)
|
|
Lease liability, non-current
|
|
$ |
1,979,294 |
|
Maturity analysis under these lease agreements is as follows:
|
Twelve months ended May 31, 2022
|
|
$ |
458,148 |
|
|
Twelve months ended May 31, 2023
|
|
|
449,071 |
|
|
Twelve months ended May 31, 2024
|
|
|
458,205 |
|
|
Twelve months ended May 31, 2025
|
|
|
471,732 |
|
|
Twelve months ended May 31, 2026
|
|
|
407,415 |
|
|
Thereafter
|
|
|
719,933 |
|
|
Total
|
|
$ |
2,964,504 |
|
|
Less: Present value discount
|
|
|
(698,085 |
)
|
|
Lease liability
|
|
$ |
2,266,419 |
|
NOTE 11 – INTANGIBLE ASSETS
Intangible assets consisted of the following at May 31, 2021 and 2020:
| |
|
May 31, 2021
|
|
| |
|
|
|
|
|
Accumulated
|
|
|
|
|
|
| |
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
Intellectual Property
|
|
$ |
319,600 |
|
|
$ |
(93,217 |
)
|
|
$ |
226,383 |
|
|
License & Customer Relations
|
|
|
990,000 |
|
|
|
(144,375 |
)
|
|
|
845,625 |
|
|
Tradenames - Trademarks
|
|
|
301,000 |
|
|
|
(87,792 |
)
|
|
|
213,208 |
|
|
Non-compete Agreements
|
|
|
27,000 |
|
|
|
(27,000 |
)
|
|
|
- |
|
|
Domain Names
|
|
|
25,993 |
|
|
|
(6,019 |
)
|
|
|
19,974 |
|
|
Total
|
|
$ |
1,663,593 |
|
|
$ |
(358,403 |
)
|
|
$ |
1,305,190 |
|
| |
|
May 31, 2020
|
|
| |
|
|
|
|
|
Accumulated
|
|
|
|
|
|
| |
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
Intellectual Property
|
|
$ |
319,600 |
|
|
$ |
(61,257 |
)
|
|
$ |
258,343 |
|
|
License & Customer Relations
|
|
|
990,000 |
|
|
|
(94,875 |
)
|
|
|
895,125 |
|
|
Tradenames - Trademarks
|
|
|
301,000 |
|
|
|
(57,692 |
)
|
|
|
243,308 |
|
|
Non-compete Agreements
|
|
|
27,000 |
|
|
|
(25,882 |
)
|
|
|
1,118 |
|
|
Domain Names
|
|
|
25,993 |
|
|
|
(2,683 |
)
|
|
|
23,310 |
|
|
Total
|
|
$ |
1,663,593 |
|
|
$ |
(242,389 |
)
|
|
$ |
1,421,204 |
|
Total amortization expense charged to operations for the years ended May 31, 2021 and 2020 was $116,014 and $125,913, respectively.
|
Amount to be amortized during the twelve months ended May 31,
|
|
| |
|
|
|
|
|
2022
|
|
$ |
111,989 |
|
|
2023
|
|
|
111,989 |
|
|
2024
|
|
|
111,989 |
|
|
2025
|
|
|
111,989 |
|
|
2026
|
|
|
111,989 |
|
|
Thereafter
|
|
|
745,245 |
|
| |
|
$ |
1,305,190 |
|
NOTE 12 – GOODWILL
The Company recorded goodwill in the amount of $25,742,899 in connection with the acquisition of Alternative Solutions on June 27, 2018 (see note 4).
Goodwill Impairment Test
The Company assessed its intangible assets as of May 31, 2020 for purposes of determining if an impairment existed as set forth in ASC 350 – Intangibles – Goodwill and Other and ASC 360 – Property Plant and Equipment. Pursuant to ASC 360, the Company recorded an impairment of goodwill in the amount of $25,185,003 based upon the difference between the carrying value of $25,742,899 and the fair value of $557,896. Fair value was based upon the price of the Company’s common stock at May 31, 2020 of $0.06 per share. . At May 31, 2020, the net amount of goodwill on the Company’s balance sheet was $557,896.
The Company assessed its intangible assets as of May 31, 2021 for purposes of determining if an impairment existed as set forth in ASC 350 – Intangibles – Goodwill and Other and ASC 360 – Property Plant and Equipment. Pursuant to ASC 360, the Company determined that the fair value of its intangible assets exceeded the carrying value of goodwill for the year ended May 31, 2021. As a result, no impairment was recorded during the year ended May 31, 2021. At May 31, 2021, the net amount of goodwill on the Company’s balance sheet was $557,896.
NOTE 13 – OTHER ASSETS
Other assets included the following as of May 31, 2021 and May 31, 2020:
| |
|
May 31,
|
|
|
May 31,
|
|
| |
|
2021
|
|
|
2020
|
|
|
Security deposits
|
|
|
167,455 |
|
|
|
167,455 |
|
| |
|
$ |
167,455 |
|
|
$ |
167,455 |
|
NOTE 14 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consisted of the following at May 31, 2021 and 2020:
| |
|
May 31,
|
|
|
May 31,
|
|
| |
|
2021
|
|
|
2020
|
|
|
Trade accounts payable
|
|
$ |
771,843 |
|
|
$ |
591,060 |
|
|
Accrued payroll and payroll taxes
|
|
|
279,721 |
|
|
|
212,361 |
|
|
Accrued liabilities
|
|
|
557,061 |
|
|
|
369,462 |
|
|
Total
|
|
$ |
1,608,625 |
|
|
$ |
1,172,883 |
|
NOTE 15 – NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE
Convertible Notes Payable
| |
|
May 31,
2021
|
|
|
May 31,
2020
|
|
| |
|
|
|
|
|
|
|
|
| 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 value of the warrants will be recorded when the issuance becomes probable. On July 26, 2019, U.S. Convertible Debenture 1 was amended such that, should the Company issue or sell common stock or equity securities convertible into common stock at a price less than the conversion price of the U.S. Convertible Debenture 1, the conversion price of U.S. Convertible Debenture 1 will be reduced to such issuance price, and the exercise price of the warrant issuable in connection with U.S. Convertible Debenture 1 will be exercisable at a price equal to 137.5% of the adjusted conversion price at the time of conversion. 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 years ended May 31, 2021 and 2020, $1,537,034 and $1,084,695 of this discount was charged to operations, respectively. During the years ended May 31, 2021 and 2020, the Company accrued interest in the amounts of $360,357 and $344,962 on the U.S. Convertible Debenture 1, respectively. Also, during the years ended May 31, 2021 and 2020, the Company transferred the amounts of $0 and $370,057 from accrued interest to principal of the U.S. Convertible Debenture 1, respectively. On April 15, 2021, the U.S. Convertible Debenture 1 was amended as follows: (i) the conversion price of the debenture was reduced to $0.30 per unit; and (ii) the maturity date was extended from October 31, 2021 to October 31, 2022. This amendment was accounted for as an extinguishment of debt, and the Company recorded a loss in the amount of $2,038,803 during the year ended May 31, 2021 in connection with this amendment. |
|
|
4,504,457 |
|
|
|
4,504,457 |
|
| |
|
May 31,
2021
|
|
|
May 31,
2020
|
|
| |
|
|
|
|
|
|
|
|
| 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 value of the warrants will be recorded when the issuance becomes probable. On July 26, 2019, U.S. Convertible Debenture 2 was amended such that, should the Company issue or sell common stock or equity securities convertible into common stock at a price less than the conversion price of the U.S. Convertible Debenture 2, the conversion price of U.S. Convertible Debenture 2 will be reduced to such issuance price, and the exercise price of the warrant issuable in connection with U.S. Convertible Debenture 2 will be exercisable at a price equal to 137.5% of the adjusted conversion price at the time of conversion. 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 year ended May 31, 2021 and 2020, $384,259 and $271,241 of this discount was charged to operations, respectively. During the years ended May 31, 2021 and 2020, the Company accrued interest in the amounts of $90,090 and $86,240 on the U.S. Convertible Debenture 2, respectively. Also, during the years ended May 31, 2021 and 2020, the Company transferred the amounts of $0 and $92,514 from accrued interest to principal of the U.S. Convertible Debenture 2, respectively. On April 15, 2021, the U.S. Convertible Debenture 2 was amended as follows: (i) the conversion price of the debentures was reduced to $0.30 per unit; and (ii) the maturity date was extended from October 31, 2021 to October 31, 2022. This amendment was accounted for as an extinguishment of debt, and the Company recorded a loss in the amount of $509,700 during the year ended May 31, 2021. |
|
|
1,126,114 |
|
|
|
1,126,114 |
|
| |
|
May 31,
2021
|
|
|
May 31,
2020
|
|
| |
|
|
|
|
|
|
|
|
| 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 value of the warrants will be recorded when the issuance becomes probable. On July 26, 2019, U.S. Convertible Debenture 3 was amended such that, should the Company issue or sell common stock or equity securities convertible into common stock at a price less than the conversion price of the U.S. Convertible Debenture 3, the conversion price of U.S. Convertible Debenture 3 will be reduced to such issuance price, and the exercise price of the warrant issuable in connection with U.S. Convertible Debenture 3 will be exercisable at a price equal to 137.5% of the adjusted conversion price at the time of conversion. 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 years ended May 31, 2021 and 2020, $25,138 and $25,138 of this discount was charged to operations, respectively. During the years ended May 31, 2021 and 2020, the Company accrued interest in the amounts of $9,009 and $8,638 on the U.S. Convertible Debenture 3, respectively. Also, during the years ended May 31, 2021 and 2020, the Company transferred the amounts of $0 and $9,117 from accrued interest to principal of the U.S. Convertible Debenture 3, respectively. |
|
|
112,613 |
|
|
|
112,613 |
|
| |
|
|
|
|
|
|
|
|
| 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 value of the warrants will be recorded when the issuance becomes probable. On July 26, 2019, U.S. Convertible Debenture 4 was amended such that, should the Company issue or sell common stock or equity securities convertible into common stock at a price less than the conversion price of the U.S. Convertible Debenture 4, the conversion price of U.S. Convertible Debenture 4 will be reduced to such issuance price, and the exercise price of the warrant issuable in connection with U.S. Convertible Debenture 4 will be exercisable at a price equal to 137.5% of the adjusted conversion price at the time of conversion. 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 years ended May 31, 2021 and 2020, $196,753 and $138,884 of this discount was charged to operations, respectively. During the years ended May 31, 2021 and 2020, the Company accrued interest in the amounts of $47,929 and $45,942 on the U.S. Convertible Debenture 4, respectively. Also, during the years ended May 31, 2021 and 2020, the Company transferred the amounts of $0 and $48,623 from accrued interest to principal of the U.S. Convertible Debenture 4, respectively. On April 19, 2021, the U.S. Convertible Debenture 4 was amended as follows: (i) the conversion price of the debenture was reduced to $0.30 per unit; and (ii) the maturity date was extended from October 31, 2021 to October 31, 2022. This amendment was accounted for as an extinguishment of debt, and the Company recorded a loss in the amount of $271,164 during the year ended May 31, 2021. |
|
|
599,101 |
|
|
|
599,101 |
|
| |
|
May 31,
2021
|
|
|
May 31,
2020
|
|
| |
|
|
|
|
|
|
|
|
| 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 value of the warrants will be recorded when the issuance becomes probable. 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 years ended May 31, 2021 and 2020, $40,033 and $40,033 of this discount was charged to operations, respectively. During the years ended May 31, 2021 and 2020, the Company accrued interest in the amounts of $13,513 and $12,950 on the U.S. Convertible Debenture 5, respectively. Also, during the years ended May 31, 2020 and 2019, the Company transferred the amounts of $0 and $13,743 from accrued interest to principal of the U.S. Convertible Debenture 5, respectively. |
|
|
168,919 |
|
|
|
168,919 |
|
| |
|
|
|
|
|
|
|
|
| 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 value of the warrants will be recorded when the issuance becomes probable. 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 years ended May 31, 2021 and 2020, $20,016 and $20,016 of this discount was charged to operations, respectively. During the years ended May 31, 2021 and 2020, the Company accrued interest in the amounts of $6,756 and $6,475 on the U.S. Convertible Debenture 6, respectively. Also, during the years ended May 31, 2021 and 2020, the Company transferred the amounts of $0 and $6,871 from accrued interest to principal of the U.S. Convertible Debenture 6, respectively. |
|
|
84,459 |
|
|
|
84,459 |
|
| |
|
May 31,
2021
|
|
|
May 31,
2020
|
|
| |
|
|
|
|
|
|
|
|
|
Convertible debentures payable in the aggregate principal amount of $12,012,000 (the “Canaccord Debentures”) dated December 12, 2018, which bear 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 value of the warrants will be recorded when the issuance becomes probable. 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. During the three months ended November 30, 2019, in two separate transactions, principal in the aggregate amount of $25,857 was converted into an aggregate of 32,321 shares of the Company’s common stock, and warrants to purchase 16,160 shares of common stock. There were no gains or losses recorded on these conversions because they were done in accordance with the terms of the original agreement. No discount was recorded for the fair value of the warrants issued. Because the market price of the Company’s common stock was less than the conversion price on the date of issuance of the Canaccord Debentures, a discount was not recorded on the Canaccord Debentures. During the years ended May 31, 2021 and 2020, the Company accrued interest in the amounts of $1,076,445 and $1,025,549 on the Canaccord Debentures, respectively. Also, during the years ended May 31, 2021 and 2020, the Company transferred the amounts of $212,601 and $984,300 from accrued interest to principal of the Canaccord Debentures, respectively. On March 31, 2021, the Canaccord Debentures were amended as follows: (i) the conversion price of the debentures was reduced to $0.30 per unit; (ii) the maturity date was extended from December 12, 2021 to December 12, 2022; (iii) the mandatory conversion threshold was reduced from a daily volume weighted average trading price of greater than $1.20 per share to $0.60 per share for the preceding ten consecutive trading days; and (iv) the exercise price of the warrants issuable upon conversion was reduced from $1.10 to $0.40 and the expiration of the warrants extended until March 31, 2024. This amendment was accounted for as an extinguishment of debt, and the Company recorded a loss in the amount of $3,286,012 during the year ended May 31, 2021.
|
|
|
13,500,150 |
|
|
|
13,287,549 |
|
| |
|
|
|
|
|
|
|
|
|
Total - Convertible Notes Payable
|
|
$ |
20,095,813 |
|
|
$ |
19,883,212 |
|
|
Less: Discount
|
|
|
(35,496 |
)
|
|
|
(2,238,730 |
)
|
|
Convertible Notes Payable, Net of Discounts
|
|
$ |
20,060,317 |
|
|
$ |
17,644,482 |
|
| |
|
|
|
|
|
|
|
|
|
Total - Convertible Notes Payable, Net of Discounts, Current Portion
|
|
$ |
330,495 |
|
|
$ |
- |
|
|
Total - Convertible Notes Payable, Net of Discounts, Long-term Portion
|
|
$ |
19,729,822 |
|
|
$ |
17,644,482 |
|
|
Discounts on notes payable amortized to interest expense – years ended May 31, 2021 and 2020, respectively
|
|
$ |
2,203,234 |
|
|
$ |
1,580,280 |
|
Aggregate maturities of notes payable and convertible notes payable as of May 31, 2021 are as follows:
For the twelve months ended May 31,
|
2022
|
|
$ |
365,991 |
|
|
2023
|
|
|
19,729,822 |
|
|
2024
|
|
|
- |
|
|
2025
|
|
|
- |
|
|
2026
|
|
|
- |
|
|
Thereafter
|
|
|
- |
|
|
Total
|
|
$ |
20,095,813 |
|
Beneficial Conversion Features
Certain of the Company’s convertible notes contained 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.
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. See note 1.
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 16 – CONTINGENT LIABILITY
The terms of the Company’s acquisition of Alternative Solutions, included 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 reviewed the value of the contingent consideration, and concluded that, due to the increased revenue of Alternative Solutions, the fair value of this contingent liability was $1,000,000 at May 31, 2019. The Company recorded a charge to operations in the amount of $321,889 during the year ended May 31, 2019.
The full amount of the bonus payment was earned, and on May 27, 2020, the Company made a payment in the amount of $850,000 to the sellers. The Company deposited the balance due to sellers of $150,000 with an escrow agent to hold pending the outcome of a tax audit. During the year ended May 31, 2020, the State of Nevada notified the Oasis LLCs that it would be conducting a tax audit for periods both before and after the closing of the sale to CLS. The tax audit was completed and the Company received a deficiency notice dated January 29, 2021. The Company paid the tax due and on February 16, 2021, $41,805 of the escrowed amount was released to the Company, $106,195 was released to sellers and the balance of $2,000 was remitted to the escrow agent as payment of its fees.
NOTE 17 – STOCKHOLDERS’ EQUITY
The Company’s authorized capital stock consists of 750,000,000 shares of common stock, par value $0.0001, at May 31, 2021 and 2020, and 20,000,000 shares of preferred stock, par value $0.001 per share. The Company had 127,221,416 and 126,521,416 shares of common stock issued and outstanding as of May 31, 2021 and 2020, respectively.
Year ended May 31, 2021:
Common Stock Issued and To Be Issued to Officers and Service Providers:
On October 11, 2020, the Company issued 50,000 shares of common stock to a former officer. The fair value of these shares in the amount of $14,970 had been previously accrued in common stock to be issued.
During the year ended May 31, 2021, the Company charged an aggregate of $80,813 to common stock subscribed representing the accrual over the vesting period of 500,000 shares of restricted common stock issuable to officers. On February 5, 2021 the Company issued 250,000 of these shares and on May 19, 2021, the Company issued the balance of the shares (a total of 500,000 shares of common stock). The fair value of these shares in the amount of $215,500 had been previously accrued in common stock to be issued.
On April 1, 2021, the Company issued 150,000 shares of common stock with a fair value of $28,500 to an employee in connection with an employment agreement. The fair value on the shares in the amount of $28,500 was charged to operations.
During the year ended May 31, 2021, the Company recognized the cancellation of a consulting contract, which resulted in a credit to operations in the amount of $22,500 and the cancellation of 100,000 shares of common stock to be issued.
During the year ended May 31, 2021, the Company recognized the cancellation of a consulting contract, which resulted in a credit to operations in the amount of $3,250 and the cancellation of 25,000 shares of common stock to be issued.
Charge to Additional Paid-in Capital for Amendment of Debt
The Company charged to additional paid-in capital the amounts of $3,286,012 for the amendments to the convertible debentures dated March 31, 2021, and $2,819,667 for the amendments to the convertible debentures dated April 15 and April 19, (a total of $6,105,679) in connection with the amendment of U.S. Convertible Debentures 1, 2 and 4, and the Canaccord Debentures. See note 15.
Year ended May 31, 2020:
Common Stock Issued and To Be Issued to Officers and Service Providers:
On July 22, 2019, the Company issued 500,000 shares of common stock with a fair value of $355,000 to Ben Sillitoe, Chief Executive Officer of CLS Nevada, in connection with his employment agreement. $325,417 was recorded during fiscal 2019, and issued from stock payable during the year ended May 31, 2020; $29,583 was charged to operations during the year ended May 31, 2020. At issuance, $50 was charged to common stock, and $354,950 was charged to additional paid-in capital.
On July 22, 2019, the Company issued 50,000 shares of common stock with a fair value of $35,495 to Don Decatur, Chief Operating Officer of CLS Nevada, in connection with his employment agreement. $32,542 of this amount was recorded during fiscal 2019, and issued from stock payable during the year ended May 31, 2020; $2,958 was charged to operations during the year ended May 31, 2020. At issuance, $5 was charged to common stock, and $35,495 was charged to additional paid-in capital.
During the year ended May 31, 2020, the Company charged an aggregate of $154,014 to common stock subscribed representing the accrual over the vesting period of 791,668 shares of restricted common stock issuable to officers.
The Company also charged $45,000 to common stock subscribed representing the fair value of 200,000 shares of common stock to be issued to a service provider. During the year ended May 31, 2020, the Company issued 100,000 of these shares of common stock. At issuance, $22,500 was transferred from common stock subscribed; $10 was charged to common stock, and $22,490 was charged to additional paid-in capital.
Common Stock and Warrants Issued upon Conversion of Notes Payable:
On July 8, 2019, the Company issued 16,644 shares of common stock and three-year warrants to acquire 8,322 shares of common stock at a price of $1.10 per share (reduced to $0.40 per share as a result of the indenture amendment) to Canaccord Genuity Corp., as nominee, in connection with the conversion of a portion of the Canaccord Debentures in the principal amount of $13,315. No gain or loss was recorded on this transaction because the conversion was made pursuant to the terms of the original agreement.
On July 19, 2019, the Company issued 15,677 shares of common stock and three-year warrants to acquire 7,838 shares of common stock at a price of $1.10 per share (reduced to $0.40 per share as a result of the indenture amendment) to Canaccord Genuity Corp., as nominee, in connection with the conversion of a portion of the Canaccord Debentures in the principal in the amount of $12,542. No gain or loss was recorded on this transaction because the conversion was made pursuant to the terms of the original agreement.
Warrants
The Company values warrants using the Black-Scholes valuation model utilizing the following variables. There were no warrant valuations performed during the years ended March 31, 2021 or 2020.
The following table summarizes the significant terms of warrants outstanding at May 31, 2021. This table does not include the unit warrants. See Unit Warrants section below.
| |
Range of
exercise
Prices
|
|
|
Number of
warrants
Outstanding
|
|
|
Weighted
average
remaining
contractual
life (years)
|
|
|
Weighted
average
exercise
price of
outstanding
Warrants
|
|
|
Number of
warrants
Exercisable
|
|
|
Weighted
average
exercise
price of
exercisable
Warrants
|
|
| |
$ |
0.49 |
|
|
|
33,465,110 |
|
|
|
1.50 |
|
|
$ |
0.49 |
|
|
|
33,465,110 |
|
|
$ |
0.49 |
|
| |
|
0.50 |
|
|
|
2,736,500 |
|
|
|
1.73 |
|
|
|
0.50 |
|
|
|
2,736,500 |
|
|
|
0.50 |
|
| |
|
0.60 |
|
|
|
17,500,000 |
|
|
|
1.50 |
|
|
|
0.60 |
|
|
|
17,500,000 |
|
|
|
0.60 |
|
| |
|
1.10 |
|
|
|
296,035 |
|
|
|
1.56 |
|
|
|
1.10 |
|
|
|
296,035 |
|
|
|
1.10 |
|
| |
|
|
|
|
|
53,997,645 |
|
|
|
0.51 |
|
|
$ |
0.53 |
|
|
|
53,997,645 |
|
|
$ |
0.53 |
|
Transactions involving warrants are summarized as follows. This table does not include the unit warrants. See Unit Warrants section below.
| |
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Warrants outstanding at May 31, 2019
|
|
|
54,818,985 |
|
|
$ |
0.53 |
|
|
Granted
|
|
|
16,160 |
|
|
$ |
1.10 |
|
|
Exercised
|
|
|
- |
|
|
$ |
- |
|
|
Cancelled / Expired
|
|
|
- |
|
|
$ |
- |
|
| |
|
|
|
|
|
|
|
|
|
Warrants outstanding at May 31, 2020
|
|
|
54,835,145 |
|
|
$ |
0.53 |
|
|
Granted
|
|
|
- |
|
|
$ |
- |
|
|
Exercised
|
|
|
- |
|
|
$ |
- |
|
|
Cancelled / Expired
|
|
|
(837,500 |
)
|
|
$ |
0.75 |
|
|
Warrants outstanding at May 31, 2021
|
|
|
53,997,645 |
|
|
$ |
0.53 |
|
Unit Warrants
In February and March 2018, in connection with the Westpark offering, the Company issued five-year warrants to purchase 205,238 of the Company’s units at an exercise price of $1.25 per unit. Each unit consists of four shares of common stock and one warrant to purchase a share of common stock for $0.75 per share.
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 year ended May 31, 2019.
On December 12, 2018, in connection with the issuance of the Canaccord Debentures, the Company issued Canaccord Genuity Corp. as compensation 1,074,720 three-year agent and advisory warrants. Each warrant entitles the holder to purchase a unit for $0.80, which unit consists of one share of common stock and a warrant to purchase one-half share of common stock at an exercise price of $1.10 per share. The Company, in connection with the issuance of the Canaccord Debentures, also issued to National Bank Financial Inc., as compensation, 268,680 three-year agent and advisory warrants. Each warrant entitles the holder to purchase a unit for $0.80, which unit consists of one share of common stock and a warrant to purchase one-half share of common stock at an exercise price of $1.10 per share. The aggregate value of these warrants was $874,457, which was charged to operations during the year ended May 31, 2019.
Because the unit warrants are exercisable for Common Stock and warrants, they are not included in the warrant tables above.
NOTE 18 – GAIN ON SETTLEMENT OF LIABILITIES
On August 14, 2019, the Company made a payment to 4Front Advisors to settle its dispute with Alternative Solutions and its former owners and the Oasis Note was reduced in accordance with its terms. In addition, the amount of $275,000, which the Company had accrued with respect to this dispute, was extinguished resulting in a gain of $275,000.
NOTE 19 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has issued convertible notes containing beneficial conversion features. One of the features is a ratchet reset provision which, in general, reduces the conversion price should the Company issue equity with an effective price per share that is lower than the stated conversion price in the note. The Company accounts for the fair value of the conversion feature in accordance with ASC 815- Accounting for Derivatives and Hedging and Emerging Issues Task Force (“EITF”) 07-05- Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock (“EITF 07-05”). The Company carries the embedded derivative on its balance sheet at fair value and accounts for any unrealized change in fair value as a component of its results of operations. The Company also had a contingent liability in connection with the acquisition of Alternative Solutions.
The following summarizes the Company’s financial liabilities that are recorded at fair value on a recurring basis at May 31, 2021 and 2020:
| |
|
May 31, 2021
|
|
| |
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
| |
|
May 31, 2020
|
|
| |
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
NOTE 20 – RELATED PARTY TRANSACTIONS
As of May 31, 2021 and 2010, 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.
On July 31, 2018, the Company granted Ben Sillitoe, the former Chief Executive Officer of CLS Nevada, Inc. a one-time signing bonus of 500,000 shares of restricted common stock, which became fully vested one year from the effective date of his employment agreement. These shares were valued at $355,000 and were amortized over the vesting period. As of May 31, 2021 and 2020, $0 and $29,583 had been charged to operations, respectively. On July 22, 2019, the Company issued these shares to Mr. Ben Sillitoe.
On July 31, 2018, the Company granted Mr. Don Decatur, the former Chief Operating Officer of CLS Nevada, Inc. a one-time signing bonus of 50,000 shares of restricted common stock, which became fully vested one year from the effective date of his employment agreement. These shares were valued at $35,000 and were amortized over the vesting period. As of May 31, 2021 and 2020, $0 and $2,958 had been charged to operations, respectively. On July 22, 2019, the Company issued these shares to Mr. Decatur.
On each of February 5, 2021 and May 19, 2021, the Company issued 250,000 shares of common stock to Andrew Glashow, the Company’s President and Chief Operating Officer (a total of 500,000 shares) pursuant to an employment agreement. The fair value of these shares in the amount of $215,500 was amortized over the vesting period, resulting in charges to operations in the amounts of $26,938 during the year ended May 31, 2019; $107,751 during the year ended May 31, 2020; and $80,811 during the year ended May 31, 2021.
NOTE 21 – 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.
The components of the income tax provision include:
|
Aggregate revenue (2019-2021)
|
|
$ |
39,668,764 |
|
|
Directly attributable costs
|
|
|
(27,810,215 |
)
|
|
Deferred
|
|
|
11,858,549 |
|
|
Tax rate
|
|
|
21 |
%
|
|
Tax expense
|
|
$ |
2,490,295 |
|
Note: Change in uncertain tax position with all tax expense recorded in current year due to change in estimate. No prior year net operating loss was considered.
The tax effects of the temporary differences that give rise to the Company’s estimated deferred tax assets and liabilities are as follows:
| |
|
Year Ended May 31,
|
|
| |
|
2021
|
|
|
2020
|
|
|
Federal and state statutory tax
|
|
|
21 |
%
|
|
|
21 |
%
|
|
Net operating loss carryforward
|
|
$ |
1,566,016 |
|
|
$ |
2,538,429 |
|
|
Valuation allowance for deferred tax assets
|
|
|
(1,566,016 |
)
|
|
|
(2,538,429 |
)
|
|
Deferred tax assets
|
|
$ |
- |
|
|
$ |
- |
|
The total net operating loss carryforward at May 31, 2021 was $7,457,218.
Section 280E of the Internal Revenue Code, as amended, prohibits businesses from deducting certain expenses associated with trafficking controlled substances (within the meaning of Schedule I and II of the Controlled Substances Act). The IRS has invoked Section 280E in tax audits against various cannabis businesses in the U.S. that are permitted under applicable state laws. Although the IRS has issued a clarification allowing the deduction of certain expenses, the bulk of operating costs and general administrative costs are generally not permitted to be deducted. The operations of certain of the Company’s subsidiaries are subject to Section 280E. This results in permanent differences between ordinary and necessary business expenses deemed non-deductible under IRC Section 280E. Therefore, the effective tax rate can be highly variable and may not necessarily correlate with pre-tax income or loss.
NOTE 22 – COMMITMENTS AND CONTINGENCIES
Lease Arrangements
The Company leases several facilities for office, warehouse, and retail space. Currently lease commitments are as follows:
| | ● | A lease that commenced in February 2019 for 1,400 square feet of office space located at 1718 Industrial Road, Las Vegas, NV 89102, for a term of eighteen months, and for the rent of $1,785 per month. In June 2020, this lease was extended to August 31, 2022, with the monthly rent increasing to $1,866.70 until September 2021, after which time it will be subject to annual increases of 3%. |
| | ● | A lease that commenced January 2018 for 1,000 square feet of storefront space plus 5,900 square feet of warehouse space located at 1800 Industrial Road, Suites 102, 160, and 180, Las Vegas, NV 89102, for a term of five years and for initial base rent of $7,500 per month, with annual increases of 3%. In February 2020, this lease was extended to February 28, 2030 and the monthly rent was increased by $600. |
| | ● | A lease that commenced in February 2019 for 2,504 square feet of office space located at 1800 Industrial Road, Suite 100, Las Vegas, NV 89102 for a term of eighteen months and for initial rent of $3,210 per month, with annual increases of 4%. In February 2020, this lease was extended to February 28, 2030, and the lease was modified to include annual rent increases of 3%. |
| | ● | A lease that commenced in January 2016 for 22,000 square feet of warehouse space located at 203 E. Mayflower Avenue, North Las Vegas, NV 89030 for a term of five years and initial rent of $11,000 per month, which amount increased to $29,000 per month on January 1, 2020. In June 2020, this lease was extended to February 28, 2026, and the monthly rent was amended as follows: $25,000 for the months of April, May, and June 2020; $22,500 for the months of March 2021 through February 2022; $23,175 for the months of March 2022 through February 2023; 23,870 for the months of March 2023 through February 2024; $24,586 for the months of March 2024 through February 2025; and $25,323 for the months of March 2025 through February 2026. |
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, 2021.
Contingent Liability
At the time of closing of the Acquisition Agreement, Alternative Solutions owed certain amounts to a consultant known as 4Front Advisors, which amount was in dispute. In August 2019, the Company made a payment to this company to settle this dispute and the Oasis Note was reduced accordingly.
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. 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. On October 14, 2019 but effective October 1, 2019, CLS Labs, Inc., the Company, and Jeffrey Binder entered into an amendment to Mr. Binder’s employment agreement to provide that the Company would assume all obligations of CLS Labs under the employment agreement. The amendment also extends the term of Mr. Binder’s employment agreement by three years instead of relying on the automatic one-year renewal provision in the employment agreement, and increases Mr. Binder’s annual base salary to $200,000. Additionally, the amendment provides for certain change of control provisions, including a payment of up to three years base salary and bonuses up to a maximum of $1,000,000, if Mr. Binder resigns or is terminated in connection with a change in control of the Company. In connection with the amendment, the parties also amended and restated that certain Confidentiality, Non-Compete and Property Rights Agreement entered into by and between RJF Labs, Inc. (now CLS Labs), and Mr. Binder effective as of July 16, 2014.
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 received a one-time signing bonus of 500,000 shares of restricted common stock, which became fully vested one year from the effective date of his employment agreement. On July 31, 2019, CLS Nevada, Inc. and Mr. Sillitoe amended Mr. Sillitoe’s employment agreement to effect the original intention of the parties that the performance bonus would be based on the results of Alternative Solutions and not CLS Nevada, Inc. On April 16, 2020, CLS Nevada, Inc. notified Mr. Sillitoe of its intent not to renew the employment agreement upon its termination on June 30, 2020.
CLS Nevada, Inc. and Mr. Decatur entered into a one-year employment agreement effective 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 received a one-time signing bonus of 50,000 shares of restricted common stock, which became fully vested one year from the effective date of his employment agreement. On May 14, 2019, CLS Nevada and Mr. Decatur entered into an amendment to his employment agreement to extend the term of Mr. Decatur's employment agreement by two years instead of relying on the automatic one-year renewal provision in the employment agreement. On July 31, 2019, CLS Nevada, Inc. and Mr. Decatur amended Mr. Decatur’s employment agreement to effect the original intention of the parties that the performance bonus would be based on the results of Alternative Solutions and not CLS Nevada, Inc. On December 16, 2019, Mr. Decatur resigned from his position as Chief Operating Officer of CLS Nevada, Inc., effective immediately, for personal reasons.
On March 1, 2019, the Company and 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 the Company’s annual EBITDA, and annual restricted stock awards in an amount equal to 1% of the Company’s annual EBITDA. Additionally, Mr. Glashow is entitled to a one-time signing bonus of 500,000 shares of the Company’s restricted common stock, half of which vested on March 1, 2020, and half of which vested on March 1, 2021. Effective March 1, 2019, and in connection with the employment agreement, Mr. Glashow and the Company entered into a Confidentiality, Non-Compete and Proprietary Rights Agreement. Pursuant thereto, Mr. Glashow agreed (i) not to compete with us during the term of his employment and for a period of one year thereafter, (ii) not to release or disclose our confidential information, and (iii) to assign the rights to all work product to us, among other terms. On October 14, 2019, but effective October 1, 2019, the Company and Mr. Glashow entered into an amendment to his employment agreement to extend the term by one year instead of relying on the automatic one-year renewal provision in the employment agreement, and to increase Mr. Glashow’s annual base salary to $200,000. The amendment also provides that in addition to his base salary, Mr. Glashow is entitled to receive, on an annual basis, a performance-based bonus equal to two percent (2%) of the Company’s annual EBITDA up to a maximum annual cash compensation of $1 million including base salary, and annual stock options, exercisable at the fair market value of the Company’s common stock on the effective date of grant, in an amount equal to 2% of the Company’s EBITDA up to $42.5 million and 4% of its annual EBITDA in excess of $42.5 million. Additionally, the amendment provides for certain change of control provisions, including a payment of up to three years base salary and bonuses up to a maximum of $1,000,000, if Mr. Glashow resigns or is terminated in connection with a change in control of the Company.
On May 2, 2019, the Company and Gregg Carlson entered into a one-year employment agreement. Pursuant to the employment agreement, Mr. Carlson commenced serving as the Company’s Chief financial Officer on May 1, 2019 and continued his employment with us pursuant to the terms of his one-year employment agreement with Alternative Solutions effective April 8, 2019. Mr. Carlson received an annual salary of $110,000, and received a one-time signing bonus of 50,000 shares of restricted common stock of the Company, which became fully vested one year from the effective date of his employment agreement. On December 16, 2020, Gregg Carlson resigned from all of his positions with Alternative Solutions and the Company, effective immediately, for personal reasons.
At May 31, 2021 and 2020, 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 23 – SUBSEQUENT EVENTS
The Company has evaluated events through the date the financial statements and has determined that there were no additional material subsequent events.
Note Receivable Settlement
On June 14, 2021, the parties to the IGH lawsuit entered into a confidential settlement agreement to resolve the action and a secured promissory note dated and executed by IGH in favor of the Company effective on June 11, 2021. Pursuant to the promissory note, IGH shall pay the Company $3,000,000, $500,000 of which was due and payable on or before June 21, 2021. A second payment of $500,000 was due and payable on or before July 12, 2021. The remaining $2,000,000 and accrued interest shall be paid in 12 equal, monthly installments beginning on August 12, 2021, pursuant to the terms of the promissory note.
Canaccord Note Conversion
On June 17, 2021, the Company issued 936,666 shares of common stock and three-year warrants to acquire 468,333 shares of common stock at a price of 0.30 per share to Canaccord Genuity Corp. in connection with the conversion of a portion of the Canaccord Debentures in the principal amount of $281,000.
CLS Holdings USA, Inc.
Unaudited Interim Condensed Consolidated Financial Statements
For the Three and Nine Month Periods Ended February 28, 2022 and 2021
CLS HOLDINGS USA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| |
|
February 28,
|
|
|
May 31,
|
|
| |
|
2022
|
|
|
2021
|
|
|
ASSETS
|
|
(unaudited)
|
|
|
(audited)
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
3,454,584 |
|
|
$ |
1,665,263 |
|
|
Accounts Receivable
|
|
|
842,673 |
|
|
|
684,935 |
|
|
Inventory
|
|
|
2,342,608 |
|
|
|
1,228,052 |
|
|
Prepaid expenses and other current assets
|
|
|
268,698 |
|
|
|
262,313 |
|
|
Total current assets
|
|
|
6,908,563 |
|
|
|
3,840,563 |
|
| |
|
|
|
|
|
|
|
|
| Property, plant and equipment, net of accumulated depreciation of $1,883,803 and $1,434,614 |
|
|
3,192,354 |
|
|
|
3,475,668 |
|
|
Right of use assets, operating leases
|
|
|
2,238,685 |
|
|
|
2,250,009 |
|
| Intangible assets, net of accumulated amortization of $444,575 and $358,403 |
|
|
1,219,018 |
|
|
|
1,305,190 |
|
|
Goodwill
|
|
|
557,896 |
|
|
|
557,896 |
|
|
Other assets
|
|
|
249,955 |
|
|
|
167,455 |
|
| |
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
14,366,471 |
|
|
$ |
11,596,781 |
|
| |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$ |
1,875,042 |
|
|
$ |
1,608,625 |
|
|
Accrued interest, current
|
|
|
325,456 |
|
|
|
267,945 |
|
|
Loan payable
|
|
|
280,000 |
|
|
|
- |
|
|
Lease liability - operating leases, current
|
|
|
311,540 |
|
|
|
287,125 |
|
|
Taxes Payable
|
|
|
3,283,617 |
|
|
|
2,490,295 |
|
|
Convertible notes payable - current, net of discount of $0 and $35,496
|
|
|
19,448,821 |
|
|
|
330,495 |
|
|
Total current liabilities
|
|
|
25,524,476 |
|
|
|
4,984,485 |
|
| |
|
|
|
|
|
|
|
|
|
Noncurrent liabilities
|
|
|
|
|
|
|
|
|
|
Lease liability - operating leases, non-current
|
|
|
1,970,464 |
|
|
|
1,979,294 |
|
| Notes payable, net of discount of $1,876,208 and $0 |
|
|
2,498,792 |
|
|
|
- |
|
| Convertible notes payable - long term, net of discount of $0 and $0 |
|
|
- |
|
|
|
19,729,822 |
|
| |
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
29,993,732 |
|
|
|
26,693,601 |
|
| |
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
- |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
Stockholder's deficit
|
|
|
|
|
|
|
|
|
| Preferred stock, $0.001 par value; 20,000,000 shares authorized; no shares issued |
|
|
- |
|
|
|
- |
|
| Common stock, $0.0001 par value; 750,000,000 shares authorized at February 28, 2022 and 2021; 128,158,082 and 127,221,416 shares issued and outstanding at February 28, 2022 and May 31, 2021 |
|
|
12,817 |
|
|
|
12,723 |
|
|
Additional paid-in capital
|
|
|
77,940,747 |
|
|
|
77,561,393 |
|
|
Common stock subscribed
|
|
|
74,482 |
|
|
|
65,702 |
|
|
Accumulated deficit
|
|
|
(93,646,779 |
)
|
|
|
(92,736,638 |
)
|
|
Stockholder's deficit attributable to CLS Holdings, Inc.
|
|
|
(15,618,733 |
)
|
|
|
(15,096,820 |
)
|
|
Non-controlling interest
|
|
|
(8,528 |
)
|
|
|
- |
|
|
Total stockholder's deficit
|
|
|
(15,627,261 |
)
|
|
|
(15,096,820 |
)
|
| |
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' deficit
|
|
$ |
14,366,471 |
|
|
$ |
11,596,781 |
|
See accompanying notes to these financial statements.
CLS HOLDINGS USA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| |
|
For the
|
|
|
For the
|
|
|
For the
|
|
|
For the
|
|
| |
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
| |
|
February 28, 2022
|
|
|
February 28, 2021
|
|
|
February 28, 2022
|
|
|
February 28, 2021
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
5,588,266 |
|
|
$ |
4,544,082 |
|
|
$ |
16,502,978 |
|
|
$ |
13,232,840 |
|
|
Cost of goods sold
|
|
|
2,701,160 |
|
|
|
2,488,906 |
|
|
|
7,989,817 |
|
|
|
6,487,089 |
|
|
Gross margin
|
|
|
2,887,106 |
|
|
|
2,055,176 |
|
|
|
8,513,161 |
|
|
|
6,745,751 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
3,492,691 |
|
|
|
2,511,502 |
|
|
|
9,440,918 |
|
|
|
7,717,063 |
|
|
Total operating expenses
|
|
|
3,492,691 |
|
|
|
2,511,502 |
|
|
|
9,440,918 |
|
|
|
7,717,063 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(605,585 |
)
|
|
|
(456,326 |
)
|
|
|
(927,757 |
)
|
|
|
(971,312 |
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
589,692 |
|
|
|
757,740 |
|
|
|
1,416,164 |
|
|
|
2,237,166 |
|
|
Impairment of note receivable
|
|
|
- |
|
|
|
2,498,706 |
|
|
|
- |
|
|
|
2,498,706 |
|
|
Gain on settlement of note receivable
|
|
|
(522,246 |
)
|
|
|
- |
|
|
|
(2,218,574 |
)
|
|
|
- |
|
|
Total other (income) expense
|
|
|
67,446 |
|
|
|
3,256,446 |
|
|
|
(802,410 |
)
|
|
|
4,735,872 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(673,031 |
)
|
|
|
(3,712,772 |
)
|
|
|
(125,347 |
)
|
|
|
(5,707,184 |
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income tax
|
|
|
(324,265 |
)
|
|
|
- |
|
|
|
(793,322 |
)
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(997,296 |
)
|
|
|
(3,712,772 |
)
|
|
|
(918,669 |
)
|
|
|
(5,707,184 |
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest
|
|
|
5,028 |
|
|
|
- |
|
|
|
8,528 |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to CLS Holdings, Inc.
|
|
$ |
(992,268 |
)
|
|
$ |
(3,712,772 |
)
|
|
$ |
(910,141 |
)
|
|
$ |
(5,707,184 |
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share – basic and diluted
|
|
$ |
(0.01 |
)
|
|
$ |
(0.03 |
)
|
|
$ |
(0.01 |
)
|
|
$ |
(0.05 |
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding – basic and diluted
|
|
|
128,158,080 |
|
|
|
126,635,303 |
|
|
|
128,099,753 |
|
|
|
126,568,117 |
|
See accompanying notes to these financial statements.
CLS HOLDINGS USA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(Unaudited)
| |
|
Common Stock
|
|
|
Paid In
|
|
|
Stock
|
|
|
Accumulated
|
|
|
Non-controlling
|
|
|
|
|
|
| |
|
Amount
|
|
|
Value
|
|
|
Capital
|
|
|
Payable
|
|
|
Deficit
|
|
|
interest
|
|
|
Total
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, May 31, 2020
|
|
|
126,521,416 |
|
|
$ |
12,653 |
|
|
$ |
71,196,814 |
|
|
$ |
241,109 |
|
|
$ |
(76,846,124 |
)
|
|
$ |
- |
|
|
$ |
(5,395,548 |
)
|
|
Common stock to be issued to officer
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
80,813 |
|
|
|
- |
|
|
|
- |
|
|
|
80,813 |
|
|
Common stock issued to officer from stock payable
|
|
|
300,000 |
|
|
|
30 |
|
|
|
122,690 |
|
|
|
(122,720 |
)
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
Common stock to be issued to consultant
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(25,750 |
)
|
|
|
- |
|
|
|
- |
|
|
|
(25,750 |
)
|
|
Net loss for the nine months ended February 28, 2021
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(5,707,184 |
)
|
|
|
- |
|
|
|
(5,707,184 |
)
|
|
Balance, February 28, 2021 (unaudited)
|
|
|
126,821,416 |
|
|
$ |
12,683 |
|
|
$ |
71,319,504 |
|
|
$ |
173,452 |
|
|
$ |
(82,553,308 |
)
|
|
$ |
- |
|
|
$ |
(11,047,669 |
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, May 31, 2021
|
|
|
127,221,416 |
|
|
$ |
12,723 |
|
|
$ |
77,561,393 |
|
|
$ |
65,702 |
|
|
$ |
(92,736,638 |
)
|
|
$ |
- |
|
|
$ |
(15,096,820 |
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for conversion of debt
|
|
|
936,666 |
|
|
|
94 |
|
|
|
280,906 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
281,000 |
|
|
Common stock to be issued to employee
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8,780 |
|
|
|
- |
|
|
|
- |
|
|
|
8,780 |
|
|
Fair value of warrants issued with debenture offering
|
|
|
- |
|
|
|
- |
|
|
|
98,448 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
98,448 |
|
|
Net loss for the nine months ended February 28, 2022
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(910,141 |
)
|
|
|
(8,528 |
)
|
|
|
(918,669 |
)
|
|
Balance, February 28, 2022 (unaudited)
|
|
|
128,158,082 |
|
|
$ |
12,817 |
|
|
$ |
77,940,747 |
|
|
$ |
74,482 |
|
|
$ |
(93,646,779 |
)
|
|
$ |
(8,528 |
)
|
|
$ |
(15,627,261 |
)
|
See accompanying notes to these financial statements.
CLS HOLDINGS USA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| |
|
For the
|
|
|
For the
|
|
| |
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
| |
|
February 28, 2022
|
|
|
February 28, 2021
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(918,669 |
)
|
|
$ |
(5,707,184 |
)
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Fair value of shares cancelled
|
|
|
- |
|
|
|
(25,750 |
)
|
|
Amortization of debt discounts
|
|
|
132,735 |
|
|
|
1,185,210 |
|
|
Fair value of shares vested by officers
|
|
|
8,780 |
|
|
|
80,813 |
|
|
Gain on settlement of note receivable
|
|
|
(2,218,574 |
)
|
|
|
- |
|
|
Impairment of note receivable
|
|
|
|
|
|
|
2,498,706 |
|
|
Depreciation and amortization expense
|
|
|
535,361 |
|
|
|
511,036 |
|
|
Bad debt expense
|
|
|
2,329 |
|
|
|
5,927 |
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(160,067 |
)
|
|
|
(121,955 |
)
|
|
Prepaid expenses and other current assets
|
|
|
(6,385 |
)
|
|
|
(158,949 |
)
|
|
Inventory
|
|
|
(1,114,556 |
)
|
|
|
(394,414 |
)
|
|
Interest receivable
|
|
|
- |
|
|
|
2,500 |
|
|
Right of use asset
|
|
|
240,736 |
|
|
|
266,734 |
|
|
Accounts payable and accrued expenses
|
|
|
266,417 |
|
|
|
6,865 |
|
|
Accrued interest
|
|
|
95,050 |
|
|
|
258,113 |
|
|
Funds held in escrow
|
|
|
- |
|
|
|
(150,000 |
)
|
|
Deferred tax liability
|
|
|
793,322 |
|
|
|
- |
|
|
Operating lease liability
|
|
|
(213,827 |
)
|
|
|
(314,311 |
)
|
|
Net cash used in operating activities
|
|
|
(2,557,348 |
)
|
|
|
(2,056,659 |
)
|
| |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Payments to purchase property, plant and equipment
|
|
|
(165,875 |
)
|
|
|
(181,266 |
)
|
|
Cash paid for construction deposit on grow facility
|
|
|
(82,500 |
)
|
|
|
- |
|
|
Proceeds from collection of note receivable
|
|
|
2,218,574 |
|
|
|
1,544,291 |
|
|
Net cash provided by investing activities
|
|
|
1,970,199 |
|
|
|
1,363,025 |
|
| |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Proceeds from loan payable
|
|
|
808,800 |
|
|
|
- |
|
|
Repayments of loans payable
|
|
|
(566,339 |
)
|
|
|
- |
|
|
Proceeds from debenture offering
|
|
|
2,500,000 |
|
|
|
- |
|
|
Principal payments on notes payable
|
|
|
(365,991 |
)
|
|
|
- |
|
|
Net cash used in financing activities
|
|
|
2,376,470 |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
1,789,321 |
|
|
|
(693,634 |
)
|
| |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
1,665,263 |
|
|
|
2,925,568 |
|
| |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
3,454,584 |
|
|
$ |
2,231,934 |
|
| |
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$ |
1,221,173 |
|
|
$ |
943,817 |
|
|
Income taxes paid
|
|
$ |
- |
|
|
$ |
- |
|
| |
|
|
|
|
|
|
|
|
|
NONCASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Capitalized interest on convertible debentures
|
|
$ |
- |
|
|
$ |
212,601 |
|
|
Shares issued for conversion of notes payable
|
|
$ |
281,000 |
|
|
$ |
- |
|
|
Shares issued for services issued from stock payable
|
|
$ |
- |
|
|
$ |
122,720 |
|
|
Initial ROU asset and lease liability
|
|
$ |
229,412 |
|
|
$ |
- |
|
|
Original issue discount on notes payable
|
|
$ |
1,875,000 |
|
|
$ |
- |
|
|
Fair value of warrants issued with debenture offering
|
|
$ |
98,448 |
|
|
$ |
- |
|
See accompanying notes to these financial statements.
CLS HOLDINGS USA, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2022
(Unaudited)
Note 1 – Nature of Business and Significant Accounting Policies
Basis of Presentation
These financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States and are expressed in US dollars. The Company has adopted a fiscal year end of May 31st.
Principals of Consolidation
The accompanying consolidated financial statements include the accounts of CLS Holdings USA, Inc., and its direct and indirect wholly owned operating subsidiaries, CLS Nevada, Inc., (“CLS Nevada”), CLS Labs, Inc. (“CLS Labs”), CLS Labs Colorado, Inc. (“CLS Colorado”), CLS Massachusetts, Inc. (“CLS Massachusetts”), and Alternative Solutions, LLC (“Alternative Solutions”), and its 50% interest in Kealii Okamalu LLC (“Kealii Okamalu”). 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”). The Company consolidates Kealii Okamalu because the Company is its sole manager. 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 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 patented proprietary process or otherwise earned any revenues from it. The Company plans to generate revenues through licensing, fee-for-service and joint venture arrangements related to its patented proprietary method of extracting cannabinoids from cannabis plants and converting the resulting cannabinoid extracts into saleable concentrates.
On December 4, 2017, the Company and Alternative Solutions, entered into a Membership Interest Purchase Agreement (the “Acquisition Agreement”), as amended, for the Company to acquire the Oasis LLCs from Alternative Solutions. Pursuant to the Acquisition Agreement, the Company initially contemplated acquiring all of the membership interests in the Oasis LLCs from Alternative Solutions. Just prior to closing, the parties agreed that the Company would instead acquire all of the membership interests in Alternative Solutions, the parent of the Oasis LLCs, from its members, and the membership interests in the Oasis LLCs owned by members other than Alternative Solutions.
Pursuant to the Acquisition Agreement, the Company paid a non-refundable deposit of $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 applied for regulatory approval to own its interest in the Oasis LLCs through Alternative Solutions under the revised structure of the transaction, which is currently under review.
On October 31, 2018, the Company, CLS Massachusetts, Inc., a Massachusetts corporation and a wholly-owned subsidiary of the Company (“CLS Massachusetts”), and In Good Health, Inc., a Massachusetts corporation (“IGH”), entered into an Option Agreement (the “IGH Option Agreement”). Under the terms of the IGH Option Agreement, CLS Massachusetts had an exclusive option to acquire all of the outstanding capital stock of IGH (the “IGH Option”) during the period beginning on the earlier of the date that is one year after the effective date of the conversion and December 1, 2019 and ending on the date that was 60 days after such date. If CLS Massachusetts exercised the IGH Option, the Company, a wholly-owned subsidiary of the Company and IGH would enter into a merger agreement (the form of which had been agreed to by the parties) (the “IGH Merger Agreement”). At the effective time of the merger contemplated by the IGH Merger Agreement, CLS Massachusetts would pay a purchase price of $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 entered into agreements pursuant to which such stockholders, among other things, agreed to vote in favor of such transactions. On October 31, 2018, as consideration for the IGH Option, the Company made a loan to IGH, in the principal amount of $5,000,000, subject to the terms and conditions set forth in that certain loan agreement, dated as of October 31, 2018 between IGH as the borrower and the Company as the lender. The loan was evidenced by a secured promissory note of IGH, which bore interest at the rate of 6% per annum and was to mature on October 31, 2021. To secure the obligations of IGH to the Company under the loan agreement and the promissory note, the Company and IGH entered into a security agreement dated as of October 31, 2018, pursuant to which IGH granted to the Company a first priority lien on and security interest in all personal property of IGH. If the Company did not exercise the Option on or prior to the date that was 30 days following the end of the option period, the loan amount would be reduced to $2,500,000 as a break-up fee, subject to certain exceptions set forth in the IGH Option Agreement. On August 26, 2019, the parties amended the IGH Option Agreement to, among other things, delay closing until January 2020. By letter agreement dated January 31, 2020, the Company, CLS Massachusetts and IGH extended the IGH Option Agreement to February 4, 2020. On February 4, 2020, CLS Massachusetts exercised the IGH Option and IGH subsequently asserted that CLS Massachusetts’ exercise was invalid. By letter dated February 26, 2020, the Company informed IGH that as a result of its breaches of the IGH Option, which remained uncured, an event of default had occurred under the IGH Note. The Company advised IGH that it was electing to cause the IGH Note to bear interest at the default rate of 15% per annum effective February 26, 2020 and to accelerate all amounts due under the IGH Note. On February 27, 2020, IGH informed CLS Massachusetts that it did not plan to make further payments under the IGH Note on the theory that the break-up excused additional payments. This dispute, including whether IGH breached the IGH Option and whether CLS was entitled to collect default interest, was in litigation. During the twelve months ended May 31, 2021, the Company impaired the remaining amounts due under the IGH Note in the amount of $2,498,706, which included $2,497,884 in principal and $822 in accrued interest.
On June 14, 2021, the parties to the IGH lawsuit entered into a confidential settlement agreement to resolve the action and a secured promissory note dated and executed by IGH in favor of the Company effective on June 11, 2021 (the “IGH Settlement Note”). Pursuant to the IGH Settlement Note, IGH shall pay the Company $3,000,000, $500,000 of which was paid on or before June 21, 2021. A second payment of $500,000 was paid on or before July 12, 2021. The remaining $2,000,000 and accrued interest is being paid in 12 equal monthly installments beginning on August 12, 2021, pursuant to the terms of the promissory note. During the nine months ended February 28, 2022, the Company received $2,218,572 under the IGH Settlement Note, which includes $2,166,667 in principal and $51,905 in accrued interest. As of February 28, 2022, the amount due under the IGH Settlement Note was $833,333. The Company records amounts paid under the IGH Settlement Note as gains when payments are received.
On August 24, 2021, the Company formed Kealii Okamalu, LLC, a Nevada limited liability company. The Company and an additional investor each acquired a 50% ownership interest in Kealii Okamalu, and agreed to contribute up to $3,000,000 each for their respective membership interests. At February 28, 2022, the Company and the outside investor had contributed $100,000 and $0 of this amount, respectively. Kealii Okamalu was formed in order to pursue certain joint venture opportunities in the state of Nevada.
On January 4, 2018, the former Attorney General, Jeff Sessions, rescinded the memorandum issued by former Deputy Attorney General James Cole on August 29, 2013 (as amended on February 14, 2014, the “Cole Memo”), the Cole Banking Memorandum, and all other related Obama-era DOJ cannabis enforcement guidance. While the rescission did not change federal law, as the Cole Memo and other DOJ guidance documents were not themselves laws, the rescission removed the DOJ’s formal policy that state-regulated cannabis businesses in compliance with the Cole Memo guidelines should not be a prosecutorial priority. Notably, former Attorney General Sessions’ rescission of the Cole Memo has not affected the status of the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) memorandum issued by the Department of Treasury, which remains in effect. This memorandum outlines Bank Secrecy Act-compliant pathways for financial institutions to service state-sanctioned cannabis businesses, which echoed the enforcement priorities outlined in the Cole Memo. In addition to his rescission of the Cole Memo, Attorney General Sessions issued a one-page memorandum known as the “Sessions Memorandum”. The Sessions Memorandum explains the DOJ’s rationale for rescinding all past DOJ cannabis enforcement guidance, claiming that Obama-era enforcement policies are “unnecessary” due to existing general enforcement guidance adopted in the 1980s, in chapter 9.27.230 of the U.A. Attorneys’ Manual (“USAM”). The USAM enforcement priorities, like those of the Cole Memo, are based on the use of the federal government’s limited resources and include “law enforcement priorities set by the Attorney General,” the “seriousness” of the alleged crimes, the “deterrent effect of criminal prosecution,” and “the cumulative impact of particular crimes on the community.” Although the Sessions Memorandum emphasizes that cannabis is a federally illegal Schedule I controlled substance, it does not otherwise instruct U.S. Attorneys to consider the prosecution of cannabis-related offenses a DOJ priority, and in practice, most U.S. Attorneys have not changed their prosecutorial approach to date. However, due to the lack of specific direction in the Sessions Memorandum as to the priority federal prosecutors should ascribe to such cannabis activities, there can be no assurance that the federal government will not seek to prosecute cases involving cannabis businesses that are otherwise compliant with state law.
William Barr served as United States Attorney General from February 14, 2019 to December 23, 2020. The DOJ under Mr. Barr did not take a formal position on federal enforcement of laws relating to cannabis. On March 11, 2021, United States President Biden’s nominee, Merrick Garland was sworn in as the U.S. Attorney General. During his campaign, President Biden stated a policy goal to decriminalize possession of cannabis at the federal level, but he has not publicly supported the full legalization of cannabis. It is unclear what impact, if any, the new administration will have on U.S. federal government enforcement policy on cannabis. Nonetheless, there is no guarantee that the position of the Department of Justice will not change.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassification
Certain amounts in the prior period have been reclassified to conform to the current period presentation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less to be cash equivalents. The Company had cash and cash equivalents of $3,454,584 and $1,665,263 as of February 28, 2022 and May 31, 2021, 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 $2,329 and $0 of bad debt expense during the three months ended February 28, 2022 and 2021, respectively. The Company had $2,329 and $5,927 of bad debt expense during the nine months ended February 28, 2022 and 2021, respectively.
Inventory
Inventories are stated at the lower of cost or market. Cost is determined using a perpetual inventory system whereby costs are determined by acquisition costs of individual items included in inventory. Market is determined based on net realizable value. Appropriate consideration is given to obsolescence, excessive levels, deterioration, and other factors in evaluating net realizable values. Our cannabis products consist of prepackaged purchased goods ready for resale, along with produced edibles and extracts developed under our production license.
Property, Plant and Equipment
Property and equipment is recorded at the lower of cost or estimated net recoverable amount, and is depreciated using the straight-line method over its estimated useful life. Property acquired in a business combination is recorded at estimated initial fair value. Property, plant, and equipment are depreciated using the straight-line method based on the lesser of the estimated useful lives of the assets or the lease term based upon the following life expectancy:
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Years
|
|
|
Office equipment
|
|
|
3 to 5 |
|
|
Furniture & fixtures
|
|
|
3 to 7 |
|
|
Machinery & equipment
|
|
|
3 to 10 |
|
|
Leasehold improvements
|
|
Term of lease |
|
Repairs and maintenance expenditures are charged to operations as incurred. Major improvements and replacements, which extend the useful life of an asset, are capitalized and depreciated over the remaining estimated useful life of the asset. When assets are retired or sold, the cost and related accumulated depreciation are eliminated and any resulting gain or loss is reflected in operations.
Long-Lived Assets
The Company reviews its property and equipment and any identifiable intangibles including goodwill for impairment on an annual basis utilizing the guidance set forth in the Statement of Financial Accounting Standards Board ASC 350 “Intangibles – Goodwill and Other” and ASC 360 “Property, Plant, and Equipment.” At February 28, 2022, the net carrying value of goodwill on the Company’s balance sheet remained at $557,896.
Comprehensive Income
ASC 220-10-15 “Reporting Comprehensive Income,” establishes standards for reporting and displaying of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, ASC 220-10-15 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company does not have any items of comprehensive income in any of the periods presented.
Non-Controlling Interests
The Company reports “non-controlling interest in subsidiary” as a component of equity, separate from parent’s equity, on the Consolidated Balance Sheets. In addition, the Company’s Consolidated Statements of Operations includes “net income (loss) attributable to non-controlling interest.”
Variable Interest Entities
The Company’s consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and variable interest entities (“VIE”), where the Company is the primary beneficiary under the provisions of ASC 810, Consolidation (“ASC 810”). A VIE must be consolidated by its primary beneficiary when, along with its affiliates and agents, the primary beneficiary has both: (i) the power to direct the activities that most significantly impact the VIE’s economic performance; and (ii) the obligation to absorb losses or the right to receive the benefits of the VIE that could potentially be significant to the VIE. The Company reconsiders whether an entity is still a VIE only upon certain triggering events and continually assesses its consolidated VIEs to determine if it continues to be the primary beneficiary. See “Note 3 – Joint Ventures” for additional information on the Company’s VIEs.
Concentrations of Credit Risk
The Company maintains its cash in bank deposit accounts and other accounts, the balances of which at times may be uninsured or exceed federally insured limits. From time to time, some of the Company’s funds are also held by escrow agents; these funds may not be federally insured. The Company continually monitors its banking relationships and consequently has not experienced any losses in such accounts.
Advertising and Marketing Costs
All costs associated with advertising and promoting products are expensed as incurred. Total recognized advertising and marketing expenses were $299,154 and $383,128 for the three months ended February 28, 2022 and 2021, respectively. Total recognized advertising and marketing expenses were $1,087,692 and $826,867 for the nine months ended February 28, 2022 and 2021, respectively.
Research and Development
Research and development expenses are charged to operations as incurred. Total recognized research and development expenses were $1,800 and $8,334 for the three months ended February 28, 2022 and 2021, respectively. Total recognized research and development expenses were $12,308 and $20,726 for the nine months ended February 28, 2022 and 2021, 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, notes receivable, convertible notes payable, accounts payable and accrued expenses, none of which is held for trading, approximate their estimated fair values due to the short-term maturities of those financial instruments.
A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable, either directly or indirectly.
Level 3 - Significant unobservable inputs that cannot be corroborated by market data.
Revenue Recognition
Revenue from the sale of cannabis products is recognized by Oasis at the point of sale, at which time payment is received. Management estimates an allowance for sales returns.
The Company also recognizes revenue from Serenity Wellness Products LLC and Serenity Wellness Growers LLC, d/b/a City Trees (“City Trees”). City Trees recognizes revenue from the sale of the following cannabis products and services to licensed dispensaries, cultivators and distributors within the State of Nevada:
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●
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Premium organic medical cannabis sold wholesale to licensed retailers
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●
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Recreational marijuana cannabis products sold wholesale to licensed distributors and retailers
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●
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Extraction products such as oils and waxes derived from in-house cannabis production
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●
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Processing and extraction services for licensed medical cannabis cultivators in Nevada
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●
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High quality cannabis strains in the form of vegetative cuttings for sale to licensed medical cannabis cultivators in Nevada
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Effective June 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from commercial sales of products and licensing agreements by applying the following steps: (1) identifying the contract with a customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to each performance obligation in the contract; and (5) recognizing revenue when each performance obligation is satisfied. For the comparative periods, revenue has not been adjusted and continues to be reported under ASC 605 — Revenue Recognition. Under ASC 605, revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the performance of the service has been rendered to a customer or delivery has occurred; (3) the amount of fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably assured. There was no impact on the Company’s financial statements as a result of adopting Topic 606 for the three and nine months ended February 28, 2022 and 20201
Disaggregation of Revenue
The following table represents a disaggregation of revenue for the three and nine months ended February 28, 2022 and 2021:
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For the Nine
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|
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For the Nine
|
|
| |
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Months Ended
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Months Ended
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|
| |
|
February 28, 2022
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|
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February 28, 2021
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|
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Cannabis Dispensary
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|
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10,670,203 |
|
|
|
10,202,638 |
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|
Cannabis Production
|
|
|
5,832,775 |
|
|
|
3,030,202 |
|
| |
|
$ |
16,502,978 |
|
|
$ |
13,232,840 |
|
| |
|
For the Three
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|
|
For the Three
|
|
| |
|
Months Ended
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|
|
Months Ended
|
|
| |
|
February 28, 2022
|
|
|
February 28, 2021
|
|
|
Cannabis Dispensary
|
|
|
3,333,229 |
|
|
|
3,384,139 |
|
|
Cannabis Production
|
|
|
2,255,037 |
|
|
|
1,159,943 |
|
| |
|
$ |
5,588,266 |
|
|
$ |
4,544,082 |
|
Basic and Diluted Earnings or Loss Per Share
Basic net earnings per share is based on the weighted average number of shares outstanding during the period, while fully diluted net earnings per share is based on the weighted average number of shares of common stock and potentially dilutive securities assumed to be outstanding during the period using the treasury stock method. Potentially dilutive securities consist of options and warrants to purchase common stock, and convertible debt. Basic and diluted net loss per share are computed based on the weighted average number of shares of common stock outstanding during the period. At February 28, 2022 and 2021, the Company had the following potentially dilutive instruments outstanding: At February 28, 2022, a total of 76,251,384 shares (7,346,297 issuable upon the exercise of warrants, 3,041,290 issuable upon the exercise of unit warrants, 65,693,797 issuable upon the conversion of convertible notes payable and accrued interest, and 170,000 in stock to be issued). At February 28 2021, a total of 87,861,815 shares (54,410,145 issuable upon the exercise of warrants; 7,676,974 issuable upon the exercise of unit warrants; 25,454,696 issuable upon the conversion of convertible notes payable and accrued interest; and 320,000 in stock to be issued).
The Company uses the treasury stock method to calculate the impact of outstanding stock options and warrants. Stock options and warrants for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on earnings per common share and, accordingly, are excluded from the calculations.
A net loss causes all outstanding stock options and warrants to be anti-dilutive. As a result, the basic and dilutive losses per common share are the same for the three and nine months ended February 28, 2022 and for the three months ended February 28, 2021. For the nine months ended February 28, 2022, the Company excluded from the calculation of fully diluted earnings per share the following instruments which were anti-dilutive: shares issuable pursuant to the conversion of notes payable and accrued interest, and shares issuable pursuant to the exercise of stock options and warrants. The Company included 170,000 shares of common stock issuable in fully diluted earnings per share for the nine months ended February 28, 2022.
Income Taxes
The Company accounts for income taxes under the asset and liability method in accordance with ASC 740. The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The components of the deferred tax assets and liabilities are classified as current and non-current based on their characteristics. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations.
Section 280E of the Internal Revenue Code, as amended, prohibits businesses from deducting certain expenses associated with trafficking controlled substances (within the meaning of Schedule I and II of the Controlled Substances Act). The IRS has invoked Section 280E in tax audits against various cannabis businesses in the U.S. that are permitted under applicable state laws. Although the IRS has issued a clarification allowing the deduction of certain expenses, the bulk of operating costs and general administrative costs are generally not permitted to be deducted. The operations of certain of the Company’s subsidiaries are subject to Section 280E. This results in permanent differences between ordinary and necessary business expenses deemed non-deductible under IRC Section 280E. Therefore, the effective tax rate can be highly variable and may not necessarily correlate with pre-tax income or loss.
Commitments and Contingencies
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims brought to such legal counsel’s attention as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed.
Recent Accounting Pronouncements
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, current U.S. GAAP requires the performance of procedures to determine the fair value at the impairment testing date of assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, the amendments under this ASU require the goodwill impairment test to be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The ASU became effective for the Company on January 1, 2020. During the year ended May 31, 2020, the Company recorded an impairment of goodwill in the amount of $25,185,003 pursuant to ASU No. 2017-04. At February 28, 2022, the net amount of goodwill on the Company’s balance sheet remained at $557,896.
There are various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
Note 2 – Going Concern
As shown in the accompanying financial statements, the Company has incurred net losses from operations resulting in an accumulated deficit of $93,646,779 as of February 28, 2022. The Company’s auditors stated in their opinion on the Company’s financial statements for the year ended May 31, 2021 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. 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 – Joint Venture and Options Transaction
In Good Health
On October 31, 2018, the Company, CLS Massachusetts, and IGH, which converted to a for-profit corporation on November 6, 2018 (the “Conversion”), entered into the IGH Option Agreement. Under the terms of the IGH Option Agreement, CLS Massachusetts had an exclusive option to acquire all of the outstanding capital stock of IGH (the “IGH Option”) during the period beginning on the earlier of the date that was one year after the effective date of the Conversion and December 1, 2019, and ending on the date that was 60 days after such date (the “Option Period”). If CLS Massachusetts exercised the IGH Option, the Company, a wholly-owned subsidiary of the Company and IGH would enter into the IGH Merger Agreement (the form of which had been agreed to by the parties). At the effective time of the merger contemplated by the IGH Merger Agreement, CLS Massachusetts would pay a purchase price of $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 entered into agreements pursuant to which such stockholders, among other things, agreed to vote in favor of such transactions.
On October 31, 2018, as consideration for the IGH Option, the Company made a loan to IGH (the “IGH Loan”), in the principal amount of $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”). The IGH Loan was evidenced by a secured promissory note of IGH (the “IGH Note”), which bore interest at the rate of 6% per annum and was scheduled to mature on October 31, 2021. The Company recorded interest income in the amounts of $149,972 and $296,450 on the IGH Loan during the twelve months ended May 31, 2021 and 2020, respectively. On March 1, 2020, the Company capitalized interest in the amount of $399,453 into the principal amount due. During the years ended May 31, 2021 and 2020, the Company capitalized interest in the amount of $0 and $399,453, respectively, on the IGH Note. During the year ended May 31, 2021, the Company received payments on the IGH Note in the amount of $1,696,765. The Company applied these payments as follows; $1,544,291 as a repayment of principal and $152,473 as a repayment of accrued interest. During the year ended May 31, 2020, the Company received payments on the IGH Note in the amount of $1,425,000. The Company applied these payments as follows; $1,357,278 as a repayment of principal and $67,722 as a repayment of accrued interest. To secure the obligations of IGH to the Company under the IGH Loan Agreement and the IGH Note, 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 did not exercise the IGH Option on or prior to the date that was 30 days following the end of the Option Period, the IGH Loan Amount would 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 IGH Option Agreement), in which case the Break-Up Fee would not apply and there would be no reduction to the Loan Amount. On August 26, 2019, the parties amended the IGH Option to, among other things, extend the Option Period and delay closing until January 2020. By letter agreement dated January 31, 2020, the Company, CLS Massachusetts and IGH extended the IGH Option Agreement to February 4, 2020. On February 4, 2020, CLS Massachusetts exercised the IGH Option and IGH subsequently asserted that CLS Massachusetts’ exercise was invalid. By letter dated February 26, 2020, the Company informed IGH that as a result of its breaches of the IGH Option, which remained uncured, an event of default had occurred under the IGH Note. The Company advised IGH that it was electing to cause the IGH Note to bear interest at the default rate of 15% per annum effective February 26, 2020 and to accelerate all amounts due under the IGH Note. On February 27, 2020, IGH informed CLS Massachusetts that it did not plan to make further payments under the IGH Note on the theory that the Break-Up Fee excused additional payments. This dispute, including whether IGH breached the IGH Option and whether CLS was entitled to collect default interest, was in litigation. During the twelve months ended May 31, 2021, the Company impaired the remaining amounts due under the IGH Note in the amount of $2,498,706, which included $2,497,884 in principal and $822 in accrued interest.
On June 14, 2021, the parties to the IGH lawsuit entered into a confidential settlement agreement to resolve the action and the IGH Settlement Note. Pursuant to the IGH Settlement Note, IGH shall pay the Company $3,000,000, $500,000 of which was paid on or before June 21, 2021. A second payment of $500,000 was paid on or before July 12, 2021. The remaining $2,000,000 and accrued interest is being paid in 12 equal monthly installments beginning on August 12, 2021, pursuant to the terms of the promissory note. During the nine months ended February 28, 2022, the Company received $2,218,572 under the IGH Settlement Note, which includes $2,166,667 in principal and $51,905 in accrued interest. The Company records amounts paid under the IGH Settlement Note as gains when payments are received.
Quinn River Joint Venture
On October 20, 2021, the Company entered into a management services agreement (the “Quinn River Joint Venture Agreement”) through its 50% owned subsidiary, Kealii Okamalu, with CSI Health MCD LLC (“CSI”) and a commission established by the authority of the Tribal Council of the Fort McDermitt Paiute and Shoshone Tribe (“Tribe”). The purpose of the Quinn River Joint Venture Agreement is to establish a business (the “Quinn River Joint Venture”) to grow, cultivate, process, and sell cannabis and related products. The Quinn River Joint Venture Agreement has an initial term of 10 years plus a 10 year renewal option from the date the first cannabis crop produced is harvested and sold. Pursuant to the Quinn River Joint Venture Agreement, Kealii Okamalu will lease approximately 30 acres of the Tribe’s land located along the Quinn River at a cost of $3,500 per month and manage the design, finance and construction of a cannabis cultivation facility on such tribal lands (“the Cultivation Facility”). Kealii Okamalu will also manage the ongoing operations of the Cultivation Facility and related business, including, but not limited to, cultivation of cannabis crops, personnel staffing, product packaging, testing, marketing and sales. Packaged products will be branded as “Quinn River Farms.” The Company will provide 10,000 square feet of warehouse space at its Las Vegas facility, and will have preferred vendor status including the right to purchase cannabis flower and the business’s cannabis trim at favorable prices. Kealii Okamalu will contribute $6 million towards the construction of the Cultivation Facility and the working capital for the Quinn River Joint Venture. This amount will be repaid from the portion of the net profits of the Quinn River Joint Venture otherwise payable to CSI and the Tribe at the rate of $750,000 per quarter for eight quarters. Kealii Okamalu will receive one-third of the net profits of the Quinn River Joint Venture.
The Company is the manager of and holds a 50% ownership interest in Kealii Okamalu. Kealii Okamalu is a VIE which the Company consolidates. The Quinn River Joint Venture is not a legal entity but rather a business operated by Kealii Okamalu. The Company uses the equity method of accounting to record one-third of the profit or loss generated by the Quinn River Joint Venture, which accrues to Kealii Okamalu. Since the Company is a 50% owner of Kealii Okamalu, 50% of the profit or loss of Kealii Okamalu is recorded as minority interest in the Company’s statement of operations.
During the nine months ended February 28, 2022, Kealii Okamalu made a deposit of $100,000 towards the construction of the Cultivation Facility; $17,500 of this amount was utilized to pay lease charges on the leased land, and the remaining $82,500 is classified as a construction deposit in other assets on the Company’s balance sheet at February 28, 2022.
Note 4 – Accounts Receivable
Accounts receivable was $842,673 and $684,935 at February 28, 2022 and May 31, 2021, respectively. During the three months ended February 28, 2022 and 2021, the Company had bad debt expense in the net amount of $2,329 and $0. During the nine months ended February 28, 2022 and 2021, the Company had bad debt expense in the net amount of $2,329 and $5,927. No allowance for doubtful accounts was necessary during the three and nine months ended February 28, 2022 and 2021.
Note 5 – Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
| |
|
February 28,
2022
|
|
|
May 31,
2021
|
|
|
Deposits
|
|
$ |
2,121 |
|
|
$ |
2,244 |
|
|
Prepaid expenses
|
|
|
189,077 |
|
|
|
250,069 |
|
|
Other receivable
|
|
|
77,500 |
|
|
|
10,000 |
|
|
Total
|
|
$ |
268,698 |
|
|
$ |
262,313 |
|
Deposits consist of amounts paid in advance for the acquisition of property and equipment. Prepaid expenses consist primarily of annual license fees charged by the State of Nevada; these fees are paid in advance, and amortized over the one-year term of the licenses.
Note 6 – Inventory
Inventory, consisting of material, overhead, labor, and manufacturing overhead, is stated at the lower of cost (first-in, first-out) or market, and consists of the following:
| |
|
February 28,
|
|
|
May 31,
|
|
| |
|
2022
|
|
|
2021
|
|
|
Raw materials
|
|
$ |
427,198 |
|
|
$ |
344,085 |
|
|
Finished goods
|
|
|
1,915,410 |
|
|
|
883,967 |
|
|
Total
|
|
$ |
2,342,608 |
|
|
$ |
1,228,052 |
|
Raw materials consist of cannabis plants and the materials that are used in our production process prior to being tested and packaged for consumption. Finished goods consist of pre-packaged materials previously purchased from other licensed cultivators and our manufactured edibles and extracts.
Note 7 – Notes Receivable
IGH Note Receivable
On October 31, 2018, in connection with an option to purchase transaction (see note 4), the Company loaned $5,000,000 pursuant to the IGH Note to IGH. On November 6, 2018, IGH converted to a for-profit corporation. The IGH Note bore interest at the rate of 6% per annum. On March 1, 2020 (the “Initial Payment Date”), all accrued interest was added to the outstanding principal due thereunder and such amount was payable in eight equal quarterly installments, commencing on the Initial Payment Date, together with interest accruing after the Initial Payment Date. The IGH Note was to mature and all outstanding principal, accrued interest and any other amounts due thereunder, was 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 the IGH Option Agreement between the Company and IGH, among others, in both cases dated as of October 31, 2018 and the other IGH Loan Documents, and was secured by the collateral described in the IGH Loan Documents and by such other collateral as may in the future have been granted to the Company to secure the IGH Note. During the years ended May 31, 2021 and 2020, the Company recorded interest income in the amounts of $149,972 and $296,250, respectively, in connection with the IGH Note. During the years ended May 31, 2021 and 2020, the Company capitalized interest in the amount of $0 and $399,453, respectively, on the IGH Note. During the year ended May 31, 2021, the Company received payments on the IGH Note in the total amount of $1,696,765. The Company applied these payments as follows; $1,544,291 as a repayment of principal and $152,473 as a repayment of accrued interest.
By letter dated February 26, 2020, the Company informed IGH that as a result of its breaches of the IGH Option, which remained uncured, an event of default had occurred under the IGH Note. The Company advised IGH that it was electing to cause the IGH Note to bear interest at the default rate of 15% per annum effective February 26, 2020 and to accelerate all amounts due under the Note. This dispute, including whether IGH breached the IGH Option and whether CLS was entitled to collect default interest, was in litigation. During the twelve months ended May 31, 2021, the Company impaired the remaining amounts due under the IGH Note in the amount of $2,498,706, which included $2,497,884 in principal and $822 in accrued interest.
On June 14, 2021, the parties to the IGH lawsuit entered into a confidential settlement agreement to resolve the action and the IGH Settlement Note. Pursuant to the IGH Settlement Note, IGH shall pay the Company $3,000,000, $500,000 of which was paid on or before June 21, 2021. A second payment of $500,000 was paid on or before July 12, 2021. The remaining $2,000,000 and accrued interest is being paid in 12 equal monthly installments beginning on August 12, 2021, pursuant to the terms of the promissory note. During the three months ended February 28, 2022, the Company received $522,245 under the IGH Settlement Note, which includes $500,000 in principal and $22,245 in accrued interest. During the nine months ended February 28, 2022, the Company received $2,218,572 under the IGH Settlement Note, which includes $2,166,667 in principal and $51,905 in accrued interest. As of February 28, 2022, the amount due under the IGH Settlement Note was $833,333. The Company records amounts paid under the IGH Settlement Note as gains when payments are received.
Note 8 – Property, Plant and Equipment
Property, plant and equipment consisted of the following at February 28, 2022 and May 31, 2021.
| |
|
February 28,
2022
|
|
|
May 31,
2021
|
|
|
Office equipment
|
|
$ |
126,824 |
|
|
$ |
120,068 |
|
|
Furniture and fixtures
|
|
|
148,358 |
|
|
|
145,103 |
|
|
Machinery & Equipment
|
|
|
1,950,500 |
|
|
|
1,823,094 |
|
|
Leasehold improvements
|
|
|
2,850,475 |
|
|
|
2,822,017 |
|
|
Less: accumulated depreciation
|
|
|
(1,883,803 |
)
|
|
|
(1,434,614 |
)
|
|
Property, plant, and equipment, net
|
|
$ |
3,192,354 |
|
|
$ |
3,475,668 |
|
The Company made payments in the amounts of $165,875 and $181,266 for property and equipment during the nine months ended February 28, 2022 and 2021, respectively.
Depreciation of property, plant, and equipment was $150,883 and $139,989 for the three months ended February 28, 2022 and 2021 respectively. Depreciation of property, plant, and equipment was $449,189 and $423,737 for the nine months ended February 28, 2022 and 2021, respectively.
Note 9 – Right to Use Assets and Liabilities – Operating Leases
The Company has operating leases for offices and warehouses. The Company’s leases have remaining lease terms of 1 year to 10.5 years, some of which include options to extend.
The Company’s lease expense for the three and nine months ended February 28, 2022 was entirely comprised of operating leases and amounted to $73,874 and $323,218, respectively. The Company’s right of use (“ROU”) asset amortization for the three and nine months ended February 28, 2022 was $82,479 and $240,736, respectively. The difference between the lease expense and the associated ROU asset amortization consists of interest.
The Company has recorded total right to use assets of $4,112,876 and liabilities in the amount of $4,069,476 through February 28, 2022, resulting in gains in the amount of $28,511 during the year ended May 31, 2020 and $14,899 during the year ended May 31, 2021. During the year ended May 31, 2020, the Company entered into agreements to amend certain of its operating leases. The lease of the dispensary and administrative offices at 1800 Industrial Road was extended from June 30, 2023 to February 28, 2030, and the lease of the offices at 1718 Industrial Road was extended from August 31, 2020 to August 31, 2022. During the year ended May 31, 2021, the Company entered into an agreement to extend the lease of its cultivation and processing facility at 203 E. Mayflower Avenue through February 28, 2030.
On October 20, 2021, pursuant to the Quinn River Joint Venture Agreement (see note 4), the Company, through Kealii Okamalu, entered into a lease agreement (the “Quinn River Lease”) for approximately 30 acres of land for purposes of building and operating a facility to grow cannabis. The lease has a term of 10 years, with a 10-year renewal option, from the date of the initial harvest produced under the Quinn River Joint Venture Agreement, which is expected to occur in the first quarter of fiscal 2023. Rent is $3,500 per month. The initial amount of the right to use asset and operating lease liability under the Quinn River Lease was $221,469.
Right to use assets – operating leases are summarized below:
| |
|
February 28,
2022
|
|
|
Amount at inception of leases
|
|
$ |
4,112,876 |
|
|
Amount amortized
|
|
|
(1,874,191 |
)
|
|
Balance – February 28, 2022
|
|
$ |
2,238,685 |
|
Operating lease liabilities are summarized below:
|
Amount at inception of leases
|
|
$ |
4,069,476 |
|
|
Amount amortized
|
|
|
(1,787,472 |
)
|
|
Balance – February 28, 2022
|
|
$ |
2,282,004 |
|
|
Warehouse and offices
|
|
$ |
2,055,145 |
|
|
Land
|
|
|
218,488 |
|
|
Office equipment
|
|
|
8,371 |
|
|
Balance – February 28, 2022
|
|
$ |
2,282,004 |
|
| |
|
|
|
|
| |
|
|
|
|
|
Lease liability
|
|
$ |
2,282,004 |
|
|
Less: current portion
|
|
|
(311,540 |
)
|
|
Lease liability, non-current
|
|
$ |
1,970,464 |
|
Maturity analysis under these lease agreements is as follows:
|
Twelve months ended February 28, 2023
|
|
$ |
496,066 |
|
|
Twelve months ended February 28, 2024
|
|
|
499,103 |
|
|
Twelve months ended February 28, 2025
|
|
|
512,532 |
|
|
Twelve months ended February 28, 2026
|
|
|
526,358 |
|
|
Twelve months ended February 28, 2027
|
|
|
226,297 |
|
|
Thereafter
|
|
|
799,417 |
|
|
Total
|
|
$ |
3,059,773 |
|
|
Less: Present value discount
|
|
|
(777,769 |
)
|
|
Lease liability
|
|
$ |
2,282,004 |
|
Note 10 – Intangible Assets
Intangible assets consisted of the following at February 28, 2022 and May 31, 2021:
| |
|
February 28, 2022
|
|
| |
|
Gross
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Intellectual Property
|
|
$ |
319,600 |
|
|
$ |
(117,187 |
)
|
|
$ |
202,413 |
|
|
License & Customer Relations
|
|
|
990,000 |
|
|
|
(181,500 |
)
|
|
|
808,500 |
|
|
Tradenames - Trademarks
|
|
|
301,000 |
|
|
|
(110,367 |
)
|
|
|
190,633 |
|
|
Non-Compete Agreements
|
|
|
27,000 |
|
|
|
(27,000 |
)
|
|
|
- |
|
|
Domain Names
|
|
|
25,993 |
|
|
|
(8,521 |
)
|
|
|
17,472 |
|
|
Total
|
|
$ |
1,663,593 |
|
|
$ |
(444,575 |
)
|
|
$ |
1,219,018 |
|
| |
|
May 31, 2021
|
|
| |
|
Gross
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Intellectual Property
|
|
$ |
319,600 |
|
|
$ |
(93,217 |
)
|
|
$ |
226,383 |
|
|
License & Customer Relations
|
|
|
990,000 |
|
|
|
(144,375 |
)
|
|
|
845,625 |
|
|
Tradenames - Trademarks
|
|
|
301,000 |
|
|
|
(87,792 |
)
|
|
|
213,208 |
|
|
Non-Compete Agreements
|
|
|
27,000 |
|
|
|
(27,000 |
)
|
|
|
- |
|
|
Domain Names
|
|
|
25,993 |
|
|
|
(6,019 |
)
|
|
|
19,974 |
|
|
Total
|
|
$ |
1,663,593 |
|
|
$ |
(358,403 |
)
|
|
$ |
1,305,190 |
|
Total amortization expense charged to operations for the three months ended February 28, 2022 and 2021 was $28,023 and $28,716, respectively. Total amortization expense charged to operations for the nine months ended February 28, 2022 and 2021 was $86,172 and $87,299, respectively.
|
Amount to be amortized during the twelve months ended February 28,
|
|
|
|
|
|
2023
|
|
$ |
111,989 |
|
|
2024
|
|
|
111,989 |
|
|
2025
|
|
|
111,989 |
|
|
2026
|
|
|
111,989 |
|
|
2027
|
|
|
111,989 |
|
|
Thereafter
|
|
|
659,073 |
|
| |
|
$ |
1,219,018 |
|
Note 11 – Goodwill
The Company recorded goodwill in the amount of $25,742,899 in connection with the acquisition of Alternative Solutions on June 27, 2018.
Goodwill Impairment Test
The Company assessed its intangible assets as of May 31, 2020 for purposes of determining if an impairment existed as set forth in ASC 350 – Intangibles – Goodwill and Other and ASC 360 – Property Plant and Equipment. Pursuant to ASC 360, the Company recorded an impairment of goodwill in the amount of $25,185,003 based upon the difference between the carrying value of $25,742,899 and the fair value of $557,896. Fair value was based upon the price of the Company’s common stock at May 31, 2020 of $0.06 per share. At May 31, 2020, the net amount of goodwill on the Company’s balance sheet was $557,896.
The Company also assessed its intangible assets as of May 31, 2021 for purposes of determining if an impairment existed as set forth in ASC 350 – Intangibles – Goodwill and Other and ASC 360 – Property Plant and Equipment. Pursuant to ASC 360, the Company determined that the fair value of its intangible assets exceeded the carrying value of goodwill for the year ended May 31, 2021. As a result, no impairment was recorded during the year ended May 31, 2021. At February 28, 2022, the net amount of goodwill on the Company’s balance sheet was $557,896.
Note 12 – Other Assets
Other assets consisted of the following at February 28, 2022 and May 31, 2021:
| |
|
February 28,
|
|
|
May 31,
|
|
| |
|
2022
|
|
|
2021
|
|
|
Security deposits
|
|
$ |
167,455 |
|
|
$ |
167,455 |
|
|
Construction deposit
|
|
|
82,500 |
|
|
|
- |
|
| |
|
$ |
249,955 |
|
|
$ |
167,455 |
|
Note 13 – Accounts Payable and Accrued Liabilities
Accrued accounts payable and accrued liabilities consisted of the following at February 28, 2022 and May 31, 2021:
| |
|
February 28,
2022
|
|
|
May 31,
2021
|
|
|
Trade accounts payable
|
|
$ |
883,939 |
|
|
$ |
771,843 |
|
|
Accrued payroll and payroll taxes
|
|
|
260,785 |
|
|
|
279,721 |
|
|
Accrued liabilities
|
|
|
730,318 |
|
|
|
557,061 |
|
|
Total
|
|
$ |
1,875,042 |
|
|
$ |
1,608,625 |
|
Note 14- Loan Payable
The Company is a party to an agreement with a lender to finance short term purchases of inventory (the “Short Term Financing Agreement”) for two of its subsidiaries. On November 9, 2021, the Company received cash in the amount of $294,700, net of fees in the amount of $9,114, pursuant to the Short Term Financing Agreement.
During the three months ended February 28, 2022, the Company received cash proceeds in the amount of $514,100 from three additional loans under the Short Term Financing Agreement, made payments in the amount of $566,339, and incurred fees in the amount of $28,425. At February 28, 2022, the balance due under the Short Term Financing Agreement was $280,000.
Note 15 – Convertible Notes Payable
| |
|
February 28, 2022
|
|
|
May 31, 2021
|
|
| 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 was to mature on a date that was three years following issuance. The U.S. Convertible Debenture 1 was convertible into units (the “Convertible Debenture Units”) at a conversion price of $0.80 per Convertible Debenture Unit. Each Convertible Debenture Unit consisted 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 value of the warrants will be recorded when the issuance becomes probable. On July 26, 2019, U.S. Convertible Debenture 1 was amended such that, should the Company issue or sell common stock or equity securities convertible into common stock at a price less than the conversion price of the U.S. Convertible Debenture 1, the conversion price of U.S. Convertible Debenture 1 would be reduced to such issuance price, and the exercise price of the warrant issuable in connection with U.S. Convertible Debenture 1 would be exercisable at a price equal to 137.5% of the adjusted conversion price at the time of conversion. 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 three and nine months ended February 28, 2022, $0 and $0 of this discount was charged to operations, respectively. During the three and nine months ended February 28, 2022, the Company accrued interest in the amounts of $90,089 and $270,267 on the U.S. Convertible Debenture 1, respectively. During the three and nine months ended February 28, 2022, the Company made interest payments in the amounts of $90,089 and $270,267, respectively. On April 15, 2021, the U.S. Convertible Debenture 1 was amended as follows: (i) the conversion price of the debenture was reduced to $0.30 per unit; and (ii) the maturity date was extended from October 31, 2021 to October 31, 2022. This amendment was accounted for as an extinguishment of debt, and the Company recorded a loss in the amount of $2,038,803 during the year ended May 31, 2021 in connection with this amendment. |
|
$ |
4,504,457 |
|
|
$ |
4,504,457 |
|
| |
|
|
|
|
|
|
|
|
| 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 was to mature on a date that was three years following issuance. The U.S. Convertible Debenture 2 was convertible into Convertible Debenture Units at a conversion price of $0.80 per Convertible Debenture Unit. Each Convertible Debenture Unit consisted 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 value of the warrants will be recorded when the issuance becomes probable. On July 26, 2019, U.S. Convertible Debenture 2 was amended such that, should the Company issue or sell common stock or equity securities convertible into common stock at a price less than the conversion price of the U.S. Convertible Debenture 2, the conversion price of U.S. Convertible Debenture 2 would be reduced to such issuance price, and the exercise price of the warrant issuable in connection with U.S. Convertible Debenture 2 would be exercisable at a price equal to 137.5% of the adjusted conversion price at the time of conversion. 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 three and nine months ended February 28, 2022, $0 and $0 of this discount was charged to operations, respectively. During the three and nine months ended February 28, 2022, the Company accrued interest in the amounts of $22,522 and $67,567 on the U.S. Convertible Debenture 2, respectively. During the three and nine months ended February 28, 2022, the Company made interest payments in the amounts of $22,522 and $67,567, respectively. On April 15, 2021, the U.S. Convertible Debenture 2 was amended as follows: (i) the conversion price of the debentures was reduced to $0.30 per unit; and (ii) the maturity date was extended from October 31, 2021 to October 31, 2022. This amendment was accounted for as an extinguishment of debt, and the Company recorded a loss in the amount of $509,700 during the year ended May 31, 2021. |
|
|
1,126,114 |
|
|
|
1,126,114 |
|
| |
|
February 28, 2022
|
|
|
May 31, 2021
|
|
| 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 was to mature on a date that was three years following issuance. The U.S. Convertible Debenture 3 was convertible into Convertible Debenture Units at a conversion price of $0.80 per Convertible Debenture Unit. Each Convertible Debenture Unit consisted 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 value of the warrants will be recorded when the issuance becomes probable. On July 26, 2019, U.S. Convertible Debenture 3 was amended such that, should the Company issue or sell common stock or equity securities convertible into common stock at a price less than the conversion price of the U.S. Convertible Debenture 3, the conversion price of U.S. Convertible Debenture 3 would be reduced to such issuance price, and the exercise price of the warrant issuable in connection with U.S. Convertible Debenture 3 would be exercisable at a price equal to 137.5% of the adjusted conversion price at the time of conversion. 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 three and nine months ended February 28, 2022, $0 and $10,474 of this discount was charged to operations, respectively. During the three and nine months ended February 28, 2022, the Company accrued interest in the amounts of $0 and $3,604 on the U.S. Convertible Debenture 3, respectively. During the three and nine months ended February 28, 2022, the Company made interest payments in the amounts of $0 and $5,106, respectively. This debenture was repaid in full during the quarter ended November 30, 2021. |
|
|
- |
|
|
|
112,613 |
|
| |
|
|
|
|
|
|
|
|
| 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 was to mature on a date that was three years following issuance. The U.S. Convertible Debenture 4 was convertible into Convertible Debenture Units at a conversion price of $0.80 per Convertible Debenture Unit. Each Convertible Debenture Unit consisted 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 value of the warrants will be recorded when the issuance becomes probable. On July 26, 2019, U.S. Convertible Debenture 4 was amended such that, should the Company issue or sell common stock or equity securities convertible into common stock at a price less than the conversion price of the U.S. Convertible Debenture 4, the conversion price of U.S. Convertible Debenture 4 would be reduced to such issuance price, and the exercise price of the warrant issuable in connection with U.S. Convertible Debenture 4 would be exercisable at a price equal to 137.5% of the adjusted conversion price at the time of conversion. 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 three and nine months ended February 28, 2022, $0 and $0 of this discount was charged to operations, respectively. During the three and nine months ended February 28, 2022, the Company accrued interest in the amounts of $11,982 and $35,946 on the U.S. Convertible Debenture 4, respectively. During the three and nine months ended February 28, 2022, the Company made interest payments in the amounts of $11,982 and $35,946, respectively. On April 19, 2021, the U.S. Convertible Debenture 4 was amended as follows: (i) the conversion price of the debenture was reduced to $0.30 per unit; and (ii) the maturity date was extended from October 31, 2021 to October 31, 2022. This amendment was accounted for as an extinguishment of debt, and the Company recorded a loss in the amount of $271,164 during the year ended May 31, 2021. |
|
|
599,101 |
|
|
|
599,101 |
|
| |
|
|
|
|
|
|
|
|
| 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 was to mature on a date that was three years following issuance. The U.S. Convertible Debenture 5 was convertible into Convertible Debenture Units at a conversion price of $0.80 per Convertible Debenture Unit. Each Convertible Debenture Unit consisted 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 value of the warrants will be recorded when the issuance becomes probable. 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 three and nine months ended February 28, 2022, $0 and $16,681 of this discount was charged to operations, respectively. During the three and nine months ended February 28, 2022, the Company accrued interest in the amounts of $0 and $5,480 on the U.S. Convertible Debenture 5, respectively. During the three and nine months ended February 28, 2022, the Company made interest payments in the amounts of $0 and $7,733, respectively. This debenture was repaid in full during the quarter ended November 30, 2021. |
|
|
- |
|
|
|
168,919 |
|
| |
|
February 28, 2022
|
|
|
May 31, 2021
|
|
| 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 was to mature on a date that was three years following issuance. The U.S. Convertible Debenture 6 was convertible into Convertible Debenture Units at a conversion price of $0.80 per Convertible Debenture Unit. Each Convertible Debenture Unit consisted 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 value of the warrants will be recorded when the issuance becomes probable. 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 three and nine months ended February 28, 2022, $0 and $8,340 of this discount was charged to operations, respectively. During the three and nine months ended February 28, 2022, the Company accrued interest in the amounts of $0 and $2,740 on the U.S. Convertible Debenture 6, respectively. During the three and nine months ended February 28, 2022, the Company made interest payments in the amounts of $0 and $3,866, respectively. This debenture was repaid in full during the quarter ended November 30, 2021. |
|
|
- |
|
|
|
84,459 |
|
| |
|
|
|
|
|
|
|
|
| Convertible debentures payable in the aggregate principal amount of $12,012,000 (the “Canaccord Debentures”) dated December 12, 2018, which bear 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 were to mature on a date that was three years following issuance. The Canaccord Debentures were convertible into Convertible Debenture Units at a conversion price of $0.80 per Convertible Debenture Unit. Each Convertible Debenture Unit consisted 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 value of the warrants will be recorded when the issuance becomes probable. 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. During the three months ended November 30, 2019, in two separate transactions, principal in the aggregate amount of $25,857 was converted into an aggregate of 32,321 shares of the Company’s common stock, and warrants to purchase 16,160 shares of common stock. There were no gains or losses recorded on these conversions because they were done in accordance with the terms of the original agreement. No discount was recorded for the fair value of the warrants issued. Because the market price of the Company’s common stock was less than the conversion price on the date of issuance of the Canaccord Debentures, a discount was not recorded on the Canaccord Debentures. During the three and nine months ended February 28, 2022, the Company accrued interest in the amounts of $264,383 and $794,148 on the Canaccord Debentures, respectively. During the three and nine months ended February 28, 2022, the Company made interest payments in the amounts of $264,383 and $793,149, respectively. Also, during the three and nine months ended February 28, 2022, the Company transferred the amounts of $0 and $212,601 from accrued interest to principal of the Canaccord Debentures, respectively. On March 31, 2021, the Canaccord Debentures were amended as follows: (i) the conversion price of the debentures was reduced to $0.30 per unit; (ii) the maturity date was extended from December 12, 2021 to December 12, 2022; (iii) the mandatory conversion threshold was reduced from a daily volume weighted average trading price of greater than $1.20 per share to $0.60 per share for the preceding ten consecutive trading days; and (iv) the exercise price of the warrants issuable upon conversion was reduced from $1.10 to $0.40 and the expiration of the warrants extended until March 31, 2024. This amendment was accounted for as an extinguishment of debt, and the Company recorded a loss in the amount of $3,286,012 during the year ended May 31, 2021. During the quarter ended August 31, 2021, principal in the aggregate amount of $281,000 was converted into an aggregate of 936,666 shares of the Company’s common stock, and warrants to purchase 468,333 shares of common stock. There were no gains or losses recorded on these conversions because they were done in accordance with the terms of the original agreement. |
|
|
13,219,149 |
|
|
|
13,500,150 |
|
| |
|
|
|
|
|
|
|
|
|
Total - Convertible Notes Payable
|
|
$ |
19,448,821 |
|
|
$ |
20,095,813 |
|
|
Less: Discount
|
|
|
(- |
) |
|
|
(35,496 |
)
|
|
Convertible Notes Payable, Net of Discounts
|
|
$ |
19,448,821 |
|
|
$ |
20,060,317 |
|
| |
|
February 28, 2022
|
|
|
May 31, 2021
|
|
| Total - Convertible Notes Payable, Net of Discounts, Current Portion, net of discount of $0 and $1,053,520 |
|
$ |
19,448,821 |
|
|
$ |
330,495 |
|
| Total - Convertible Notes Payable, Net of Discounts, Long-term Portion, net of discount of $0 and $0 |
|
$ |
- |
|
|
$ |
19,729,822 |
|
| |
|
February 28, 2022
|
|
|
February 28, 2021
|
|
|
Discounts on notes payable amortized to interest expense – 3 months ended February 28, 2022 and 2021, respectively
|
|
$ |
- |
|
|
$ |
35,495 |
|
|
Discounts on notes payable amortized to interest expense – 9 months ended February 28, 2022 and 2021, respectively
|
|
$ |
132,735 |
|
|
$ |
1,185,210 |
|
Note 16- Notes Payable
| |
|
February 28, 2022
|
|
|
May 31, 2021
|
|
| Debenture in the principal amount of $250,000 (the “Debenture 1”) dated December 1, 2021, which bears interest, payable quarterly commencing six months after issuance, at a rate of 15% per annum. Principal on Debenture 1 is due in two equal installments 18 months after issuance and at maturity on July 10, 2024. With the Debenture, the purchaser received warrants to purchase 303,030 shares of common stock at an exercise price of $0.4125 per share of common stock. The Company shall make additional quarterly payments under Debenture 1 beginning 90 days after the end of its first fiscal quarter after January 10, 2025, and for the next five years, on an annual basis, equal to the greater of (a) 15% of the original principal amount, or (b) the purchaser’s pro rata portion of 5% of the distributions the Company receives as a result of the Quinn River Joint Venture during the prior fiscal year. The Company recorded a discount in the amount of $17,223 on the Debenture 1. During the three and nine months ended February 28, 2022, $1,667 and $1,667 of this discount was charged to operations, respectively. The Company recorded an original issue discount in the amount of $187,500 on the Debenture 1. During the three and nine months ended February 28, 2022, $18,145 and $18,145 of this original issue discount was charged to operations, respectively. During the three and nine months ended February 28, 2022, the Company accrued interest in the amounts of $9,375 and $9,375 on the Debenture 1, respectively. |
|
$ |
250,000 |
|
|
$ |
- |
|
| |
|
|
|
|
|
|
|
|
| Debenture in the principal amount of $250,000 (the “Debenture 2”) dated December 21, 2021, which bears interest, payable quarterly commencing six months after issuance, at a rate of 15% per annum. Principal on Debenture 2 is due in two equal installments 18 months after issuance and at maturity on July 10, 2024. With the Debenture, the purchaser received warrants to purchase 303,030 shares of common stock at an exercise price of $0.4125 per share of common stock. The Company shall make additional quarterly payments under Debenture 2 beginning 90 days after the end of its first fiscal quarter after January 10, 2025, and for the next five years, on an annual basis, equal to the greater of (a) 15% of the original principal amount, or (b) the purchaser’s pro rata portion of 5% of the distributions the Company receives as a result of the Quinn River Joint Venture during the prior fiscal year. The Company recorded a discount in the amount of $10,428 on the Debenture 2. During the three and nine months ended February 28, 2022, $673 and $673 of this discount was charged to operations, respectively. The Company recorded an original issue discount in the amount of $187,500 on the Debenture 2. During the three and nine months ended February 28, 2022, $12,097 and $12,097 of this original issue discount was charged to operations, respectively. During the three and nine months ended February 28, 2022, the Company accrued interest in the amounts of $7,188 and $7,188 on the Debenture 1, respectively. |
|
|
250,000 |
|
|
|
- |
|
| |
|
February 28, 2022
|
|
|
May 31, 2021
|
|
| Debenture in the principal amount of $500,000 (the “Debenture 3”) dated December 21, 2021, which bears interest, payable quarterly commencing six months after issuance, at a rate of 15% per annum. Principal on Debenture 1 is due in two equal installments 18 months after issuance and at maturity on July 10, 2024. With the Debenture, the purchaser received warrants to purchase 303,030 shares of common stock at an exercise price of $0.4125 per share of common stock. The Company shall make additional quarterly payments under Debenture 3 beginning 90 days after the end of its first fiscal quarter after January 10, 2025, and for the next five years, on an annual basis, equal to the greater of (a) 15% of the original principal amount, or (b) the purchaser’s pro rata portion of 5% of the distributions the Company receives as a result of the Quinn River Joint Venture during the prior fiscal year. The Company recorded a discount in the amount of $19,335 on the Debenture 3. During the three and nine months ended February 28, 2022, $1,247 and $1,247 of this discount was charged to operations, respectively. The Company recorded an original issue discount in the amount of $375,000 on the Debenture 3. During the three and nine months ended February 28, 2022, $24,195 and $24,195 of this original issue discount was charged to operations, respectively. During the three and nine months ended February 28, 2022, the Company accrued interest in the amounts of $14,375 and $14,375 on the Debenture 3, respectively. |
|
|
500,000 |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
| Debenture in the principal amount of $500,000 (the “Debenture 4”) dated January 4, 2022, which bears interest, payable quarterly commencing six months after issuance, at a rate of 15% per annum. Principal on Debenture 4 is due in two equal installments 18 months after issuance and at maturity on July 10, 2024. With the Debenture, the purchaser received warrants to purchase 606,061 shares of common stock at an exercise price of $0.4125 per share of common stock. The Company shall make additional quarterly payments under Debenture 4 beginning 90 days after the end of its first fiscal quarter after January 10, 2025, and for the next five years, on an annual basis, equal to the greater of (a) 15% of the original principal amount, or (b) the purchaser’s pro rata portion of 5% of the distributions the Company receives as a result of the Quinn River Joint Venture during the prior fiscal year. The Company recorded a discount in the amount of $17,154 on the Debenture 4. During the three and nine months ended February 28, 2022, $572 and $572 of this discount was charged to operations, respectively. The Company recorded an original issue discount in the amount of $375,000 on the Debenture 4. During the three and nine months ended February 28, 2022, $12,500 and $12,500 of this original issue discount was charged to operations, respectively. During the three and nine months ended February 28, 2022, the Company accrued interest in the amounts of $11,667 and $11,667 on the Debenture 4, respectively. |
|
|
500,000 |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
| Debenture in the principal amount of $500,000 (the “Debenture 5”) dated January 4, 2022, which bears interest, payable quarterly commencing six months after issuance, at a rate of 15% per annum. Principal on Debenture 5 is due in two equal installments 18 months after issuance and at maturity on July 10, 2024. With the Debenture, the purchaser received warrants to purchase 606,061 shares of common stock at an exercise price of $0.4125 per share of common stock. The Company shall make additional quarterly payments under Debenture 5 beginning 90 days after the end of its first fiscal quarter after January 10, 2025, and for the next five years, on an annual basis, equal to the greater of (a) 15% of the original principal amount, or (b) the purchaser’s pro rata portion of 5% of the distributions the Company receives as a result of the Quinn River Joint Venture during the prior fiscal year. The Company recorded a discount in the amount of $17,154 on the Debenture 5. During the three and nine months ended February 28, 2022, $572 and $572 of this discount was charged to operations, respectively. The Company recorded an original issue discount in the amount of $375,000 on the Debenture 5. During the three and nine months ended February 28, 2022, $12,500 and $12,500 of this original issue discount was charged to operations, respectively. During the three and nine months ended February 28, 2022, the Company accrued interest in the amounts of $11,667 and $11,667 on the Debenture 5, respectively. |
|
|
500,000 |
|
|
|
- |
|
| |
|
February 28, 2022
|
|
|
May 31, 2021
|
|
| Debenture in the principal amount of $500,000 (the “Debenture 6”) dated January 4, 2022, which bears interest, payable quarterly commencing six months after issuance, at a rate of 15% per annum. Principal on Debenture 6 is due in two equal installments 18 months after issuance and at maturity on July 10, 2024. With the Debenture, the purchaser received warrants to purchase 606,061 shares of common stock at an exercise price of $0.4125 per share of common stock. The Company shall make additional quarterly payments under Debenture 6 beginning 90 days after the end of its first fiscal quarter after January 10, 2025, and for the next five years, on an annual basis, equal to the greater of (a) 15% of the original principal amount, or (b) the purchaser’s pro rata portion of 5% of the distributions the Company receives as a result of the Quinn River Joint Venture during the prior fiscal year. The Company recorded a discount in the amount of $17,154 on the Debenture 6. During the three and nine months ended February 28, 2022, $572 and $572 of this discount was charged to operations, respectively. The Company recorded an original issue discount in the amount of $375,000 on the Debenture 6. During the three and nine months ended February 28, 2022, $12,500 and $12,500 of this original issue discount was charged to operations, respectively. During the three and nine months ended February 28, 2022, the Company accrued interest in the amounts of $11,667 and $11,667 on the Debenture 6, respectively. |
|
|
500,000 |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,500,000 |
|
|
|
- |
|
|
Original Issue Discount
|
|
|
1,875,000 |
|
|
|
- |
|
|
Notes Payable, Gross
|
|
|
4,375,000 |
|
|
|
- |
|
|
Less: Discount
|
|
|
(1,876,208 |
)
|
|
|
- |
|
|
Notes Payable, Net of Discount
|
|
|
2,498,792 |
|
|
|
- |
|
| |
|
February 28, 2022
|
|
|
February 28, 2021
|
|
|
Discounts on notes payable amortized to interest expense – 3 months ended February 28, 2022 and 2021, respectively
|
|
$ |
97,239 |
|
|
$ |
- |
|
|
Discounts on notes payable amortized to interest expense – 9 months ended February 28, 2022 and 2021, respectively
|
|
$ |
97,239 |
|
|
$ |
- |
|
Aggregate maturities of notes payable and convertible notes payable as of February 28, 2022 are as follows:
For the twelve months ended February 28,
|
2023
|
|
$ |
19,448,822 |
|
|
2024
|
|
|
1,250,000 |
|
|
2025
|
|
|
1,250,000 |
|
|
2026
|
|
|
375,000 |
|
|
2027
|
|
|
375,000 |
|
|
Thereafter
|
|
|
1,125,000 |
|
|
Total
|
|
$ |
23,823,822 |
|
During the nine months ended February 28, 2022, the Company offered for sale a maximum of $5,500,000 of debentures (the “2021 Debentures”) and warrants to purchase shares of the Company’s common stock at a price of $0.4125 per share in an aggregate amount equal to one-half of the aggregate purchase price for the 2021 Debentures (the “2021 Debenture Warrants”) (collectively, the “November 2021 Offering”). During the nine months ended February 28, 2022, the Company received the amount of $2,500,000 pursuant to the November 2021 Offering and issued an aggregate of 3,030,304 warrants to purchase its common stock at an exercise price of $0.4125 per share to the investors.
Note 17 – Contingent Liability
The terms of the Company’s acquisition of Alternative Solutions, included 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 reviewed the value of the contingent consideration, and concluded that, due to the increased revenue of Alternative Solutions, the fair value of this contingent liability was $1,000,000 at May 31, 2019. The Company recorded a charge to operations in the amount of $321,889 during the year ended May 31, 2019.
The full amount of the bonus payment was earned, and on May 27, 2020, the Company made a payment in the amount of $850,000 to the sellers. The Company deposited the balance due to sellers of $150,000 with an escrow agent to hold pending the outcome of a tax audit. During the year ended May 31, 2020, the State of Nevada notified the Oasis LLCs that it would be conducting a tax audit for periods both before and after the closing of the sale to CLS. The tax audit was completed and the Company received a deficiency notice dated January 29, 2021. The Company paid the tax due and on February 16, 2021, $41,805 of the escrowed amount was released to the Company, $106,195 was released to sellers and the balance of $2,000 was remitted to the escrow agent as payment of its fees.
Note 18 – Stockholders’ Equity
The Company’s authorized capital stock consists of 750,000,000 shares of common stock, par value $0.0001, at February 28, 2022 and May 31, 2021, and 20,000,000 shares of preferred stock, par value $0.001 per share. The Company had 128,158,082 and 127,221,416 shares of common stock issued and outstanding as of February 28, 2022 and May 31, 2021, respectively.
Nine months ended February 28, 2022
Common Stock and Warrants Issued upon Conversion of Notes Payable:
On June 17, 2021, the Company issued 936,666 shares of common stock and three-year warrants to acquire 468,333 shares of common stock at a price of $1.10 (now $0.40 as a result of the amendment of the Canaccord Debentures) per share to Canaccord Genuity Corp., as nominee, in connection with the conversion of a portion of the Canaccord Debentures in the principal amount of $281,000. No gain or loss was recorded on this transaction because the conversion was made pursuant to the terms of the original agreement.
During the three months ended February 28, 2022, the Company granted 100,000 shares of common stock to an employee. The Company charged the value of these shares $8,780 to common stock subscribed. These shares had not been issued as of February 28, 2022.
Nine months ended February 28, 2021
Common Stock Issued and To Be Issued to Officers and Service Providers:
During the nine months ended February 28, 2021, the Company charged an aggregate of $80,813 to common stock subscribed representing the accrual over the vesting period of 500,000 shares of restricted common stock issuable to officers.
During the nine months ended February 28, 2021, the Company recognized the cancellation of a consulting contract, which resulted in a credit to operations in the amount of $22,500 and the reversal of 100,000 shares of common stock to be issued.
During the nine months ended February 28, 2021, the Company recognized the cancellation of a consulting contract, which resulted in a credit to operations in the amount of $3,250 and the reversal of 25,000 shares of common stock to be issued.
During the nine months ended February 28, 2021, the Company recognized the issuance of 50,000 to a former officer, which shares were previously recorded in common stock to be issued.
Warrants
The Company values warrants using the Black-Scholes valuation model utilizing the following variables. On March 31, 2021, the Company reduced the conversion price of the Canaccord Debentures from $0.80 per unit to $0.30 per unit, increasing the warrants issuable upon conversion of the Canaccord Debentures from 8,408,400 to 22,516,374. As amended, each warrant issuable pursuant to conversion of the Canaccord Debentures is exercisable for one share of the Company’s common stock at a price equal to $0.40 per share until March 31, 2024.
In April 2021, the Company amended $6,229,672 in outstanding debentures to reduce the conversion price of the debentures from $0.80 per unit to $0.30 per unit, increasing the warrants issuable upon conversion of such debentures from 3,893,545 to 10,382,785. As amended, each warrant issuable pursuant to conversion of such debentures is exercisable for one share of the Company’s common stock at a price equal to 137.5% of the conversion price (presently $0.4125 per share) until July 14, 2024.
From December 1, 2021 through January 4, 2022 the Company issued $2,500,000 in debentures and issued 3,030,304 warrants with these debentures. Each warrant allows the holder to purchase one share of the Company’s common stock at an exercise price of $0.4125 per share for three years after its date of issuance.
The following table summarizes the significant terms of warrants outstanding at February 28, 2022. This table does not include the unit warrants. See Unit Warrants section below.
| |
Range of
exercise
Prices
|
|
|
Number of
warrants
Outstanding
|
|
|
Weighted average
remaining
contractual
life (years)
|
|
|
Weighted average
exercise
price of
outstanding
Warrants
|
|
|
Number of
warrants
Exercisable
|
|
|
Weighted average
exercise
price of
exercisable
Warrants
|
|
| |
$ |
0.41 |
|
|
|
3,514,797 |
|
|
|
0.21 |
|
|
$ |
0.41 |
|
|
|
3,514,797 |
|
|
$ |
0.41 |
|
| |
|
0.50 |
|
|
|
706,500 |
|
|
|
0.04 |
|
|
|
0.50 |
|
|
|
706,500 |
|
|
|
0.50 |
|
| |
|
0.60 |
|
|
|
3,125,000 |
|
|
|
0.72 |
|
|
|
0.60 |
|
|
|
3,125,000 |
|
|
|
0.60 |
|
| |
|
|
|
|
|
7,346,297 |
|
|
|
0.41 |
|
|
$ |
0.50 |
|
|
|
7,346,297 |
|
|
$ |
0.50 |
|
Transactions involving warrants are summarized as follows. This table does not include the unit warrants. See Unit Warrants section below.
| |
|
Number of
Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Warrants outstanding at May 31, 2020
|
|
|
54,835,145 |
|
|
$ |
0.53 |
|
|
Granted
|
|
|
- |
|
|
$ |
- |
|
|
Exercised
|
|
|
- |
|
|
$ |
- |
|
|
Cancelled / Expired
|
|
|
(837,500 |
)
|
|
$ |
0.75 |
|
| |
|
|
|
|
|
|
|
|
|
Warrants outstanding at May 31, 2021
|
|
|
53,997,645 |
|
|
$ |
0.53 |
|
|
Granted
|
|
|
3,498,637 |
|
|
$ |
0.41 |
|
|
Exercised
|
|
|
- |
|
|
$ |
- |
|
|
Cancelled / Expired
|
|
|
(50,149,985 |
)
|
|
$ |
0.53 |
|
|
Warrants outstanding at February 28, 2022
|
|
|
7,346,297 |
|
|
$ |
0.50 |
|
Unit Warrants
In February and March 2018, in connection with the Westpark offering, the Company issued five-year warrants to purchase 205,238 of the Company’s units at an exercise price of $1.25 per unit. Each unit consists of four shares of common stock and one warrant to purchase a share of common stock for $0.75 per share.
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 year ended May 31, 2019. These warrants expired on June 20, 2021.
On December 12, 2018, in connection with the issuance of the Canaccord Debentures, the Company issued Canaccord Genuity Corp. as compensation 1,074,720 three-year agent and advisory warrants. Each warrant entitles the holder to purchase a unit for $0.80, which unit consists of one share of common stock and a warrant to purchase one-half share of common stock at an exercise price of $1.10 per share. The Company, in connection with the issuance of the Canaccord Debentures, also issued to National Bank Financial Inc., as compensation, 268,680 three-year agent and advisory warrants. Each warrant entitles the holder to purchase a unit for $0.80, which unit consists of one share of common stock and a warrant to purchase one-half share of common stock at an exercise price of $1.10 per share. The aggregate value of these warrants was $874,457, which was charged to operations during the year ended May 31, 2019. These warrants expired on December 12, 2021.
Because the unit warrants are exercisable for Common Stock and warrants, they are not included in the warrant tables above.
Note 19 – Fair Value of Financial Instruments
The Company has issued convertible notes containing beneficial conversion features. One of the features is a ratchet reset provision which, in general, reduces the conversion price should the Company issue equity with an effective price per share that is lower than the stated conversion price in the note. The Company accounts for the fair value of the conversion feature in accordance with ASC 815- Accounting for Derivatives and Hedging and Emerging Issues Task Force (“EITF”) 07-05- Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock (“EITF 07-05”). The Company carries the embedded derivative on its balance sheet at fair value and accounts for any unrealized change in fair value as a component of its results of operations.
The following summarizes the Company’s financial liabilities that are recorded at fair value on a recurring basis at February 28, 2022 and May 31, 2021:
| |
|
February 28, 2022
|
|
| |
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
| |
|
May 31, 2021
|
|
| |
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Note 20 – Related Party Transactions
As of February 28, 2022 and May 31, 2021, the Company had accrued salary due to Michael Abrams, a former officer of the Company prior to his September 1, 2015 termination, in the amount of $16,250.
Note 21 – Income Taxes
The following table summarizes the Company’s income tax accrued for the three and nine months ended February 28, 2022:
| |
|
For the Three Months
Ended
February 28, 2022
|
|
|
For the Nine Months
Ended
February 28, 2022
|
|
|
Loss before provision for income taxes
|
|
$ |
(673,031 |
)
|
|
$ |
(125,347 |
)
|
|
Provision for income taxes
|
|
$ |
(324,265 |
)
|
|
$ |
(793,322 |
)
|
|
Effective tax rate
|
|
|
7.9 |
%
|
|
|
16.24 |
%
|
Due to the accrual of taxes related to Section 280E of the Internal Revenue Code, as amended, the Company has an uncertain tax accrual that is currently being expensed as a change in estimate. The Company has net operating losses that it believes are available to it to offset this expense; however, there can be no assurance under current interpretations of tax laws for cannabis companies that the Company will be allowed to use these net operating losses to offset Section 280E tax expenses.
Note 22 – Commitments and Contingencies
Lease Arrangements
The Company leases several facilities for office, warehouse, and retail space. Currently lease commitments are as follows:
| | ● | A lease that commenced in February 2019 for 1,400 square feet of office space located at 1718 Industrial Road, Las Vegas, NV 89102, for a term of eighteen months, and for rent of $1,785 per month. In June 2020, this lease was extended to August 31, 2022, with the monthly rent increasing to $1,866.70 until September 2021, after which time it will be subject to annual increases of 3%. The lease was extended again on April 1, 2022, see Note 23. |
| | ● | A lease that commenced January 2018 for 1,000 square feet of storefront space plus 5,900 square feet of warehouse space located at 1800 Industrial Road, Suites 102, 160, and 180, Las Vegas, NV 89102, for a term of five years and for initial base rent of $7,500 per month, with annual increases of 3%. In February 2020, this lease was extended to February 28, 2030 and the monthly rent was increased by $600. |
| | ● | A lease that commenced in February 2019 for 2,504 square feet of office space located at 1800 Industrial Road, Suite 100, Las Vegas, NV 89102 for a term of eighteen months and for initial rent of $3,210 per month, with annual increases of 4%. In February 2020, this lease was extended to February 28, 2030, and the lease was modified to include annual rent increases of 3%. |
| | ● | A lease that commenced in January 2016 for 22,000 square feet of warehouse space located at 203 E. Mayflower Avenue, North Las Vegas, NV 89030 for a term of five years and initial rent of $11,000 per month, which amount increased to $29,000 per month on January 1, 2020. In June 2020, this lease was extended to February 28, 2026, and the monthly rent was amended as follows: $25,000 for the months of April, May, and June 2020; $22,500 for the months of March 2021 through February 2022; $23,175 for the months of March 2022 through February 2023; 23,870 for the months of March 2023 through February 2024; $24,586 for the months of March 2024 through February 2025; and $25,323 for the months of March 2025 through February 2026. |
| | ● | A lease that commenced on October 20, 2021 for approximately 30 acres of land for purposes of developing a cultivation facility along the Quinn River in Nevada at a cost of $3,500 per month (the “Quinn River Land Lease”). The Quinn River Land Lease has a term of 10 years beginning on the date of the first harvest generated by the Quinn River Joint Venture, or approximately 10.5 years, plus a 10 year renewal option. See note 3. |
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, 2022.
Note 23 – Subsequent Events
The Company has evaluated events through the date of the financial statements and has determined that there were no additional material subsequent events.
A lease for office space located at 1718 Industrial Road, Las Vegas, NV 89102 was extended again on April 1, 2022, effective September 1, 2022, until August 31, 2024. The monthly rent will increase on September 1, 2022 to $2,084.14 with annual increases of 3%.
Subsequent to February 28, 2022, the Company has issued 50,000 to an employee which were previously subscribed.
CLS HOLDINGS USA, INC.
PROSPECTUS
3,030,304 Shares of Common Stock
, 2022
Until , 2022, 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