UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2022
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-55546
CLS HOLDINGS USA,
INC.
(Exact name of registrant as specified in its charter)
|
Nevada
|
45-1352286
|
|
(State or other jurisdiction of incorporation or organization)
|
(I.R.S. Employer Identification No.)
|
1800 S. Industrial Road
Suite 100, Las Vegas Nevada, 89102
(Address of principal executive offices) (Zip Code)
(416)
992-4539
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|
Title of each class
|
Trading Symbol(s)
|
Name of each exchange on which registered
|
|
N/A
|
N/A
|
N/A
|
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer”, “accelerated filer”,
“smaller reporting company”, and “emerging growth company” in Rule
12b-2 of the Exchange Act.
|
Large Accelerated filer ☐
|
Accelerated filer ☐
|
|
Non-accelerated filer ☐
|
Smaller reporting company ☒
|
|
Emerging growth company ☐
|
|
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
State the number of shares outstanding of each of the issuer’s
classes of common stock as of the latest practicable date:
72,518,142 shares of $0.0001 par value common stock outstanding as
of January 10, 2023.
CLS HOLDINGS USA, INC.
FORM 10-Q
Quarterly Period Ended November 30, 2022
TABLE OF CONTENTS
EXPLANATORY NOTE
Unless otherwise noted, references in this report to “CLS Holdings
USA, Inc.,” the “Company,” “we,” “our” or “us” means CLS Holdings
USA, Inc. and its subsidiaries.
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements as that term is
defined in the Private Securities Litigation Reform Act of 1995.
These statements relate to, among other things, the impact of the
COVID-19 virus on our business, the results of our initiatives to
retain our employees and strengthen our relationships with our
customers and community, the effect of our initiatives to expand
market share and achieve growth, the expected development of our
business and joint ventures, results of operations and financial
performance, liquidity, working capital and capital requirements,
the effects of the additional dilution on our common stock that may
occur as a result of the amendments to our convertible debentures,
and anticipated future events. The continued spread of COVID-19
could have, and in some cases already has had, an adverse impact on
our business, operations and financial results, including through
disruptions in our cultivation and processing activities, supply
chains and sales channels, and retail dispensary operations as well
as a deterioration of general economic conditions including a
possible national or global recession. These forward-looking
statements also relate to our ability to obtain debt or equity
capital on reasonable terms, or at all, to finance our operations,
and to identify, finance and close potential acquisitions and joint
ventures, whether our joint venture partner will make its capital
contribution, our ability to comply with applicable
cannabis-related regulations and obtain regulatory approvals,
market acceptance of our services and product offerings, our
ability to protect and commercialize our intellectual property, our
ability to use net operating losses to offset certain
cannabis-related tax liabilities and our ability to grow our
wholesale and processing businesses and joint ventures. In some
cases, you can identify forward-looking statements by terminology
such as “may,” “might,” “will,” “should,” “intends,” “expects,”
“plans,” “goals,” “projects,” “anticipates,” “believes,”
“estimates,” “predicts,” “potential,” or “continue” or the negative
of these terms or other comparable terminology.
These forward-looking statements are only predictions, are
uncertain and involve substantial known and unknown risks,
uncertainties and other factors which may cause our (or our
industry’s) actual results, levels of activity or performance to be
materially different from any expected future results, levels of
activity or performance expressed or implied by these
forward-looking statements.
We cannot guarantee future results, levels of activity or
performance. You should not place undue reliance on these
forward-looking statements, which speak only as of the date that
they were made. These cautionary statements should be considered
together with any written or oral forward-looking statements that
we may issue in the future. Except as required by applicable law,
we do not intend to update any of the forward-looking statements to
conform these statements to reflect actual results, later events or
circumstances or to reflect the occurrence of unanticipated
events.
AVAILABLE INFORMATION
We file certain reports under the Securities Exchange Act of 1934
(the “Exchange Act”). Such filings include annual and quarterly
reports. The reports we file with the Securities and Exchange
Commission (“SEC”) are available on the SEC’s website at
(http://www.sec.gov).
Item 1. Financial Statements.
CLS HOLDINGS USA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
November 30,
|
|
|
May 31,
|
|
|
|
|
2022
|
|
|
2022
|
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
808,592 |
|
|
$ |
2,551,859 |
|
|
Accounts Receivable
|
|
|
1,005,284 |
|
|
|
618,227 |
|
|
Inventory
|
|
|
4,875,656 |
|
|
|
3,417,602 |
|
|
Prepaid expenses and other current assets
|
|
|
287,248 |
|
|
|
295,869 |
|
|
Total current assets
|
|
|
6,976,780 |
|
|
|
6,883,557 |
|
| |
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net of accumulated depreciation of
$2,493,182 and $2,073,449
|
|
|
4,061,177 |
|
|
|
4,342,434 |
|
|
Right of use assets, operating leases
|
|
|
2,027,195 |
|
|
|
2,154,517 |
|
|
Intangible assets, net of accumulated amortization of $530,768 and
$473,308
|
|
|
1,132,825 |
|
|
|
1,190,285 |
|
|
Goodwill
|
|
|
557,896 |
|
|
|
557,896 |
|
|
Investments
|
|
|
558,421 |
|
|
|
469,575 |
|
|
Other assets
|
|
|
208,500 |
|
|
|
229,500 |
|
| |
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
15,522,794 |
|
|
$ |
15,827,764 |
|
| |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$ |
3,300,107 |
|
|
$ |
2,317,898 |
|
|
Accrued interest, current
|
|
|
317,850 |
|
|
|
419,206 |
|
|
Loan payable
|
|
|
1,439,000 |
|
|
|
1,013,073 |
|
|
Lease liability - financing leases, current
|
|
|
77,697 |
|
|
|
71,813 |
|
|
Lease liability - operating leases, current
|
|
|
352,162 |
|
|
|
309,597 |
|
|
Taxes Payable
|
|
|
5,567,558 |
|
|
|
4,531,782 |
|
|
Convertible notes payable - current, net of discount of $0 and
$0
|
|
|
400,000 |
|
|
|
19,448,821 |
|
| |
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
11,454,374 |
|
|
|
28,112,190 |
|
| |
|
|
|
|
|
|
|
|
|
Noncurrent liabilities
|
|
|
|
|
|
|
|
|
|
Lease liability - operating leases, non-current
|
|
|
1,736,837 |
|
|
|
1,893,810 |
|
|
Lease liability - financing leases, non-current
|
|
|
236,803 |
|
|
|
277,180 |
|
|
Convertible notes payable, net of discount $0 and $0
|
|
|
7,506,102 |
|
|
|
- |
|
|
Notes payable, net of discount of $1,291,887 and $1,681,434
|
|
|
3,083,113 |
|
|
|
2,693,566 |
|
| |
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
24,017,229 |
|
|
|
32,976,746 |
|
| |
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
- |
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
Stockholder’s deficit
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 5,000,000 shares authorized; no
shares issued
|
|
|
- |
|
|
|
- |
|
|
Common stock, $0.0001 par value; 187,500,000 shares authorized at
November 30, 2022 and May 31, 2022; 72,518,142 and 32,052,021
shares issued and outstanding at November 30, 2022 and May 31,
2022
|
|
|
7,253 |
|
|
|
3,206 |
|
|
Additional paid-in capital
|
|
|
96,142,740 |
|
|
|
77,954,748 |
|
|
Common stock subscribed
|
|
|
70,092 |
|
|
|
70,092 |
|
|
Accumulated deficit
|
|
|
(104,444,249 |
)
|
|
|
(95,079,817 |
)
|
|
Stockholder's deficit attributable to CLS Holdings, Inc.
|
|
|
(8,224,164 |
)
|
|
|
(17,051,771 |
)
|
|
Non-controlling interest
|
|
|
(270,271 |
)
|
|
|
(97,211 |
)
|
|
Total stockholder’s deficit
|
|
|
(8,494,435 |
)
|
|
|
(17,148,982 |
)
|
| |
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ deficit
|
|
$ |
15,522,794 |
|
|
$ |
15,827,764 |
|
See accompanying notes to these financial statements.
CLS HOLDINGS USA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
For the Three
|
|
|
For the Three
|
|
|
For the Six
|
|
|
For the Six
|
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
|
November 30, 2022
|
|
|
November 30, 2021
|
|
|
November 30, 2022
|
|
|
November 30, 2021
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
6,074,177 |
|
|
$ |
5,414,002 |
|
|
$ |
12,119,104 |
|
|
$ |
10,914,712 |
|
|
Cost of goods sold
|
|
|
3,071,733 |
|
|
|
2,684,190 |
|
|
|
6,074,463 |
|
|
|
5,288,657 |
|
|
Gross margin
|
|
|
3,002,444 |
|
|
|
2,729,812 |
|
|
|
6,044,641 |
|
|
|
5,626,055 |
|
|
Selling, general and administrative expenses
|
|
|
3,505,559 |
|
|
|
3,052,433 |
|
|
|
6,707,861 |
|
|
|
5,948,227 |
|
|
Total operating expenses
|
|
|
3,505,559 |
|
|
|
3,052,433 |
|
|
|
6,707,861 |
|
|
|
5,948,227 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(503,115 |
)
|
|
|
(322,621 |
)
|
|
|
(663,220 |
)
|
|
|
(322,172 |
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
608,905 |
|
|
|
407,880 |
|
|
|
1,375,575 |
|
|
|
826,472 |
|
|
Loss on extinguishment of debt
|
|
|
6,659,359 |
|
|
|
- |
|
|
|
6,659,359 |
|
|
|
- |
|
|
(Income) Loss on equity investment
|
|
|
(80,319 |
)
|
|
|
- |
|
|
|
154,111 |
|
|
|
- |
|
|
Gain on settlement of debt
|
|
|
(2,384 |
)
|
|
|
- |
|
|
|
(2,384 |
)
|
|
|
- |
|
|
Gain on settlement of note receivable
|
|
|
- |
|
|
|
(522,246 |
)
|
|
|
(348,165 |
)
|
|
|
(1,696,328 |
)
|
|
Total other (income) expense
|
|
|
7,185,561 |
|
|
|
(114,366 |
)
|
|
|
7,838,496 |
|
|
|
(869,856 |
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before income taxes
|
|
|
(7,688,676 |
)
|
|
|
(208,255 |
)
|
|
|
(8,501,716 |
)
|
|
|
547,684 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income tax
|
|
|
(516,691 |
)
|
|
|
(140,717 |
)
|
|
|
(1,035,776 |
)
|
|
|
(469,057 |
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(8,205,367 |
)
|
|
|
(348,972 |
)
|
|
|
(9,537,492 |
)
|
|
|
78,627 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest
|
|
|
(10,587 |
)
|
|
|
3,500 |
|
|
|
173,060 |
|
|
|
3,500 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to CLS Holdings, Inc.
|
|
$ |
(8,215,954 |
)
|
|
$ |
(345,472 |
)
|
|
$ |
(9,364,432 |
)
|
|
$ |
82,127 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share - basic
|
|
$ |
(0.12 |
)
|
|
$ |
(0.01 |
)
|
|
$ |
(0.19 |
)
|
|
$ |
0.00 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share - diluted
|
|
$ |
(0.12 |
)
|
|
$ |
(0.01 |
)
|
|
$ |
(0.19 |
)
|
|
$ |
0.00 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic
|
|
|
65,847,863 |
|
|
|
32,039,520 |
|
|
|
48,857,603 |
|
|
|
32,017,767 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - diluted
|
|
|
65,847,863 |
|
|
|
32,039,520 |
|
|
|
48,857,603 |
|
|
|
32,035,267 |
|
See accompanying notes to these financial statements.
CLS HOLDINGS USA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
DEFICIT
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid In
|
|
|
Stock
|
|
|
Accumulated
|
|
|
controlling
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Value
|
|
|
Capital
|
|
|
Payable
|
|
|
Deficit
|
|
|
interest
|
|
|
Total
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, May 31, 2021
|
|
|
31,805,354 |
|
|
$ |
3,182 |
|
|
$ |
77,570,934 |
|
|
$ |
65,702 |
|
|
$ |
(92,736,638 |
)
|
|
$ |
- |
|
|
$ |
(15,096,820 |
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for conversion of debt
|
|
|
234,167 |
|
|
|
23 |
|
|
|
280,977 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
281,000 |
|
|
Net income (loss) for the six months ended November 30, 2021
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
82,127 |
|
|
|
(3,500 |
)
|
|
|
78,627 |
|
|
Balance, November 30, 2021
|
|
|
32,039,521 |
|
|
$ |
3,205 |
|
|
$ |
77,851,911 |
|
|
$ |
65,702 |
|
|
$ |
(92,654,511 |
)
|
|
$ |
(3,500 |
)
|
|
$ |
(14,737,193 |
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, May 31, 2022
|
|
|
32,052,021 |
|
|
$ |
3,206 |
|
|
$ |
77,954,748 |
|
|
$ |
70,092 |
|
|
$ |
(95,079,817 |
)
|
|
$ |
(97,211 |
)
|
|
$ |
(17,148,982 |
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for the conversion of debt
|
|
|
40,465,546 |
|
|
|
4,047 |
|
|
|
11,528,633 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
11,532,680 |
|
|
Rounding for reverse split
|
|
|
576 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Loss on extinguishment of debt
|
|
|
- |
|
|
|
- |
|
|
|
6,659,359 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6,659,359 |
|
|
Net loss for the six months ended November 30, 2022
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(9,364,432 |
)
|
|
|
(173,060 |
)
|
|
|
(9,537,492 |
)
|
|
Balance, November 30, 2022
|
|
|
72,518,142 |
|
|
$ |
7,253 |
|
|
$ |
96,142,740 |
|
|
$ |
70,092 |
|
|
$ |
(104,444,249 |
)
|
|
$ |
(270,271 |
)
|
|
$ |
(8,494,435 |
)
|
See accompanying notes to these financial statements.
CLS HOLDINGS USA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
For the Six
|
|
|
For the Six
|
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
|
November 30, 2022
|
|
|
November 30, 2021
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(9,537,492 |
)
|
|
$ |
78,627 |
|
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
Loss on equity investment
|
|
|
154,111 |
|
|
|
- |
|
|
Amortization of debt discounts and fees
|
|
|
394,110 |
|
|
|
35,496 |
|
|
Gain on settlement of note receivable
|
|
|
(348,165 |
)
|
|
|
(1,696,328 |
)
|
|
Loss on extinguishment of debt
|
|
|
6,659,359 |
|
|
|
- |
|
|
Gain on debt settlement
|
|
|
(2,384 |
)
|
|
|
- |
|
|
Depreciation and amortization expense
|
|
|
477,193 |
|
|
|
356,455 |
|
|
Bad debt expense
|
|
|
- |
|
|
|
129 |
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(387,057 |
)
|
|
|
(115,060 |
)
|
|
Prepaid expenses and other current assets
|
|
|
29,621 |
|
|
|
3,586 |
|
|
Inventory
|
|
|
(1,458,054 |
)
|
|
|
(1,013,127 |
)
|
|
Right of use asset
|
|
|
174,067 |
|
|
|
158,257 |
|
|
Accounts payable and accrued expenses
|
|
|
982,209 |
|
|
|
93,988 |
|
|
Accrued interest
|
|
|
166,547 |
|
|
|
(8,427 |
)
|
|
Funds held in escrow
|
|
|
- |
|
|
|
250,000 |
|
|
Deferred tax liability
|
|
|
1,035,776 |
|
|
|
469,057 |
|
|
Operating lease liability
|
|
|
(161,153 |
)
|
|
|
(139,983 |
)
|
|
Net cash used in operating activities
|
|
|
(1,821,312 |
)
|
|
|
(1,527,330 |
)
|
| |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Payments to purchase property, plant and equipment
|
|
|
(138,476 |
)
|
|
|
(145,015 |
)
|
|
Investment in Quinn River
|
|
|
(242,957 |
)
|
|
|
- |
|
|
Cash paid for construction deposit on grow facility
|
|
|
- |
|
|
|
(93,000 |
)
|
|
Proceeds from collection of note receivable
|
|
|
348,165 |
|
|
|
1,696,328 |
|
|
Net cash provided by (used in) investing activities
|
|
|
(33,268 |
)
|
|
|
1,458,313 |
|
| |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Proceeds from loan payable
|
|
|
1,717,115 |
|
|
|
303,815 |
|
|
Repayments on convertible debt
|
|
|
(200,000 |
)
|
|
|
- |
|
|
Repayments of loan payable
|
|
|
(1,371,309 |
)
|
|
|
(365,991 |
)
|
|
Principal payments on finance leases
|
|
|
(34,493 |
)
|
|
|
- |
|
|
Net cash provided by (used in) financing activities
|
|
|
111,313 |
|
|
|
(62,176 |
)
|
| |
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(1,743,267 |
)
|
|
|
(131,193 |
)
|
| |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
2,551,859 |
|
|
|
1,665,263 |
|
| |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
808,592 |
|
|
$ |
1,534,070 |
|
| |
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$ |
894,838 |
|
|
$ |
799,403 |
|
|
Income taxes paid
|
|
$ |
- |
|
|
$ |
- |
|
| |
|
|
|
|
|
|
|
|
|
NONCASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Shares issued for conversion of notes payable
|
|
$ |
11,532,680 |
|
|
$ |
281,000 |
|
|
Capitalized interest
|
|
$ |
3,283 |
|
|
$ |
- |
|
|
Initial ROU asset and lease liability - operating
|
|
$ |
46,745 |
|
|
$ |
229,412 |
|
See accompanying notes to these financial statements.
CLS HOLDINGS USA, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November 30, 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”).
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 accompanying
consolidated financial statements also include the accounts of a
variable interest entity, Kealii Okamalu, LLC (“Kealii Okamalu”),
in which the Company owns a 50% interest. 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 2,500,000 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, 1,562,500 shares
of the Company’s common stock were issued to CLS Labs in exchange
for the 2,500,000 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 3,750,000 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. The Company has not
commercialized its patented proprietary process or otherwise earned
any revenues from it. The Company is currently exploring ways in
which to generate revenue from the patent or the sale of the
patent.
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 5,514,706 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
received final regulatory approval to own its interest in the Oasis
LLCs through Alternative Solutions under the revised structure of
the transaction on April 26, 2022.
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 paid 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 was paid in 12 equal
monthly installments beginning on August 12, 2021, pursuant to the
terms of the promissory note. During the year ended May 31, 2022,
the Company received $2,740,820 under the IGH Settlement Note,
which included $2,666,670 in principal and $74,150 in accrued
interest. During the six months ended November 30, 2022, the
Company received $348,165 under the IGH Settlement Note, which
included $333,333 in principal and $14,832 in accrued interest. As
of November 30, 2022, the IGH Settlement Note had been repaid in
full. The Company records amounts paid under the IGH Settlement
Note as gains when payments are received.
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, LLC (“Kealii Okamalu”), with
CSI Health MCD LLC (“CSI”) and a commission established by the
authority of the Tribal Council of the Fort McDermitt Paiute and
Shoshone Tribe (the “Tribe”). The purpose of the Quinn River Joint
Venture Agreement is to establish a business (the “Quinn River
Joint Venture”) to grow, cultivate, process and sell cannabis and
related products. The Quinn River Joint Venture Agreement has a
term of 10 years plus a 10-year renewal term from the date the
first cannabis crop produced is harvested and sold. Pursuant to the
Quinn River Joint Venture Agreement, Kealii Okamalu leases
approximately 20-30 acres of the Tribe’s land located along the
Quinn River at a cost of $3,500 per quarter and managed the design,
finance and construction of a cannabis cultivation facility on such
tribal lands (the “Cultivation Facility”). Kealii Okamalu also
manages 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 are branded as “Quinn River
Farms.” The Company has provided up to 10,000 square feet of
warehouse space at its Las Vegas facility for the Quinn River
product and has preferred vendor status, including the right to
purchase cannabis flower and the business’s cannabis trim at
favorable prices. Kealii Okamalu is expected to ultimately
contribute $6 million towards the construction of the Cultivation
Facility and the working capital for the Quinn River Joint Venture.
This amount will be repaid from a portion of the net income of the
Quinn River Joint Venture otherwise payable to CSI and the Tribe at
the rate of $750,000 per quarter for eight quarters. After
repayment to Kealii Okamalu of the initial investment amount of
approximately $6 million, Kealii Okamalu will receive one-third of
the net profits of the Quinn River Joint Venture.
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, this administration will have on U.S.
federal government enforcement policy on cannabis. There is no
guarantee that the position of the Department of Justice will
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.
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 $808,592 and $2,551,859 as of November
30, 2022 and May 31, 2022, 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
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 $0 and $129 of bad debt expense during the three months
ended November 30, 2022 and 2021, respectively. The Company had $0
and $129 of bad debt expense during the six months ended November
30, 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:
|
|
|
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 November
30, 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.” During the three months
ended November 30, 2022 and 2021, the Company reported a
non-controlling interest in the amount of ($10,587) and $3,500,
respectively, representing 50% of the (income) loss incurred by its
partially owned subsidiary, Kealii Okamalu. During the six months
ended November 30, 2022 and 2021, the Company reported a
non-controlling interest in the amount of $173,060 and $3,500,
respectively, representing 50% of the loss incurred by its
partially owned subsidiary, Kealii Okamalu.
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 $175,232 and $341,872 for the three months ended
November 30, 2022 and 2021, respectively. Total recognized
advertising and marketing expenses were $398,125 and $788,538 for
the six months ended November 30, 2022 and 2021, respectively.
Research and
Development
Research and development expenses are charged to operations as
incurred. The Company incurred research and development costs of
$683 and $9,908 for the three months ended November 30, 2022 and
2021, respectively. The Company incurred research and development
costs of $683 and $10,508 for the six months ended November 30,
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, the
product is delivered, and the Company’s performance obligation has
been met. Management estimates an allowance for sales returns.
The Company also recognizes revenue from Serenity Wellness Products
LLC and Serenity Wellness Growers LLC, d/b/a City Trees (“City
Trees”). City Trees recognizes revenue from the sale of the
following cannabis products and services to licensed dispensaries,
cultivators and distributors within the State of Nevada:
| |
● |
Premium organic medical cannabis sold
wholesale to licensed retailers |
| |
|
|
| |
● |
Recreational marijuana cannabis products
sold wholesale to licensed distributors and retailers |
| |
|
|
| |
● |
Extraction products such as oils and waxes
derived from in-house cannabis production |
| |
|
|
| |
● |
Processing and extraction services for
licensed medical cannabis cultivators in Nevada |
| |
|
|
| |
● |
High quality cannabis strains in the form
of vegetative cuttings for sale to licensed medical cannabis
cultivators in Nevada |
Effective June 1, 2018, the Company adopted ASC 606 — Revenue from
Contracts with Customers. Under ASC 606, the Company recognizes
revenue from commercial sales of products and licensing agreements
by applying the following steps: (1) identifying the contract with
a customer; (2) identifying the performance obligations in the
contract; (3) determining the transaction price; (4) allocating the
transaction price to each performance obligation in the contract;
and (5) recognizing revenue when each performance obligation is
satisfied.
Disaggregation of
Revenue
The following table represents a disaggregation of revenue for the
three and six months ended November 30, 2022 and 2021:
|
|
|
For the Three
|
|
|
For the Three
|
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
|
November 30, 2022
|
|
|
November 30, 2021
|
|
|
Cannabis Dispensary
|
|
|
3,792,804 |
|
|
|
3,591,399 |
|
|
Cannabis Production
|
|
|
2,281,373 |
|
|
|
1,822,603 |
|
|
|
|
$ |
6,074,177 |
|
|
$ |
5,414,002 |
|
|
|
|
For the Six
|
|
|
For the Six
|
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
|
November 30, 2022
|
|
|
November 30, 2021
|
|
|
Cannabis Dispensary
|
|
|
7,681,361 |
|
|
|
7,336,974 |
|
|
Cannabis Production
|
|
|
4,437,743 |
|
|
|
3,577,738 |
|
|
|
|
$ |
12,119,104 |
|
|
$ |
10,914,712 |
|
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 November 30, 2022 and 2021, the Company had the
following potentially dilutive instruments outstanding: at November
30, 2022, a total of 42,653,147 shares (21,962,699 issuable upon
the exercise of warrants, 256,550 issuable upon the exercise of
unit warrants, 20,403,898 issuable upon the conversion of
convertible notes payable and accrued interest, and 30,000 in stock
to be issued); and at November 30, 2021, a total of 18,857,739
shares (1,656,467 issuable upon the exercise of warrants, 760,323
issuable upon the exercise of unit warrants, 16,423,449 issuable
upon the conversion of convertible notes payable and accrued
interest, and 17,500 in stock to be issued).
The following is a reconciliation for the calculation of basic and
diluted earnings per share for the three and six months ended
November 30, 2022 and 2021:
|
|
|
For the Three Months Ended November 30,
|
|
|
|
|
2022
|
|
|
2021
|
|
| |
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to CLS Holdings, Inc.
|
|
$ |
(8,215,954 |
)
|
|
$ |
(345,472 |
)
|
|
Weighted average number of common shares outstanding
|
|
|
65,847,863 |
|
|
|
32,039,520 |
|
|
Dilutive effect of shares issuable
|
|
|
- |
|
|
|
- |
|
|
Diluted weighted average number of common shares outstanding
|
|
|
65,847,863 |
|
|
|
32,039,520 |
|
|
Basic earnings (loss) per share
|
|
$ |
(0.12 |
)
|
|
$ |
(0.01 |
)
|
|
Diluted earnings (loss) per share
|
|
$ |
(0.12 |
)
|
|
$ |
(0.01 |
)
|
|
|
|
For the Six Months Ended November 30,
|
|
|
|
|
2022
|
|
|
2021
|
|
| |
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to CLS Holdings, Inc.
|
|
$ |
(9,364,432 |
)
|
|
$ |
82,127 |
|
|
Weighted average number of common shares outstanding
|
|
|
48,857,603 |
|
|
|
32,017,767 |
|
|
Dilutive effect of shares issuable
|
|
|
- |
|
|
|
17,500 |
|
|
Diluted weighted average number of common shares outstanding
|
|
|
48,857,603 |
|
|
|
32,035,267 |
|
|
Basic earnings (loss) per share
|
|
$ |
(0.19 |
)
|
|
$ |
0.00 |
|
|
Diluted earnings (loss) per share
|
|
$ |
(0.19 |
)
|
|
$ |
0.00 |
|
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 six months ended
November 30, 2022. For the three and six months ended November 30,
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, shares issuable pursuant to the
exercise of warrants, and 30,000 shares of common stock
issuable.
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
There are various 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 $104,444,249 as of November 30, 2022. 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 revenues from operations.
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 paid 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 was paid in
12 equal monthly installments beginning on August 12, 2021,
pursuant to the terms of the promissory note. During the year ended
May 31, 2022, the Company received $2,740,820 under the IGH
Settlement Note, which included $2,666,670 in principal and $74,150
in accrued interest. During the six months ended November 30, 2022,
the Company received $348,165 under the IGH Settlement Note, which
included $333,333 in principal and $14,832 in accrued interest. As
of November 30, 2022, the IGH Settlement Note had been repaid in
full. 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 is expected to eventually lease
approximately 20-30 acres of the Tribe’s land located along the
Quinn River at a cost of $3,500 per quarter. Additionally, pursuant
to the terms of the Quinn River Joint Venture Agreement, Kealii
Okamalu has managed the design, finance and construction of a
cannabis cultivation facility on such tribal lands (“the
Cultivation Facility”). Kealii Okamalu also manages the ongoing
operations of the Cultivation Facility and related business,
including, but not limited to, the cultivation of cannabis crops,
personnel staffing, product packaging, testing, marketing and
sales. Packaged products are branded as “Quinn River Farms.” The
Company will provide up to 10,000 square feet of warehouse space at
its Las Vegas facility for the Quinn River Joint Venture product,
and has preferred vendor status, including the right to purchase
cannabis flower and the business’s cannabis trim at favorable
prices. Kealii Okamalu is expected to contribute up to $6 million
(the “Invested Amount”) 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. After
repayment of the Invested Amount, 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 year ended May 31, 2022, Kealii Okamalu made cash
investments in the aggregate amount of $581,714 in the Quinn River
Joint Venture. The Company also purchased $949,939 of fixed assets
for use by the Quinn River Joint Venture which are on the balance
sheet of Kealii Okamalu. During the year ended May 31, 2022, the
Quinn River Joint Venture recorded a loss in the amount of
$336,416. One-third of this amount, or $112,139, was charged to the
financial statements of Kealii Okamalu and recorded as a loss on
equity investment in the Company’s financial statements for the
year ended May 31, 2022, reducing the Company’s equity investment
in the Quinn River Joint Venture from $581,714 to $469,575 at May
31, 2022.
During the six months ended November 30, 2022, Kealii Okamalu made
cash investments in the aggregate amount of $242,957 in the Quinn
River Joint Venture. The Company also purchased $84,327 of fixed
assets for use by the Quinn River Joint Venture which are on the
balance sheet of Kealii Okamalu. During the six months ended
November 30, 2022, the Quinn River Joint Venture recorded a loss in
the amount of $462,333. One-third of this amount, or $154,111, was
charged to the financial statements of Kealii Okamalu and recorded
as a loss on equity investment in the Company’s financial
statements for the six months ended November 30, 2022. The
Company’s net equity investment in the Quinn River Joint Venture
was $558,421 at November 30, 2022.
Note 4 – Accounts Receivable
Accounts receivable was $1,005,284 and $618,227 at November 30,
2022 and May 31, 2022, respectively. The Company had bad debt
expense of $0 and $129 during the three months ended November 30,
2022 and 2021. The Company had bad debt expense of $0 and $129
during the six months ended November 30, 2022 and 2021. No
allowance for doubtful accounts was necessary during the three and
six months ended November 30, 2022 and 2021.
Note 5 – 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:
|
|
|
November 30,
|
|
|
May 31,
|
|
|
|
|
2022
|
|
|
2022
|
|
|
Raw materials
|
|
$ |
494,981 |
|
|
$ |
297,563 |
|
|
Finished goods
|
|
|
4,380,675 |
|
|
|
3,120,039 |
|
|
Total
|
|
$ |
4,875,656 |
|
|
$ |
3,417,602 |
|
Raw materials consist of cannabis plants and the materials that are
used in our production process prior to being tested and packaged
for consumption. Finished goods consist of pre-packaged materials
previously purchased from other licensed cultivators and our
manufactured edibles and extracts.
Note 6 – Prepaid Expenses and Other Current
Assets
Prepaid expenses and other current assets consisted of the
following at November 30, 2022 and May 31, 2022:
|
|
|
November 30,
|
|
|
May 31,
|
|
|
|
|
2022
|
|
|
2022
|
|
|
Deposits
|
|
$ |
- |
|
|
|
2,016 |
|
|
Prepaid expenses
|
|
|
287,248 |
|
|
|
293,853 |
|
|
Total
|
|
$ |
287,248 |
|
|
$ |
295,869 |
|
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 7 – Notes Receivable
IGH Note
Receivable
On October 31, 2018, in connection with an option to purchase
transaction (see note 4 for details), the Company loaned $5,000,000
pursuant to the IGH Note to IGH.
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.
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 paid 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 was paid in
12 equal monthly installments beginning on August 12, 2021,
pursuant to the terms of the promissory note. During the year ended
May 31, 2022, the Company received $2,740,820 under the IGH
Settlement Note, which included $2,666,670 in principal and $74,150
in accrued interest. During the six months ended November 30, 2022,
the Company received $348,165 under the IGH Settlement Note, which
included $333,333 in principal and $14,832 in accrued interest. As
of November 30, 2022, the IGH Settlement Note had been repaid in
full. 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
November 30, 2022 and May 31, 2022:
|
|
|
November 30,
2022
|
|
|
May 31,
2022
|
|
|
Office equipment
|
|
$ |
136,476 |
|
|
$ |
132,859 |
|
|
Furniture and fixtures
|
|
|
148,358 |
|
|
|
148,358 |
|
|
Machinery & Equipment
|
|
|
2,557,078 |
|
|
|
2,447,715 |
|
|
Leasehold improvements
|
|
|
3,712,447 |
|
|
|
3,686,951 |
|
|
Less: accumulated depreciation
|
|
|
(2,493,182 |
)
|
|
|
(2,073,449 |
)
|
|
Property, plant, and equipment, net
|
|
$ |
4,061,177 |
|
|
$ |
4,342,434 |
|
The Company made payments in the amounts of $138,476 and $145,015
for property and equipment during the six months ended November 30,
2022 and May 31, 2022, respectively.
Depreciation expense totaled $211,543 and $150,428 for the three
months ended November 30, 2022 and 2021, respectively. Depreciation
expense totaled $419,733 and $298,306 for the six months ended
November 30, 2022 and 2021, respectively.
Note 9 – Right of 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 months ended November 30,
2022 and 2021 was entirely comprised of operating leases and
amounted to $83,520 and $126,430, respectively. The Company’s lease
expense for the six months ended November 30, 2022 and 2021 was
entirely comprised of operating leases and amounted to $207,908 and
$249,374, respectively. The Company’s right of use (“ROU”) asset
amortization for the three months ended November 30, 2022 and 2021
was $87,318 and $80,021, respectively. The Company’s right of use
(“ROU”) asset amortization for the three months ended November 30,
2022 and 2021 was $174,067 and $158,257, respectively. The
difference between the lease expense and the associated ROU asset
amortization consists of interest.
The Company has recorded total right of use assets of $4,159,621
and liabilities in the amount of $4,116,221 through November 30,
2022. During the six months ended November 30, 2022, the Company
entered into an agreement to extend the lease term of its property
located at 1718 Industrial Road from August 31, 2022 to August 31,
2024, resulting in an increase in right of use assets and lease
liabilities in the amount of $46,745.
On May 17, 2022, pursuant to the Quinn River Joint Venture
Agreement (see note 4 for details), the Company, through CLS
Nevada, Inc., entered into an agreement (the “Quinn River Lease”)
to use approximately 20 acres of land for purposes of building and
operating a facility to grow cannabis. The lease has a term of 9
years, with two-year renewal options. Rent is $3,500 per quarter.
The initial amount of the right of use asset and operating lease
liability under the Quinn River Lease was $221,469.
Right of use assets – operating leases are summarized below:
|
|
|
November 30,
2022
|
|
|
Amount at inception of leases
|
|
$ |
4,159,621 |
|
|
Amount amortized
|
|
|
(2,132,426 |
)
|
|
Balance – November 30, 2022
|
|
$ |
2,027,195 |
|
Operating lease liabilities are summarized below:
|
Amount at inception of leases
|
|
$ |
4,116,221 |
|
|
Amount amortized
|
|
|
(2,027,222 |
)
|
|
Balance – November 30, 2022
|
|
$ |
2,088,999 |
|
|
Warehouse and offices
|
|
$ |
1,808,834 |
|
|
Land
|
|
|
211,211 |
|
|
Office equipment
|
|
|
7,150 |
|
|
Balance – November 30, 2022
|
|
$ |
2,027,195 |
|
| |
|
|
|
|
| |
|
|
|
|
|
Lease liability
|
|
$ |
2,088,999 |
|
|
Less: current portion
|
|
|
(352,162 |
)
|
|
Lease liability, non-current
|
|
$ |
1,736,837 |
|
Maturity analysis under these lease agreements is as follows:
|
Twelve months ended November 30, 2023
|
|
$ |
521,105 |
|
|
Twelve months ended November 30, 2024
|
|
|
526,348 |
|
|
Twelve months ended November 30, 2025
|
|
|
522,901 |
|
|
Twelve months ended November 30, 2026
|
|
|
301,547 |
|
|
Twelve months ended November 30, 2027
|
|
|
229,320 |
|
|
Thereafter
|
|
|
626,435 |
|
|
Total
|
|
$ |
2,727,656 |
|
|
Less: Present value discount
|
|
|
(638,657 |
)
|
|
Lease liability
|
|
$ |
2,088,999 |
|
Note 10 – Intangible Assets
Intangible assets consisted of the following at November 30, 2022
and May 31, 2022:
|
|
|
November 30, 2022
|
|
|
|
|
Gross
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Intellectual Property
|
|
$ |
319,600 |
|
|
$ |
(141,157 |
)
|
|
$ |
178,443 |
|
|
License & Customer Relations
|
|
|
990,000 |
|
|
|
(218,625 |
)
|
|
|
771,375 |
|
|
Tradenames - Trademarks
|
|
|
301,000 |
|
|
|
(132,942 |
)
|
|
|
168,058 |
|
|
Non-Compete Agreements
|
|
|
27,000 |
|
|
|
(27,000 |
)
|
|
|
- |
|
|
Domain Names
|
|
|
25,993 |
|
|
|
(11,044 |
)
|
|
|
14,949 |
|
|
Total
|
|
$ |
1,663,593 |
|
|
$ |
(530,768 |
)
|
|
$ |
1,132,825 |
|
|
|
|
May 31, 2022
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
Intellectual Property
|
|
$ |
319,600 |
|
|
$ |
(125,177 |
)
|
|
$ |
194,423 |
|
|
License & Customer Relations
|
|
|
990,000 |
|
|
|
(193,875 |
)
|
|
|
796,125 |
|
|
Tradenames - Trademarks
|
|
|
301,000 |
|
|
|
(117,892 |
)
|
|
|
183,108 |
|
|
Non-compete Agreements
|
|
|
27,000 |
|
|
|
(27,000 |
)
|
|
|
- |
|
|
Domain Names
|
|
|
25,993 |
|
|
|
(9,364 |
)
|
|
|
16,629 |
|
|
Total
|
|
$ |
1,663,593 |
|
|
$ |
(473,308 |
)
|
|
$ |
1,190,285 |
|
Total amortization expense charged to operations for the three
months ended November 30, 2022 and 2021 was $28,715 and $28,715,
respectively. Total amortization expense charged to operations for
the six months ended November 30, 2022 and 2021 was $57,460 and
$58,149, respectively.
|
Amount to be amortized during the twelve months ended November
30,
|
|
|
|
|
|
2023
|
|
$ |
114,896 |
|
|
2024
|
|
|
114,896 |
|
|
2025
|
|
|
114,896 |
|
|
2026
|
|
|
114,896 |
|
|
2027
|
|
|
113,165 |
|
|
Thereafter
|
|
|
560,076 |
|
|
|
|
$ |
1,132,825 |
|
Note 11 – Goodwill
Goodwill in the amount of $557,896 is carried on the Company’s
balance sheet at November 30, 2022 and May 31, 2022 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, 2022 and
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 at November 30, 2022 and May 31,
2022. As a result, no impairment was recorded. At November 30, 2022
and May 31, 2022, the net amount of goodwill on the Company’s
balance sheet was $557,896.
Note 12 – Other Assets
Other assets included the following as of November 30, 2022 and May
31, 2022:
|
|
|
November 30,
|
|
|
May 31,
|
|
|
|
|
2022
|
|
|
2022
|
|
|
Security deposits
|
|
$ |
208,500 |
|
|
$ |
229,500 |
|
|
|
|
$ |
208,500 |
|
|
$ |
229,500 |
|
Note 13 – Accounts Payable and Accrued
Liabilities
Accounts payable and accrued liabilities consisted of the following
at November 30, 2022 and May 31, 2022:
|
|
|
November 30,
2022
|
|
|
May 31,
2022
|
|
|
Trade accounts payable
|
|
$ |
2,207,945 |
|
|
$ |
1,414,074 |
|
|
Accrued payroll and payroll taxes
|
|
|
304,644 |
|
|
|
323,254 |
|
|
Accrued liabilities
|
|
|
539,487 |
|
|
|
580,570 |
|
|
Legal fees in dispute (a)
|
|
|
248,031 |
|
|
|
- |
|
|
Total
|
|
$ |
3,300,107 |
|
|
$ |
2,317,898 |
|
| |
a.
|
Amount represents invoices received by the Company from prior legal
counsel for services. As of November 30, 2022, the
Company has completed its investigation of these invoices and has
determined not to approve them for payment. Furthermore, on January
4, 2023, the company filed a Florida Bar Association Complaint
against the lawyer who provided the services. The Bar Complaint
seeks sanctions for “Excessive and Unreasonable Legal Fees”,
“Violation of the Attorney-Client Privilege” and
“Intentional Delay and Harm to the Company’s
Interest”.
|
Note 14 – Loans Payable
Leaflink Financing
Agreement
The Company is a party to an accounts receivable financing
agreement with a lender (the “Short Term Financing Agreement”) for
two of its subsidiaries. During the three months ended November 30,
2022, the Company received cash proceeds in the amount of $0 from
additional loans under the Short-Term Financing Agreement, made
payments in the amount of $765,000 and incurred fees in the amount
of $0. During the six months ended November 30, 2022, the Company
received cash proceeds in the amount of $650,115 from additional
loans under the Short-Term Financing Agreement, made payments in
the amount of $1,350,962, and incurred fees in the amount of
$75,558. At November 30, 2022, and May 31, 2022, the balance due
under the Short Term Financing Agreement was $387,784 and
$1,013,073, respectively. The loans are due in 30 days and have a
discount fee of 3%.
2022 Financing Agreement
CBR
Effective September 30, 2022, we entered into a Business Loan and
Security Agreement with CBR Capital LLC to borrow $900,000. The
loan is repayable in 48 weekly installments in the amount of
$13,312.50 for weeks 1-8 and $29,287.50 for weeks 9-48. CBR Capital
LLC has stated that it is aware of the Canaccord Debentures and the
U.S. Convertible Debentures and will agree to subordinate the CBR
security interest to these debenture holders.
During the three months ended November 30, 2022, the Company
received cash proceeds in the amount of $873,000 from the loan
agreement and made payments in the amount of $93,188. Of these
payments $5,652 was principal and $87,536 was interest. At the
inception of the loan, the Company recorded a discount in the
amount of $27,000 related to prepaid fees. During the three months
ended November 30, 2022, the Company amortized $3,938 of these fees
to interest expense, the balance of the discount remaining at
November 20, 2022 is $23,063. At November 30, 2022, and May 31,
2022, the balance due under the CBR Agreement was $871,286 and $0
net of discount, respectively
2022 Financing Agreement
TVT
Effective October 21, 2022, we entered into a Purchase and Sale of
Future Receipts Agreement with TVT Business Funding LLC to borrow
$200,000. The loan is repayable in 48 weekly installments in the
amount of $5,916.67.
During the three months ended November 30, 2022, the Company
received cash proceeds in the amount of $194,000 from the loan
agreement and made payments in the amount of $29,583. Of these
payments $14,695 was principal and $14,888 was interest. At the
inception of the loan, the Company recorded a discount in the
amount of $6,000 related to prepaid fees. During the three months
ended November 30, 2022, the Company amortized $625 of these fees
to interest expense, the balance of the discount remaining at
November 20, 2022 is $5,375. At November 30, 2022, and May 31,
2022, the balance due under the TVT Agreement was $179,930 and $0
net of discount, respectively
Note 15 – Convertible Notes Payable
|
|
|
November 30, 2022
|
|
|
May 31, 2022
|
|
|
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 $3.20 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 $4.40. 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 six months ended
November 30, 2022, the Company accrued interest in the amounts of
$45,045 and $135,134 on the U.S. Convertible Debenture 1,
respectively. During the three and six months ended November 30,
2022, the Company made interest payments in the amounts of $0 and
$90,089, 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 $1.20 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 the amendment. On September
15, 2022, the U.S. Convertible Debenture 1 was further amended as
follows: (i) the conversion price of debentures with a principal
amount of $2,702,674 was reduced to $0.285 per unit, and these
debentures along with accrued interest in the amount of $45,044
were converted to 9,641,118 shares of common stock and warrants to
purchase 4,820,560 shares of common stock; (ii) the conversion
price of the remaining debentures with a principal amount of
$1,801,783 was reduced to $0.40 per share; (iii) the maturity date
of 50% of the remaining debentures with a principal amount of
$900,891.50 was extended to December 31, 2023, and the maturity
date of 50% of the remaining debentures with a principal amount of
$900,891.50 was extended to December 31, 2024; and (iv) the
conversion price of the warrants issuable upon conversion of the
debentures was reduced to $0.40. The value of the warrants will be
determined when the issuance becomes probable. This amendment was
accounted for as an extinguishment of debt, and a loss in the
amount of $1,689,368 was recorded on this transaction.
|
|
$ |
1,801,783 |
|
|
$ |
4,504,457 |
|
|
|
|
November 30, 2022
|
|
|
May 31, 2022
|
|
|
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 $3.20 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 $4.40. 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 six months ended
November 30, 2022, the Company accrued interest in the amounts of
$11,261 and $33,783 on the U.S. Convertible Debenture 2,
respectively. During the three and six months ended November 30,
2022, the Company made interest payments in the amounts of $0 and
$22,522, 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 $1.20 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. On September 15, 2022, the U.S. Convertible
Debenture 2 was further amended as follows: (i) the conversion
price of debentures with a principal amount of $675,668 was reduced
to $0.285 per unit, and these debentures along with accrued
interest in the amount of $11,261 were converted to 2,410,279
shares of common stock and warrants to purchase 1,205,140 shares of
common stock; (ii) the conversion price of the remaining debentures
with a principal amount of $450,446 was reduced to $0.40 per share;
(iii) the maturity date of 50% of the remaining debentures with a
principal amount of $225,223 was extended to December 31, 2023, and
the maturity date of 50% of the remaining debentures with a
principal amount of $225,223 was extended to December 31, 2024; and
(iv) the conversion price of the warrants issuable upon conversion
of the debentures was reduced to $0.40. The value of the warrants
will be determined when the issuance becomes probable. This
amendment was accounted for as an extinguishment of debt, and a
loss in the amount of $422,331 was recorded on this
transaction.
|
|
|
450,446 |
|
|
|
1,126,114 |
|
|
|
|
November 30, 2022
|
|
|
May 31, 2022
|
|
|
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 $3.20 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 $4.40. 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 six months ended
November 30, 2022, the Company accrued interest in the amounts of
$12,527 and $24,509 on the U.S. Convertible Debenture 4,
respectively. During the three and six months ended November 30,
2022, the Company made interest payments in the amounts of $11,982
and $23,964, 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 $1.20 per unit; and (ii) the maturity date
was extended from October 25, 2021 to October 25, 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. On October 25, 2022, the Company received a
notice of demand from the lender, placing the U.S. Convertible Debt
4 into default status. On November 1, 2022, the Company entered
into a forbearance agreement with the lender (the “Forbearance
Agreement”) with the following terms: (i) the Company will pay the
lender the amount of $150,000 on November 2, 2022, and an
additional $50,000 each month for the following nine months, or a
total of $600,000; (ii) the default interest rate of 12% will be
applied on the existing principal balances until paid in full;
(iii) lender shall forbear from taking any further action based
upon the existing default. As a result of this agreement, the
Company capitalized $3,283 of accrued interest. During the three
months ended November 30, 2022, the Company made payments in the
aggregate amount of $200,000 pursuant to Forbearance Agreement. The
Company recognized a gain in the amount of $2,384 on this
transaction during the three months ended November 30, 2022.
|
|
|
400,000 |
|
|
|
599,101 |
|
|
|
|
November 30, 2022
|
|
|
May 31, 2022
|
|
|
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 $3.20 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 $4.40. 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 8,081 shares of the
Company’s common stock, and warrants to purchase 4,040 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 six months ended
November 30, 2022, the Company accrued interest in the amounts of
$131,628 and $396,011 on the Canaccord Debentures, respectively.
During the three and six months ended November 30, 2022, the
Company made interest payments in the amounts of $0 and $264,383,
respectively. On March 31, 2021, the Canaccord Debentures were
amended as follows: (i) the conversion price of the debentures was
reduced to $1.20 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 $4.80 per share to $2.40 per
share for the preceding ten consecutive trading days; and (iv) the
exercise price of the warrants issuable upon conversion was reduced
from $4.40 to $1.60 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
year ended May 31, 2022, principal in the aggregate amount of
$281,000 was converted into an aggregate of 234,167 shares of the
Company’s common stock, and warrants to purchase 117,084 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. On September 15, 2022, the Canaccord
Debentures were further amended as follows: (i) the conversion
price of debentures with a principal amount of $7,965,278 was
reduced to $0.285 per unit, and these debentures along with accrued
interest in the amount of $132,755 were converted to 28,414,149
shares of common stock and warrants to purchase 14,207,075 shares
of common stock; (ii) the conversion price of the remaining
debentures with a principal amount of $52,53,873 was reduced to
$0.40 per share; (iii) the maturity date of 50% of the remaining
debentures with a principal amount of $2,626,936.50 was extended to
December 31, 2023, and the maturity date of 50% of the remaining
debentures with a principal amount of $2,626,936.50 was extended to
December 31, 2024; and (iv) the conversion price of the warrants
issuable upon conversion of the debentures was reduced to $0.40.
The value of the warrants will be determined when the issuance
becomes probable. This amendment was accounted for as an
extinguishment of debt, and a loss in the amount of $4,547,660 was
recorded on this transaction.
|
|
|
5,253,873 |
|
|
|
13,219,149 |
|
| |
|
|
|
|
|
|
|
|
|
Total - Convertible Notes Payable
|
|
$ |
7,906,102 |
|
|
$ |
19,448,821 |
|
|
Less: Discount
|
|
|
(- |
)
|
|
|
(- |
)
|
|
Convertible Notes Payable, Net of Discounts
|
|
$ |
7,906,102 |
|
|
$ |
19,448,821 |
|
|
|
|
November 30, 2022
|
|
|
May 31, 2022
|
|
|
Total - Convertible Notes Payable, Net of Discounts, Current
Portion, net of discount
|
|
$ |
400,000 |
|
|
$ |
19,448,821 |
|
|
Total - Convertible Notes Payable, Net of Discounts, Long-term
Portion, net of discount
|
|
$ |
7,506,102 |
|
|
$ |
- |
|
|
Discounts on notes payable amortized to interest expense – 3 months
ended November 30, 2022 and 2021, respectively
|
|
$ |
- |
|
|
$ |
14,199 |
|
|
Discounts on notes payable amortized to interest expense – 6 months
ended November 30, 2022 and 2021, respectively
|
|
$ |
- |
|
|
$ |
35,496 |
|
Note 16 – Notes Payable
|
|
|
November 30, 2022
|
|
|
May 31, 2022
|
|
|
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 75,758
shares of common stock at an exercise price of $1.65 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 Debenture 1. During
the three and six months ended November 30, 2022 $1,667 and $3,333
of this discount was charged to operations, respectively. The
Company recorded an original issue discount in the amount of
$187,500 on Debenture 1. During the three and six months ended
November 30, 2022, $18,145 and $36,290 of this original issue
discount was charged to operations, respectively. During three and
six months ended November 30, 2022, the Company accrued interest in
the amounts of $9,375 and $18,750 on Debenture 1, respectively.
During the three and six months ended November 30, 2022, the
Company made interest payments in the amounts of $8,333 and
$31,250, respectively.
|
|
$ |
250,000 |
|
|
$ |
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 75,758
shares of common stock at an exercise price of $1.65 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 Debenture 2. During
the three and six months ended November 30, 2022, $1,009 and $2,018
of this discount was charged to operations, respectively. The
Company recorded an original issue discount in the amount of
$187,500 on Debenture 2. During the three and six months ended
November 30, 2022, $18,145 and $36,290 of this original issue
discount was charged to operations, respectively. During the three
and six months ended November 30, 2022, the Company accrued
interest in the amounts of $9,375 and $18,750 on Debenture 2,
respectively. During the three and six months ended November 30,
2022, the Company made interest payments in the amounts of $8,333
and $29,167, respectively.
|
|
|
250,000 |
|
|
|
250,000 |
|
|
|
|
November 30, 2022
|
|
|
May 31, 2022
|
|
|
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 3 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 151,516
shares of common stock at an exercise price of $1.65 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 Debenture 3. During
the three and six months ended November 30, 2022, $1,871 and $3,742
of this discount was charged to operations, respectively. The
Company recorded an original issue discount in the amount of
$375,000 on Debenture 3. During the three and six months ended
November 30, 2022, $36,290 and $72,581 of this original issue
discount was charged to operations, respectively. During the three
and six months ended November 30, 2022, the Company accrued
interest in the amounts of $18,750 and $37,500 on Debenture 3,
respectively. During the three and six months ended November 30,
2022, the Company made interest payments in the amounts of $16,667
and $58,125, respectively.
|
|
|
500,000 |
|
|
|
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 151,516
shares of common stock at an exercise price of $1.65 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 Debenture 4. During
the three and six months ended November 30, 2022, $1,715 and $3,431
of this discount was charged to operations, respectively. The
Company recorded an original issue discount in the amount of
$375,000 on Debenture 4. During the three and six months ended
November 30, 2022, $37,500 and $75,000 of this original issue
discount was charged to operations, respectively. During the three
and six months ended November 30, 2022, the Company accrued
interest in the amounts of $18,750 and $37,500 on Debenture 4,
respectively. During the three and six months ended November 30,
2022, the Company made interest payments in the amounts of $16,667
and $55,417, respectively.
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
|
November 30, 2022
|
|
|
May 31, 2022
|
|
|
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 151,516
shares of common stock at an exercise price of $1.65 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 Debenture 5. During
the three and six months ended November 30, 2022, $1,715 and $3,431
of this discount was charged to operations, respectively. The
Company recorded an original issue discount in the amount of
$375,000 on Debenture 5. During the three and six months ended
November 30, 2022, $37,500 and $75,000 of this original issue
discount was charged to operations, respectively. During the three
and six months ended November 30, 2022, the Company accrued
interest in the amounts of $18,750 and $37,500 on Debenture 5,
respectively. During the three and six months ended November 30,
2022, the Company made interest payments in the amounts of $16,667
and $55,417, respectively.
|
|
|
500,000 |
|
|
|
500,000 |
|
| |
|
|
|
|
|
|
|
|
|
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 151,516
shares of common stock at an exercise price of $1.65 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 Debenture 6. During
the three and six months ended November 30, 2022, $1,715 and $3,431
of this discount was charged to operations, respectively. The
Company recorded an original issue discount in the amount of
$375,000 on Debenture 6. During the three and six months ended
November 30, 2022, $37,500 and $75,000 of this original issue
discount was charged to operations, respectively. During the three
and six months ended November 30, 2022, the Company accrued
interest in the amounts of $18,750 and $37,500 on Debenture 6,
respectively. During the three and six months ended November 30,
2022, the Company made interest payments in the amounts of $16,667
and $55,714, respectively.
|
|
|
500,000 |
|
|
|
500,000 |
|
| |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2,500,000 |
|
|
$ |
2,500,000 |
|
|
Original Issue Discount
|
|
|
1,875,000 |
|
|
|
1,875,000 |
|
|
Notes Payable, Gross
|
|
|
4,375,000 |
|
|
|
4,375,000 |
|
|
Less: Discount
|
|
|
(1,291,887 |
)
|
|
|
(1,681,434 |
)
|
|
Notes Payable, Net of Discount
|
|
$ |
3,083,113 |
|
|
$ |
2,693,566 |
|
|
Discounts on notes payable amortized to interest expense – 3 months
ended November 30, 2022 and 2021, respectively
|
|
$ |
194,773 |
|
|
$ |
- |
|
|
Discounts on notes payable amortized to interest expense – 6 months
ended November 30, 2022 and 2021, respectively
|
|
$ |
389,547 |
|
|
$ |
- |
|
Aggregate maturities of notes payable and convertible notes payable
as of November 30, 2022 are as follows:
For the twelve months ended November 30,
|
2023
|
|
$
|
1,650,000
|
|
|
2024
|
|
|
5,003,051
|
|
|
2025
|
|
|
4,128,051
|
|
|
2026
|
|
|
375,000
|
|
|
2027
|
|
|
1,125,000
|
|
|
Thereafter
|
|
|
-
|
|
|
Total
|
|
$
|
12,281,102
|
|
During the year ended May 31, 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 $1.65 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 year ended May 31, 2022, the Company received the amount
of $2,500,000 pursuant to the November 2021 Offering and issued an
aggregate of 757,576 warrants to purchase its common stock at an
exercise price of $1.65 per share to the investors.
Note 17 – Lease Liabilities - Financing Leases
|
|
|
November 30,
2022
|
|
|
May 31,
2022
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
Financing lease obligation under a lease agreement for extraction
equipment dated March 14, 2022 in the original amount of $359,900
payable in forty-eight monthly installments of $10,173 including
interest at the rate of 15.89%. During the three months ended
November 30, 2022, the Company made principal and interest payments
on this lease obligation in the amounts of $17,586 and $12,933,
respectively. During the six months ended November 30, 2022, the
Company made principal and interest payments on this lease
obligation in the amounts of $34,493 and $27,224, respectively.
|
|
$ |
314,500 |
|
|
$ |
348,993 |
|
| |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
314,500 |
|
|
$ |
348,993 |
|
| |
|
|
|
|
|
|
|
|
|
Current portion
|
|
$ |
77,697 |
|
|
$ |
71,813 |
|
|
Long-term maturities
|
|
|
236,803 |
|
|
|
277,180 |
|
|
Total
|
|
$ |
314,500 |
|
|
$ |
348,993 |
|
Aggregate maturities of lease liabilities – financing leases as of
November 30, 2022 are as follows:
For the period ended November 30,
|
2023
|
|
$
|
77,697
|
|
|
2024
|
|
|
90,952
|
|
|
2025
|
|
|
106,468
|
|
|
2026
|
|
|
39,383
|
|
|
2027
|
|
|
-
|
|
|
Thereafter
|
|
|
-
|
|
|
Total
|
|
$
|
314,500
|
|
Note 18 – Stockholders’ Equity
The Company’s authorized capital stock consists of 187,500,000
shares of common stock, par value $0.0001, at November 30, 2022 and
2021, and 5,000,000 shares of preferred stock, par value $0.001 per
share.
On September 15, 2022, the Company effected a reverse stock split
of its issued and outstanding common stock (“the “Reverse Split”)
at a ratio of 1-for-4, whereby four shares of the Company’s common
stock issued and outstanding were exchanged for one share. The
number of shares of common stock issued and outstanding immediately
before the Reverse Split was 290,070,272; the number of shares
outstanding immediately after the reverse split was 72,517,570, a
decrease of 217,552,702 shares. All share and per-share information
in these financial statements have been adjusted to reflect the
effects of the Reverse Split. As a result of the split, an
additional 576 shares were issued due to rounding.
Common stock transactions
for the six months ended November 30, 2022
Common Stock and Warrants Issued upon Conversion of Notes
Payable:
On September 15, 2022, the Company issued 28,414,149 shares and
three-year
warrants to acquire 14,207,075 shares of common stock at a price of
$0.40 per share as a result of the mandatory conversion provided in
the amendments to the Canaccord Debentures. The conversion was for
the total amount of $8,098,033, of which $7,965,278 was principal
and $132,755 was accrued interest. (See note 15 for details). A
loss in the amount of $4,547,660 was recorded in connection with
the extinguishment of the Canaccord Debentures. No gain or loss was
recorded on the issuance of the shares because the conversion was
made pursuant to the terms of the Restructured Canaccord Debenture
Agreement.
On September 15, 2022, the Company issued 12,051,397 shares and
three-year
warrants to acquire 6,025,700 shares of common stock at a price of
$0.40 per share as a result of the mandatory conversion provided in
the amendments to the U.S. Convertible Debenture holders. The
conversion was for the total amount of $3,434,647, of which
$3,378,342 was principal and $56,305 was accrued interest. (See
note 15 for details). A loss in the amount of $2,111,699 was
recorded in connection with the extinguishment of the U.S.
Convertible Debentures 1 and 2. No gain or loss was recorded on the
issuance of the shares because the conversion was made pursuant to
the terms of the Restructured U.S. Convertible Debentures 1 and 2
Agreements.
Other Warrant Transactions
From December 1, 2021, through January 4, 2022, the Company issued
$2,500,000 in debentures and issued 757,576 warrants in connection
with these debentures. Each warrant allows the holder to purchase
one share of the Company’s common stock at an exercise price of
$1.65 per share for three years after its date of issuance.
On September 15, 2022, the Company amended $18,846,721 in
outstanding debentures to reduce the conversion price of the
debentures from $1.20 per unit to $0.40 per unit, increasing the
warrants issuable upon conversion of such debentures from 3,400,652
to 6,801,298. As amended, each warrants issuable pursuant to the
conversion of such debentures is exercisable for one share of the
Company’s common stock at a price of $0.40 per share.
Common stock transactions
for the six months ended November 30, 2021
Common Stock and Warrants Issued upon Conversion of Notes
Payable:
On June 17, 2021, the Company issued 234,167 shares of common stock
and three-year
warrants to acquire 117,083 shares of common stock at a price of
$4.40 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.
Other Warrant transactions
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 $3.20
per unit to $1.20 per unit, increasing the warrants issuable upon
conversion of the Canaccord Debentures from 2,102,100 to 5,629,094.
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 $1.60 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
$3.20 per unit to $1.20 per unit, increasing the warrants issuable
upon conversion of such debentures from 973,387 to 2,595,697. 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
$1.65 per share) until July 14, 2024.
The following table summarizes the significant terms of warrants
outstanding at November 30, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.40
|
|
|
|
20,232,775
|
|
|
|
2.79
|
|
|
|
0.40
|
|
|
|
20,232,775
|
|
|
|
0.40
|
|
|
|
1.60
|
|
|
|
191,094
|
|
|
|
2.79
|
|
|
$
|
1.60
|
|
|
|
191,094
|
|
|
$
|
1.60
|
|
|
|
1.65
|
|
|
|
757,580
|
|
|
|
2.08
|
|
|
|
1.65
|
|
|
|
757,580
|
|
|
|
1.65
|
|
|
|
2.40
|
|
|
|
781,250
|
|
|
|
0.45
|
|
|
|
2.40
|
|
|
|
781,250
|
|
|
|
2.40 |
|
|
|
|
|
|
|
21,962,699
|
|
|
|
2.69
|
|
|
$
|
0.53
|
|
|
|
21,962,699
|
|
|
$
|
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, 2021
|
|
|
13,499,411 |
|
|
$ |
2.12 |
|
|
Granted
|
|
|
874,666 |
|
|
$ |
1.65 |
|
|
Exercised
|
|
|
- |
|
|
$ |
- |
|
|
Cancelled / Expired
|
|
|
(12,644,153 |
)
|
|
$ |
2.09 |
|
|
Warrants outstanding at May 31, 2022
|
|
|
1,729,924 |
|
|
$ |
1.98 |
|
|
Granted
|
|
|
20,232,775 |
|
|
$ |
0.40 |
|
|
Exercised
|
|
|
- |
|
|
$ |
- |
|
|
Cancelled / Expired
|
|
|
- |
|
|
$ |
- |
|
|
Warrants outstanding at November 30, 2022
|
|
|
21,962,699 |
|
|
$ |
0.53 |
|
Unit Warrants
In February and March 2018, in connection with the Westpark
offering, the Company issued five-year warrants to purchase 51,310
of the Company’s units at an exercise price of $5.00 per unit. Each
unit consists of four shares of common stock and one warrant to
purchase a share of common stock for $3.00
On June 20, 2018, in connection with the special warrant offering,
the Company issued Canaccord Genuity Corp. 579,461 three-year
broker warrants at an exercise price of C$1.80 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$2.60 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 268,680 three-year agent and advisory warrants.
Each warrant entitles the holder to purchase a unit for $3.20,
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
$4.40 per share. The Company, in connection with the issuance of
the Canaccord Debentures, also issued to National Bank Financial
Inc., as compensation, 67,170 three-year agent and advisory
warrants. Each warrant entitles the holder to purchase a unit for
$3.20, 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 $4.40 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 – Related Party Transactions
As of November 30, 2022 and May 31, 2022, 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 August 17, 2022, the Company granted 50,000 shares of restricted
common stock to Charlene Soco, an officer of the Company, effective
February 4, 2022. The shares shall become fully vested, and the
restrictions removed, on December 31, 2022 assuming Ms. Soco
remains employed by Alternative Solutions and/or the Company on
such date.
During the six months ended November 30, 2022, the Company made
payments of $5,000 to each of it’s three directors, for a total of
$15,000.
As of May, 2019 the Company entered into a monthly retainer
arrangement with a company called The Workshop LLC located in Miami
Florida. The Workshop LLC provided services related to marketing
and advertising for the Company and its subsidiaries, including
design work for marketing materials. The Workshop LLC is owned by
Jordan Binder, the son of the former CEO of the Company, Jeff
Binder. Jeff Binder resigned as CEO effective August 23rd, 2022
after serving seven years in that position. As of December 31, 2022
the retainer agreement between The Workshop LLC and the Company was
ended.
Note 20 – Income Taxes
The following table summarizes the Company’s income tax accrued for
the three and six months ended November 30, 2022:
|
|
|
For the Three
Months Ended
November 30, 2022
|
|
|
For the Three
Months Ended
November 30, 2021
|
|
|
Loss before provision for income taxes
|
|
$ |
(7,596,688 |
)
|
|
$ |
(208,255 |
)
|
|
Provision for income taxes
|
|
$ |
516,691 |
|
|
$ |
140,717 |
|
|
Effective tax rate
|
|
|
6.8 |
%
|
|
|
67.5 |
%
|
|
|
|
For the Six
Months Ended
November 30, 2022
|
|
|
For the Six
Months Ended
November 30, 2021
|
|
|
Loss before provision for income taxes
|
|
$ |
(8,409,728 |
)
|
|
$ |
547,684 |
|
|
Provision for income taxes
|
|
$ |
1,035,776 |
|
|
$ |
469,057 |
|
|
Effective tax rate
|
|
|
12.3 |
%
|
|
|
85.6 |
%
|
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 21 – 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, 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%. (See Note 23 for
details).
|
|
|
|
|
|
|
●
|
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 May 17, 2022 for approximately 20 acres
of land for purposes of developing a cultivation facility along the
Quinn River in Nevada at a cost of $3,500 per quarter beginning on
or before May 31, 2022 (the “Quinn River Land Lease”). The Quinn
River Land Lease has a term of 9 years, with two-year renewal
options. The lessee under this Lease is CLS Nevada, Inc. 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 May 31, 2022.
Note 22 – 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.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
HISTORY AND OUTLOOK
We were incorporated on March 31, 2011 as Adelt Design, Inc. to
manufacture and market carpet binding art. Production and marketing
of carpet binding art never commenced. On November 20, 2014, we
adopted amended and restated articles of incorporation, thereby
changing our name to CLS Holdings USA, Inc. Effective December 10,
2014, we effected a reverse stock split of our issued and
outstanding common stock at a ratio of 1-for-0.625 (the “Reverse
Split”), wherein 0.625 shares of our common stock were issued in
exchange for each share of common stock issued and outstanding.
On April 29, 2015, the Company, CLS Labs and the Merger Sub
consummated the Merger, whereby the Merger Sub merged with and into
CLS Labs, with CLS Labs remaining as the surviving entity. As a
result of the Merger, we acquired the business of CLS Labs and
abandoned our previous business. As such, only the financial
statements of CLS Labs are included herein.
CLS Labs was originally incorporated in the state of Nevada on May
1, 2014 under the name RJF Labs, Inc. before changing its name to
CLS Labs, Inc. on October 24, 2014. It was formed to commercialize
a proprietary method of extracting cannabinoids from cannabis
plants and converting the resulting cannabinoid extracts into
concentrates such as oils, waxes, edibles and shatter.
On April 17, 2015, CLS Labs took its first step toward
commercializing its proprietary methods and processes by entering
into agreements through its wholly owned subsidiary, CLS Labs
Colorado, with certain Colorado entities. During 2017, we suspended
our plans to proceed with the Colorado Arrangement due to
regulatory delays and have not yet determined if or when we will
pursue them again.
We have been issued a U.S. patent with respect to our proprietary
method of extracting cannabinoids from cannabis (hemp) plants and
converting the resulting cannabinoid extracts into concentrates
such as oils, waxes, edibles and shatter. These concentrates may be
ingested in a number of ways, including through vaporization via
electronic cigarettes, and used for a variety of pharmaceutical and
other purposes. Internal testing of this extraction method and
conversion process has revealed that it produces a cleaner, higher
quality product and a significantly higher yield than the
cannabinoid extraction processes currently existing in the
marketplace. We have not yet commercialized our proprietary process
and the extraction and production process utilized in the patent is
currently prohibited in Nevada. The Company is currently pursuing
options to generate revenue from the patent, including the possible
sale of the patent.
We intend to generate revenues through: (i) the processing of
cannabis for others, and (ii) the purchase of cannabis (or
cultivation through our joint venture) and the processing and sale
of cannabis-related products. We plan to accomplish this through
the acquisition of companies, the creation of joint ventures,
through licensing agreements, and through fee-for-service
arrangements with growers and dispensaries of cannabis products. We
believe that we have established a position as one of the premier
cannabinoid extraction and processing companies in the industry. We
have already created our own brand of concentrates for consumer
use, which we sell wholesale to cannabis dispensaries. We believe
that we have created a “gold standard” national brand by
standardizing the testing, compliance and labeling of our products
in an industry currently comprised of small, local businesses with
erratic and unreliable product quality, testing practices and
labeling. We also plan to offer consulting services through
Cannabis Life Sciences Consulting, LLC, which will generate revenue
by providing consulting services to cannabis-related businesses,
including growers, dispensaries and laboratories, and driving
business to our processing facilities. Finally, we intend to grow
through select acquisitions in secondary and tertiary markets,
targeting newly regulated states that we believe offer a
competitive advantage. Our goal at this time is to become a
successful regional cannabis company.
On December 4, 2017, we entered into the Acquisition Agreement with
Alternative Solutions to acquire the outstanding equity interests
in the Oasis LLCs. Pursuant to the Acquisition Agreement, as
amended, we paid a non-refundable deposit of $250,000 upon signing,
which was followed by an additional payment of $1,800,000 on
February 5, 2018, for an initial 10% of Alternative Solutions and
each of the subsidiaries. At the closing of our purchase of the
remaining 90% of the ownership interests in Alternative Solutions
and the Oasis LLCs, which occurred on June 27, 2018, we paid the
following consideration: $5,995,543 in cash, a $4.0 million
promissory note due in December 2019, and $6,000,000 in shares of
our common stock. The cash payment of $5,995,543 was less than the
$6,200,000 payment originally contemplated because we assumed an
additional $204,457 of liabilities. The Oasis Note, which was
repaid in full in December 2019, was secured by all of the
membership interests in Alternative Solutions and the Oasis LLCs
and by the assets of the Oasis LLCs. At that time, we applied for
regulatory approval to own an interest in the Oasis LLCs, which
approval was received on June 21, 2018. Just prior to closing, the
parties agreed that we would instead acquire all of the membership
interests in Alternative Solutions, the parent of the Oasis LLCs,
from its members, and the membership interests in the Oasis LLCs
owned by members other than Alternative Solutions. We received
final regulatory approval to own our interest in the Oasis LLCs
through Alternative Solutions under the final structure of the
transaction on April 26, 2022.
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. (See Note 3
for more detail).
On October 31, 2018, as consideration for the IGH Option, we made a
loan to IGH, in the principal amount of $5,000,000, subject to the
terms and conditions set forth in that certain loan agreement,
dated as of October 31, 2018 between IGH as the borrower and the
Company as the lender. The loan was evidenced by a secured
promissory note of IGH, which bore interest at the rate of 6% per
annum and was to mature on October 31, 2021.
On February 4, 2020, CLS Massachusetts exercised the IGH Option and
IGH subsequently asserted that CLS Massachusetts’ exercise was
invalid. By letter dated February 26, 2020, we informed IGH that as
a result of its breaches of the IGH Option, which remained uncured,
an event of default had occurred under the IGH Note. We advised IGH
that we were electing to cause the IGH Note to bear interest at the
default rate of 15% per annum effective February 26, 2020 and to
accelerate all amounts due under the IGH Note. On February 27,
2020, IGH informed CLS Massachusetts that it did not plan to make
further payments under the IGH Note on the theory that the break-up
fee excused additional payments.
On June 14, 2021, the parties to the IGH lawsuit entered into a
confidential settlement agreement to resolve the action and a
secured promissory note dated and executed by IGH in favor of us
and effective June 11, 2021 (the “IGH Settlement Note”). Pursuant
to the IGH Settlement Note, IGH paid us $3,000,000, $1,000,000 of
which was paid on or before July 12, 2021. The remaining $2,000,000
and accrued interest was paid in 12 equal monthly installments,
which began on August 12, 2021. During the year ended May 31, 2022,
we received $2,740,820 under the IGH Settlement Note, which
included $2,666,670 in principal and $74,150 in accrued interest.
During the six months ended November 30, 2022, we received $348,165
was due under the IGH Settlement Note, which included $333,333 in
principal and $14,382 in accrued interest. As of November 30, 2022,
the IGH Settlement Note has been paid in full. We record amounts
paid under the IGH Settlement Note as gains when payments are
received
On October 20, 2021, we entered into a management services
agreement (the “Quinn River Joint Venture Agreement”) through our
50% owned subsidiary, Kealii Okamalu, LLC (“Kealii Okamalu”), with
CSI Health MCD LLC (“CSI”) and a commission established by the
authority of the Tribal Council of the Fort McDermitt Paiute and
Shoshone Tribe (the “Tribe”). The purpose of the Quinn River Joint
Venture Agreement is to establish a business (the “Quinn River
Joint Venture”) to grow, cultivate, process and sell cannabis and
related products. (See Note 3 for more detail) The Quinn River
Joint Venture Agreement has a term of 10 years plus a 10 year
renewal term from the date the first cannabis crop produced is
harvested and sold. The first cannabis crop was harvested in
September of 2022. Pursuant to the Quinn River Joint Venture
Agreement, Kealii Okamalu leased approximately 20-30 acres of the
Tribe’s land located along the Quinn River at a cost of $3,500 per
quarter and managed the design, finance and construction of a
cannabis cultivation facility on such tribal lands (the
“Cultivation Facility”). Kealii Okamalu now also manages the
ongoing operations of the Cultivation Facility and related
business, including, but not limited to, the cultivation of
cannabis crops, personnel staffing, product packaging, testing,
marketing and sales. Packaged products are branded as “Quinn River
Farms.” We have provided up to 10,000 square feet of warehouse
space at our Las Vegas facility for the Quinn River Joint Venture
product, and have preferred vendor status including the right to
purchase cannabis flower and the business’s cannabis trim at
favorable prices. Kealii Okamalu will contribute up to $6 million
(the “Invested Amount”) towards the construction of the Cultivation
Facility and the working capital for the Quinn River Joint Venture.
This Invested Amount will be repaid from a portion of the net
income of the Quinn River Joint Venture otherwise payable to CSI
and the Tribe at the rate of $750,000 per quarter for eight
quarters. Once the Invested Amount is paid in full, Kealii Okamalu
will receive one-third of the net profits of the Quinn River Joint
Venture.
COVID-19 Update
On March 12, 2020, Governor Steven Sisolak declared a State of
Emergency related to the COVID-19 global pandemic. This State of
Emergency was initiated due to the multiple confirmed and
presumptive cases of COVID-19 in the State of Nevada. On March 17,
2020, pursuant to the Declaration of Emergency, Governor Sisolak
released the Nevada Health Response COVID-19 Risk Mitigation
Initiative (“Initiative”). This Initiative provided guidance
related to the March 12 Declaration of Emergency, requiring
Nevadans to stay home and all nonessential businesses to
temporarily close to the public for thirty (30) days. In the
Initiative, it was declared that licensed cannabis stores and
medical dispensaries could remain open only if employees and
consumers strictly adhered to the social distancing protocols.
In light of the Initiative, Governor Sisolak issued Declaration of
Emergency Directive 003 on March 20, 2020 which mandated retail
cannabis dispensaries to operate as delivery only. On April 29,
2020, Governor Sisolak issued Declaration of Emergency Directive
016 which amended the cannabis section of Directive 003 and
permitted licensed cannabis dispensaries to engage in retail sales
on a curbside pickup or home delivery basis pursuant to guidance
from the Cannabis Compliance Board. Through Directive 016, licensed
cannabis dispensaries were able to begin curbside pickup on May 1,
2020 so long as the facility adhered to protocols developed by the
Cannabis Compliance Board (“CCB”).
In accordance with Directive 016, the CCB released guidelines
related to curbside pickup requiring all facilities wishing to
offer curbside pickup to first submit and receive approval from the
CCB. Serenity Wellness Center LLC developed the required procedures
and submitted and received State approval on April 30, 2020 to
conduct curbside pickup sales effective May 1, 2020. Further, the
City of Las Vegas required cannabis facilities to obtain a
temporary 30-day curbside pickup permit. Serenity Wellness Center
LLC was issued its first temporary curbside pickup permit from the
City of Las Vegas on May 1, 2020. Serenity Wellness Center LLC has
subsequently received a temporary curbside permit every thirty (30)
days thereafter. The City of Las Vegas has since extended the
permit to 6 months before it needs to be renewed. Serenity Wellness
Center LLC dba Oasis Cannabis was issued its most recent curbside
sales permit on January 1, 2023 which is set to expire on June 30,
2023. Upon expiration every 6 months, the City of Las Vegas reviews
the licensee and determines if a new temporary permit shall be
issued.
On May 7, 2020, Governor Sisolak issued Declaration of Emergency
Directive 018. Directive 018 worked to reopen the State of Nevada
as a part of Phase One of the Nevada United: Roadmap to Recovery
Plan introduced by Governor Sisolak on April 30, 2020. Directive
018 provided that, in addition to curbside pickup or home delivery,
licensed cannabis dispensaries could engage in retail sales on an
in-store basis effective May 9, 2020, pursuant to guidance from the
CCB. The CCB required facilities wishing to engage in limited
in-store retail sales to submit Standard Operating Procedures and
receive approval of the same. Serenity Wellness Center LLC
developed the required procedures and submitted and received State
approval on May 8, 2020 to conduct limited in-store retail sales
effective May 9, 2020. The City of Las Vegas did not require a
separate permit for limited in-store sales.
On July 31, 2020, Governor Sisolak issued Declaration of Emergency
Directive 029 reaffirming The Nevada United: Roadmap to Recovery
Plan. Directive 029 stated that all directives promulgated pursuant
to the March 12, 2020 Declaration of Emergency or subsections
thereof set to expire on July 31, 2020, would remain in effect for
the duration of the current state of emergency unless terminated
prior to that date by a subsequent directive or by operation of law
associated with lifting the Declaration of Emergency. Further,
Directive 029, having become effective at 11:59 PM on Friday, July
31, 2020 shall remain in effect until terminated by a subsequent
directive promulgated pursuant to the March 12, 2020 Declaration of
Emergency, or dissolution or lifting of the Declaration of
Emergency itself, to facilitate the State’s response to the
COVID-19 pandemic.
COVID-19 cases increased at a significant rate in November and
December 2021 with the arrival of the Omicron variant, but then
sharply dropped off as we started 2022. As a result, our curbside
and delivery programs have now returned to approximately 20% of
total dispensary revenue. In addition, COVID-19 restrictions and
mask mandates have ceased. The number of customers and transactions
at our dispensary have increased from 64,886 for the three months
ending November 30, 2021 to 83,744 for the three months ending
November 30, 2022. This increase in customer traffic of 18,858
visits represents a 29% increase over the same period last year.
The average amount of each purchase per visit has decreased from
$55.03 for the three months ending November 30, 2021 to $44.93 for
the three months ending November 30, 2022, largely due to an
increase in competitive pricing at other dispensaries which have
forced us to reduce our prices and offer deeper discounts.
Our supply chain remains challenging at times with respect to our
purchases on non-cannabis items; the purchase of cannabis-related
items has returned to normal and prices for wholesale cannabis trim
have fallen below pre-pandemic levels. In recent months the labor
market has been very tight for us. Although we have been able to
employ sufficient staff to maintain operations at a normal level,
wage increases have averaged about 15% annually in order for us to
do so.
The gradual return to more normal operations from the COVID-19
pandemic is continuing to evolve and the ways that our business may
respond to meet the needs of our customers cannot, at this time, be
fully known.
Results of Operations for the Three Months Ended November 30,
2022 and November 30, 2021
The table below sets forth our select expenses as a percentage of
revenue for the applicable periods:
|
|
|
Three Months
Ended
|
|
|
Three Months
Ended
|
|
|
|
|
November 30, 2022
|
|
|
November 30, 2021
|
|
|
Revenue
|
|
|
100 |
%
|
|
|
100 |
%
|
|
Cost of Goods Sold
|
|
|
51 |
%
|
|
|
50 |
%
|
|
Gross Margin
|
|
|
49 |
%
|
|
|
50 |
%
|
|
Selling, General, and Administrative Expenses
|
|
|
58 |
%
|
|
|
56 |
%
|
|
Gain on Settlement of Notes Receivable
|
|
|
0 |
%
|
|
|
10 |
%
|
|
Loss on Extinguishment of Debt
|
|
|
110 |
%
|
|
|
- |
|
|
Provision for Income Tax
|
|
|
9 |
%
|
|
|
3 |
%
|
The table below sets forth certain statistical and financial
highlights for the applicable periods:
|
|
|
Three Months
Ended
|
|
|
Three Months
Ended
|
|
|
|
|
November 30, 2022
|
|
|
November 30, 2021
|
|
|
Number of Customers Served (Dispensary)
|
|
|
83,744 |
|
|
|
64,886 |
|
|
Revenue
|
|
$ |
6,074,177 |
|
|
$ |
5,414,002 |
|
|
Gross Profit
|
|
$ |
3,002,444 |
|
|
$ |
2,729,812 |
|
|
Gain on Note Receivable
|
|
$ |
- |
|
|
$ |
522,246 |
|
|
Loss on Extinguishment of Debt
|
|
$ |
(6,659,359 |
)
|
|
|
- |
|
|
Net (Loss) Income
|
|
$ |
(8,215,954 |
)
|
|
$ |
(345,472 |
)
|
|
EBITDA (1)
|
|
$ |
(6,850,100 |
)
|
|
$ |
382,268 |
|
|
|
(1)
|
|
EBITDA is a non-GAAP financial performance measures and should not
be considered as alternatives to net income(loss) or any other
measure derived in accordance with GAAP. This non-GAAP measure has
limitations as an analytical tool and should not be considered in
isolation or as substitutes for analysis of our financial results
as reported in accordance with GAAP. Because not all companies use
identical calculations, these presentations may not be comparable
to other similarly titled measures of other companies. As required
by the rules of the SEC, we provide below a reconciliation of this
non-GAAP financial measure contained herein to the most directly
comparable measure under GAAP. Management believes that EBITDA
provides relevant and useful information, which is widely used by
analysts, investors and competitors in our industry as well as by
our management. By providing this non-GAAP profitability measure,
management intends to provide investors with a meaningful,
consistent comparison of our profitability measures for the periods
presented.
|
Reconciliation of net loss for the three months ended November 30,
2022 and 2021 to EBITDA:
|
|
|
Three Months
Ended
November 30, 2022
|
|
|
Three Months
Ended
November 30, 2021
|
|
|
Net Loss attributable to CLS Holdings, Inc.
|
|
$ |
(8,215,954 |
)
|
|
$ |
(345,472 |
)
|
|
Add:
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
$ |
608,905 |
|
|
$ |
407,880 |
|
|
Provision for income taxes
|
|
$ |
516,691 |
|
|
$ |
140,717 |
|
|
Depreciation and amortization
|
|
$ |
240,258 |
|
|
$ |
179,143 |
|
|
EBITDA
|
|
$ |
(6,850,100 |
)
|
|
$ |
382,268 |
|
Revenues
We had revenue of $6,074,177 during the three months ended November
30, 2022, an increase of $660,175, or 12%, compared to revenue of
$5,414,002 during the three months ended November 30, 2021. Our
cannabis dispensary accounted for $3,792,804, or 62%, of our
revenue for the three months ended November 30, 2022, an increase
of $201,405, or 6%, compared to $3,591,399 during the three months
ended November 30, 2021. Dispensary revenue increased during the
second quarter of fiscal year 2023 because our average sales per
day increased from $39,466 during the second quarter of fiscal year
2022 to $41,679 during the second quarter of fiscal year 2023. Our
cannabis production accounted for $2,281,373, or 38%, of our
revenue for the three months ended November 30, 2022, an increase
of $458,770 or 25%, compared to $1,822,603 for the three months
ended November 30, 2021. The increase in production revenues for
the second quarter of fiscal year 2023 was primarily due to an
increase in our THC distillate sales of almost $1,000,000, as well
as sales to 10 new dispensaries and significant increases in
existing customer order size and frequency. These improvements
occurred as a result of our addition of a new sales director, an
improvement in our product mix, the introduction of new products,
and the procurement of higher quality materials. The increase was
also due to greater revenue from third parties for whom we
manufactured and processed products.
Cost of Goods Sold
Our cost of goods sold for the three months ended November 30, 2022
was $3,071,733, an increase of $387,543, or 14%, compared to cost
of goods sold of $2,684,190 for the three months ended November 30,
2021. The increase in cost of goods sold for the three months ended
November 30, 2022 was due primarily to an increase in revenue and
more aggressive competitive discounts. Cost of goods sold was 51%
of sales during the three months ended November 30, 2022 resulting
in a gross margin of 49%. Cost of goods sold was 50% for the three
months ended November 30, 2021 resulting in a gross margin of 50%.
Costs of goods sold as a percentage of revenue increased due to
aggressive pricing in response to a very competitive market. Gross
margin was slightly under our target of 50% for the second quarter
of fiscal year 2023. Cost of goods sold during the second quarter
of the 2023 fiscal year primarily consisted of $2,697,590 of
product cost, $200,942 of state and local fees and taxes, and
$132,426 of supplies and materials.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, or SG&A,
increased by $453,126, or approximately 15%, to $3,505,559 during
the three months ended November 30, 2022, compared to $3,052,433
for the three months ended November 30, 2021. The increase in
SG&A expenses for the three months ended November 30, 2022 was
primarily due to increases in costs associated with operating the
Oasis LLCs.
SG&A expense during the three months ended November 30, 2022
was primarily attributable to an aggregate of $2,801,960 in costs
associated with operating the Oasis LLCs, an increase of $320,320
compared to $2,481,640 during the second quarter of fiscal 2022.
The major components of the $320,320 increase in SG&A
associated with the operation of the Oasis LLCs during the three
months ended November 30, 2022 compared to the three months ended
November 30, 2021 were as follows: payroll and related costs of
$1,412,510 compared to $1,140,962; lease, facilities and office
costs of $671,449 compared to $635,038; professional fees of
$241,594 compared to $58,143; depreciation and amortization of
$165,961 compared to $103,927;and taxes and licenses of $108,248
compared to $26,175. Payroll costs increased during the second
quarter of fiscal 2023 primarily due to increases in salaries of
our employees related to the national labor shortage and due to an
increase in the number of employees in our manufacturing division
as we planned for the rollout of our pre-roll division. Payroll
costs also increased due to costs incurred in connection with our
response to COVID-19. Lease, facilities and office costs increased
due to our efforts to prepare our facilities for the new pre-roll
division by purchasing equipment and implementing compliance
procedures applicable to this new division. Lease, facilities and
office costs also increased due to costs incurred in connection
with our response to COVID-19. Professional fees increased
primarily due to legal fees related to regulatory compliance
issues. Travel increased due to tribal visits in New Mexico and
Northern Nevada. These increases were partially offset by a
decrease in sales and marketing costs of $165,679 due to a
concerted effort to reduce professional outsourced marketing
programs.
Finally, SG&A increased by $132,806 during the three months
ended November 30, 2022 as a result of an increase in the expenses
associated with the ongoing implementation of other aspects of our
business plan and our general corporate overhead to $703,599 from
$570,793 during the three months ended November 30, 2021. The major
components of this inecrease compared to the second quarter of
fiscal 2022 was an increase in professional fees to $538,761
compared to $264,444 in the previous period due to increased legal
fees. The Company is actively disputing the amount of fees charged
by our prior legal counsel.
Loss on Extinguishment of Debt
During the three months ended November 30, 2022, certain of our
convertible debentures were amended to (i) permit mandatory
conversion of $11,343,619 in principal plus $189,061 in accrued
interest into units at a reduced rate of $0.285 per unit; (ii)
decrease the conversion price of the remaining debentures to $0.40
per unit; (iii) reduce the mandatory conversion VWAP provision from
$2.40 to $0.80; and (iv) change the maturity date so that half of
the remaining balance matures on December 31, 2023 and the
remaining on December 31, 2024. We recognized a loss on the
amendment of the debt in the amount of $6,659,359 in connection
with these amendments during the second quarter of fiscal 2023.
There was no comparable transaction in the prior year.
Gain on Settlement of Debt
During the three months ended November 30, 2022, our U.S.
Convertible Debenture 4 in the amount $599,101 in principal and
accrued interest in the amount of $3,283, went into default. We
entered into a forbearance agreement with the lender, whereby we
would pay the amount of $600,000 in installments beginning in
November of 2022 through August of 2023. As a result of this
agreement, we recognized a gain on the settlement of debt in the
amount of $2,384. There is no comparable transaction in the prior
period.
Gain on Settlement of Note Receivable
During the three months ended November 30, 2022, we recorded a gain
on the settlement of the IGH Settlement Note in the amount of $0
compared to $522,246 for the first half of fiscal 2022. This gain
on the settlement arose after IGH notified us on February 27, 2021,
that it did not plan to make further payments in accordance with
the terms of the IGH Note on the theory that the Break-Up Fee
excused such additional payments. We vehemently disagreed and
litigation ensued. On June 14, 2021, the parties to the IGH lawsuit
entered into a confidential settlement agreement to resolve the
action and executed the $3,000,000 IGH Settlement Note. Pursuant to
the IGH Settlement Note, IGH paid us $1,000,000 on or before July
21, 2021. The remaining $2,000,000 and accrued interest was paid in
12 equal monthly installments, and the final installment was paid
in July 2022.
Loss on Equity Investment
During the three months ended November 30, 2022, we had income on
equity investment in the amount of $80,319; there was no comparable
transaction in the prior period. The Company, through its 50% owned
subsidiary Kealii Okamalu, owns a one-third interest in the Quinn
River Joint Venture. The second quarter of fiscal 2023 loss
represents our share of the results of the Quinn River Joint
Venture. The Quinn River Joint Venture completed its first harvest
during the three months ended November 30, 2022, and the Company
purchased inventory in the amount of $952,124 from the Quinn River
Joint Venture.
Interest Expense, Net
Our interest expense was $608,905 for the three months ended
November 30, 2022, an increase of $201,025, or 49%, compared to
$407,880 for the three months ended November 30, 2021. The increase
in interest expense was primarily due to the original issue
discount associated with the 2021 Debentures in the amount of
$185,081 which was amortized to interest expense during the three
months ended November 30, 2022. There was no comparable charge
during the second quarter of the prior fiscal year. In addition,
the increase in net interest expense for the second quarter of
fiscal 2023 was due to an increase in interest expense of $20,450
in connection with the 2021 Debentures in the principal amount of
$2,500,000 (net of original issue discount of $1,875,000), which we
issued in the November 2021 Debenture Offering. The increase in net
interest expense for the second quarter of fiscal 2023 was
partially offset by a decrease in the amortization of discounts on
debentures in the amount of $4,506.
Provision for Income Taxes
We recorded a provision for income taxes in the amount of $516,691
during the three months ended November 30, 2022 compared to
$140,717 during the three months ended November 30, 2021. Although
we have net operating losses that we believe are available to us to
offset this entire tax liability, which arises under Section 280E
of the Code because we are a cannabis company, as a conservative
measure, we have accrued this liability.
Net Loss
Our net loss for the three months ended November 30, 2022 was
$8,205,367compared to a net loss of $348,972 for the three months
ended November 30, 2022, an increase of $7,856,395, or 2,251%. The
net loss amount was primarily due to a one-time entry of $6,815,402
for the Loss on Extinguishment of Debt resulting from the debt
restructuring and the conversion of $11,523,680 of debt to
equity.
Non-Controlling Interest
During the three months ended November 30, 2022 and 2021, the loss
(income) associated with the non-controlling interest in Kealii
Okamalu was ($10,587) and $3,500, respectively. This amount is
comprised of the third-party portion of the operating loss of the
Quinn River Joint Venture and our loss on equity investment.
Net Loss Attributable to CLS Holdings USA, Inc.
Our net loss attributable to CLS Holdings USA, Inc. for the three
months ended November 30, 2022 was $8,215,954 compared to a net
loss of $345,472 for the three months ended November 30, 2021, a
decrease of $7,870,482 or 2,278%.
Results of Operations for the Six Months Ended November 30, 2022
and November 30, 2021
The table below sets forth our select expenses as a percentage of
revenue for the applicable periods:
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
November 30, 2022
|
|
|
November 30, 2021
|
|
|
Revenue
|
|
|
100 |
%
|
|
|
100 |
%
|
|
Cost of Goods Sold
|
|
|
50 |
%
|
|
|
48 |
%
|
|
Gross Margin
|
|
|
50 |
%
|
|
|
52 |
%
|
|
Selling, General, and Administrative Expenses
|
|
|
55 |
%
|
|
|
54 |
%
|
|
Gain on Settlement of Notes Receivable
|
|
|
3 |
%
|
|
|
16 |
%
|
|
Loss on Extinguishment of Debt
|
|
|
55 |
%
|
|
|
- |
|
|
Provision for Income Tax
|
|
|
9 |
%
|
|
|
4 |
%
|
The table below sets forth certain statistical and financial
highlights for the applicable periods:
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
November 30, 2022
|
|
|
November 30, 2021
|
|
|
Number of Customers Served (Dispensary)
|
|
|
166,688 |
|
|
|
129,978 |
|
|
Revenue
|
|
$ |
12,119,104 |
|
|
$ |
10,914,712 |
|
|
Gross Profit
|
|
$ |
6,044,641 |
|
|
$ |
5,626,055 |
|
|
Gain on Note Receivable
|
|
$ |
(348,165 |
)
|
|
$ |
(1,696,328 |
)
|
|
Net (Loss) Income
|
|
$ |
(9,364,432 |
)
|
|
$ |
82,127 |
|
|
Loss on Extinguishment of Debt
|
|
$ |
6,659,359 |
|
|
$ |
- |
|
|
EBITDA (1)
|
|
$ |
(6,475,888 |
)
|
|
$ |
1,734,111 |
|
|
|
(1)
|
|
EBITDA is a non-GAAP financial performance measures and should not
be considered as an alternative to net income(loss) or any other
measure derived in accordance with GAAP. This non-GAAP measure has
limitations as an analytical tool and should not be considered in
isolation or as substitutes for analysis of our financial results
as reported in accordance with GAAP. Because not all companies use
identical calculations, these presentations may not be comparable
to other similarly titled measures of other companies. As required
by the rules of the SEC, we provide below a reconciliation of this
non-GAAP financial measure contained herein to the most directly
comparable measure under GAAP. Management believes that EBITDA
provides relevant and useful information, which is widely used by
analysts, investors and competitors in our industry as well as by
our management. By providing this non-GAAP profitability measure,
management intends to provide investors with a meaningful,
consistent comparison of our profitability measures for the periods
presented.
|
Reconciliation of net loss for the six months ended November 30,
2022 and 2021 to EBITDA:
|
|
|
Six Months Ended
November 30, 2022
|
|
|
Six Months Ended
November 30, 2021
|
|
|
Net Loss attributable to CLS Holdings, Inc.
|
|
$ |
(9,364,432 |
)
|
|
$ |
82,127 |
|
|
Add:
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
$ |
1,375,575 |
|
|
$ |
826,472 |
|
|
Provision for income taxes
|
|
$ |
1,035,776 |
|
|
$ |
469,057 |
|
|
Depreciation and amortization
|
|
$ |
477,193 |
|
|
$ |
356,455 |
|
|
EBITDA
|
|
$ |
(6,475,888 |
)
|
|
$ |
1,734,111 |
|
Revenues
We had revenue of $12,119,104 during the six months ended November
30, 2022, an increase of $1,204,392, or 11%, compared to revenue of
$10,914,712 during the six months ended November 30, 2021. Our
cannabis dispensary accounted for $7,681,361, or 63%, of our
revenue for the six months ended November 30, 2022, an increase of
$344,387, or 5%, compared to $7,336,974 during the six months ended
November 30, 2021. Dispensary revenue increased during the first
half of fiscal year 2023 because our average sales per day
increased from $40,093 during the first half of fiscal year 2022 to
$41,975 during the first half of fiscal year 2023. Our cannabis
production accounted for $4,437,743, or 37%, of our revenue for the
six months ended November 30, 2022, an increase of $860,005 or 24%,
compared to $3,577,738 for the six months ended November 30, 2021.
The increase in production revenues for the first half of fiscal
year 2023 was primarily due to an increase in our THC distillate
sales of almost $1,000,000, as well as sales to 10 new dispensaries
and significant increases in existing customer order size and
frequency. These improvements occurred as a result of our addition
of a new sales director, an improvement in our product mix, the
introduction of new products, and the procurement of higher quality
materials. The increase was also due to greater revenue from third
parties for whom we manufactured and processed their products.
Cost of Goods Sold
Our cost of goods sold for the six months ended November 30, 2022
was $6,074,463, an increase of $785,806, or 15%, compared to cost
of goods sold of $5,288,657 for the six months ended November 30,
2021. The increase in cost of goods sold for the six months ended
November 30, 2022 was due primarily to an increase in revenue and
more aggressive competitive discounts. Cost of goods sold was 50%
of sales during the six months ended November 30, 2022 resulting in
a gross margin of 50%. Cost of goods sold was 48% for the six
months ended November 30, 2021 resulting in a gross margin of 52%.
Costs of goods sold as a percentage of revenue increased due to
aggressive pricing in response to a very competitive market. Gross
margin met our target of 50% for the first half of fiscal year
2023. Cost of goods sold during the first half of the 2023 fiscal
year primarily consisted of $5,333,84 of product cost, $399,203 of
state and local fees and taxes, and $283,933 of supplies and
materials.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, or SG&A,
increased by $759,634, or approximately 13%, to $6,707,861 during
the six months ended November 30, 2022, compared to $5,948,227 for
the six months ended November 30, 2021. The increase in SG&A
expenses for the six months ended November 30, 2022 was primarily
due to increases in costs associated with operating the Oasis
LLCs.
SG&A expense during the six months ended November 30, 2022 was
primarily attributable to an aggregate of $5,488,789 in costs
associated with operating the Oasis LLCs, an increase of $647,953
compared to $4,840,836 during the first half of fiscal 2022. The
major components of the $647,953 increase in SG&A associated
with the operation of the Oasis LLCs during the six months ended
November 30, 2022 compared to the six months ended November 30,
2021 were as follows: payroll and related costs of $2,826,346
compared to $2,142,613; lease, facilities and office costs of
$1,371,903 compared to $1,157,255; professional fees of $391,826
compared to $146,513; depreciation and amortization of $327,517
compared to $205,285; and travel of $176,970 compared to $145,178.
Payroll costs increased during the first half of fiscal 2023
primarily due to increases in salaries of our employees related to
the national labor shortage and due to an increase in the number of
employees in our manufacturing division as we planned for the
rollout of our pre-roll division. Lease, facilities and office
costs increased due to our efforts to prepare our facilities for
the new pre-roll division by purchasing equipment and implementing
compliance procedures applicable to this new division. Professional
fees increased primarily due to legal fees related to the
restructuring of debt and the implementation of a reverse stock
split. Travel increased due to tribal visits in New Mexico and
Northern Nevada. These increases were partially offset by a
decrease in sales and marketing costs of $397,448 due to a
concerted effort to reduce professional outsourced marketing
programs.
Finally, SG&A increased by $111,681 during the six months ended
November 30, 2022 as a result of an increase in the expenses
associated with the ongoing implementation of other aspects of our
business plan and our general corporate overhead to $1,219,073 from
$1,107,392 during the six months ended November 30, 2021. The major
component of this increase compared to the first half of fiscal
2022 was due to increased legal fees. The Company is actively
disputing the amount of fees charged by our prior legal
counsel.
Loss on Equity Investment
During the six months ended November 30, 2022, we had a loss on
equity investment in the amount of $154,111; there was no
comparable transaction in the prior period. The Company, through
its 50% owned subsidiary Kealii Okamalu, owns a one-third interest
in the Quinn River Joint Venture. The Quinn River Joint Venture
completed its first harvest during the three months ended November
30, 2022, and the Company purchased inventory in the amount of
$952,124 from the Quinn River Joint Venture.
Gain on Settlement of Note Receivable
During the six months ended November 30, 2022, we recorded a gain
on the settlement of the IGH Settlement Note in the amount of
$348,165 compared to $1,696,328 for the first half of fiscal 2022.
This gain on the settlement arose after IGH notified us on February
27, 2021, that it did not plan to make further payments in
accordance with the terms of the IGH Note on the theory that the
Break-Up Fee excused such additional payments. We vehemently
disagreed and litigation ensued. On June 14, 2021, the parties to
the IGH lawsuit entered into a confidential settlement agreement to
resolve the action and executed the $3,000,000 IGH Settlement Note.
Pursuant to the IGH Settlement Note, IGH paid us $1,000,000 on or
before July 21, 2021. The remaining $2,000,000 and accrued interest
was paid in 12 equal monthly installments, and the final
installment was paid in July 2022.
Loss on Extinguishment of Debt
During the six months ended November 30, 2022, certain of our
convertible debentures were amended to: (i) permit mandatory
conversion of $11,343,619 in principal plus $189,061 in accrued
interest into units at a reduced rate of $0.285 per unit; (ii)
decrease the conversion price of the remaining debentures to $0.40
per unit; (iii) reduce the mandatory conversion VWAP provision from
$2.40 to $0.80; (iv) change the maturity date so that half of the
remaining balance matures on December 31, 2023 and the remaining on
December 31, 2024. We recognized a loss on the amendment of the
debt in the amount of $6,659,359 in connection with these
amendments during the first half of fiscal 2023. There was no
comparable transaction in the prior year.
Gain on Settlement of Debt
During the six months ended November 30, 2022, our U.S. Convertible
Debenture 4 in the amount $599,101 in principal and accrued
interest in the amount of $3,283, went into default. We entered
into a forbearance agreement with the lender, whereby we would pay
the amount of $600,000 in installments beginning with a $150,000
payment on November 2, 2022 and $50,000 payments each month
thereafter through August of 2023. As a result of this agreement,
we recognized a gain on the settlement of debt in the amount of
$2,384. There is no comparable transaction in the prior period.
Interest Expense, Net
Our interest expense was $1,375,575 for the six months ended
November 30, 2022, an increase of $549,103, or 66%, compared to
$826,472 for the six months ended November 30, 2021. The increase
in interest expense was primarily due to the original issue
discount associated with the 2021 Debentures in the amount of
$370,162 which was amortized to interest expense during the six
months ended November 30, 2022. There was no comparable charge
during the first half of the prior fiscal year. In addition, the
increase in net interest expense for the first half of fiscal 2023
was due to an increase in interest expense of $195,051 in
connection with the 2021 Debentures in the principal amount of
$2,500,000 (net of original issue discount of $1,875,000), which we
issued in the November 2021 Debenture Offering. The increase in net
interest expense for the first half of fiscal 2023 was partially
offset by a decrease in the amortization of discounts on debentures
in the amount of $16,110.
Provision for Income Taxes
We recorded a provision for income taxes in the amount of
$1,035,776 during the six months ended November 30, 2022 compared
to $469,057 during the six months ended November 30, 2021. Although
we have net operating losses that we believe are available to us to
offset this entire tax liability, which arises under Section 280E
of the Code because we are a cannabis company, as a conservative
measure, we have accrued this liability.
Net Loss
Our net loss for the six months ended November 30, 2022 was
$9,537,492 compared to a net income of $78,627 for the six months
ended November 30, 2022, a decrease of $9,049,400, or 1,652%. The
net loss amount was primarily due to a one-time entry of $6,659,359
for the Loss on Extinguishment of Debt resulting from the debt
restructuring and the conversion of $11,523,680 of debt to
equity.
Non-Controlling Interest
During the six months ended November 30, 2022 and 2021, income
(loss) associated with the non-controlling interest in Kealii
Okamalu was $173,060 and $3,500, respectively. This amount is
composed of the third-party portion of the operating loss of the
Quinn River Joint Venture and our loss on equity investment.
Net Loss Attributable to CLS Holdings USA, Inc.
Our net loss attributable to CLS Holdings USA, Inc. for the six
months ended November 30, 2022 was $9,364,432 compared to a net
income of $82,127 for the six months ended November 30, 2021, a
decrease of $9,446,559, or 11,502%.
Liquidity and Capital Resources
The following table summarizes our total current assets,
liabilities and working capital at November 30, 2022 and May 31,
2022:
|
|
|
November 30,
|
|
|
May 31,
|
|
|
|
|
2022
|
|
|
2022
|
|
|
Current Assets
|
|
$ |
6,976,780 |
|
|
$ |
6,883,557 |
|
|
Current Liabilities
|
|
$ |
11,454,374 |
|
|
$ |
28,112,190 |
|
|
Working Capital (Deficit)
|
|
$ |
(4,477,594 |
)
|
|
$ |
(21,228,633 |
)
|
At November 30, 2022, we had a working capital deficit of
$4,477,594, a decrease of $16,751,039 from the working capital
deficit of $21,228,633 we had at May 31, 2022. Our working capital
increased primarily due to the restructuring of debenture
agreements whereby (i) the current principal and interest in the
aggregate amount of $11,532,679 was converted to common stock, and
(ii) the principal in the aggregate amount of $7,506,102 was
converted to long term liabilities. Working capital also increased
due to an increase in inventory in the amount of $1,458,054. Our
working capital increase was partially offset by an increase in our
accrued potential tax liability in the amount of $1,035,776 as a
result of the calculation of our tax liability under 280E, which
can change based on the deductibility of applicable expenses and is
not necessarily tied to operating income.
We recently completed the first harvest of the Quinn River Joint
Venture and have been selling the products derived from that
initial harvest since October of 2022. Our partner in Kealii
Okamalu has not yet contributed its capital contribution and we
have advanced additional amounts to cover this cash need. We
believe that once we sell the initial crop from the Quinn River
Joint Venture, which is expected to occur by the end of the third
quarter of fiscal 2023, our liquidity will improve significantly;
however, we cannot yet estimate when, or if, our partner will make
the required capital contributions. If our partner fails to make
the required capital contributions we will take control and
ownership of our partners interest in Kealii Okamalu (among other
remedies) in lieu of the contributions that should have been made
by the partner. Until these issues are resolved, we may utilize
short-term financing through the 2022 Financing Agreement and our
Short-Term Financing Agreement. Although we have been able to
secure such financing so far, there can be no assurance that we
will be able to continue to secure such financing if we continue to
need it.
In September 2022, we successfully refinanced all but one of the
U.S. Convertible Debentures and all of the Canaccord Debentures so
that 60% of them were converted into equity and the balance of them
mature in equal portions in December 2023 and December 2024.
Although our revenues are expected to grow as we expand our
operations, we only achieved net income for the first time during
our first quarter of fiscal 2022 and we have experienced net losses
since such time. Nonetheless, as a result of the debt restructuring
and the competition of the first harvest of the Quinn River Joint
Venture, we believe we will have funds sufficient to sustain our
operations at their current level, or if we require additional
cash, we expect to obtain the necessary funds as described above;
however, our prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in
the cannabis business. To address these risks, we must, among other
things, seek growth opportunities through investments and
acquisitions in our industry, successfully execute our business
strategy and successfully navigate the COVID-19 business
environment in which we currently operate as well as any changes
that may arise in the cannabis regulatory environment. We cannot
assure that we will be successful in addressing such risks, and the
failure to do so could have a material adverse effect on our
business prospects, financial condition and results of
operations.
Cash flows used in operating activities were $1,821,312 during the
six months ended November 30, 2022, an increase of $293,982, or
approximately 19%, compared to $1,527,330 during the six months
ended November 30, 2021. In deriving cash flows used in operating
activities from the net losses for the first half of fiscal 2023
and the first half of fiscal 2022, certain non-cash items were
(deducted from) or added back to the net loss for each such period.
These amounts were $7,334,224 and $(1,304,248) for the six months
ended November 30, 2022 and 2021, respectively. For the first half
of fiscal year 2023, the most significant item deducted from the
net loss was $348,165 related to the gain on settlement of the IGH
Settlement Note; compared to $1,696,328 during the first half of
fiscal 2022. For the first half of fiscal year 2023, the most
significant item added to the net loss was $6,659,359 related to
the loss on extinguishment of debt. There is no comparable
transaction during the first half of fiscal 2022.
Finally, our cash used in operating activities was affected by
changes in the components of working capital. The amounts of the
components of working capital fluctuate for a variety of reasons,
including management’s expectation of required inventory levels;
the amount of accrued interest, both receivable and payable; the
amount of prepaid expenses; the amount of accrued compensation and
other accrued liabilities; our accounts payable and accounts
receivable balances; and the capitalization of right of use assets
and liabilities associated with operating leases. The overall net
change in the components of working capital resulted in an increase
in cash from operating activities in the amount of $133,925 during
the six months ended November 30, 2022, compared to a decrease in
cash from operating activities of $301,709 during the first half of
fiscal 2022. The more significant changes for the first half of
fiscal 2023 were as follows: inventory increased during first half
of fiscal 2023 by $1,458,054, compared to an increase of $1,013,127
during the first half of the prior fiscal year because of increased
inventory levels necessary to support increased sales; tax
liability increased by $1,035,776 during the first half of fiscal
2023, compared to $469,057 during the first half of the prior year
as we accrued potential taxes in connection with Section 280E of
the tax code; accounts receivable increased by $387,057 during the
first half of fiscal 2023 compared to an increase of $115,060
during the first half of prior fiscal year due to an increase in
revenue; and operating lease liability decreased by $161,153 during
the first quarter of fiscal 2023 compared to $139,983 during the
first quarter of prior fiscal year as certain leases were
renegotiated resulting in lower monthly amortization.
Cash flows used by investing activities were $33,268 for the six
months ended November 30, 2022, a decrease of $1,491,581, or 102%,
compared to cash flow provided by investing activities of
$1,458,313 during the six months ended November 30, 2021. This
decrease was primarily due to payments for our investment in the
Quinn River Joint Venture of $242,957, and payments to acquire
property, plant and equipment of $138,476, all of which occurred in
the first half of fiscal 2023. The decrease was partially offset by
our receipt of principal payments on the IGH Settlement Note in the
amount of $348,165 during the six months ended November 30, 2022,
compared to our receipt of $1,696,328 during the six months ended
November 30, 2021.
Cash flows provided by financing activities were $111,313 for the
six months ended November 30, 2022, an increase of $173,489, or
279%, compared to cash flow used in financing activities of $62,176
during the six months ended November 30, 2021. This increase was
primarily due to proceeds from loans payable in the amount of
$1,717,115. This increase was partially offset by principal
payments we made on loans payable in the amount $1,371,309,
principal payments on convertible notes payable in the amount of
$200,000, and principal payments on our equipment financing lease
obligations of $34,493.
Third Party Debt
The table below summarizes the status of our third party debt,
excluding our short term receivables-based debt facilities and
reflects whether such debt remains outstanding, has been repaid, or
has been converted into or exchanged for our common stock:
|
Name of Note
|
|
Original
Principal Amount
|
|
Outstanding
or Repaid
|
|
Payment Details
|
|
|
|
|
|
|
|
|
|
|
Oasis Note
|
|
$
|
4,000,000
|
|
Repaid
|
|
Repaid
|
|
|
|
|
|
|
|
|
|
|
2018 U.S. Convertible Debentures
|
|
$
|
365,991
|
|
Outstanding
|
|
Repaid
|
|
|
|
|
|
|
|
|
|
|
Amended and Restated 2018 U.S. Convertible Debentures
|
|
$
|
2,252,229
|
|
Outstanding
|
|
Half due on December 31, 2023 and half due on December 31, 2024
|
|
|
|
|
|
|
|
|
|
|
2018 Convertible Debentures
|
|
$
|
5,253,872
|
|
Outstanding
|
|
Half due December 31, 2023 and half due December 31, 2024
|
|
|
|
|
|
|
|
|
|
|
2021 Debentures*
|
|
$
|
2,500,000
|
|