UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
or
Commission File Number:
(Exact name of registrant as specified in its charter)
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| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
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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 |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated filer ☐ | Accelerated filer ☐ |
| | Smaller reporting company |
| Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐
State the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:
CLS HOLDINGS USA, INC.
FORM 10-Q
Quarterly Period Ended February 28, 2022
TABLE OF CONTENTS
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| AVAILABLE INFORMATION | 3 | |
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PART I. FINANCIAL INFORMATION |
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Item 1. |
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Condensed Consolidated Balance Sheets as of February 28, 2022 (Unaudited) and May 31, 2021 (audited) |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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PART II. OTHER INFORMATION |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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EXPLANATORY NOTE
Unless otherwise noted, references in this report to “CLS Holdings USA, Inc.,” the “Company,” “we,” “our” or “us” means CLS Holdings USA, Inc. and its subsidiaries.
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements relate to, among other things, the impact of the COVID-19 virus on our business, the results of our initiatives to retain our employees and strengthen our relationships with our customers and community during the pandemic, the effect of our initiatives to expand market share and achieve growth during and following the pandemic, results of operations and financial performance, anticipated future events, and the effectiveness of our business practices during the pandemic. The continued spread of COVID-19 could have, and in some cases already has had, an adverse impact on our business, operations and financial results, including through disruptions in our cultivation and processing activities, supply chains and sales channels, and retail dispensary operations as well as a deterioration of general economic conditions including a possible national or global recession. Due to the uncertainties associated with the continued spread of COVID-19 and the timing of vaccinations, it is not possible to estimate its impact on our business, operations or financial results; however, the impact could be material. These forward-looking statements also relate to our ability to finance our operations, identify, finance and close potential acquisitions and joint ventures, market acceptance of our services and product offerings, our ability to protect and commercialize our intellectual property, our ability to use net operating losses to offset certain cannabis-related tax liabilities and our ability to grow our wholesale and processing businesses and joint ventures. In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “will,” “should,” “intends,” “expects,” “plans,” “goals,” “projects,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these terms or other comparable terminology.
These forward-looking statements are only predictions, are uncertain and involve substantial known and unknown risks, uncertainties and other factors which may cause our (or our industry’s) actual results, levels of activity or performance to be materially different from any expected future results, levels of activity or performance expressed or implied by these forward-looking statements.
We cannot guarantee future results, levels of activity or performance. You should not place undue reliance on these forward-looking statements, which speak only as of the date that they were made. These cautionary statements should be considered together with any written or oral forward-looking statements that we may issue in the future. Except as required by applicable law, we do not intend to update any of the forward-looking statements to conform these statements to reflect actual results, later events or circumstances or to reflect the occurrence of unanticipated events.
AVAILABLE INFORMATION
We file certain reports under the Securities Exchange Act of 1934 (the “Exchange Act”). Such filings include annual and quarterly reports. The reports we file with the Securities and Exchange Commission (“SEC”) are available on the SEC’s website at (http://www.sec.gov).
Item 1. Financial Statements.
CLS HOLDINGS USA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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February 28, |
May 31, |
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2022 |
2021 |
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ASSETS |
(unaudited) |
(audited) |
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Current assets |
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Cash and cash equivalents |
$ | $ | ||||||
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Accounts Receivable |
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Inventory |
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Prepaid expenses and other current assets |
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Total current assets |
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| Property, plant and equipment, net of accumulated depreciation of $ |
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Right of use assets, operating leases |
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| Intangible assets, net of accumulated amortization of $ |
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Goodwill |
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Other assets |
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Total assets |
$ | $ | ||||||
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LIABILITIES AND STOCKHOLDERS' DEFICIT |
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Current liabilities |
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Accounts payable and accrued liabilities |
$ | $ | ||||||
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Accrued interest, current |
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Loan payable |
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Lease liability - operating leases, current |
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Taxes Payable |
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| Convertible notes payable - current, net of discount of $ |
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Total current liabilities |
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Noncurrent liabilities |
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Lease liability - operating leases, non-current |
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| Notes payable, net of discount of $ |
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| Convertible notes payable - long term, net of discount of $ |
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Total Liabilities |
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Commitments and contingencies |
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Stockholder's deficit |
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Additional paid-in capital |
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Common stock subscribed |
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Accumulated deficit |
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Stockholder's deficit attributable to CLS Holdings, Inc. |
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Non-controlling interest |
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Total stockholder's deficit |
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Total liabilities and stockholders' deficit |
$ | $ | ||||||
See accompanying notes to these financial statements.
CLS HOLDINGS USA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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For the |
For the |
For the |
For the |
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Three Months Ended |
Three Months Ended |
Nine Months Ended |
Nine Months Ended |
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February 28, 2022 |
February 28, 2021 |
February 28, 2022 |
February 28, 2021 |
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Revenue |
$ | $ | $ | $ | ||||||||||||
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Cost of goods sold |
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Gross margin |
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Selling, general and administrative expenses |
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Total operating expenses |
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Operating loss |
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Other (income) expense: |
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Interest expense, net |
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Impairment of note receivable |
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Gain on settlement of note receivable |
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Total other (income) expense |
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Loss before income taxes |
( |
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( |
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( |
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( |
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Provision for income tax |
( |
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Net loss |
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( |
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Non-controlling interest |
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Net loss attributable to CLS Holdings, Inc. |
$ | ( |
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$ | ( |
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$ | ( |
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$ | ( |
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Net loss per share – basic and diluted |
$ | ( |
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$ | ( |
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$ | ( |
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$ | ( |
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Weighted average shares outstanding – basic and diluted |
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See accompanying notes to these financial statements.
CLS HOLDINGS USA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(Unaudited)
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Common Stock |
Paid In |
Stock |
Accumulated |
Non-controlling |
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Amount |
Value |
Capital |
Payable |
Deficit |
interest |
Total |
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Balance, May 31, 2020 |
$ | $ | $ | $ | ( |
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Common stock to be issued to officer |
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Common stock issued to officer from stock payable |
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Common stock to be issued to consultant |
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- | - | ( |
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Net loss for the nine months ended February 28, 2021 |
- | - | - | - | ( |
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- | ( |
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Balance, February 28, 2021 (unaudited) |
$ | $ | $ | $ | ( |
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$ | - | $ | ( |
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Balance, May 31, 2021 |
$ | $ | $ | $ | ( |
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$ | - | $ | ( |
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Common stock issued for conversion of debt |
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Common stock to be issued to employee |
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Fair value of warrants issued with debenture offering |
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Net loss for the nine months ended February 28, 2022 |
- | - | - | - | ( |
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( |
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Balance, February 28, 2022 (unaudited) |
$ | $ | $ | $ | ( |
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$ | ( |
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$ | ( |
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See accompanying notes to these financial statements.
CLS HOLDINGS USA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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For the |
For the |
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Nine Months Ended |
Nine Months Ended |
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February 28, 2022 |
February 28, 2021 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net loss |
$ | ( |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Fair value of shares cancelled |
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Amortization of debt discounts |
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Fair value of shares vested by officers |
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Gain on settlement of note receivable |
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Impairment of note receivable |
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Depreciation and amortization expense |
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Bad debt expense |
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Changes in assets and liabilities: |
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Accounts receivable |
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Prepaid expenses and other current assets |
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Inventory |
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Interest receivable |
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Right of use asset |
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Accounts payable and accrued expenses |
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Accrued interest |
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Funds held in escrow |
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Deferred tax liability |
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Operating lease liability |
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Net cash used in operating activities |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Payments to purchase property, plant and equipment |
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Cash paid for construction deposit on grow facility |
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Proceeds from collection of note receivable |
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Net cash provided by investing activities |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Proceeds from loan payable |
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Repayments of loans payable |
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Proceeds from debenture offering |
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Principal payments on notes payable |
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Net cash used in financing activities |
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Net decrease in cash and cash equivalents |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
$ | $ | ||||||
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
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Interest paid |
$ | $ | ||||||
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Income taxes paid |
$ | $ | ||||||
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NONCASH INVESTING AND FINANCING ACTIVITIES: |
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Capitalized interest on convertible debentures |
$ | $ | ||||||
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Shares issued for conversion of notes payable |
$ | $ | ||||||
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Shares issued for services issued from stock payable |
$ | $ | ||||||
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Initial ROU asset and lease liability |
$ | $ | ||||||
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Original issue discount on notes payable |
$ | $ | ||||||
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Fair value of warrants issued with debenture offering |
$ | $ | ||||||
See accompanying notes to these financial statements.
CLS HOLDINGS USA, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2022
(Unaudited)
Note 1 – Nature of Business and Significant Accounting Policies
Basis of Presentation
These financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States and are expressed in US dollars. The Company has adopted a fiscal year end of May 31st.
Principals of Consolidation
The accompanying consolidated financial statements include the accounts of CLS Holdings USA, Inc., and its direct and indirect wholly owned operating subsidiaries, CLS Nevada, Inc., (“CLS Nevada”), CLS Labs, Inc. (“CLS Labs”), CLS Labs Colorado, Inc. (“CLS Colorado”), CLS Massachusetts, Inc. (“CLS Massachusetts”), and Alternative Solutions, LLC (“Alternative Solutions”), and its
Nature of Business
CLS Holdings USA, Inc. (the “Company”) was originally incorporated as Adelt Design, Inc. (“Adelt”) on March 31, 2011 to manufacture and market carpet binding art. Production and marketing of carpet binding art never commenced.
On November 12, 2014, CLS Labs acquired
On April 29, 2015, the Company, CLS Labs and CLS Merger Inc., a Nevada corporation and wholly owned subsidiary of CLS Holdings (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) and completed a merger, whereby CLS Merger Inc. merged with and into CLS Labs, with CLS Labs remaining as the surviving entity (the “Merger”). Upon the consummation of the Merger, the shares of the common stock of CLS Holdings owned by CLS Labs were extinguished and the former stockholders of CLS Labs were issued an aggregate of
The Company has been issued a U.S. patent with respect to its proprietary method of extracting cannabinoids from cannabis plants and converting the resulting cannabinoid extracts into concentrates such as oils, waxes, edibles and shatter. These concentrates may be ingested in a number of ways, including through vaporization via electronic cigarettes (“e-cigarettes”), and used for a variety of pharmaceutical and other purposes. Internal testing of this extraction method and conversion process has revealed that it produces a cleaner, higher quality product and a significantly higher yield than the cannabinoid extraction processes currently existing in the marketplace. The Company has not commercialized its patented proprietary process or otherwise earned any revenues from it. The Company plans to generate revenues through licensing, fee-for-service and joint venture arrangements related to its patented proprietary method of extracting cannabinoids from cannabis plants and converting the resulting cannabinoid extracts into saleable concentrates.
On December 4, 2017, the Company and Alternative Solutions, entered into a Membership Interest Purchase Agreement (the “Acquisition Agreement”), as amended, for the Company to acquire the Oasis LLCs from Alternative Solutions. Pursuant to the Acquisition Agreement, the Company initially contemplated acquiring all of the membership interests in the Oasis LLCs from Alternative Solutions. Just prior to closing, the parties agreed that the Company would instead acquire all of the membership interests in Alternative Solutions, the parent of the Oasis LLCs, from its members, and the membership interests in the Oasis LLCs owned by members other than Alternative Solutions.
Pursuant to the Acquisition Agreement, the Company paid a non-refundable deposit of $
On October 31, 2018, the Company, CLS Massachusetts, Inc., a Massachusetts corporation and a wholly-owned subsidiary of the Company (“CLS Massachusetts”), and In Good Health, Inc., a Massachusetts corporation (“IGH”), entered into an Option Agreement (the “IGH Option Agreement”). Under the terms of the IGH Option Agreement, CLS Massachusetts had an exclusive option to acquire all of the outstanding capital stock of IGH (the “IGH Option”) during the period beginning on the earlier of the date that is one year after the effective date of the conversion and December 1, 2019 and ending on the date that was 60 days after such date. If CLS Massachusetts exercised the IGH Option, the Company, a wholly-owned subsidiary of the Company and IGH would enter into a merger agreement (the form of which had been agreed to by the parties) (the “IGH Merger Agreement”). At the effective time of the merger contemplated by the IGH Merger Agreement, CLS Massachusetts would pay a purchase price of $
On June 14, 2021, the parties to the IGH lawsuit entered into a confidential settlement agreement to resolve the action and a secured promissory note dated and executed by IGH in favor of the Company effective on June 11, 2021 (the “IGH Settlement Note”). Pursuant to the IGH Settlement Note, IGH shall pay the Company $
On August 24, 2021, the Company formed Kealii Okamalu, LLC, a Nevada limited liability company. The Company and an additional investor each acquired a
On January 4, 2018, the former Attorney General, Jeff Sessions, rescinded the memorandum issued by former Deputy Attorney General James Cole on August 29, 2013 (as amended on February 14, 2014, the “Cole Memo”), the Cole Banking Memorandum, and all other related Obama-era DOJ cannabis enforcement guidance. While the rescission did not change federal law, as the Cole Memo and other DOJ guidance documents were not themselves laws, the rescission removed the DOJ’s formal policy that state-regulated cannabis businesses in compliance with the Cole Memo guidelines should not be a prosecutorial priority. Notably, former Attorney General Sessions’ rescission of the Cole Memo has not affected the status of the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) memorandum issued by the Department of Treasury, which remains in effect. This memorandum outlines Bank Secrecy Act-compliant pathways for financial institutions to service state-sanctioned cannabis businesses, which echoed the enforcement priorities outlined in the Cole Memo. In addition to his rescission of the Cole Memo, Attorney General Sessions issued a one-page memorandum known as the “Sessions Memorandum”. The Sessions Memorandum explains the DOJ’s rationale for rescinding all past DOJ cannabis enforcement guidance, claiming that Obama-era enforcement policies are “unnecessary” due to existing general enforcement guidance adopted in the 1980s, in chapter 9.27.230 of the U.A. Attorneys’ Manual (“USAM”). The USAM enforcement priorities, like those of the Cole Memo, are based on the use of the federal government’s limited resources and include “law enforcement priorities set by the Attorney General,” the “seriousness” of the alleged crimes, the “deterrent effect of criminal prosecution,” and “the cumulative impact of particular crimes on the community.” Although the Sessions Memorandum emphasizes that cannabis is a federally illegal Schedule I controlled substance, it does not otherwise instruct U.S. Attorneys to consider the prosecution of cannabis-related offenses a DOJ priority, and in practice, most U.S. Attorneys have not changed their prosecutorial approach to date. However, due to the lack of specific direction in the Sessions Memorandum as to the priority federal prosecutors should ascribe to such cannabis activities, there can be no assurance that the federal government will not seek to prosecute cases involving cannabis businesses that are otherwise compliant with state law.
William Barr served as United States Attorney General from February 14, 2019 to December 23, 2020. The DOJ under Mr. Barr did not take a formal position on federal enforcement of laws relating to cannabis. On March 11, 2021, United States President Biden’s nominee, Merrick Garland was sworn in as the U.S. Attorney General. During his campaign, President Biden stated a policy goal to decriminalize possession of cannabis at the federal level, but he has not publicly supported the full legalization of cannabis. It is unclear what impact, if any, the new administration will have on U.S. federal government enforcement policy on cannabis. Nonetheless, there is no guarantee that the position of the Department of Justice will not change.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassification
Certain amounts in the prior period have been reclassified to conform to the current period presentation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less to be cash equivalents. The Company had cash and cash equivalents of $
Allowance for Doubtful Accounts
The Company generates the majority of its revenues and corresponding accounts receivable from the sale of cannabis, and cannabis related products. The Company evaluates the collectability of its accounts receivable considering a combination of factors. In circumstances where it is aware of a specific customer’s inability to meet its financial obligations to it, the Company records a specific reserve for bad debts against amounts due in order to reduce the net recognized receivable to the amount it reasonably believe will be collected. For all other customers, the Company recognizes reserves for bad debts based on past write-off experience and the length of time the receivables are past due. The Company had $
Inventory
Inventories are stated at the lower of cost or market. Cost is determined using a perpetual inventory system whereby costs are determined by acquisition costs of individual items included in inventory. Market is determined based on net realizable value. Appropriate consideration is given to obsolescence, excessive levels, deterioration, and other factors in evaluating net realizable values. Our cannabis products consist of prepackaged purchased goods ready for resale, along with produced edibles and extracts developed under our production license.
Property, Plant and Equipment
Property and equipment is recorded at the lower of cost or estimated net recoverable amount, and is depreciated using the straight-line method over its estimated useful life. Property acquired in a business combination is recorded at estimated initial fair value. Property, plant, and equipment are depreciated using the straight-line method based on the lesser of the estimated useful lives of the assets or the lease term based upon the following life expectancy:
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Years |
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Office equipment |
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Furniture & fixtures |
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Machinery & equipment |
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Leasehold improvements |
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Repairs and maintenance expenditures are charged to operations as incurred. Major improvements and replacements, which extend the useful life of an asset, are capitalized and depreciated over the remaining estimated useful life of the asset. When assets are retired or sold, the cost and related accumulated depreciation are eliminated and any resulting gain or loss is reflected in operations.
Long-Lived Assets
The Company reviews its property and equipment and any identifiable intangibles including goodwill for impairment on an annual basis utilizing the guidance set forth in the Statement of Financial Accounting Standards Board ASC 350 “Intangibles – Goodwill and Other” and ASC 360 “Property, Plant, and Equipment.” At February 28, 2022, the net carrying value of goodwill on the Company’s balance sheet remained at $
Comprehensive Income
ASC 220-10-15 “Reporting Comprehensive Income,” establishes standards for reporting and displaying of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, ASC 220-10-15 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company does not have any items of comprehensive income in any of the periods presented.
Non-Controlling Interests
The Company reports “non-controlling interest in subsidiary” as a component of equity, separate from parent’s equity, on the Consolidated Balance Sheets. In addition, the Company’s Consolidated Statements of Operations includes “net income (loss) attributable to non-controlling interest.”
Variable Interest Entities
The Company’s consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and variable interest entities (“VIE”), where the Company is the primary beneficiary under the provisions of ASC 810, Consolidation (“ASC 810”). A VIE must be consolidated by its primary beneficiary when, along with its affiliates and agents, the primary beneficiary has both: (i) the power to direct the activities that most significantly impact the VIE’s economic performance; and (ii) the obligation to absorb losses or the right to receive the benefits of the VIE that could potentially be significant to the VIE. The Company reconsiders whether an entity is still a VIE only upon certain triggering events and continually assesses its consolidated VIEs to determine if it continues to be the primary beneficiary. See “Note 3 – Joint Ventures” for additional information on the Company’s VIEs.
Concentrations of Credit Risk
The Company maintains its cash in bank deposit accounts and other accounts, the balances of which at times may be uninsured or exceed federally insured limits. From time to time, some of the Company’s funds are also held by escrow agents; these funds may not be federally insured. The Company continually monitors its banking relationships and consequently has not experienced any losses in such accounts.
Advertising and Marketing Costs
All costs associated with advertising and promoting products are expensed as incurred. Total recognized advertising and marketing expenses were $
Research and Development
Research and development expenses are charged to operations as incurred. Total recognized research and development expenses were $
Fair Value of Financial Instruments
Pursuant to Accounting Standards Codification (“ASC”) No. 825 - Financial Instruments, the Company is required to estimate the fair value of all financial instruments included on its balance sheets. The carrying amounts of the Company’s cash and cash equivalents, notes receivable, convertible notes payable, accounts payable and accrued expenses, none of which is held for trading, approximate their estimated fair values due to the short-term maturities of those financial instruments.
A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable, either directly or indirectly.
Level 3 - Significant unobservable inputs that cannot be corroborated by market data.
Revenue Recognition
Revenue from the sale of cannabis products is recognized by Oasis at the point of sale, at which time payment is received. Management estimates an allowance for sales returns.
The Company also recognizes revenue from Serenity Wellness Products LLC and Serenity Wellness Growers LLC, d/b/a City Trees (“City Trees”). City Trees recognizes revenue from the sale of the following cannabis products and services to licensed dispensaries, cultivators and distributors within the State of Nevada:
|
● |
Premium organic medical cannabis sold wholesale to licensed retailers |
|
● |
Recreational marijuana cannabis products sold wholesale to licensed distributors and retailers |
|
● |
Extraction products such as oils and waxes derived from in-house cannabis production |
|
● |
Processing and extraction services for licensed medical cannabis cultivators in Nevada |
|
● |
High quality cannabis strains in the form of vegetative cuttings for sale to licensed medical cannabis cultivators in Nevada |
Effective June 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from commercial sales of products and licensing agreements by applying the following steps: (1) identifying the contract with a customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to each performance obligation in the contract; and (5) recognizing revenue when each performance obligation is satisfied. For the comparative periods, revenue has not been adjusted and continues to be reported under ASC 605 — Revenue Recognition. Under ASC 605, revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the performance of the service has been rendered to a customer or delivery has occurred; (3) the amount of fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably assured. There was no impact on the Company’s financial statements as a result of adopting Topic 606 for the three and nine months ended February 28, 2022 and 20201
Disaggregation of Revenue
The following table represents a disaggregation of revenue for the three and nine months ended February 28, 2022 and 2021:
|
For the Nine |
For the Nine |
|||||||
|
Months Ended |
Months Ended |
|||||||
|
February 28, 2022 |
February 28, 2021 |
|||||||
|
Cannabis Dispensary |
||||||||
|
Cannabis Production |
||||||||
| $ | $ | |||||||
|
For the Three |
For the Three |
|||||||
|
Months Ended |
Months Ended |
|||||||
|
February 28, 2022 |
February 28, 2021 |
|||||||
|
Cannabis Dispensary |
||||||||
|
Cannabis Production |
||||||||
| $ | $ | |||||||
Basic and Diluted Earnings or Loss Per Share
Basic net earnings per share is based on the weighted average number of shares outstanding during the period, while fully diluted net earnings per share is based on the weighted average number of shares of common stock and potentially dilutive securities assumed to be outstanding during the period using the treasury stock method. Potentially dilutive securities consist of options and warrants to purchase common stock, and convertible debt. Basic and diluted net loss per share are computed based on the weighted average number of shares of common stock outstanding during the period. At February 28, 2022 and 2021, the Company had the following potentially dilutive instruments outstanding: At February 28, 2022, a total of
The Company uses the treasury stock method to calculate the impact of outstanding stock options and warrants. Stock options and warrants for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on earnings per common share and, accordingly, are excluded from the calculations.
A net loss causes all outstanding stock options and warrants to be anti-dilutive. As a result, the basic and dilutive losses per common share are the same for the three and nine months ended February 28, 2022 and for the three months ended February 28, 2021. For the nine months ended February 28, 2022, the Company excluded from the calculation of fully diluted earnings per share the following instruments which were anti-dilutive: shares issuable pursuant to the conversion of notes payable and accrued interest, and shares issuable pursuant to the exercise of stock options and warrants. The Company included 170,000 shares of common stock issuable in fully diluted earnings per share for the nine months ended February 28, 2022.
Income Taxes
The Company accounts for income taxes under the asset and liability method in accordance with ASC 740. The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The components of the deferred tax assets and liabilities are classified as current and non-current based on their characteristics. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations.
Section 280E of the Internal Revenue Code, as amended, prohibits businesses from deducting certain expenses associated with trafficking controlled substances (within the meaning of Schedule I and II of the Controlled Substances Act). The IRS has invoked Section 280E in tax audits against various cannabis businesses in the U.S. that are permitted under applicable state laws. Although the IRS has issued a clarification allowing the deduction of certain expenses, the bulk of operating costs and general administrative costs are generally not permitted to be deducted. The operations of certain of the Company’s subsidiaries are subject to Section 280E. This results in permanent differences between ordinary and necessary business expenses deemed non-deductible under IRC Section 280E. Therefore, the effective tax rate can be highly variable and may not necessarily correlate with pre-tax income or loss.
Commitments and Contingencies
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims brought to such legal counsel’s attention as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed.
Recent Accounting Pronouncements
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, current U.S. GAAP requires the performance of procedures to determine the fair value at the impairment testing date of assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, the amendments under this ASU require the goodwill impairment test to be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The ASU became effective for the Company on January 1, 2020. During the year ended May 31, 2020, the Company recorded an impairment of goodwill in the amount of $
There are various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
Note 2 – Going Concern
As shown in the accompanying financial statements, the Company has incurred net losses from operations resulting in an accumulated deficit of $
Note 3 – Joint Venture and Options Transaction
In Good Health
On October 31, 2018, the Company, CLS Massachusetts, and IGH, which converted to a for-profit corporation on November 6, 2018 (the “Conversion”), entered into the IGH Option Agreement. Under the terms of the IGH Option Agreement, CLS Massachusetts had an exclusive option to acquire all of the outstanding capital stock of IGH (the “IGH Option”) during the period beginning on the earlier of the date that was one year after the effective date of the Conversion and December 1, 2019, and ending on the date that was 60 days after such date (the “Option Period”). If CLS Massachusetts exercised the IGH Option, the Company, a wholly-owned subsidiary of the Company and IGH would enter into the IGH Merger Agreement (the form of which had been agreed to by the parties). At the effective time of the merger contemplated by the IGH Merger Agreement, CLS Massachusetts would pay a purchase price of $
On October 31, 2018, as consideration for the IGH Option, the Company made a loan to IGH (the “IGH Loan”), in the principal amount of $
On June 14, 2021, the parties to the IGH lawsuit entered into a confidential settlement agreement to resolve the action and the IGH Settlement Note. Pursuant to the IGH Settlement Note, IGH shall pay the Company $
Quinn River Joint Venture
On October 20, 2021, the Company entered into a management services agreement (the “Quinn River Joint Venture Agreement”) through its
The Company is the manager of and holds a 50% ownership interest in Kealii Okamalu. Kealii Okamalu is a VIE which the Company consolidates. The Quinn River Joint Venture is not a legal entity but rather a business operated by Kealii Okamalu. The Company uses the equity method of accounting to record one-third of the profit or loss generated by the Quinn River Joint Venture, which accrues to Kealii Okamalu. Since the Company is a 50% owner of Kealii Okamalu, 50% of the profit or loss of Kealii Okamalu is recorded as minority interest in the Company’s statement of operations.
During the nine months ended February 28, 2022, Kealii Okamalu made a deposit of $
Note 4 – Accounts Receivable
Accounts receivable was $
Note 5 – Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
|
February 28, 2022 |
May 31, 2021 |
|||||||
|
Deposits |
$ | $ | ||||||
|
Prepaid expenses |
||||||||
|
Other receivable |
||||||||
|
Total |
$ | $ | ||||||
Deposits consist of amounts paid in advance for the acquisition of property and equipment. Prepaid expenses consist primarily of annual license fees charged by the State of Nevada; these fees are paid in advance, and amortized over the one-year term of the licenses.
Note 6 – Inventory
Inventory, consisting of material, overhead, labor, and manufacturing overhead, is stated at the lower of cost (first-in, first-out) or market, and consists of the following:
|
February 28, |
May 31, |
|||||||
|
2022 |
2021 |
|||||||
|
Raw materials |
$ | $ | ||||||
|
Finished goods |
||||||||
|
Total |
$ | $ | ||||||
Raw materials consist of cannabis plants and the materials that are used in our production process prior to being tested and packaged for consumption. Finished goods consist of pre-packaged materials previously purchased from other licensed cultivators and our manufactured edibles and extracts.
Note 7 – Notes Receivable
IGH Note Receivable
On October 31, 2018, in connection with an option to purchase transaction (see note 4), the Company loaned $
By letter dated February 26, 2020, the Company informed IGH that as a result of its breaches of the IGH Option, which remained uncured, an event of default had occurred under the IGH Note. The Company advised IGH that it was electing to cause the IGH Note to bear interest at the default rate of
On June 14, 2021, the parties to the IGH lawsuit entered into a confidential settlement agreement to resolve the action and the IGH Settlement Note. Pursuant to the IGH Settlement Note, IGH shall pay the Company $
Note 8 – Property, Plant and Equipment
Property, plant and equipment consisted of the following at February 28, 2022 and May 31, 2021.
|
February 28, 2022 |
May 31, 2021 |
|||||||
|
Office equipment |
$ | $ | ||||||
|
Furniture and fixtures |
||||||||
|
Machinery & Equipment |
||||||||
|
Leasehold improvements |
||||||||
|
Less: accumulated depreciation |
( |
) |
( |
) |
||||
|
Property, plant, and equipment, net |
$ | $ | ||||||
The Company made payments in the amounts of $
Depreciation of property, plant, and equipment was $
Note 9 – Right to Use Assets and Liabilities – Operating Leases
The Company has operating leases for offices and warehouses. The Company’s leases have remaining lease terms of
The Company’s lease expense for the three and nine months ended February 28, 2022 was entirely comprised of operating leases and amounted to $
The Company has recorded total right to use assets of $
On October 20, 2021, pursuant to the Quinn River Joint Venture Agreement (see note 4), the Company, through Kealii Okamalu, entered into a lease agreement (the “Quinn River Lease”) for approximately 30 acres of land for purposes of building and operating a facility to grow cannabis. The lease has a term of
Right to use assets – operating leases are summarized below:
|
February 28, 2022 |
||||
|
Amount at inception of leases |
$ | |||
|
Amount amortized |
( |
) |
||
|
Balance – February 28, 2022 |
$ | |||
Operating lease liabilities are summarized below:
|
Amount at inception of leases |
$ | |||
|
Amount amortized |
( |
) |
||
|
Balance – February 28, 2022 |
$ |
|
Warehouse and offices |
$ | |||
|
Land |
||||
|
Office equipment |
||||
|
Balance – February 28, 2022 |
$ | |||
|
Lease liability |
$ | |||
|
Less: current portion |
( |
) |
||
|
Lease liability, non-current |
$ |
Maturity analysis under these lease agreements is as follows:
|
Twelve months ended February 28, 2023 |
$ | |||
|
Twelve months ended February 28, 2024 |
||||
|
Twelve months ended February 28, 2025 |
||||
|
Twelve months ended February 28, 2026 |
||||
|
Twelve months ended February 28, 2027 |
||||
|
Thereafter |
||||
|
Total |
$ | |||
|
Less: Present value discount |
( |
) |
||
|
Lease liability |
$ |
Note 10 – Intangible Assets
Intangible assets consisted of the following at February 28, 2022 and May 31, 2021:
|
February 28, 2022 |
||||||||||||
|
Gross |
Accumulated Amortization |
Net |
||||||||||
|
Intellectual Property |
$ | $ | ( |
) |
$ | |||||||
|
License & Customer Relations |
( |
) |
||||||||||
|
Tradenames - Trademarks |
( |
) |
||||||||||
|
Non-Compete Agreements |
( |
) |
||||||||||
|
Domain Names |
( |
) |
||||||||||
|
Total |
$ | $ | ( |
) |
$ | |||||||
|
May 31, 2021 |
||||||||||||
|
Gross |
Accumulated Amortization |
Net |
||||||||||
|
Intellectual Property |
$ | $ | ( |
) |
$ | |||||||
|
License & Customer Relations |
( |
) |
||||||||||
|
Tradenames - Trademarks |
( |
) |
||||||||||
|
Non-Compete Agreements |
( |
) |
||||||||||
|
Domain Names |
( |
) |
||||||||||
|
Total |
$ | $ | ( |
) |
$ | |||||||
Total amortization expense charged to operations for the three months ended February 28, 2022 and 2021 was $
|
Amount to be amortized during the twelve months ended February 28, |
||||
|
2023 |
$ | |||
|
2024 |
||||
|
2025 |
||||
|
2026 |
||||
|
2027 |
||||
|
Thereafter |
||||
| $ |
Note 11 – Goodwill
The Company recorded goodwill in the amount of $
Goodwill Impairment Test
The Company assessed its intangible assets as of May 31, 2020 for purposes of determining if an impairment existed as set forth in ASC 350 – Intangibles – Goodwill and Other and ASC 360 – Property Plant and Equipment. Pursuant to ASC 360, the Company recorded an impairment of goodwill in the amount of $
The Company also assessed its intangible assets as of May 31, 2021 for purposes of determining if an impairment existed as set forth in ASC 350 – Intangibles – Goodwill and Other and ASC 360 – Property Plant and Equipment. Pursuant to ASC 360, the Company determined that the fair value of its intangible assets exceeded the carrying value of goodwill for the year ended May 31, 2021. As a result, no impairment was recorded during the year ended May 31, 2021. At February 28, 2022, the net amount of goodwill on the Company’s balance sheet was $
Note 12 – Other Assets
Other assets consisted of the following at February 28, 2022 and May 31, 2021:
|
February 28, |
May 31, |
|||||||
|
2022 |
2021 |
|||||||
|
Security deposits |
$ | $ | ||||||
|
Construction deposit |
||||||||
| $ | $ | |||||||
Note 13 – Accounts Payable and Accrued Liabilities
Accrued accounts payable and accrued liabilities consisted of the following at February 28, 2022 and May 31, 2021:
|
February 28, 2022 |
May 31, 2021 |
|||||||
|
Trade accounts payable |
$ | $ | ||||||
|
Accrued payroll and payroll taxes |
||||||||
|
Accrued liabilities |
||||||||
|
Total |
$ | $ | ||||||
Note 14- Loan Payable
The Company is a party to an agreement with a lender to finance short term purchases of inventory (the “Short Term Financing Agreement”) for two of its subsidiaries. On November 9, 2021, the Company received cash in the amount of $
During the three months ended February 28, 2022, the Company received cash proceeds in the amount of $
Note 15 – Convertible Notes Payable
|
February 28, 2022 |
May 31, 2021 |
|||||||
| Convertible debenture in the principal amount of $ |
$ | $ | ||||||
| Convertible debenture in the principal amount of $ |
||||||||
|
February 28, 2022 |
May 31, 2021 |
|||||||
| Convertible debenture in the principal amount of $ |
||||||||
| Convertible debenture in the principal amount of $ |
||||||||
| Convertible debenture in the principal amount of $ |
||||||||
|
February 28, 2022 |
May 31, 2021 |
|||||||
| Convertible debenture payable in the principal amount of $ |
||||||||
| Convertible debentures payable in the aggregate principal amount of $ |
||||||||
|
Total - Convertible Notes Payable |
$ | $ | ||||||
|
Less: Discount |
) |
( |
) |
|||||
|
Convertible Notes Payable, Net of Discounts |
$ | $ | ||||||
|
February 28, 2022 |
May 31, 2021 |
|||||||
| Total - Convertible Notes Payable, Net of Discounts, Current Portion, net of discount of $ |
$ | $ | ||||||
| Total - Convertible Notes Payable, Net of Discounts, Long-term Portion, net of discount of $ |
$ | $ | ||||||
|
February 28, 2022 |
February 28, 2021 |
|||||||
|
Discounts on notes payable amortized to interest expense – 3 months ended February 28, 2022 and 2021, respectively |
$ | $ | ||||||
|
Discounts on notes payable amortized to interest expense – 9 months ended February 28, 2022 and 2021, respectively |
$ | $ |
Note 16- Notes Payable
|
February 28, 2022 |
May 31, 2021 |
|||||||
| Debenture in the principal amount of $ |
$ | $ | ||||||
| Debenture in the principal amount of $ |
||||||||
|
February 28, 2022 |
May 31, 2021 |
|||||||
| Debenture in the principal amount of $ |
||||||||
| Debenture in the principal amount of $ |
||||||||
| Debenture in the principal amount of $ |
||||||||
|
February 28, 2022 |
May 31, 2021 |
|||||||
| Debenture in the principal amount of $ |
||||||||
|
Total |
||||||||
|
Original Issue Discount |
||||||||
|
Notes Payable, Gross |
||||||||
|
Less: Discount |
( |
) |
||||||
|
Notes Payable, Net of Discount |
||||||||
|
February 28, 2022 |
February 28, 2021 |
|||||||
|
Discounts on notes payable amortized to interest expense – 3 months ended February 28, 2022 and 2021, respectively |
$ | $ | ||||||
|
Discounts on notes payable amortized to interest expense – 9 months ended February 28, 2022 and 2021, respectively |
$ | $ |
Aggregate maturities of notes payable and convertible notes payable as of February 28, 2022 are as follows:
For the twelve months ended February 28,
|
2023 |
$ | |||
|
2024 |
||||
|
2025 |
||||
|
2026 |
||||
|
2027 |
||||
|
Thereafter |
||||
|
Total |
$ |
During the nine months ended February 28, 2022, the Company offered for sale a maximum of $
Note 17 – Contingent Liability
The terms of the Company’s acquisition of Alternative Solutions, included a payment of $
The full amount of the bonus payment was earned, and on May 27, 2020, the Company made a payment in the amount of $
Note 18 – Stockholders’ Equity
The Company’s authorized capital stock consists of
Nine months ended February 28, 2022
Common Stock and Warrants Issued upon Conversion of Notes Payable:
On June 17, 2021, the Company issued
During the three months ended February 28, 2022, the Company granted
Nine months ended February 28, 2021
Common Stock Issued and To Be Issued to Officers and Service Providers:
During the nine months ended February 28, 2021, the Company charged an aggregate of $
During the nine months ended February 28, 2021, the Company recognized the cancellation of a consulting contract, which resulted in a credit to operations in the amount of $
During the nine months ended February 28, 2021, the Company recognized the cancellation of a consulting contract, which resulted in a credit to operations in the amount of $
During the nine months ended February 28, 2021, the Company recognized the issuance of
Warrants
The Company values warrants using the Black-Scholes valuation model utilizing the following variables. On March 31, 2021, the Company reduced the conversion price of the Canaccord Debentures from $
In April 2021, the Company amended $
From December 1, 2021 through January 4, 2022 the Company issued $
The following table summarizes the significant terms of warrants outstanding at February 28, 2022. This table does not include the unit warrants. See Unit Warrants section below.
|
Range of exercise Prices |
|
|
Number of warrants Outstanding |
|
|
Weighted average remaining contractual life (years) |
|
|
Weighted average exercise price of outstanding Warrants |
|
|
Number of warrants Exercisable |
|
|
Weighted average exercise price of exercisable Warrants |
|
||||||
|
$ |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
Transactions involving warrants are summarized as follows. This table does not include the unit warrants. See Unit Warrants section below.
|
Number of Shares |
Weighted Average Exercise Price |
|||||||
|
Warrants outstanding at May 31, 2020 |
$ | |||||||
|
Granted |
$ | |||||||
|
Exercised |
$ | |||||||
|
Cancelled / Expired |
( |
) |
$ | |||||
|
Warrants outstanding at May 31, 2021 |
$ | |||||||
|
Granted |
$ | |||||||
|
Exercised |
$ | |||||||
|
Cancelled / Expired |
( |
) |
$ | |||||
|
Warrants outstanding at February 28, 2022 |
$ | |||||||
Unit Warrants
In February and March 2018, in connection with the Westpark offering, the Company issued five-year warrants to purchase
On June 20, 2018, in connection with the special warrant offering, the Company issued Canaccord Genuity Corp.
On December 12, 2018, in connection with the issuance of the Canaccord Debentures, the Company issued Canaccord Genuity Corp. as compensation
Because the unit warrants are exercisable for Common Stock and warrants, they are not included in the warrant tables above.
Note 19 – Fair Value of Financial Instruments
The Company has issued convertible notes containing beneficial conversion features. One of the features is a ratchet reset provision which, in general, reduces the conversion price should the Company issue equity with an effective price per share that is lower than the stated conversion price in the note. The Company accounts for the fair value of the conversion feature in accordance with ASC 815- Accounting for Derivatives and Hedging and Emerging Issues Task Force (“EITF”) 07-05- Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock (“EITF 07-05”). The Company carries the embedded derivative on its balance sheet at fair value and accounts for any unrealized change in fair value as a component of its results of operations.
The following summarizes the Company’s financial liabilities that are recorded at fair value on a recurring basis at February 28, 2022 and May 31, 2021:
|
February 28, 2022 |
||||||||||||||||
|
Level 1 |
Level 2 |
Level 3 |
Total |
|||||||||||||
|
Liabilities |
||||||||||||||||
|
Derivative liabilities |
$ | $ | $ | $ | ||||||||||||
|
May 31, 2021 |
||||||||||||||||
|
Level 1 |
Level 2 |
Level 3 |
Total |
|||||||||||||
|
Liabilities |
||||||||||||||||
|
Derivative liabilities |
$ | $ | $ | $ | ||||||||||||
Note 20 – Related Party Transactions
As of February 28, 2022 and May 31, 2021, the Company had accrued salary due to Michael Abrams, a former officer of the Company prior to his September 1, 2015 termination, in the amount of $
Note 21 – Income Taxes
The following table summarizes the Company’s income tax accrued for the three and nine months ended February 28, 2022:
|
For the Three Months Ended February 28, 2022 |
For the Nine Months Ended February 28, 2022 |
|||||||
|
Loss before provision for income taxes |
$ | ( |
) |
$ | ( |
) |
||
|
Provision for income taxes |
$ | ( |
) |
$ | ( |
) |
||
|
Effective tax rate |
% |
% |
||||||
Due to the accrual of taxes related to Section 280E of the Internal Revenue Code, as amended, the Company has an uncertain tax accrual that is currently being expensed as a change in estimate. The Company has net operating losses that it believes are available to it to offset this expense; however, there can be no assurance under current interpretations of tax laws for cannabis companies that the Company will be allowed to use these net operating losses to offset Section 280E tax expenses.
Note 22 – Commitments and Contingencies
Lease Arrangements
The Company leases several facilities for office, warehouse, and retail space. Currently lease commitments are as follows:
|
| ● | A lease that commenced in February 2019 for |
|
| ● | A lease that commenced January 2018 for |
|
| ● | A lease that commenced in February 2019 for |
|
| ● | A lease that commenced in January 2016 for |
|
| ● | A lease that commenced on October 20, 2021 for approximately |
In connection with the Company’s planned Colorado operations, on April 17, 2015, pursuant to an Industrial Lease Agreement (the “Lease”), CLS Labs Colorado leased
In August 2017, the Company’s Colorado subsidiary received a demand letter from its Colorado landlord requesting the forfeiture of the $
Note 23 – Subsequent Events
The Company has evaluated events through the date of the financial statements and has determined that there were no additional material subsequent events.
A lease for office space located at 1718 Industrial Road, Las Vegas, NV 89102 was extended again on April 1, 2022, effective September 1, 2022, until August 31, 2024. The monthly rent will increase on September 1, 2022 to $
Subsequent to February 28, 2022, the Company has issued
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
HISTORY AND OUTLOOK
We were incorporated on March 31, 2011 as Adelt Design, Inc. to manufacture and market carpet binding art. Production and marketing of carpet binding art never commenced. On November 20, 2014, we adopted amended and restated articles of incorporation, thereby changing our name to CLS Holdings USA, Inc. Effective December 10, 2014, we effected a reverse stock split of our issued and outstanding common stock at a ratio of 1-for-0.625 (the “Reverse Split”), wherein 0.625 shares of our common stock were issued in exchange for each share of common stock issued and outstanding.
On April 29, 2015, the Company, CLS Labs and the Merger Sub consummated the Merger, whereby the Merger Sub merged with and into CLS Labs, with CLS Labs remaining as the surviving entity. As a result of the Merger, we acquired the business of CLS Labs and abandoned our previous business. As such, only the financial statements of CLS Labs are included herein.
CLS Labs was originally incorporated in the state of Nevada on May 1, 2014 under the name RJF Labs, Inc. before changing its name to CLS Labs, Inc. on October 24, 2014. It was formed to commercialize a proprietary method of extracting cannabinoids from cannabis plants and converting the resulting cannabinoid extracts into concentrates such as oils, waxes, edibles and shatter. These concentrates may be ingested in a number of ways, including through vaporization via electronic cigarettes (“e-cigarettes”), and used for a variety of pharmaceutical and other purposes. Testing in conjunction with two Colorado growers of this extraction method and conversion process has revealed that it produces a cleaner, higher quality product and a significantly higher yield than the cannabinoid extraction processes currently existing in the marketplace.
On April 17, 2015, CLS Labs took its first step toward commercializing its proprietary methods and processes by entering into agreements through its wholly owned subsidiary, CLS Labs Colorado, with certain Colorado entities. During 2017, we suspended our plans to proceed with the Colorado Arrangement due to regulatory delays and have not yet determined if or when we will pursue them again.
We have been issued a U.S. patent with respect to our proprietary method of extracting cannabinoids from cannabis plants and converting the resulting cannabinoid extracts into concentrates such as oils, waxes, edibles and shatter. These concentrates may be ingested in a number of ways, including through vaporization via electronic cigarettes, and used for a variety of pharmaceutical and other purposes. Internal testing of this extraction method and conversion process has revealed that it produces a cleaner, higher quality product and a significantly higher yield than the cannabinoid extraction processes currently existing in the marketplace. We have not yet commercialized our proprietary process. We plan to generate revenues through licensing, fee-for-service and joint venture arrangements related to our proprietary method of extracting cannabinoids from cannabis plants and converting the resulting cannabinoid extracts into saleable concentrates.
We intend to monetize our extraction and conversion method and generate revenues through (i) the licensing of our patented proprietary methods and processes to others, (ii) the processing of cannabis for others, and (iii) the purchase of cannabis and the processing and sale of cannabis-related products. We plan to accomplish this through the acquisition of companies, the creation of joint ventures, through licensing agreements, and through fee-for-service arrangements with growers and dispensaries of cannabis products. We believe that we can establish a position as one of the premier cannabinoid extraction and processing companies in the industry. Assuming we do so, we then intend to explore the creation of our own brand of concentrates for consumer use, which we would sell wholesale to cannabis dispensaries. We believe that we can create a “gold standard” national brand by standardizing the testing, compliance and labeling of our products in an industry currently comprised of small, local businesses with erratic and unreliable product quality, testing practices and labeling. We also plan to offer consulting services through Cannabis Life Sciences Consulting, LLC, which will generate revenue by providing consulting services to cannabis-related businesses, including growers, dispensaries and laboratories, and driving business to our processing facilities. Finally, we intend to grow through select acquisitions in secondary and tertiary markets, targeting newly regulated states that we believe offer a competitive advantage. Our goal at this time is to become a successful regional cannabis company.
On December 4, 2017, we entered into the Acquisition Agreement with Alternative Solutions to acquire the outstanding equity interests in the Oasis LLCs. Pursuant to the Acquisition Agreement, as amended, we paid a non-refundable deposit of $250,000 upon signing, which was followed by an additional payment of $1,800,000 on February 5, 2018, for an initial 10% of Alternative Solutions and each of the subsidiaries. At the closing of our purchase of the remaining 90% of the ownership interests in Alternative Solutions and the Oasis LLCs, which occurred on June 27, 2018, we paid the following consideration: $5,995,543 in cash, a $4.0 million promissory note due in December 2019, and $6,000,000 in shares of our common stock. The cash payment of $5,995,543 was less than the $6,200,000 payment originally contemplated because we assumed an additional $204,457 of liabilities. The Oasis Note, which was repaid in full in December 2019, was secured by all of the membership interests in Alternative Solutions and the Oasis LLCs and by the assets of the Oasis LLCs. At that time, we applied for regulatory approval to own an interest in the Oasis LLCs, which approval was received on June 21, 2018. Just prior to closing, the parties agreed that we would instead acquire all of the membership interests in Alternative Solutions, the parent of the Oasis LLCs, from its members, and the membership interests in the Oasis LLCs owned by members other than Alternative Solutions. We have applied for regulatory approval to own our interest in the Oasis LLCs through Alternative Solutions under the final structure of the transaction, which is currently under review.
On October 31, 2018, the Company, CLS Massachusetts, Inc., a Massachusetts corporation and a wholly-owned subsidiary of the Company (“CLS Massachusetts”), and In Good Health, Inc., a Massachusetts corporation (“IGH”), entered into an Option Agreement (the “IGH Option Agreement”). Under the terms of the IGH Option Agreement, CLS Massachusetts had an exclusive option to acquire all of the outstanding capital stock of IGH (the “IGH Option”) during the period beginning on the earlier of the date that is one year after the effective date of the conversion and December 1, 2019 and ending on the date that was 60 days after such date. If CLS Massachusetts exercised the IGH Option, the Company, a wholly-owned subsidiary of the Company and IGH would enter into a merger agreement (the form of which has been agreed to by the parties) (the “IGH Merger Agreement”). At the effective time of the merger contemplated by the IGH Merger Agreement, CLS Massachusetts would pay a purchase price of $47,500,000, subject to reduction as provided in the IGH Merger Agreement, payable as follows: $35 million in cash, $7.5 million in the form of a five-year promissory note, and $5 million in the form of restricted common stock of the Company, plus $2.5 million as consideration for a non-competition agreement with IGH’s President, payable in the form of a five-year promissory note. IGH and certain IGH stockholders holding sufficient aggregate voting power to approve the transactions contemplated by the IGH Merger Agreement had entered into agreements pursuant to which such stockholders had, among other things, agreed to vote in favor of such transactions. On October 31, 2018, as consideration for the IGH Option, we made a loan to IGH, in the principal amount of $5,000,000, subject to the terms and conditions set forth in that certain loan agreement, dated as of October 31, 2018 between IGH as the borrower and the Company as the lender. The loan was evidenced by a secured promissory note of IGH, which bore interest at the rate of 6% per annum and was to mature on October 31, 2021. To secure the obligations of IGH to us under the loan agreement and the promissory note, the Company and IGH entered into a security agreement dated as of October 31, 2018, pursuant to which IGH granted to us a first priority lien on and security interest in all personal property of IGH. If we did not exercise the Option on or prior to the date that was 30 days following the end of the option period, the loan amount was to be reduced to $2,500,000 as a break-up fee, subject to certain exceptions set forth in the IGH Option Agreement. On August 26, 2019, the parties amended the IGH Option Agreement to, among other things, delay the closing until January 2020. By letter agreement dated January 31, 2020, the parties extended the IGH Option Agreement to February 4, 2020. On February 4, 2020, CLS Massachusetts exercised the IGH Option and IGH subsequently asserted that CLS Massachusetts’ exercise was invalid. By letter dated February 26, 2020, we informed IGH that as a result of its breaches of the IGH Option, which remained uncured, an event of default had occurred under the IGH Note. We advised IGH that we were electing to cause the IGH Note to bear interest at the default rate of 15% per annum effective February 26, 2020 and to accelerate all amounts due under the IGH Note. On February 27, 2020, IGH informed CLS Massachusetts that it did not plan to make further payments under the IGH Note on the theory that the break-up fee excused additional payments. This dispute, including whether IGH breached the IGH Option and whether CLS was entitled to collect default interest, was in litigation. During the twelve months ended May 31, 2021, we impaired the remaining amounts due under the IGH Note in the amount of $2,498,706, which included $2,497,884 in principal and $822 in accrued interest. As of November 30, 2021, the principal balance of the IGH Note was $0 and the interest receivable was $0.
On June 14, 2021, the parties to the IGH lawsuit entered into a confidential settlement agreement to resolve the action and a secured promissory note dated and executed by IGH in favor of us and effective June 11, 2021 (the “IGH Settlement Note”). Pursuant to the IGH Settlement Note, IGH shall pay us $3,000,000, $1,000,000 of which was paid on or before July 12, 2021. The remaining $2,000,000 and accrued interest is being paid in 12 equal monthly installments, which began on August 12, 2021. During the three months ended February 28, 2022, we received $522,245 under the IGH Settlement Note, which included $500,000 in principal and $22,245 in accrued interest. During the nine months ended February 28, 2022, we received $2,218,572 under the IGH Settlement Note, which included $2,166,667 in principal and $51,905 in accrued interest. As of February 28, 2022, $833,333 was due under the IGH Settlement Note. We record amounts paid under the IGH Settlement Note as gains when payments are received.
On October 20, 2021, we entered into a management services agreement (the “Quinn River Joint Venture Agreement”) through our 50% owned subsidiary, Kealii Okamalu, LLC (“Kealii Okamalu”), with CSI Health MCD LLC (“CSI”) and a commission established by the authority of the Tribal Council of the Fort McDermitt Paiute and Shoshone Tribe (the “Tribe”). The purpose of the Quinn River Joint Venture Agreement is to establish a business (the “Quinn River Joint Venture”) to grow, cultivate, process and sell cannabis and related products. The Quinn River Joint Venture Agreement has a term of 10 years plus a 10 year renewal term from the date the first cannabis crop produced is harvested and sold. Pursuant to the Quinn River Joint Venture Agreement, Kealii Okamalu will lease approximately 30 acres of the Tribe’s land located along the Quinn River at a cost of $3,500 per month and manage the design, finance and construction of a cannabis cultivation facility on such tribal lands (the “Cultivation Facility”). Kealii Okamalu will also manage the ongoing operations of the Cultivation Facility and related business, including, but not limited to, cultivation of cannabis crops, personnel staffing, product packaging, testing, marketing and sales. Packaged products will be branded as “Quinn River Farms.” We will provide 10,000 square feet of warehouse space at our Las Vegas facility, and will have preferred vendor status including the right to purchase cannabis flower and the business’s cannabis trim at favorable prices. Kealii Okamalu will contribute $6 million towards the construction of the Cultivation Facility and the working capital for the Quinn River Joint Venture. This amount will be repaid from a portion of the net income of the Quinn River Joint Venture otherwise payable to CSI and the Tribe at the rate of $750,000 per quarter for eight quarters. Kealii Okamalu will receive one-third of the net profits of the Quinn River Joint Venture.
On January 4, 2018, former Attorney General Jeff Sessions rescinded the memorandum issued by former Deputy Attorney General James Cole on August 29, 2013 (as amended on February 14, 2014, the “Cole Memo”), the Cole Banking Memorandum, and all other related Obama-era DOJ cannabis enforcement guidance. While the rescission did not change federal law, as the Cole Memo and other DOJ guidance documents were not themselves laws, the rescission removed the DOJ’s formal policy that state-regulated cannabis businesses in compliance with the Cole Memo guidelines should not be a prosecutorial priority. Notably, former Attorney General Sessions’ rescission of the Cole Memo has not affected the status of the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) memorandum issued by the Department of Treasury, which remains in effect. This memorandum outlines Bank Secrecy Act-compliant pathways for financial institutions to service state-sanctioned cannabis businesses, which echoed the enforcement priorities outlined in the Cole Memo. In addition to his rescission of the Cole Memo, Attorney General Sessions issued a one-page memorandum known as the “Sessions Memorandum”. The Sessions Memorandum explains the DOJ’s rationale for rescinding all past DOJ cannabis enforcement guidance, claiming that Obama-era enforcement policies are “unnecessary” due to existing general enforcement guidance adopted in the 1980s, in chapter 9.27.230 of the U.A. Attorneys’ Manual (“USAM”). The USAM enforcement priorities, like those of the Cole Memo, are based on the use of the federal government’s limited resources and include “law enforcement priorities set by the Attorney General,” the “seriousness” of the alleged crimes, the “deterrent effect of criminal prosecution,” and “the cumulative impact of particular crimes on the community.” Although the Sessions Memorandum emphasizes that cannabis is a federally illegal Schedule I controlled substance, it does not otherwise instruct U.S. Attorneys to consider the prosecution of cannabis-related offenses a DOJ priority, and in practice, most U.S. Attorneys have not changed their prosecutorial approach to date. However, due to the lack of specific direction in the Sessions Memorandum as to the priority federal prosecutors should ascribe to such cannabis activities, there can be no assurance that the federal government will not seek to prosecute cases involving cannabis businesses that are otherwise compliant with state law.
William Barr served as United States Attorney General from February 14, 2019 to December 23, 2020. The DOJ under Mr. Barr did not take a formal position on federal enforcement of laws relating to cannabis. On March 11, 2021, United States President Biden’s nominee, Merrick Garland was sworn in as the U.S. Attorney General. During his campaign, President Biden stated a policy goal to decriminalize possession of cannabis at the federal level, but he has not publicly supported the full legalization of cannabis. It is unclear what impact, if any, the new administration will have on U.S. federal government enforcement policy on cannabis. Nonetheless, there is no guarantee that the position of the Department of Justice will not change.
We incurred a net loss of $15,890,514 for the year ended May 31, 2021, and net losses of $1,117,530 and $1,039,903 for the three and nine months ended February 28, 2022, respectively, resulting in an accumulated deficit of $92,736,638 as of May 31, 2021, which increased to $93,767,013 as of February 28, 2022. Although we achieved net income during the first quarter of fiscal 2022, these conditions continue to raise substantial doubt about our ability to continue as a going concern.
Recent Developments – COVID-19
On March 12, 2020, Governor Steven Sisolak declared a State of Emergency related to the COVID-19 global pandemic. This State of Emergency was initiated due to the multiple confirmed and presumptive cases of COVID-19 in the State of Nevada. On March 17, 2020, pursuant to the Declaration of Emergency, Governor Sisolak released the Nevada Health Response COVID-19 Risk Mitigation Initiative (“Initiative”). This Initiative provided guidance related to the March 12 Declaration of Emergency, requiring Nevadans to stay home and all nonessential businesses to temporarily close to the public for thirty (30) days. In the Initiative, it was declared that licensed cannabis stores and medical dispensaries could remain open only if employees and consumers strictly adhered to the social distancing protocols.
In light of the Initiative, Governor Sisolak issued Declaration of Emergency Directive 003 on March 20, 2020 which mandated retail cannabis dispensaries to operate as delivery only. On April 29, 2020, Governor Sisolak issued Declaration of Emergency Directive 016 which amended the cannabis section of Directive 003 and permitted licensed cannabis dispensaries to engage in retail sales on a curbside pickup or home delivery basis pursuant to guidance from the Cannabis Compliance Board. Through Directive 016, licensed cannabis dispensaries were able to begin curbside pickup on May 1, 2020 so long as the facility adhered to protocols developed by the Cannabis Compliance Board (“CCB”).
In accordance with Directive 016, the CCB released guidelines related to curbside pickup requiring all facilities wishing to offer curbside pickup to first submit and receive approval from the CCB. Serenity Wellness Center LLC developed the required procedures and submitted and received State approval on April 30, 2020 to conduct curbside pickup sales effective May 1, 2020. Further, the City of Las Vegas required cannabis facilities to obtain a temporary 30-day curbside pickup permit. Serenity Wellness Center LLC was issued its first temporary curbside pickup permit from the City of Las Vegas on May 1, 2020. Serenity Wellness Center LLC has subsequently received a temporary curbside permit every thirty (30) days thereafter. Upon expiration every 30 days, the City of Las Vegas reviews the licensee and determines if a new temporary permit shall be issued.
On May 7, 2020, Governor Sisolak issued Declaration of Emergency Directive 018. Directive 018 worked to reopen the State of Nevada as a part of Phase One of the Nevada United: Roadmap to Recovery Plan introduced by Governor Sisolak on April 30, 2020. Directive 018 provided that, in addition to curbside pickup or home delivery, licensed cannabis dispensaries could engage in retail sales on an in-store basis effective May 9, 2020, pursuant to guidance from the CCB. The CCB required facilities wishing to engage in limited in-store retail sales to submit Standard Operating Procedures and receive approval of the same. Serenity Wellness Center LLC developed the required procedures and submitted and received State approval on May 8, 2020 to conduct limited in-store retail sales effective May 9, 2020. The City of Las Vegas did not require a separate permit for limited in-store sales.
On July 31, 2020, Governor Sisolak issued Declaration of Emergency Directive 029 reaffirming The Nevada United: Roadmap to Recovery Plan. Directive 029 stated that all directives promulgated pursuant to the March 12, 2020 Declaration of Emergency or subsections thereof set to expire on July 31, 2020, would remain in effect for the duration of the current state of emergency unless terminated prior to that date by a subsequent directive or by operation of law associated with lifting the Declaration of Emergency. Further, Directive 029, having become effective at 11:59 PM on Friday, July 31, 2020 shall remain in effect until terminated by a subsequent directive promulgated pursuant to the March 12, 2020 Declaration of Emergency, or dissolution or lifting of the Declaration of Emergency itself, to facilitate the State’s response to the COVID-19 pandemic.
COVID-19 cases increased at a significant rate in November and December 2021 with the arrival of the Omicron variant, but then sharply dropped off as we started 2022. As a result, our curbside and delivery programs have now returned to approximately 20% of total dispensary revenue. The number of transactions at our dispensary have increased recently, although the amount of each transaction decreased slightly primarily as a result of the cessation of special federal unemployment benefits.
The global pandemic of COVID-19 continues to evolve and the ways that our business may evolve to respond to the pandemic and the needs of our customers cannot be fully known.
Results of Operations for the Three Months Ended February 28, 2022 and 2021
The table below sets forth our expenses as a percentage of revenue for the applicable periods:
|
Three Months Ended |
Three Months Ended |
Nine Months Ended |
Nine Months Ended |
|||||||||||||
|
February 28, 2022 |
February 28, 2021 |
February 28, 2022 |
February 28, 2021 |
|||||||||||||
|
Revenue |
100 |
% |
100 |
% |
100 |
% |
100 |
% |
||||||||
|
Cost of Goods Sold |
48 |
% |
55 |
% |
48 |
% |
49 |
% |
||||||||
|
Gross Margin |
52 |
% |
45 |
% |
52 |
% |
51 |
% |
||||||||
|
Selling, General, and Administrative Expenses |
63 |
% |
55 |
% |
57 |
% |
58 |
% |
||||||||
|
Interest expense, net |
11 |
% |
17 |
% |
9 |
% |
17 |
% |
||||||||
|
Impairment of note receivable |
- |
% |
55 |
% |
- |
% |
19 |
% |
||||||||
|
Gain on settlement of note receivable |
9 |
% |
- |
% |
13 |
% |
- |
% |
||||||||
The table below sets forth certain statistical and financial highlights for the applicable periods:
|
Three Months Ended |
Three Months Ended |
Nine Months Ended |
Nine Months Ended |
|||||||||||||
|
February 28, 2022 |
February 28, 2021 |
February 28, 2022 |
February 28, 2021 |
|||||||||||||
|
Number of Customers Served (Dispensary) |
66,016 | 62,753 | 195,994 | 184,129 | ||||||||||||
|
Revenue |
$ | 5,588,266 | $ | 4,554,082 | $ | 16,502,978 | $ | 13,232,840 | ||||||||
|
Gross Profit |
$ | 2,887,106 | $ | 2,055,176 | $ | 8,513,161 | $ | 6,745,751 | ||||||||
|
Net Loss Attributable to CLS Holdings USA, Inc. |
$ | (992,268 |
) |
$ | (3,712,772 |
) |
$ | (910,141 |
) |
$ | (5,707,184 |
) |
||||
|
EBITDA (1) |
$ | 100,595 | $ | (2,786,327 |
) |
$ | 1,834,716 | $ | (2,958,982 |
) |
||||||
|
|
(1) |
EBITDA is a non-GAAP financial performance measures and should not be considered as alternatives to net income(loss) or any other measure derived in accordance with GAAP. This non-GAAP measure has limitations as an analytical tool and should not be considered in isolation or as substitutes for analysis of our financial results as reported in accordance with GAAP. Because not all companies use identical calculations, these presentations may not be comparable to other similarly titled measures of other companies. As required by the rules of the SEC, we provide below a reconciliation of this non-GAAP financial measure contained herein to the most directly comparable measure under GAAP. Management believes that EBITDA provides relevant and useful information, which is widely used by analysts, investors and competitors in our industry as well as by our management. By providing this non-GAAP profitability measure, management intends to provide investors with a meaningful, consistent comparison of our profitability measures for the periods presented. |
Reconciliation of net loss for the three and nine months ended February 28, 2022 and 2021 to EBITDA for the three and nine months ended February 28, 2022 and 2021:
|
Three Months Ended |
Three Months Ended |
Nine Months Ended |
Nine Months Ended |
|||||||||||||
|
February 28, 2022 |
February 28, 2021 |
February 28, 2022 |
February 28, 2021 |
|||||||||||||
|
Net Income (Loss) Attributable to CLS Holdings USA, Inc. |
$ | (992,268 |
) |
$ | (3,712,772 |
) |
$ | (910,141 |
) |
$ | (5,707,184 |
) |
||||
|
Add: |
||||||||||||||||
|
Income tax |
$ | 324,265 | $ | - | $ | 793,322 | $ | - | ||||||||
|
Interest expense, net |
$ | 589,692 | $ | 757,740 | $ | 1,416,164 | $ | 2,237,166 | ||||||||
|
Depreciation and amortization |
$ | 178,906 | $ | 168,705 | $ | 535,361 | $ | 511,036 | ||||||||
|
EBITDA |
$ | 100,595 | $ | (2,786,327 |
) |
$ | 1,834,716 | $ | (2,958.982 |
) |
||||||
Three Months Ended February 28, 2022 and February 28, 2021
Revenues
We had revenue of $5,588,266 during the three months ended February 28, 2022, an increase of $1,044,184, or 23%, compared to revenue of $4,544,082 during the three months ended February 28, 2021. Our cannabis dispensary accounted for $3,333,229, or 60%, of our revenue for the three months ended February 28, 2022, a decrease of $50,910, or 2%, compared to $3,384,139 during the three months ended February 28, 2021. Dispensary revenue decreased during the third quarter of fiscal year 2022 reflecting the absence of federal unemployment payments to taxpayers in the community. Our cannabis production accounted for $2,255,037, or 40%, of our revenue for the three months ended February 28, 2022, an increase of $1,095,094, or 94%, compared to $1,159,943 for the three months ended February 28, 2021. The increase in production revenues for the third quarter of fiscal 2022 was primarily due to our addition of a new sales director, an improvement in our product mix, the introduction of new products, operating efficiencies and the procurement of higher quality materials. The increase was also due to greater revenue from third parties for whom we manufactured and processed their products.
Cost of Goods Sold
Our cost of goods sold for the three months ended February 28, 2022 was $2,701,160, an increase of $212,254, or 9%, compared to cost of goods sold of $2,488,906 for the three months ended February 28, 2021. The increase in cost of goods sold for the three months ended February 28, 2022 was due primarily to an increase in revenue. Cost of goods sold was 48% of sales during third quarter of fiscal 2022 resulting in a gross margin of 52%; cost of goods sold was 55% for the third quarter of fiscal 2021 resulting in a gross margin of 45%. Cost of goods sold as a percentage of revenue declined due to our utilization of low-cost high volume purchasing and a shift in product mix at City Trees to increased THC distillate sales, which are no-cost sales. Gross margin for the quarter did not exceeded our target of 50%. Cost of goods sold during the third quarter of fiscal 2022 primarily consisted of $2,418,531 of product cost, $200,102 of state and local fees and taxes, and $82,527 of supplies and materials.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, or SG&A, increased by $981,189, or approximately 39%, to $3,492,691 during the three months ended February 28, 2022, compared to $2,511,502 for the three months ended February 28, 2021. The increase in SG&A expenses for the three months ended February 28, 2022 was primarily due to increases in costs associates with operating the Oasis LLCs and offering expenses associated with the 2021 Debenture Offering.
SG&A expense during the third quarter of fiscal 2022 was primarily attributable to an aggregate of $2,576,817 in costs associated with operating the Oasis LLCs, an increase of $605,110 compared to $1,971,707 during the third quarter of fiscal 2021. The major components of the $605,110 increase in SG&A associated with the operation of the Oasis LLCs during the three months ended February 28, 2022 compared to the three months ended February 28, 2021 were as follows: lease, facilities and office costs were $662,294 compared to $381,763; and payroll and related costs were $1,220,960 compared to $989,837. Lease, facilities and office costs increased due to our efforts to prepare our facilities for the new pre-roll division by purchasing equipment and implementing compliance procedures applicable to this new division. Lease, facilities and office costs also increased during the third quarter of fiscal 2022 due to costs incurred in connection with our response to COVID-19. Payroll costs increased during the third quarter of fiscal 2022 primarily due to increases in salaries of our employees related to the national labor shortage and due to an increase in the number of employees in our manufacturing division as we planned for the rollout of our pre-roll division. Payroll costs also increased due to costs incurred in connection with our response to COVID-19.
Finally, SG&A increased by an aggregate of $376,079 during the third quarter of fiscal 2022 as a result of an increase in the expenses associated with the ongoing implementation of other aspects of our business plan and our general corporate overhead to an aggregate of $915,875, from $539,796 during the third quarter of fiscal 2021. The major components of this increase compared to the third quarter of fiscal 2022 were as follows: expenses related to the 2011 Debenture Offering were $411,298; and payroll and related costs increased by $53,787. These increases were partially offset by decreases in sales and marketing in the amount of $50,795 and professional fees in the amount of $28,012 during the third quarter of fiscal 2022.
Gain on Settlement of Note Receivable
During the three months ended February 28, 2022, we recorded a gain on the settlement of the IGH Note in the amount of $522,246; there was no comparable transaction during the third quarter of the prior fiscal year. This gain on the settlement arose after IGH notified us on February 27, 2021, that it did not plan to make further payments in accordance with the terms of the IGH Note on the theory that the Break-Up Fee excused such additional payments. On June 14, 2021, the parties to the IGH lawsuit entered into a confidential settlement agreement to resolve the action and executed the $3,000,000 IGH Settlement Note. Pursuant to the IGH Settlement Note, IGH paid us $1,000,000 on or before July 21, 2021. The remaining $2,000,000 and accrued interest is being paid in 12 equal monthly installments, which commenced on August 12, 2021.
Interest Expense, Net
Our interest expense, net of interest income, was $589,692 for the three months ended February 28, 2022, a decrease of $168,048, or 22%, compared to $757,740 for the three months ended February 28, 2021. The decrease in interest expense was primarily due to a $389,767 decrease in the amortization of the discounts on debentures to $5,303 during the three months ended February 28, 2022 compared to $395,070 during the three months ended February 28, 2021. The decrease occurred because discounts on debentures in the amount $996,727 were written off in connection with the amendment of U.S. Convertible Debentures 1, 2 and 4 and the Canaccord Debentures during the fourth quarter of fiscal 2021. The decrease in net interest expense for the third quarter of fiscal 2022 was partially offset by an increase in interest expense of $65,938 in connection with our issuance of the 2021 Debentures in the principal amount of $2,500,000 (net of original issue discount of $1,875,000) in the 2021 Debenture Offering. In addition, original issue discount, associated with the 2021 Debentures, in the amount of $91,936 was amortized to interest expense during the three months ended February 28, 2022, which increased interest expense there was no comparable charge in the same period of the prior year.
Impairment of Note Receivable
During the three months ended February 28, 2021, we recorded an impairment of the IGH Note in the amount of $2,498,706; there was no comparable transaction in the comparable period of the current year. This impairment arose after IGH notified us on February 27, 2021, that it did not plan to make further payments in accordance with the terms of the IGH Note on the theory that the Break-Up Fee excused such additional payments. We vehemently disagreed with this assertion. On June 19, 2021 we entered into a settlement agreement with IGH regarding this dispute and IGH executed the $3,000,000 IGH Settlement Note, which is being paid in accordance with its terms. There are no comparable charges in the current period.
Provision for Income Taxes
We recorded a provision for income taxes in the amount of $324,265 during the three months ended February 28, 2022 compared to $0 during the three months ended February 28, 2021. We have net operating losses that we believe are available to us to offset any income tax liability that may arise under Section 280E of the Code because we are a cannabis company.
Net Loss
Our net loss for the three months ended February 28, 2022 was $997,296 compared to a net loss of $3,712,772 for the three months ended February 28, 2021, an improvement of $2,715,476, or 73%.
Non-Controlling Interest
During the three months ended February 28, 2022, the non-controlling interest in our investment in the Quinn River Joint Venture, through our subsidiary, Kealii Okamalu was $5,028. This amount is composed primarily of the cost of a land lease. There was no comparable expense during the third quarter of fiscal 2021.
Net Loss Attributable to CLS Holdings USA, Inc.