UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended February 28, 2022

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 000-55546

 

CLS HOLDINGS USA, INC.

(Exact name of registrant as specified in its charter)

 

Nevada

45-1352286

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

11767 South Dixie Highway, Suite 115, Miami, Florida 33156

(Address of principal executive offices) (Zip Code)

 

(888) 359-4666

Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

N/A

N/A

N/A

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer

Smaller reporting company

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No

 

State the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 128,208,082 shares of $0.0001 par value common stock outstanding as of April 12, 2022.

 

 

 

 

CLS HOLDINGS USA, INC.

 

FORM 10-Q

Quarterly Period Ended February 28, 2022

 

TABLE OF CONTENTS

 

 

Page

 

 

FORWARD-LOOKING STATEMENTS

3

 

 

AVAILABLE INFORMATION 3
   

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

4

 

Condensed Consolidated Balance Sheets as of February 28, 2022 (Unaudited) and May 31, 2021 (audited)

4

 

Condensed Consolidated Statements of Operations for the Three and Nine Months ended February 28, 2022 and 2021 (Unaudited)

5

 

Condensed Consolidated Statements of Stockholders’ Deficit for the Nine Months ended February 28, 2022 and 2021 (Unaudited)

6

 

Condensed Consolidated Statements of Cash Flows for the Nine Months ended February 28, 2022 and 2021 (Unaudited)

7

 

Notes to the Consolidated Financial Statements (Unaudited)

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

31

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

48

Item 4.

Controls and Procedures

48

 

 

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

49

Item 1A.

Risk Factors

49

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

49

Item 3.

Defaults Upon Senior Securities

49

Item 4.

Mine Safety Disclosures

49

Item 5.

Other Information

49

Item 6.

Exhibits

49

 

 

SIGNATURES

50

 

 

 

 

EXPLANATORY NOTE

 

Unless otherwise noted, references in this report to “CLS Holdings USA, Inc.,” the “Company,” “we,” “our” or “us” means CLS Holdings USA, Inc. and its subsidiaries.

 

FORWARD-LOOKING STATEMENTS

 

This document contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements relate to, among other things, the impact of the COVID-19 virus on our business, the results of our initiatives to retain our employees and strengthen our relationships with our customers and community during the pandemic, the effect of our initiatives to expand market share and achieve growth during and following the pandemic, results of operations and financial performance, anticipated future events, and the effectiveness of our business practices during the pandemic. The continued spread of COVID-19 could have, and in some cases already has had, an adverse impact on our business, operations and financial results, including through disruptions in our cultivation and processing activities, supply chains and sales channels, and retail dispensary operations as well as a deterioration of general economic conditions including a possible national or global recession. Due to the uncertainties associated with the continued spread of COVID-19 and the timing of vaccinations, it is not possible to estimate its impact on our business, operations or financial results; however, the impact could be material. These forward-looking statements also relate to our ability to finance our operations, identify, finance and close potential acquisitions and joint ventures, market acceptance of our services and product offerings, our ability to protect and commercialize our intellectual property, our ability to use net operating losses to offset certain cannabis-related tax liabilities and our ability to grow our wholesale and processing businesses and joint ventures. In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “will,” “should,” “intends,” “expects,” “plans,” “goals,” “projects,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these terms or other comparable terminology.

 

These forward-looking statements are only predictions, are uncertain and involve substantial known and unknown risks, uncertainties and other factors which may cause our (or our industry’s) actual results, levels of activity or performance to be materially different from any expected future results, levels of activity or performance expressed or implied by these forward-looking statements.

 

We cannot guarantee future results, levels of activity or performance. You should not place undue reliance on these forward-looking statements, which speak only as of the date that they were made. These cautionary statements should be considered together with any written or oral forward-looking statements that we may issue in the future. Except as required by applicable law, we do not intend to update any of the forward-looking statements to conform these statements to reflect actual results, later events or circumstances or to reflect the occurrence of unanticipated events.

 

AVAILABLE INFORMATION

 

We file certain reports under the Securities Exchange Act of 1934 (the “Exchange Act”). Such filings include annual and quarterly reports. The reports we file with the Securities and Exchange Commission (“SEC”) are available on the SEC’s website at (http://www.sec.gov).

 

3

 

Item 1. Financial Statements.

 

CLS HOLDINGS USA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   

February 28,

   

May 31,

 
   

2022

   

2021

 

ASSETS

 

(unaudited)

   

(audited)

 

Current assets

               

Cash and cash equivalents

  $ 3,454,584     $ 1,665,263  

Accounts Receivable

    842,673       684,935  

Inventory

    2,342,608       1,228,052  

Prepaid expenses and other current assets

    268,698       262,313  

Total current assets

    6,908,563       3,840,563  
                 

Property, plant and equipment, net of accumulated depreciation of $1,883,803 and $1,434,614

    3,192,354       3,475,668  

Right of use assets, operating leases

    2,238,685       2,250,009  

Intangible assets, net of accumulated amortization of $444,575 and $358,403

    1,219,018       1,305,190  

Goodwill

    557,896       557,896  

Other assets

    249,955       167,455  
                 

Total assets

  $ 14,366,471     $ 11,596,781  
                 

LIABILITIES AND STOCKHOLDERS' DEFICIT

               

Current liabilities

               

Accounts payable and accrued liabilities

  $ 1,875,042     $ 1,608,625  

Accrued interest, current

    325,456       267,945  

Loan payable

    280,000       -  

Lease liability - operating leases, current

    311,540       287,125  

Taxes Payable

    3,283,617       2,490,295  

Convertible notes payable - current, net of discount of $0 and $35,496

    19,448,821       330,495  

Total current liabilities

    25,524,476       4,984,485  
                 

Noncurrent liabilities

               

Lease liability - operating leases, non-current

    1,970,464       1,979,294  

Notes payable, net of discount of $1,876,208 and $0

    2,498,792       -  

Convertible notes payable - long term, net of discount of $0 and $0

    -       19,729,822  
                 

Total Liabilities

    29,993,732       26,693,601  
                 

Commitments and contingencies

    -       -  
                 

Stockholder's deficit

               

Preferred stock, $0.001 par value; 20,000,000 shares authorized; no shares issued

    -       -  

Common stock, $0.0001 par value; 750,000,000 shares authorized at February 28, 2022 and 2021; 128,158,082 and 127,221,416 shares issued and outstanding at February 28, 2022 and May 31, 2021

    12,817       12,723  

Additional paid-in capital

    77,940,747       77,561,393  

Common stock subscribed

    74,482       65,702  

Accumulated deficit

    (93,646,779

)

    (92,736,638

)

Stockholder's deficit attributable to CLS Holdings, Inc.

    (15,618,733

)

    (15,096,820

)

Non-controlling interest

    (8,528

)

    -  

Total stockholder's deficit

    (15,627,261

)

    (15,096,820

)

                 

Total liabilities and stockholders' deficit

  $ 14,366,471     $ 11,596,781  

 

See accompanying notes to these financial statements.

 

4

 

CLS HOLDINGS USA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   

For the

   

For the

   

For the

   

For the

 
   

Three Months Ended

   

Three Months Ended

   

Nine Months Ended

   

Nine Months Ended

 
   

February 28, 2022

   

February 28, 2021

   

February 28, 2022

   

February 28, 2021

 
                                 
                                 

Revenue

  $ 5,588,266     $ 4,544,082     $ 16,502,978     $ 13,232,840  

Cost of goods sold

    2,701,160       2,488,906       7,989,817       6,487,089  

Gross margin

    2,887,106       2,055,176       8,513,161       6,745,751  
                                 
                                 

Selling, general and administrative expenses

    3,492,691       2,511,502       9,440,918       7,717,063  

Total operating expenses

    3,492,691       2,511,502       9,440,918       7,717,063  
                                 

Operating loss

    (605,585

)

    (456,326

)

    (927,757

)

    (971,312

)

                                 

Other (income) expense:

                               

Interest expense, net

    589,692       757,740       1,416,164       2,237,166  

Impairment of note receivable

    -       2,498,706       -       2,498,706  

Gain on settlement of note receivable

    (522,246

)

    -       (2,218,574

)

    -  

Total other (income) expense

    67,446       3,256,446       (802,410

)

    4,735,872  
                                 

Loss before income taxes

    (673,031

)

    (3,712,772

)

    (125,347

)

    (5,707,184

)

                                 

Provision for income tax

    (324,265 )     -       (793,322

)

    -  
                                 

Net loss

    (997,296

)

    (3,712,772

)

    (918,669

)

    (5,707,184

)

                                 

Non-controlling interest

    5,028       -       8,528       -  
                                 

Net loss attributable to CLS Holdings, Inc.

  $ (992,268

)

  $ (3,712,772

)

  $ (910,141

)

  $ (5,707,184

)

                                 

Net loss per share – basic and diluted

  $ (0.01

)

  $ (0.03

)

  $ (0.01

)

  $ (0.05

)

                                 

Weighted average shares outstanding – basic and diluted

    128,158,080       126,635,303       128,099,753       126,568,117  

 

See accompanying notes to these financial statements.

 

5

 

CLS HOLDINGS USA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT

(Unaudited)

 

   

Common Stock

   

Paid In

   

Stock

   

Accumulated

   

Non-controlling

         
   

Amount

   

Value

   

Capital

   

Payable

   

Deficit

   

interest

   

Total

 
                                                         

Balance, May 31, 2020

    126,521,416     $ 12,653     $ 71,196,814     $ 241,109     $ (76,846,124

)

  $ -     $ (5,395,548

)

Common stock to be issued to officer

    -       -       -       80,813       -       -       80,813  

Common stock issued to officer from stock payable

    300,000       30       122,690       (122,720

)

            -       -  

Common stock to be issued to consultant

    -       -       -       (25,750

)

    -       -       (25,750

)

Net loss for the nine months ended February 28, 2021

    -       -       -       -       (5,707,184

)

    -       (5,707,184

)

Balance, February 28, 2021 (unaudited)

    126,821,416     $ 12,683     $ 71,319,504     $ 173,452     $ (82,553,308

)

  $ -     $ (11,047,669

)

                                                         

Balance, May 31, 2021

    127,221,416     $ 12,723     $ 77,561,393     $ 65,702     $ (92,736,638

)

  $ -     $ (15,096,820

)

                                                         

Common stock issued for conversion of debt

    936,666       94       280,906       -       -               281,000  

Common stock to be issued to employee

    -       -       -       8,780       -       -       8,780  

Fair value of warrants issued with debenture offering

    -       -       98,448       -       -       -       98,448  

Net loss for the nine months ended February 28, 2022

    -       -       -       -       (910,141

)

    (8,528 )     (918,669

)

Balance, February 28, 2022 (unaudited)

    128,158,082     $ 12,817     $ 77,940,747     $ 74,482     $ (93,646,779

)

  $ (8,528

)

  $ (15,627,261

)

 

See accompanying notes to these financial statements.

 

6

 

CLS HOLDINGS USA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   

For the

   

For the

 
   

Nine Months Ended

   

Nine Months Ended

 
   

February 28, 2022

   

February 28, 2021

 

CASH FLOWS FROM OPERATING ACTIVITIES

               

Net loss

  $ (918,669

)

  $ (5,707,184

)

Adjustments to reconcile net loss to net cash used in operating activities:

               

Fair value of shares cancelled

    -       (25,750

)

Amortization of debt discounts

    132,735       1,185,210  

Fair value of shares vested by officers

    8,780       80,813  

Gain on settlement of note receivable

    (2,218,574

)

    -  

Impairment of note receivable

            2,498,706  

Depreciation and amortization expense

    535,361       511,036  

Bad debt expense

    2,329       5,927  

Changes in assets and liabilities:

               

Accounts receivable

    (160,067

)

    (121,955

)

Prepaid expenses and other current assets

    (6,385

)

    (158,949

)

Inventory

    (1,114,556

)

    (394,414

)

Interest receivable

    -       2,500  

Right of use asset

    240,736       266,734  

Accounts payable and accrued expenses

    266,417       6,865  

Accrued interest

    95,050       258,113  

Funds held in escrow

    -       (150,000

)

Deferred tax liability

    793,322       -  

Operating lease liability

    (213,827

)

    (314,311

)

Net cash used in operating activities

    (2,557,348

)

    (2,056,659

)

                 

CASH FLOWS FROM INVESTING ACTIVITIES

               

Payments to purchase property, plant and equipment

    (165,875

)

    (181,266

)

Cash paid for construction deposit on grow facility

    (82,500

)

    -  

Proceeds from collection of note receivable

    2,218,574       1,544,291  

Net cash provided by investing activities

    1,970,199       1,363,025  
                 

CASH FLOWS FROM FINANCING ACTIVITIES

               

Proceeds from loan payable

    808,800       -  

Repayments of loans payable

    (566,339

)

    -  

Proceeds from debenture offering

    2,500,000       -  

Principal payments on notes payable

    (365,991

)

    -  

Net cash used in financing activities

    2,376,470       -  
                 

Net decrease in cash and cash equivalents

    1,789,321       (693,634

)

                 

Cash and cash equivalents at beginning of period

    1,665,263       2,925,568  
                 

Cash and cash equivalents at end of period

  $ 3,454,584     $ 2,231,934  
                 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

               

Interest paid

  $ 1,221,173     $ 943,817  

Income taxes paid

  $ -     $ -  
                 

NONCASH INVESTING AND FINANCING ACTIVITIES:

               

Capitalized interest on convertible debentures

  $ -     $ 212,601  

Shares issued for conversion of notes payable

  $ 281,000     $ -  

Shares issued for services issued from stock payable

  $ -     $ 122,720  

Initial ROU asset and lease liability

  $ 229,412     $ -  

Original issue discount on notes payable

  $ 1,875,000     $ -  

Fair value of warrants issued with debenture offering

  $ 98,448     $ -  

 

See accompanying notes to these financial statements.

 

7

 

CLS HOLDINGS USA, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

February 28, 2022

(Unaudited)

 

Note 1 Nature of Business and Significant Accounting Policies

 

Basis of Presentation

 

These financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States and are expressed in US dollars. The Company has adopted a fiscal year end of May 31st.

 

Principals of Consolidation

 

The accompanying consolidated financial statements include the accounts of CLS Holdings USA, Inc., and its direct and indirect wholly owned operating subsidiaries, CLS Nevada, Inc., (“CLS Nevada”), CLS Labs, Inc. (“CLS Labs”), CLS Labs Colorado, Inc. (“CLS Colorado”), CLS Massachusetts, Inc. (“CLS Massachusetts”), and Alternative Solutions, LLC (“Alternative Solutions”), and its 50% interest in Kealii Okamalu LLC (“Kealii Okamalu”). Alternative Solutions is the sole owner of the following three entities (collectively, the “Oasis LLCs”): Serenity Wellness Center, LLC (“Serenity Wellness Center”); Serenity Wellness Products, LLC (“Serenity Wellness Products”); and Serenity Wellness Growers, LLC (“Serenity Wellness Growers”). The Company consolidates Kealii Okamalu because the Company is its sole manager. All material intercompany transactions have been eliminated upon consolidation of these entities.

 

Nature of Business

 

CLS Holdings USA, Inc. (the “Company”) was originally incorporated as Adelt Design, Inc. (“Adelt”) on March 31, 2011 to manufacture and market carpet binding art. Production and marketing of carpet binding art never commenced.

 

On November 12, 2014, CLS Labs acquired 10,000,000 shares, or 55.6%, of the outstanding shares of common stock of Adelt from its founder, Larry Adelt. On that date, Jeffrey Binder, the Chairman, President and Chief Executive Officer of CLS Labs, was appointed Chairman, President and Chief Executive Officer of the Company. On November 20, 2014, Adelt adopted amended and restated articles of incorporation, thereby changing its name to CLS Holdings USA, Inc. Effective December 10, 2014, the Company effected a reverse stock split of its issued and outstanding common stock at a ratio of 1-for-0.625 (the “Reverse Split”), wherein 0.625 shares of the Company’s common stock were issued in exchange for each share of common stock issued and outstanding. As a result, 6,250,000 shares of the Company’s common stock were issued to CLS Labs in exchange for the 10,000,000 shares that it owned by virtue of the above-referenced purchase from Larry Adelt.

 

On April 29, 2015, the Company, CLS Labs and CLS Merger Inc., a Nevada corporation and wholly owned subsidiary of CLS Holdings (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) and completed a merger, whereby CLS Merger Inc. merged with and into CLS Labs, with CLS Labs remaining as the surviving entity (the “Merger”). Upon the consummation of the Merger, the shares of the common stock of CLS Holdings owned by CLS Labs were extinguished and the former stockholders of CLS Labs were issued an aggregate of 15,000,000 (post Reverse Split) shares of common stock in CLS Holdings in exchange for their shares of common stock in CLS Labs. As a result of the Merger, the Company acquired the business of CLS Labs and abandoned its previous business.

 

The Company has been issued a U.S. patent with respect to its proprietary method of extracting cannabinoids from cannabis plants and converting the resulting cannabinoid extracts into concentrates such as oils, waxes, edibles and shatter. These concentrates may be ingested in a number of ways, including through vaporization via electronic cigarettes (“e-cigarettes”), and used for a variety of pharmaceutical and other purposes. Internal testing of this extraction method and conversion process has revealed that it produces a cleaner, higher quality product and a significantly higher yield than the cannabinoid extraction processes currently existing in the marketplace. The Company has not commercialized its patented proprietary process or otherwise earned any revenues from it. The Company plans to generate revenues through licensing, fee-for-service and joint venture arrangements related to its patented proprietary method of extracting cannabinoids from cannabis plants and converting the resulting cannabinoid extracts into saleable concentrates.

 

On December 4, 2017, the Company and Alternative Solutions, entered into a Membership Interest Purchase Agreement (the “Acquisition Agreement”), as amended, for the Company to acquire the Oasis LLCs from Alternative Solutions. Pursuant to the Acquisition Agreement, the Company initially contemplated acquiring all of the membership interests in the Oasis LLCs from Alternative Solutions. Just prior to closing, the parties agreed that the Company would instead acquire all of the membership interests in Alternative Solutions, the parent of the Oasis LLCs, from its members, and the membership interests in the Oasis LLCs owned by members other than Alternative Solutions.

 

8

 

Pursuant to the Acquisition Agreement, the Company paid a non-refundable deposit of $250,000 upon signing, which was followed by an additional payment of $1,800,000 paid in February 2018, for an initial 10% of each of the Oasis LLCs. At that time, the Company applied for regulatory approval to own an interest in the Oasis LLCs, which approval was received. On June 27, 2018, the Company made the payments to indirectly acquire the remaining 90% of the Oasis LLCs, which were equal to cash in the amount of $5,995,543, a $4.0 million promissory note due in December 2019 (the “Oasis Note”), and 22,058,823 shares of its common stock (the “Purchase Price Shares”) (collectively, the “Closing Consideration”). The cash payment of $5,995,543 was less than the $6,200,000 payment originally contemplated because the Company assumed an additional $204,457 of liabilities. The Company used the proceeds of a Canadian private securities offering to fund the cash portion of the Closing Consideration. The Company then applied for regulatory approval to own the additional 90% in membership interests in the Oasis LLCs, which it received on December 12, 2018. The Company has applied for regulatory approval to own its interest in the Oasis LLCs through Alternative Solutions under the revised structure of the transaction, which is currently under review.

 

On October 31, 2018, the Company, CLS Massachusetts, Inc., a Massachusetts corporation and a wholly-owned subsidiary of the Company (“CLS Massachusetts”), and In Good Health, Inc., a Massachusetts corporation (“IGH”), entered into an Option Agreement (the “IGH Option Agreement”). Under the terms of the IGH Option Agreement, CLS Massachusetts had an exclusive option to acquire all of the outstanding capital stock of IGH (the “IGH Option”) during the period beginning on the earlier of the date that is one year after the effective date of the conversion and December 1, 2019 and ending on the date that was 60 days after such date. If CLS Massachusetts exercised the IGH Option, the Company, a wholly-owned subsidiary of the Company and IGH would enter into a merger agreement (the form of which had been agreed to by the parties) (the “IGH Merger Agreement”). At the effective time of the merger contemplated by the IGH Merger Agreement, CLS Massachusetts would pay a purchase price of $47,500,000, subject to reduction as provided in the IGH Merger Agreement, payable as follows: $35 million in cash, $7.5 million in the form of a five-year promissory note, and $5 million in the form of restricted common stock of the Company, plus $2.5 million as consideration for a non-competition agreement with IGH’s President, payable in the form of a five-year promissory note. IGH and certain IGH stockholders holding sufficient aggregate voting power to approve the transactions contemplated by the IGH Merger Agreement entered into agreements pursuant to which such stockholders, among other things, agreed to vote in favor of such transactions. On October 31, 2018, as consideration for the IGH Option, the Company made a loan to IGH, in the principal amount of $5,000,000, subject to the terms and conditions set forth in that certain loan agreement, dated as of October 31, 2018 between IGH as the borrower and the Company as the lender. The loan was evidenced by a secured promissory note of IGH, which bore interest at the rate of 6% per annum and was to mature on October 31, 2021. To secure the obligations of IGH to the Company under the loan agreement and the promissory note, the Company and IGH entered into a security agreement dated as of October 31, 2018, pursuant to which IGH granted to the Company a first priority lien on and security interest in all personal property of IGH. If the Company did not exercise the Option on or prior to the date that was 30 days following the end of the option period, the loan amount would be reduced to $2,500,000 as a break-up fee, subject to certain exceptions set forth in the IGH Option Agreement. On August 26, 2019, the parties amended the IGH Option Agreement to, among other things, delay closing until January 2020. By letter agreement dated January 31, 2020, the Company, CLS Massachusetts and IGH extended the IGH Option Agreement to February 4, 2020. On February 4, 2020, CLS Massachusetts exercised the IGH Option and IGH subsequently asserted that CLS Massachusetts’ exercise was invalid. By letter dated February 26, 2020, the Company informed IGH that as a result of its breaches of the IGH Option, which remained uncured, an event of default had occurred under the IGH Note. The Company advised IGH that it was electing to cause the IGH Note to bear interest at the default rate of 15% per annum effective February 26, 2020 and to accelerate all amounts due under the IGH Note. On February 27, 2020, IGH informed CLS Massachusetts that it did not plan to make further payments under the IGH Note on the theory that the break-up excused additional payments. This dispute, including whether IGH breached the IGH Option and whether CLS was entitled to collect default interest, was in litigation. During the twelve months ended May 31, 2021, the Company impaired the remaining amounts due under the IGH Note in the amount of $2,498,706, which included $2,497,884 in principal and $822 in accrued interest.

 

On June 14, 2021, the parties to the IGH lawsuit entered into a confidential settlement agreement to resolve the action and a secured promissory note dated and executed by IGH in favor of the Company effective on June 11, 2021 (the “IGH Settlement Note”). Pursuant to the IGH Settlement Note, IGH shall pay the Company $3,000,000, $500,000 of which was paid on or before June 21, 2021. A second payment of $500,000 was paid on or before July 12, 2021. The remaining $2,000,000 and accrued interest is being paid in 12 equal monthly installments beginning on August 12, 2021, pursuant to the terms of the promissory note. During the nine months ended February 28, 2022, the Company received $2,218,572 under the IGH Settlement Note, which includes $2,166,667 in principal and $51,905 in accrued interest. As of February 28, 2022, the amount due under the IGH Settlement Note was $833,333. The Company records amounts paid under the IGH Settlement Note as gains when payments are received.

 

On August 24, 2021, the Company formed Kealii Okamalu, LLC, a Nevada limited liability company. The Company and an additional investor each acquired a 50% ownership interest in Kealii Okamalu, and agreed to contribute up to $3,000,000 each for their respective membership interests. At February 28, 2022, the Company and the outside investor had contributed $100,000 and $0 of this amount, respectively. Kealii Okamalu was formed in order to pursue certain joint venture opportunities in the state of Nevada.

 

9

 

On January 4, 2018, the former Attorney General, Jeff Sessions, rescinded the memorandum issued by former Deputy Attorney General James Cole on August 29, 2013 (as amended on February 14, 2014, the “Cole Memo”), the Cole Banking Memorandum, and all other related Obama-era DOJ cannabis enforcement guidance. While the rescission did not change federal law, as the Cole Memo and other DOJ guidance documents were not themselves laws, the rescission removed the DOJ’s formal policy that state-regulated cannabis businesses in compliance with the Cole Memo guidelines should not be a prosecutorial priority. Notably, former Attorney General Sessions’ rescission of the Cole Memo has not affected the status of the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) memorandum issued by the Department of Treasury, which remains in effect. This memorandum outlines Bank Secrecy Act-compliant pathways for financial institutions to service state-sanctioned cannabis businesses, which echoed the enforcement priorities outlined in the Cole Memo. In addition to his rescission of the Cole Memo, Attorney General Sessions issued a one-page memorandum known as the “Sessions Memorandum”. The Sessions Memorandum explains the DOJ’s rationale for rescinding all past DOJ cannabis enforcement guidance, claiming that Obama-era enforcement policies are “unnecessary” due to existing general enforcement guidance adopted in the 1980s, in chapter 9.27.230 of the U.A. Attorneys’ Manual (“USAM”). The USAM enforcement priorities, like those of the Cole Memo, are based on the use of the federal government’s limited resources and include “law enforcement priorities set by the Attorney General,” the “seriousness” of the alleged crimes, the “deterrent effect of criminal prosecution,” and “the cumulative impact of particular crimes on the community.” Although the Sessions Memorandum emphasizes that cannabis is a federally illegal Schedule I controlled substance, it does not otherwise instruct U.S. Attorneys to consider the prosecution of cannabis-related offenses a DOJ priority, and in practice, most U.S. Attorneys have not changed their prosecutorial approach to date. However, due to the lack of specific direction in the Sessions Memorandum as to the priority federal prosecutors should ascribe to such cannabis activities, there can be no assurance that the federal government will not seek to prosecute cases involving cannabis businesses that are otherwise compliant with state law.

 

William Barr served as United States Attorney General from February 14, 2019 to December 23, 2020. The DOJ under Mr. Barr did not take a formal position on federal enforcement of laws relating to cannabis. On March 11, 2021, United States President Biden’s nominee, Merrick Garland was sworn in as the U.S. Attorney General. During his campaign, President Biden stated a policy goal to decriminalize possession of cannabis at the federal level, but he has not publicly supported the full legalization of cannabis. It is unclear what impact, if any, the new administration will have on U.S. federal government enforcement policy on cannabis. Nonetheless, there is no guarantee that the position of the Department of Justice will not change.

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Reclassification

 

Certain amounts in the prior period have been reclassified to conform to the current period presentation.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with maturities of three months or less to be cash equivalents. The Company had cash and cash equivalents of $3,454,584 and $1,665,263 as of February 28, 2022 and May 31, 2021, respectively.

 

Allowance for Doubtful Accounts

 

The Company generates the majority of its revenues and corresponding accounts receivable from the sale of cannabis, and cannabis related products. The Company evaluates the collectability of its accounts receivable considering a combination of factors. In circumstances where it is aware of a specific customer’s inability to meet its financial obligations to it, the Company records a specific reserve for bad debts against amounts due in order to reduce the net recognized receivable to the amount it reasonably believe will be collected. For all other customers, the Company recognizes reserves for bad debts based on past write-off experience and the length of time the receivables are past due. The Company had $2,329 and $0 of bad debt expense during the three months ended February 28, 2022 and 2021, respectively. The Company had $2,329 and $5,927 of bad debt expense during the nine months ended February 28, 2022 and 2021, respectively.

 

10

 

Inventory

 

Inventories are stated at the lower of cost or market. Cost is determined using a perpetual inventory system whereby costs are determined by acquisition costs of individual items included in inventory. Market is determined based on net realizable value. Appropriate consideration is given to obsolescence, excessive levels, deterioration, and other factors in evaluating net realizable values. Our cannabis products consist of prepackaged purchased goods ready for resale, along with produced edibles and extracts developed under our production license.

 

Property, Plant and Equipment

 

Property and equipment is recorded at the lower of cost or estimated net recoverable amount, and is depreciated using the straight-line method over its estimated useful life. Property acquired in a business combination is recorded at estimated initial fair value. Property, plant, and equipment are depreciated using the straight-line method based on the lesser of the estimated useful lives of the assets or the lease term based upon the following life expectancy:

 

 

 

Years

 

Office equipment

 

 

3 to 5

 

Furniture & fixtures

 

 

3 to 7

 

Machinery & equipment

 

 

3 to 10

 

Leasehold improvements

 

Term of lease

 

 

Repairs and maintenance expenditures are charged to operations as incurred. Major improvements and replacements, which extend the useful life of an asset, are capitalized and depreciated over the remaining estimated useful life of the asset. When assets are retired or sold, the cost and related accumulated depreciation are eliminated and any resulting gain or loss is reflected in operations.

 

Long-Lived Assets

 

The Company reviews its property and equipment and any identifiable intangibles including goodwill for impairment on an annual basis utilizing the guidance set forth in the Statement of Financial Accounting Standards Board ASC 350 “Intangibles – Goodwill and Other” and ASC 360 “Property, Plant, and Equipment.” At February 28, 2022, the net carrying value of goodwill on the Company’s balance sheet remained at $557,896.

 

Comprehensive Income

 

ASC 220-10-15 “Reporting Comprehensive Income,” establishes standards for reporting and displaying of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, ASC 220-10-15 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company does not have any items of comprehensive income in any of the periods presented.

 

Non-Controlling Interests

 

The Company reports “non-controlling interest in subsidiary” as a component of equity, separate from parent’s equity, on the Consolidated Balance Sheets. In addition, the Company’s Consolidated Statements of Operations includes “net income (loss) attributable to non-controlling interest.”

 

Variable Interest Entities

 

The Company’s consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and variable interest entities (“VIE”), where the Company is the primary beneficiary under the provisions of ASC 810, Consolidation (“ASC 810”). A VIE must be consolidated by its primary beneficiary when, along with its affiliates and agents, the primary beneficiary has both: (i) the power to direct the activities that most significantly impact the VIE’s economic performance; and (ii) the obligation to absorb losses or the right to receive the benefits of the VIE that could potentially be significant to the VIE. The Company reconsiders whether an entity is still a VIE only upon certain triggering events and continually assesses its consolidated VIEs to determine if it continues to be the primary beneficiary. See “Note 3 – Joint Ventures” for additional information on the Company’s VIEs.

 

11

 

Concentrations of Credit Risk

 

The Company maintains its cash in bank deposit accounts and other accounts, the balances of which at times may be uninsured or exceed federally insured limits. From time to time, some of the Company’s funds are also held by escrow agents; these funds may not be federally insured. The Company continually monitors its banking relationships and consequently has not experienced any losses in such accounts.

 

Advertising and Marketing Costs

 

All costs associated with advertising and promoting products are expensed as incurred. Total recognized advertising and marketing expenses were $299,154 and $383,128 for the three months ended February 28, 2022 and 2021, respectively. Total recognized advertising and marketing expenses were $1,087,692 and $826,867 for the nine months ended February 28, 2022 and 2021, respectively.

 

Research and Development

 

Research and development expenses are charged to operations as incurred. Total recognized research and development expenses were $1,800 and $8,334 for the three months ended February 28, 2022 and 2021, respectively. Total recognized research and development expenses were $12,308 and $20,726 for the nine months ended February 28, 2022 and 2021, respectively.

 

Fair Value of Financial Instruments

 

Pursuant to Accounting Standards Codification (“ASC”) No. 825 - Financial Instruments, the Company is required to estimate the fair value of all financial instruments included on its balance sheets. The carrying amounts of the Company’s cash and cash equivalents, notes receivable, convertible notes payable, accounts payable and accrued expenses, none of which is held for trading, approximate their estimated fair values due to the short-term maturities of those financial instruments.

 

A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:

 

Level 1 - Quoted prices in active markets for identical assets or liabilities.

 

Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable, either directly or indirectly.

 

Level 3 - Significant unobservable inputs that cannot be corroborated by market data.

 

Revenue Recognition

 

Revenue from the sale of cannabis products is recognized by Oasis at the point of sale, at which time payment is received. Management estimates an allowance for sales returns.

 

The Company also recognizes revenue from Serenity Wellness Products LLC and Serenity Wellness Growers LLC, d/b/a City Trees (“City Trees”). City Trees recognizes revenue from the sale of the following cannabis products and services to licensed dispensaries, cultivators and distributors within the State of Nevada:

 

 

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

 

12

 

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

    10,670,203       10,202,638  

Cannabis Production

    5,832,775       3,030,202  
    $ 16,502,978     $ 13,232,840  

 

   

For the Three

   

For the Three

 
   

Months Ended

   

Months Ended

 
   

February 28, 2022

   

February 28, 2021

 

Cannabis Dispensary

    3,333,229       3,384,139  

Cannabis Production

    2,255,037       1,159,943  
    $ 5,588,266     $ 4,544,082  

 

Basic and Diluted Earnings or Loss Per Share

 

Basic net earnings per share is based on the weighted average number of shares outstanding during the period, while fully diluted net earnings per share is based on the weighted average number of shares of common stock and potentially dilutive securities assumed to be outstanding during the period using the treasury stock method. Potentially dilutive securities consist of options and warrants to purchase common stock, and convertible debt. Basic and diluted net loss per share are computed based on the weighted average number of shares of common stock outstanding during the period. At February 28, 2022 and 2021, the Company had the following potentially dilutive instruments outstanding: At February 28, 2022, a total of 76,251,384 shares (7,346,297 issuable upon the exercise of warrants, 3,041,290 issuable upon the exercise of unit warrants, 65,693,797 issuable upon the conversion of convertible notes payable and accrued interest, and 170,000 in stock to be issued). At February 28 2021, a total of 87,861,815 shares (54,410,145 issuable upon the exercise of warrants; 7,676,974 issuable upon the exercise of unit warrants; 25,454,696 issuable upon the conversion of convertible notes payable and accrued interest; and 320,000 in stock to be issued).

 

The Company uses the treasury stock method to calculate the impact of outstanding stock options and warrants. Stock options and warrants for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on earnings per common share and, accordingly, are excluded from the calculations.

 

A net loss causes all outstanding stock options and warrants to be anti-dilutive. As a result, the basic and dilutive losses per common share are the same for the three and nine months ended February 28, 2022 and for the three months ended February 28, 2021. For the nine months ended February 28, 2022, the Company excluded from the calculation of fully diluted earnings per share the following instruments which were anti-dilutive: shares issuable pursuant to the conversion of notes payable and accrued interest, and shares issuable pursuant to the exercise of stock options and warrants. The Company included 170,000 shares of common stock issuable in fully diluted earnings per share for the nine months ended February 28, 2022.

 

13

 

Income Taxes

 

The Company accounts for income taxes under the asset and liability method in accordance with ASC 740. The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The components of the deferred tax assets and liabilities are classified as current and non-current based on their characteristics. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations.

 

Section 280E of the Internal Revenue Code, as amended, prohibits businesses from deducting certain expenses associated with trafficking controlled substances (within the meaning of Schedule I and II of the Controlled Substances Act). The IRS has invoked Section 280E in tax audits against various cannabis businesses in the U.S. that are permitted under applicable state laws. Although the IRS has issued a clarification allowing the deduction of certain expenses, the bulk of operating costs and general administrative costs are generally not permitted to be deducted. The operations of certain of the Company’s subsidiaries are subject to Section 280E. This results in permanent differences between ordinary and necessary business expenses deemed non-deductible under IRC Section 280E. Therefore, the effective tax rate can be highly variable and may not necessarily correlate with pre-tax income or loss.

 

Commitments and Contingencies

 

Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims brought to such legal counsel’s attention as well as the perceived merits of the amount of relief sought or expected to be sought therein.

 

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.

 

Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed.

 

Recent Accounting Pronouncements

 

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, current U.S. GAAP requires the performance of procedures to determine the fair value at the impairment testing date of assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, the amendments under this ASU require the goodwill impairment test to be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The ASU became effective for the Company on January 1, 2020. During the year ended May 31, 2020, the Company recorded an impairment of goodwill in the amount of $25,185,003 pursuant to ASU No. 2017-04. At February 28, 2022, the net amount of goodwill on the Company’s balance sheet remained at $557,896.

 

There are various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

 

14

 

Note 2 Going Concern

 

As shown in the accompanying financial statements, the Company has incurred net losses from operations resulting in an accumulated deficit of $93,646,779 as of February 28, 2022. The Company’s auditors stated in their opinion on the Company’s financial statements for the year ended May 31, 2021 that there was substantial doubt about the Company’s ability to continue as a going concern, and that further losses were anticipated in the development of the Company’s business raising substantial doubt about the Company’s ability to continue as a going concern. The ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty.

 

Note 3 Joint Venture and Options Transaction

 

In Good Health

 

On October 31, 2018, the Company, CLS Massachusetts, and IGH, which converted to a for-profit corporation on November 6, 2018 (the “Conversion”), entered into the IGH Option Agreement. Under the terms of the IGH Option Agreement, CLS Massachusetts had an exclusive option to acquire all of the outstanding capital stock of IGH (the “IGH Option”) during the period beginning on the earlier of the date that was one year after the effective date of the Conversion and December 1, 2019, and ending on the date that was 60 days after such date (the “Option Period”). If CLS Massachusetts exercised the IGH Option, the Company, a wholly-owned subsidiary of the Company and IGH would enter into the IGH Merger Agreement (the form of which had been agreed to by the parties). At the effective time of the merger contemplated by the IGH Merger Agreement, CLS Massachusetts would pay a purchase price of $47,500,000, subject to reduction as provided in the IGH Merger Agreement, payable as follows: $35 million in cash, $7.5 million in the form of a five-year promissory note, and $5 million in the form of restricted common stock of the Company, plus $2.5 million as consideration for a non-competition agreement with IGH’s President, payable in the form of a five-year promissory note. IGH and certain IGH stockholders holding sufficient aggregate voting power to approve the transactions contemplated by the IGH Merger Agreement entered into agreements pursuant to which such stockholders, among other things, agreed to vote in favor of such transactions.

 

On October 31, 2018, as consideration for the IGH Option, the Company made a loan to IGH (the “IGH Loan”), in the principal amount of $5,000,000 (the “IGH Loan Amount”), subject to the terms and conditions set forth in that certain Loan Agreement, dated as of October 31, 2018 between IGH as the borrower and the Company as the lender (the “IGH Loan Agreement”). The IGH Loan was evidenced by a secured promissory note of IGH (the “IGH Note”), which bore interest at the rate of 6% per annum and was scheduled to mature on October 31, 2021. The Company recorded interest income in the amounts of $149,972 and $296,450 on the IGH Loan during the twelve months ended May 31, 2021 and 2020, respectively. On March 1, 2020, the Company capitalized interest in the amount of $399,453 into the principal amount due. During the years ended May 31, 2021 and 2020, the Company capitalized interest in the amount of $0 and $399,453, respectively, on the IGH Note. During the year ended May 31, 2021, the Company received payments on the IGH Note in the amount of $1,696,765. The Company applied these payments as follows; $1,544,291 as a repayment of principal and $152,473 as a repayment of accrued interest. During the year ended May 31, 2020, the Company received payments on the IGH Note in the amount of $1,425,000. The Company applied these payments as follows; $1,357,278 as a repayment of principal and $67,722 as a repayment of accrued interest. To secure the obligations of IGH to the Company under the IGH Loan Agreement and the IGH Note, the Company and IGH entered into a Security Agreement dated as of October 31, 2018 (the “IGH Security Agreement”), pursuant to which IGH granted to the Company a first priority lien on and security interest in all personal property of IGH. If the Company did not exercise the IGH Option on or prior to the date that was 30 days following the end of the Option Period, the IGH Loan Amount would be reduced to $2,500,000 as a break-up fee (the “Break-Up Fee”), except in the event of a Purchase Exception (as defined in the IGH Option Agreement), in which case the Break-Up Fee would not apply and there would be no reduction to the Loan Amount. On August 26, 2019, the parties amended the IGH Option to, among other things, extend the Option Period and delay closing until January 2020. By letter agreement dated January 31, 2020, the Company, CLS Massachusetts and IGH extended the IGH Option Agreement to February 4, 2020. On February 4, 2020, CLS Massachusetts exercised the IGH Option and IGH subsequently asserted that CLS Massachusetts’ exercise was invalid. By letter dated February 26, 2020, the Company informed IGH that as a result of its breaches of the IGH Option, which remained uncured, an event of default had occurred under the IGH Note. The Company advised IGH that it was electing to cause the IGH Note to bear interest at the default rate of 15% per annum effective February 26, 2020 and to accelerate all amounts due under the IGH Note. On February 27, 2020, IGH informed CLS Massachusetts that it did not plan to make further payments under the IGH Note on the theory that the Break-Up Fee excused additional payments. This dispute, including whether IGH breached the IGH Option and whether CLS was entitled to collect default interest, was in litigation. During the twelve months ended May 31, 2021, the Company impaired the remaining amounts due under the IGH Note in the amount of $2,498,706, which included $2,497,884 in principal and $822 in accrued interest.

 

15

 

On June 14, 2021, the parties to the IGH lawsuit entered into a confidential settlement agreement to resolve the action and the IGH Settlement Note. Pursuant to the IGH Settlement Note, IGH shall pay the Company $3,000,000, $500,000 of which was paid on or before June 21, 2021. A second payment of $500,000 was paid on or before July 12, 2021. The remaining $2,000,000 and accrued interest is being paid in 12 equal monthly installments beginning on August 12, 2021, pursuant to the terms of the promissory note. During the nine months ended February 28, 2022, the Company received $2,218,572 under the IGH Settlement Note, which includes $2,166,667 in principal and $51,905 in accrued interest. The Company records amounts paid under the IGH Settlement Note as gains when payments are received.

 

Quinn River Joint Venture

 

On October 20, 2021, the Company entered into a management services agreement (the “Quinn River Joint Venture Agreement”) through its 50% owned subsidiary, Kealii Okamalu, with CSI Health MCD LLC (“CSI”) and a commission established by the authority of the Tribal Council of the Fort McDermitt Paiute and Shoshone Tribe (“Tribe”). The purpose of the Quinn River Joint Venture Agreement is to establish a business (the “Quinn River Joint Venture”) to grow, cultivate, process, and sell cannabis and related products. The Quinn River Joint Venture Agreement has an initial term of 10 years plus a 10 year renewal option from the date the first cannabis crop produced is harvested and sold. Pursuant to the Quinn River Joint Venture Agreement, Kealii Okamalu will lease approximately 30 acres of the Tribe’s land located along the Quinn River at a cost of $3,500 per month and manage the design, finance and construction of a cannabis cultivation facility on such tribal lands (“the Cultivation Facility”). Kealii Okamalu will also manage the ongoing operations of the Cultivation Facility and related business, including, but not limited to, cultivation of cannabis crops, personnel staffing, product packaging, testing, marketing and sales. Packaged products will be branded as “Quinn River Farms.” The Company will provide 10,000 square feet of warehouse space at its Las Vegas facility, and will have preferred vendor status including the right to purchase cannabis flower and the business’s cannabis trim at favorable prices. Kealii Okamalu will contribute $6 million towards the construction of the Cultivation Facility and the working capital for the Quinn River Joint Venture. This amount will be repaid from the portion of the net profits of the Quinn River Joint Venture otherwise payable to CSI and the Tribe at the rate of $750,000 per quarter for eight quarters. Kealii Okamalu will receive one-third of the net profits of the Quinn River Joint Venture.

 

The Company is the manager of and holds a 50% ownership interest in Kealii Okamalu. Kealii Okamalu is a VIE which the Company consolidates. The Quinn River Joint Venture is not a legal entity but rather a business operated by Kealii Okamalu. The Company uses the equity method of accounting to record one-third of the profit or loss generated by the Quinn River Joint Venture, which accrues to Kealii Okamalu. Since the Company is a 50% owner of Kealii Okamalu, 50% of the profit or loss of Kealii Okamalu is recorded as minority interest in the Company’s statement of operations.

 

During the nine months ended February 28, 2022, Kealii Okamalu made a deposit of $100,000 towards the construction of the Cultivation Facility; $17,500 of this amount was utilized to pay lease charges on the leased land, and the remaining $82,500 is classified as a construction deposit in other assets on the Company’s balance sheet at February 28, 2022.

 

Note 4 Accounts Receivable

 

Accounts receivable was $842,673 and $684,935 at February 28, 2022 and May 31, 2021, respectively. During the three months ended February 28, 2022 and 2021, the Company had bad debt expense in the net amount of $2,329 and $0. During the nine months ended February 28, 2022 and 2021, the Company had bad debt expense in the net amount of $2,329 and $5,927. No allowance for doubtful accounts was necessary during the three and nine months ended February 28, 2022 and 2021.

 

Note 5 Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets consisted of the following:

 

   

February 28,

2022

   

May 31,

2021

 

Deposits

  $ 2,121     $ 2,244  

Prepaid expenses

    189,077       250,069  

Other receivable

    77,500       10,000  

Total

  $ 268,698     $ 262,313  

 

Deposits consist of amounts paid in advance for the acquisition of property and equipment. Prepaid expenses consist primarily of annual license fees charged by the State of Nevada; these fees are paid in advance, and amortized over the one-year term of the licenses.

 

16

 

Note 6 Inventory

 

Inventory, consisting of material, overhead, labor, and manufacturing overhead, is stated at the lower of cost (first-in, first-out) or market, and consists of the following:

 

   

February 28,

   

May 31,

 
   

2022

   

2021

 

Raw materials

  $ 427,198     $ 344,085  

Finished goods

    1,915,410       883,967  

Total

  $ 2,342,608     $ 1,228,052  

 

Raw materials consist of cannabis plants and the materials that are used in our production process prior to being tested and packaged for consumption. Finished goods consist of pre-packaged materials previously purchased from other licensed cultivators and our manufactured edibles and extracts.

 

Note 7 Notes Receivable

 

IGH Note Receivable

 

On October 31, 2018, in connection with an option to purchase transaction (see note 4), the Company loaned $5,000,000 pursuant to the IGH Note to IGH. On November 6, 2018, IGH converted to a for-profit corporation. The IGH Note bore interest at the rate of 6% per annum. On March 1, 2020 (the “Initial Payment Date”), all accrued interest was added to the outstanding principal due thereunder and such amount was payable in eight equal quarterly installments, commencing on the Initial Payment Date, together with interest accruing after the Initial Payment Date. The IGH Note was to mature and all outstanding principal, accrued interest and any other amounts due thereunder, was due and payable in full on the third anniversary of the IGH Note. The IGH Note was issued in connection with a loan agreement and security agreement between the Company and IGH, and the IGH Option Agreement between the Company and IGH, among others, in both cases dated as of October 31, 2018 and the other IGH Loan Documents, and was secured by the collateral described in the IGH Loan Documents and by such other collateral as may in the future have been granted to the Company to secure the IGH Note. During the years ended May 31, 2021 and 2020, the Company recorded interest income in the amounts of $149,972 and $296,250, respectively, in connection with the IGH Note. During the years ended May 31, 2021 and 2020, the Company capitalized interest in the amount of $0 and $399,453, respectively, on the IGH Note. During the year ended May 31, 2021, the Company received payments on the IGH Note in the total amount of $1,696,765. The Company applied these payments as follows; $1,544,291 as a repayment of principal and $152,473 as a repayment of accrued interest.

 

By letter dated February 26, 2020, the Company informed IGH that as a result of its breaches of the IGH Option, which remained uncured, an event of default had occurred under the IGH Note. The Company advised IGH that it was electing to cause the IGH Note to bear interest at the default rate of 15% per annum effective February 26, 2020 and to accelerate all amounts due under the Note. This dispute, including whether IGH breached the IGH Option and whether CLS was entitled to collect default interest, was in litigation. During the twelve months ended May 31, 2021, the Company impaired the remaining amounts due under the IGH Note in the amount of $2,498,706, which included $2,497,884 in principal and $822 in accrued interest.

 

On June 14, 2021, the parties to the IGH lawsuit entered into a confidential settlement agreement to resolve the action and the IGH Settlement Note. Pursuant to the IGH Settlement Note, IGH shall pay the Company $3,000,000, $500,000 of which was paid on or before June 21, 2021. A second payment of $500,000 was paid on or before July 12, 2021. The remaining $2,000,000 and accrued interest is being paid in 12 equal monthly installments beginning on August 12, 2021, pursuant to the terms of the promissory note. During the three months ended February 28, 2022, the Company received $522,245 under the IGH Settlement Note, which includes $500,000 in principal and $22,245 in accrued interest. During the nine months ended February 28, 2022, the Company received $2,218,572 under the IGH Settlement Note, which includes $2,166,667 in principal and $51,905 in accrued interest. As of February 28, 2022, the amount due under the IGH Settlement Note was $833,333. The Company records amounts paid under the IGH Settlement Note as gains when payments are received.

 

17

 

Note 8 Property, Plant and Equipment

 

Property, plant and equipment consisted of the following at February 28, 2022 and May 31, 2021.

 

   

February 28,

2022

   

May 31,

2021

 

Office equipment

  $ 126,824     $ 120,068  

Furniture and fixtures

    148,358       145,103  

Machinery & Equipment

    1,950,500       1,823,094  

Leasehold improvements

    2,850,475       2,822,017  

Less: accumulated depreciation

    (1,883,803

)

    (1,434,614

)

Property, plant, and equipment, net

  $ 3,192,354     $ 3,475,668  

 

The Company made payments in the amounts of $165,875 and $181,266 for property and equipment during the nine months ended February 28, 2022 and 2021, respectively.

 

Depreciation of property, plant, and equipment was $150,883 and $139,989 for the three months ended February 28, 2022 and 2021 respectively. Depreciation of property, plant, and equipment was $449,189 and $423,737 for the nine months ended February 28, 2022 and 2021, respectively.

 

Note 9 Right to Use Assets and Liabilities Operating Leases

 

The Company has operating leases for offices and warehouses. The Company’s leases have remaining lease terms of 1 year to 10.5 years, some of which include options to extend.

 

The Company’s lease expense for the three and nine months ended February 28, 2022 was entirely comprised of operating leases and amounted to $73,874 and $323,218, respectively. The Company’s right of use (“ROU”) asset amortization for the three and nine months ended February 28, 2022 was $82,479 and $240,736, respectively. The difference between the lease expense and the associated ROU asset amortization consists of interest.

 

The Company has recorded total right to use assets of $4,112,876 and liabilities in the amount of $4,069,476 through February 28, 2022, resulting in gains in the amount of $28,511 during the year ended May 31, 2020 and $14,899 during the year ended May 31, 2021. During the year ended May 31, 2020, the Company entered into agreements to amend certain of its operating leases. The lease of the dispensary and administrative offices at 1800 Industrial Road was extended from June 30, 2023 to February 28, 2030, and the lease of the offices at 1718 Industrial Road was extended from August 31, 2020 to August 31, 2022. During the year ended May 31, 2021, the Company entered into an agreement to extend the lease of its cultivation and processing facility at 203 E. Mayflower Avenue through February 28, 2030.

 

On October 20, 2021, pursuant to the Quinn River Joint Venture Agreement (see note 4), the Company, through Kealii Okamalu, entered into a lease agreement (the “Quinn River Lease”) for approximately 30 acres of land for purposes of building and operating a facility to grow cannabis. The lease has a term of 10 years, with a 10-year renewal option, from the date of the initial harvest produced under the Quinn River Joint Venture Agreement, which is expected to occur in the first quarter of fiscal 2023. Rent is $3,500 per month. The initial amount of the right to use asset and operating lease liability under the Quinn River Lease was $221,469.

 

Right to use assets – operating leases are summarized below:

 

   

February 28,

2022

 

Amount at inception of leases

  $ 4,112,876  

Amount amortized

    (1,874,191

)

Balance – February 28, 2022

  $ 2,238,685  

 

Operating lease liabilities are summarized below:

 

Amount at inception of leases

  $ 4,069,476  

Amount amortized

    (1,787,472

)

Balance – February 28, 2022

  $ 2,282,004  

 

18

 

 

Warehouse and offices

  $ 2,055,145  

Land

    218,488  

Office equipment

    8,371  

Balance – February 28, 2022

  $ 2,282,004  
         
         

Lease liability

  $ 2,282,004  

Less: current portion

    (311,540

)

Lease liability, non-current

  $ 1,970,464  

 

Maturity analysis under these lease agreements is as follows:

 

Twelve months ended February 28, 2023

  $ 496,066  

Twelve months ended February 28, 2024

    499,103  

Twelve months ended February 28, 2025

    512,532  

Twelve months ended February 28, 2026

    526,358  

Twelve months ended February 28, 2027

    226,297  

Thereafter

    799,417  

Total

  $ 3,059,773  

Less: Present value discount

    (777,769

)

Lease liability

  $ 2,282,004  

 

Note 10 Intangible Assets

 

Intangible assets consisted of the following at February 28, 2022 and May 31, 2021:

 

   

February 28, 2022

 
   

Gross

   

Accumulated

Amortization

   

Net

 

Intellectual Property

  $ 319,600     $ (117,187

)

  $ 202,413  

License & Customer Relations

    990,000       (181,500

)

    808,500  

Tradenames - Trademarks

    301,000       (110,367

)

    190,633  

Non-Compete Agreements

    27,000       (27,000

)

    -  

Domain Names

    25,993       (8,521

)

    17,472  

Total

  $ 1,663,593     $ (444,575

)

  $ 1,219,018  

 

   

May 31, 2021

 
   

Gross

   

Accumulated

Amortization

   

Net

 

Intellectual Property

  $ 319,600     $ (93,217

)

  $ 226,383  

License & Customer Relations

    990,000       (144,375

)

    845,625  

Tradenames - Trademarks

    301,000       (87,792

)

    213,208  

Non-Compete Agreements

    27,000       (27,000

)

    -  

Domain Names

    25,993       (6,019

)

    19,974  

Total

  $ 1,663,593     $ (358,403

)

  $ 1,305,190  

 

Total amortization expense charged to operations for the three months ended February 28, 2022 and 2021 was $28,023 and $28,716, respectively. Total amortization expense charged to operations for the nine months ended February 28, 2022 and 2021 was $86,172 and $87,299, respectively.

 

Amount to be amortized during the twelve months ended February 28,

       

2023

  $ 111,989  

2024

    111,989  

2025

    111,989  

2026

    111,989  

2027

    111,989  

Thereafter

    659,073  
    $ 1,219,018  

 

19

 

Note 11 Goodwill

 

The Company recorded goodwill in the amount of $25,742,899 in connection with the acquisition of Alternative Solutions on June 27, 2018.

 

Goodwill Impairment Test

 

The Company assessed its intangible assets as of May 31, 2020 for purposes of determining if an impairment existed as set forth in ASC 350 – Intangibles – Goodwill and Other and ASC 360 – Property Plant and Equipment. Pursuant to ASC 360, the Company recorded an impairment of goodwill in the amount of $25,185,003 based upon the difference between the carrying value of $25,742,899 and the fair value of $557,896. Fair value was based upon the price of the Company’s common stock at May 31, 2020 of $0.06 per share. At May 31, 2020, the net amount of goodwill on the Company’s balance sheet was $557,896.

 

The Company also assessed its intangible assets as of May 31, 2021 for purposes of determining if an impairment existed as set forth in ASC 350 – Intangibles – Goodwill and Other and ASC 360 – Property Plant and Equipment. Pursuant to ASC 360, the Company determined that the fair value of its intangible assets exceeded the carrying value of goodwill for the year ended May 31, 2021. As a result, no impairment was recorded during the year ended May 31, 2021. At February 28, 2022, the net amount of goodwill on the Company’s balance sheet was $557,896.

 

Note 12 Other Assets

 

Other assets consisted of the following at February 28, 2022 and May 31, 2021:

 

   

February 28,

   

May 31,

 
   

2022

   

2021

 

Security deposits

  $ 167,455     $ 167,455  

Construction deposit

    82,500       -  
    $ 249,955     $ 167,455  

 

Note 13 Accounts Payable and Accrued Liabilities

 

Accrued accounts payable and accrued liabilities consisted of the following at February 28, 2022 and May 31, 2021:

 

   

February 28,

2022

   

May 31,

2021

 

Trade accounts payable

  $ 883,939     $ 771,843  

Accrued payroll and payroll taxes

    260,785       279,721  

Accrued liabilities

    730,318       557,061  

Total

  $ 1,875,042     $ 1,608,625  

 

Note 14- Loan Payable

 

The Company is a party to an agreement with a lender to finance short term purchases of inventory (the “Short Term Financing Agreement”) for two of its subsidiaries. On November 9, 2021, the Company received cash in the amount of $294,700, net of fees in the amount of $9,114, pursuant to the Short Term Financing Agreement.

 

During the three months ended February 28, 2022, the Company received cash proceeds in the amount of $514,100 from three additional loans under the Short Term Financing Agreement, made payments in the amount of $566,339, and incurred fees in the amount of $28,425. At February 28, 2022, the balance due under the Short Term Financing Agreement was $280,000.

 

20

 

Note 15 Convertible Notes Payable

 

   

February 28, 2022

   

May 31, 2021

 

Convertible debenture in the principal amount of $4,000,000 (the “U.S. Convertible Debenture 1”) dated October 31, 2018, which bears interest, payable quarterly, at a rate of 8% per annum, with interest during the first eighteen months following issuance being payable by increasing the then-outstanding principal amount of the U.S. Convertible Debenture 1. The U.S. Convertible Debenture 1 was to mature on a date that was three years following issuance. The U.S. Convertible Debenture 1 was convertible into units (the “Convertible Debenture Units”) at a conversion price of $0.80 per Convertible Debenture Unit. Each Convertible Debenture Unit consisted of (i) one share of the Company’s common stock, and (ii) one-half of one warrant, with each warrant exercisable for three years to purchase a share of common stock at a price of $1.10. The value of the warrants will be recorded when the issuance becomes probable. On July 26, 2019, U.S. Convertible Debenture 1 was amended such that, should the Company issue or sell common stock or equity securities convertible into common stock at a price less than the conversion price of the U.S. Convertible Debenture 1, the conversion price of U.S. Convertible Debenture 1 would be reduced to such issuance price, and the exercise price of the warrant issuable in connection with U.S. Convertible Debenture 1 would be exercisable at a price equal to 137.5% of the adjusted conversion price at the time of conversion. The U.S. Convertible Debenture 1 has other features, such as mandatory conversion in the event the common stock trades at a particular price over a specified period of time and required redemption in the event of a “Change in Control” of the Company. The U.S. Convertible Debenture 1 is an unsecured obligation of the Company and ranks pari passu in right of payment of principal and interest with all other unsecured obligations of the Company. The Company recorded a discount in the amount of $3,254,896 on the U.S. Convertible Debenture 1. During the three and nine months ended February 28, 2022, $0 and $0 of this discount was charged to operations, respectively. During the three and nine months ended February 28, 2022, the Company accrued interest in the amounts of $90,089 and $270,267 on the U.S. Convertible Debenture 1, respectively. During the three and nine months ended February 28, 2022, the Company made interest payments in the amounts of $90,089 and $270,267, respectively. On April 15, 2021, the U.S. Convertible Debenture 1 was amended as follows: (i) the conversion price of the debenture was reduced to $0.30 per unit; and (ii) the maturity date was extended from October 31, 2021 to October 31, 2022. This amendment was accounted for as an extinguishment of debt, and the Company recorded a loss in the amount of $2,038,803 during the year ended May 31, 2021 in connection with this amendment.

  $ 4,504,457     $ 4,504,457  
                 

Convertible debenture in the principal amount of $1,000,000 (the “U.S. Convertible Debenture 2”) dated October 31, 2018, which bears interest, payable quarterly, at a rate of 8% per annum, with interest during the first eighteen months following issuance being payable by increasing the then-outstanding principal amount of the U.S. Convertible Debenture 2. The U.S. Convertible Debenture 2 was to mature on a date that was three years following issuance. The U.S. Convertible Debenture 2 was convertible into Convertible Debenture Units at a conversion price of $0.80 per Convertible Debenture Unit. Each Convertible Debenture Unit consisted of (i) one share of the Company’s common stock, and (ii) one-half of one warrant, with each warrant exercisable for three years to purchase a share of common stock at a price of $1.10. The value of the warrants will be recorded when the issuance becomes probable. On July 26, 2019, U.S. Convertible Debenture 2 was amended such that, should the Company issue or sell common stock or equity securities convertible into common stock at a price less than the conversion price of the U.S. Convertible Debenture 2, the conversion price of U.S. Convertible Debenture 2 would be reduced to such issuance price, and the exercise price of the warrant issuable in connection with U.S. Convertible Debenture 2 would be exercisable at a price equal to 137.5% of the adjusted conversion price at the time of conversion. The U.S. Convertible Debenture 2 has other features, such as mandatory conversion in the event the common stock trades at a particular price over a specified period of time and required redemption in the event of a “Change in Control” of the Company. The U.S. Convertible Debenture 2 is an unsecured obligation of the Company and ranks pari passu in right of payment of principal and interest with all other unsecured obligations of the Company. The Company recorded a discount in the amount of $813,724 on the U.S. Convertible Debenture 2. During the three and nine months ended February 28, 2022, $0 and $0 of this discount was charged to operations, respectively. During the three and nine months ended February 28, 2022, the Company accrued interest in the amounts of $22,522 and $67,567 on the U.S. Convertible Debenture 2, respectively. During the three and nine months ended February 28, 2022, the Company made interest payments in the amounts of $22,522 and $67,567, respectively. On April 15, 2021, the U.S. Convertible Debenture 2 was amended as follows: (i) the conversion price of the debentures was reduced to $0.30 per unit; and (ii) the maturity date was extended from October 31, 2021 to October 31, 2022. This amendment was accounted for as an extinguishment of debt, and the Company recorded a loss in the amount of $509,700 during the year ended May 31, 2021.

    1,126,114       1,126,114  

 

21

 

   

February 28, 2022

   

May 31, 2021

 

Convertible debenture in the principal amount of $100,000 (the “U.S. Convertible Debenture 3”) dated October 24, 2018, which bears interest, payable quarterly, at a rate of 8% per annum, with interest during the first eighteen months following issuance being payable by increasing the then-outstanding principal amount of the U.S. Convertible Debenture 3. The U.S. Convertible Debenture 3 was to mature on a date that was three years following issuance. The U.S. Convertible Debenture 3 was convertible into Convertible Debenture Units at a conversion price of $0.80 per Convertible Debenture Unit. Each Convertible Debenture Unit consisted of (i) one share of the Company’s common stock, and (ii) one-half of one warrant, with each warrant exercisable for three years to purchase a share of common stock at a price of $1.10. The value of the warrants will be recorded when the issuance becomes probable. On July 26, 2019, U.S. Convertible Debenture 3 was amended such that, should the Company issue or sell common stock or equity securities convertible into common stock at a price less than the conversion price of the U.S. Convertible Debenture 3, the conversion price of U.S. Convertible Debenture 3 would be reduced to such issuance price, and the exercise price of the warrant issuable in connection with U.S. Convertible Debenture 3 would be exercisable at a price equal to 137.5% of the adjusted conversion price at the time of conversion. The U.S. Convertible Debenture 3 has other features, such as mandatory conversion in the event the common stock trades at a particular price over a specified period of time and required redemption in the event of a “Change in Control” of the Company. The U.S. Convertible Debenture 3 is an unsecured obligation of the Company and ranks pari passu in right of payment of principal and interest with all other unsecured obligations of the Company. The Company recorded a discount in the amount of $75,415 on the U.S. Convertible Debenture 3. During the three and nine months ended February 28, 2022, $0 and $10,474 of this discount was charged to operations, respectively. During the three and nine months ended February 28, 2022, the Company accrued interest in the amounts of $0 and $3,604 on the U.S. Convertible Debenture 3, respectively. During the three and nine months ended February 28, 2022, the Company made interest payments in the amounts of $0 and $5,106, respectively. This debenture was repaid in full during the quarter ended November 30, 2021.

    -       112,613  
                 

Convertible debenture in the principal amount of $532,000 (the “U.S. Convertible Debenture 4”) dated October 25, 2018, which bears interest, payable quarterly, at a rate of 8% per annum, with interest during the first eighteen months following issuance being payable by increasing the then-outstanding principal amount of the U.S. Convertible Debenture 4. The U.S. Convertible Debenture 4 was to mature on a date that was three years following issuance. The U.S. Convertible Debenture 4 was convertible into Convertible Debenture Units at a conversion price of $0.80 per Convertible Debenture Unit. Each Convertible Debenture Unit consisted of (i) one share of the Company’s common stock, and (ii) one-half of one warrant, with each warrant exercisable for three years to purchase a share of common stock at a price of $1.10. The value of the warrants will be recorded when the issuance becomes probable. On July 26, 2019, U.S. Convertible Debenture 4 was amended such that, should the Company issue or sell common stock or equity securities convertible into common stock at a price less than the conversion price of the U.S. Convertible Debenture 4, the conversion price of U.S. Convertible Debenture 4 would be reduced to such issuance price, and the exercise price of the warrant issuable in connection with U.S. Convertible Debenture 4 would be exercisable at a price equal to 137.5% of the adjusted conversion price at the time of conversion. The U.S. Convertible Debenture 4 has other features, such as mandatory conversion in the event the common stock trades at a particular price over a specified period of time and required redemption in the event of a “Change in Control” of the Company. The U.S. Convertible Debenture 4 is an unsecured obligation of the Company and ranks pari passu in right of payment of principal and interest with all other unsecured obligations of the Company. The Company recorded a discount in the amount of $416,653 on the U.S. Convertible Debenture 4. During the three and nine months ended February 28, 2022, $0 and $0 of this discount was charged to operations, respectively. During the three and nine months ended February 28, 2022, the Company accrued interest in the amounts of $11,982 and $35,946 on the U.S. Convertible Debenture 4, respectively. During the three and nine months ended February 28, 2022, the Company made interest payments in the amounts of $11,982 and $35,946, respectively. On April 19, 2021, the U.S. Convertible Debenture 4 was amended as follows: (i) the conversion price of the debenture was reduced to $0.30 per unit; and (ii) the maturity date was extended from October 31, 2021 to October 31, 2022. This amendment was accounted for as an extinguishment of debt, and the Company recorded a loss in the amount of $271,164 during the year ended May 31, 2021.

    599,101       599,101  
                 

Convertible debenture in the principal amount of $150,000 (the “U.S. Convertible Debenture 5”) dated October 26, 2018, which bears interest, payable quarterly, at a rate of 8% per annum, with interest during the first eighteen months following issuance being payable by increasing the then-outstanding principal amount of the U.S. Convertible Debenture 5. The U.S. Convertible Debenture 5 was to mature on a date that was three years following issuance. The U.S. Convertible Debenture 5 was convertible into Convertible Debenture Units at a conversion price of $0.80 per Convertible Debenture Unit. Each Convertible Debenture Unit consisted of (i) one share of the Company’s common stock, and (ii) one-half of one warrant, with each warrant exercisable for three years to purchase a share of common stock at a price of $1.10. The value of the warrants will be recorded when the issuance becomes probable. The U.S. Convertible Debenture 5 has other features, such as mandatory conversion in the event the common stock trades at a particular price over a specified period of time and required redemption in the event of a “Change in Control” of the Company. The U.S. Convertible Debenture 5 is an unsecured obligation of the Company and ranks pari passu in right of payment of principal and interest with all other unsecured obligations of the Company. The Company recorded a discount in the amount of $120,100 on the U.S. Convertible Debenture 5. During the three and nine months ended February 28, 2022, $0 and $16,681 of this discount was charged to operations, respectively. During the three and nine months ended February 28, 2022, the Company accrued interest in the amounts of $0 and $5,480 on the U.S. Convertible Debenture 5, respectively. During the three and nine months ended February 28, 2022, the Company made interest payments in the amounts of $0 and $7,733, respectively. This debenture was repaid in full during the quarter ended November 30, 2021.

    -       168,919  

 

22

 

   

February 28, 2022

   

May 31, 2021

 

Convertible debenture payable in the principal amount of $75,000 (the “U.S. Convertible Debenture 6”) dated October 26, 2018, which bears interest, payable quarterly, at a rate of 8% per annum, with interest during the first eighteen months following issuance being payable by increasing the then-outstanding principal amount of the U.S. Convertible Debenture 6. The U.S. Convertible Debenture 6 was to mature on a date that was three years following issuance. The U.S. Convertible Debenture 6 was convertible into Convertible Debenture Units at a conversion price of $0.80 per Convertible Debenture Unit. Each Convertible Debenture Unit consisted of (i) one share of the Company’s common stock, and (ii) one-half of one warrant, with each warrant exercisable for three years to purchase a share of common stock at a price of $1.10. The value of the warrants will be recorded when the issuance becomes probable. The U.S. Convertible Debenture 6 has other features, such as mandatory conversion in the event the common stock trades at a particular price over a specified period of time and required redemption in the event of a “Change in Control” of the Company. The U.S. Convertible Debenture 6 is an unsecured obligation of the Company and ranks pari passu in right of payment of principal and interest with all other unsecured obligations of the Company. The Company recorded a discount in the amount of $60,049 on the U.S. Convertible Debenture 6. During the three and nine months ended February 28, 2022, $0 and $8,340 of this discount was charged to operations, respectively. During the three and nine months ended February 28, 2022, the Company accrued interest in the amounts of $0 and $2,740 on the U.S. Convertible Debenture 6, respectively. During the three and nine months ended February 28, 2022, the Company made interest payments in the amounts of $0 and $3,866, respectively. This debenture was repaid in full during the quarter ended November 30, 2021.

    -       84,459  
                 

Convertible debentures payable in the aggregate principal amount of $12,012,000 (the “Canaccord Debentures”) dated December 12, 2018, which bear interest, payable quarterly, at a rate of 8% per annum, with interest during the first eighteen months following issuance being payable by increasing the then-outstanding principal amount of the Canaccord Debentures. The Canaccord Debentures were to mature on a date that was three years following issuance. The Canaccord Debentures were convertible into Convertible Debenture Units at a conversion price of $0.80 per Convertible Debenture Unit. Each Convertible Debenture Unit consisted of (i) one share of the Company’s common stock, and (ii) one-half of one warrant, with each warrant exercisable for three years to purchase a share of common stock at a price of $1.10. The value of the warrants will be recorded when the issuance becomes probable. The Canaccord Debentures have other features, such as mandatory conversion in the event the common stock trades at a particular price over a specified period of time and required redemption in the event of a “Change in Control” of the Company. The Canaccord Debentures are unsecured obligations of the Company and rank pari passu in right of payment of principal and interest with all other unsecured obligations of the Company. During the three months ended November 30, 2019, in two separate transactions, principal in the aggregate amount of $25,857 was converted into an aggregate of 32,321 shares of the Company’s common stock, and warrants to purchase 16,160 shares of common stock. There were no gains or losses recorded on these conversions because they were done in accordance with the terms of the original agreement. No discount was recorded for the fair value of the warrants issued. Because the market price of the Company’s common stock was less than the conversion price on the date of issuance of the Canaccord Debentures, a discount was not recorded on the Canaccord Debentures. During the three and nine months ended February 28, 2022, the Company accrued interest in the amounts of $264,383 and $794,148 on the Canaccord Debentures, respectively. During the three and nine months ended February 28, 2022, the Company made interest payments in the amounts of $264,383 and $793,149, respectively. Also, during the three and nine months ended February 28, 2022, the Company transferred the amounts of $0 and $212,601 from accrued interest to principal of the Canaccord Debentures, respectively. On March 31, 2021, the Canaccord Debentures were amended as follows: (i) the conversion price of the debentures was reduced to $0.30 per unit; (ii) the maturity date was extended from December 12, 2021 to December 12, 2022; (iii) the mandatory conversion threshold was reduced from a daily volume weighted average trading price of greater than $1.20 per share to $0.60 per share for the preceding ten consecutive trading days; and (iv) the exercise price of the warrants issuable upon conversion was reduced from $1.10 to $0.40 and the expiration of the warrants extended until March 31, 2024. This amendment was accounted for as an extinguishment of debt, and the Company recorded a loss in the amount of $3,286,012 during the year ended May 31, 2021. During the quarter ended August 31, 2021, principal in the aggregate amount of $281,000 was converted into an aggregate of 936,666 shares of the Company’s common stock, and warrants to purchase 468,333 shares of common stock. There were no gains or losses recorded on these conversions because they were done in accordance with the terms of the original agreement.

    13,219,149       13,500,150  
                 

Total - Convertible Notes Payable

  $ 19,448,821     $ 20,905,813  

Less: Discount

    (-

)

    (35,496

)

Convertible Notes Payable, Net of Discounts

  $ 19,448,821     $ 20,060,317  

 

23

 

   

February 28, 2022

   

May 31, 2021

 

Total - Convertible Notes Payable, Net of Discounts, Current Portion, net of discount of $0 and $1,053,520

  $ 19,448,821     $ 330,495  

Total - Convertible Notes Payable, Net of Discounts, Long-term Portion, net of discount of $0 and $0

  $ -     $ 19,729,822  

 

 

   

February 28, 2022

   

February 28, 2021

 

Discounts on notes payable amortized to interest expense – 3 months ended February 28, 2022 and 2021, respectively

  $ -     $ 35,495  

 

Discounts on notes payable amortized to interest expense – 9 months ended February 28, 2022 and 2021, respectively

  $ 132,735     $ 1,185,210  

 

Note 16- Notes Payable

 

   

February 28, 2022

   

May 31, 2021

 

Debenture in the principal amount of $250,000 (the “Debenture 1”) dated December 1, 2021, which bears interest, payable quarterly commencing six months after issuance, at a rate of 15% per annum. Principal on Debenture 1 is due in two equal installments 18 months after issuance and at maturity on July 10, 2024. With the Debenture, the purchaser received warrants to purchase 303,030 shares of common stock at an exercise price of $0.4125 per share of common stock. The Company shall make additional quarterly payments under Debenture 1 beginning 90 days after the end of its first fiscal quarter after January 10, 2025, and for the next five years, on an annual basis, equal to the greater of (a) 15% of the original principal amount, or (b) the purchaser’s pro rata portion of 5% of the distributions the Company receives as a result of the Quinn River Joint Venture during the prior fiscal year. The Company recorded a discount in the amount of $17,223 on the Debenture 1. During the three and nine months ended February 28, 2022, $1,667 and $1,667 of this discount was charged to operations, respectively. The Company recorded an original issue discount in the amount of $187,500 on the Debenture 1. During the three and nine months ended February 28, 2022, $18,145 and $18,145 of this original issue discount was charged to operations, respectively. During the three and nine months ended February 28, 2022, the Company accrued interest in the amounts of $9,375 and $9,375 on the Debenture 1, respectively.

  $ 250,000     $ -  
                 

Debenture in the principal amount of $250,000 (the “Debenture 2”) dated December 21, 2021, which bears interest, payable quarterly commencing six months after issuance, at a rate of 15% per annum. Principal on Debenture 2 is due in two equal installments 18 months after issuance and at maturity on July 10, 2024. With the Debenture, the purchaser received warrants to purchase 303,030 shares of common stock at an exercise price of $0.4125 per share of common stock. The Company shall make additional quarterly payments under Debenture 2 beginning 90 days after the end of its first fiscal quarter after January 10, 2025, and for the next five years, on an annual basis, equal to the greater of (a) 15% of the original principal amount, or (b) the purchaser’s pro rata portion of 5% of the distributions the Company receives as a result of the Quinn River Joint Venture during the prior fiscal year. The Company recorded a discount in the amount of $10,428 on the Debenture 2. During the three and nine months ended February 28, 2022, $673 and $673 of this discount was charged to operations, respectively. The Company recorded an original issue discount in the amount of $187,500 on the Debenture 2. During the three and nine months ended February 28, 2022, $12,097 and $12,097 of this original issue discount was charged to operations, respectively. During the three and nine months ended February 28, 2022, the Company accrued interest in the amounts of $7,188 and $7,188 on the Debenture 1, respectively.

    250,000       -  

 

24

 

   

February 28, 2022

   

May 31, 2021

 

Debenture in the principal amount of $500,000 (the “Debenture 3”) dated December 21, 2021, which bears interest, payable quarterly commencing six months after issuance, at a rate of 15% per annum. Principal on Debenture 1 is due in two equal installments 18 months after issuance and at maturity on July 10, 2024. With the Debenture, the purchaser received warrants to purchase 303,030 shares of common stock at an exercise price of $0.4125 per share of common stock. The Company shall make additional quarterly payments under Debenture 3 beginning 90 days after the end of its first fiscal quarter after January 10, 2025, and for the next five years, on an annual basis, equal to the greater of (a) 15% of the original principal amount, or (b) the purchaser’s pro rata portion of 5% of the distributions the Company receives as a result of the Quinn River Joint Venture during the prior fiscal year. The Company recorded a discount in the amount of $19,335 on the Debenture 3. During the three and nine months ended February 28, 2022, $1,247 and $1,247 of this discount was charged to operations, respectively. The Company recorded an original issue discount in the amount of $375,000 on the Debenture 3. During the three and nine months ended February 28, 2022, $24,195 and $24,195 of this original issue discount was charged to operations, respectively. During the three and nine months ended February 28, 2022, the Company accrued interest in the amounts of $14,375 and $14,375 on the Debenture 3, respectively.

    500,000       -  
                 

Debenture in the principal amount of $500,000 (the “Debenture 4”) dated January 4, 2022, which bears interest, payable quarterly commencing six months after issuance, at a rate of 15% per annum. Principal on Debenture 4 is due in two equal installments 18 months after issuance and at maturity on July 10, 2024. With the Debenture, the purchaser received warrants to purchase 606,061 shares of common stock at an exercise price of $0.4125 per share of common stock. The Company shall make additional quarterly payments under Debenture 4 beginning 90 days after the end of its first fiscal quarter after January 10, 2025, and for the next five years, on an annual basis, equal to the greater of (a) 15% of the original principal amount, or (b) the purchaser’s pro rata portion of 5% of the distributions the Company receives as a result of the Quinn River Joint Venture during the prior fiscal year. The Company recorded a discount in the amount of $17,154 on the Debenture 4. During the three and nine months ended February 28, 2022, $572 and $572 of this discount was charged to operations, respectively. The Company recorded an original issue discount in the amount of $375,000 on the Debenture 4. During the three and nine months ended February 28, 2022, $12,500 and $12,500 of this original issue discount was charged to operations, respectively. During the three and nine months ended February 28, 2022, the Company accrued interest in the amounts of $11,667 and $11,667 on the Debenture 4, respectively.

    500,000       -  
                 

Debenture in the principal amount of $500,000 (the “Debenture 5”) dated January 4, 2022, which bears interest, payable quarterly commencing six months after issuance, at a rate of 15% per annum. Principal on Debenture 5 is due in two equal installments 18 months after issuance and at maturity on July 10, 2024. With the Debenture, the purchaser received warrants to purchase 606,061 shares of common stock at an exercise price of $0.4125 per share of common stock. The Company shall make additional quarterly payments under Debenture 5 beginning 90 days after the end of its first fiscal quarter after January 10, 2025, and for the next five years, on an annual basis, equal to the greater of (a) 15% of the original principal amount, or (b) the purchaser’s pro rata portion of 5% of the distributions the Company receives as a result of the Quinn River Joint Venture during the prior fiscal year. The Company recorded a discount in the amount of $17,154 on the Debenture 5. During the three and nine months ended February 28, 2022, $572 and $572 of this discount was charged to operations, respectively. The Company recorded an original issue discount in the amount of $375,000 on the Debenture 5. During the three and nine months ended February 28, 2022, $12,500 and $12,500 of this original issue discount was charged to operations, respectively. During the three and nine months ended February 28, 2022, the Company accrued interest in the amounts of $11,667 and $11,667 on the Debenture 5, respectively.

    500,000       -  

 

25

 

   

February 28, 2022

   

May 31, 2021

 

Debenture in the principal amount of $500,000 (the “Debenture 6”) dated January 4, 2022, which bears interest, payable quarterly commencing six months after issuance, at a rate of 15% per annum. Principal on Debenture 6 is due in two equal installments 18 months after issuance and at maturity on July 10, 2024. With the Debenture, the purchaser received warrants to purchase 606,061 shares of common stock at an exercise price of $0.4125 per share of common stock. The Company shall make additional quarterly payments under Debenture 6 beginning 90 days after the end of its first fiscal quarter after January 10, 2025, and for the next five years, on an annual basis, equal to the greater of (a) 15% of the original principal amount, or (b) the purchaser’s pro rata portion of 5% of the distributions the Company receives as a result of the Quinn River Joint Venture during the prior fiscal year. The Company recorded a discount in the amount of $17,154 on the Debenture 6. During the three and nine months ended February 28, 2022, $572 and $572 of this discount was charged to operations, respectively. The Company recorded an original issue discount in the amount of $375,000 on the Debenture 6. During the three and nine months ended February 28, 2022, $12,500 and $12,500 of this original issue discount was charged to operations, respectively. During the three and nine months ended February 28, 2022, the Company accrued interest in the amounts of $11,667 and $11,667 on the Debenture 6, respectively.

    500,000       -  
                 

Total

    2,500,000       -  

Original Issue Discount

    1,875,000       -  

Notes Payable, Gross

    4,375,000       -  

Less: Discount

    (1,876,208

)

    -  

Notes Payable, Net of Discount

    2,498,792       -  

 

   

February 28, 2022

   

February 28, 2021

 

Discounts on notes payable amortized to interest expense – 3 months ended February 28, 2022 and 2021, respectively

  $ 97,239     $ -  

 

Discounts on notes payable amortized to interest expense – 9 months ended February 28, 2022 and 2021, respectively

  $ 97,239     $ -  

 

Aggregate maturities of notes payable and convertible notes payable as of February 28, 2022 are as follows:

 

For the twelve months ended February 28,

 

2023

  $ 19,448,822  

2024

    1,250,000  

2025

    1,250,000  

2026

    375,000  

2027

    375,000  

Thereafter

    1,125,000  

Total

  $ 23,823,822  

 

During the nine months ended February 28, 2022, the Company offered for sale a maximum of $5,500,000 of debentures (the “2021 Debentures”) and warrants to purchase shares of the Company’s common stock at a price of $0.4125 per share in an aggregate amount equal to one-half of the aggregate purchase price for the 2021 Debentures (the “2021 Debenture Warrants”) (collectively, the “November 2021 Offering”). During the nine months ended February 28, 2022, the Company received the amount of $2,500,000 pursuant to the November 2021 Offering and issued an aggregate of 3,030,304 warrants to purchase its common stock at an exercise price of $0.4125 per share to the investors.

 

Note 17 Contingent Liability

 

The terms of the Company’s acquisition of Alternative Solutions, included a payment of $1,000,000 contingent upon the Oasis LLCs achieving certain revenue targets. (see note 3). The fair value of this contingent consideration at the time of the Acquisition Agreement was $678,111 as determined by the Company’s outside valuation consultants. Management reviewed the value of the contingent consideration, and concluded that, due to the increased revenue of Alternative Solutions, the fair value of this contingent liability was $1,000,000 at May 31, 2019. The Company recorded a charge to operations in the amount of $321,889 during the year ended May 31, 2019.

 

26

 

The full amount of the bonus payment was earned, and on May 27, 2020, the Company made a payment in the amount of $850,000 to the sellers. The Company deposited the balance due to sellers of $150,000 with an escrow agent to hold pending the outcome of a tax audit. During the year ended May 31, 2020, the State of Nevada notified the Oasis LLCs that it would be conducting a tax audit for periods both before and after the closing of the sale to CLS. The tax audit was completed and the Company received a deficiency notice dated January 29, 2021. The Company paid the tax due and on February 16, 2021, $41,805 of the escrowed amount was released to the Company, $106,195 was released to sellers and the balance of $2,000 was remitted to the escrow agent as payment of its fees.

 

Note 18 Stockholders Equity

 

The Company’s authorized capital stock consists of 750,000,000 shares of common stock, par value $0.0001, at February 28, 2022 and May 31, 2021, and 20,000,000 shares of preferred stock, par value $0.001 per share. The Company had 128,158,082 and 127,221,416 shares of common stock issued and outstanding as of February 28, 2022 and May 31, 2021, respectively.

 

Nine months ended February 28, 2022

 

Common Stock and Warrants Issued upon Conversion of Notes Payable:

 

On June 17, 2021, the Company issued 936,666 shares of common stock and three-year warrants to acquire 468,333 shares of common stock at a price of $1.10 (now $0.40 as a result of the amendment of the Canaccord Debentures) per share to Canaccord Genuity Corp., as nominee, in connection with the conversion of a portion of the Canaccord Debentures in the principal amount of $281,000. No gain or loss was recorded on this transaction because the conversion was made pursuant to the terms of the original agreement.

 

During the three months ended February 28, 2022, the Company granted 100,000 shares of common stock to an employee. The Company charged the value of these shares $8,780 to common stock subscribed. These shares had not been issued as of February 28, 2022.

 

Nine months ended February 28, 2021

 

Common Stock Issued and To Be Issued to Officers and Service Providers:

 

During the nine months ended February 28, 2021, the Company charged an aggregate of $80,813 to common stock subscribed representing the accrual over the vesting period of 500,000 shares of restricted common stock issuable to officers.

 

During the nine months ended February 28, 2021, the Company recognized the cancellation of a consulting contract, which resulted in a credit to operations in the amount of $22,500 and the reversal of 100,000 shares of common stock to be issued.

 

During the nine months ended February 28, 2021, the Company recognized the cancellation of a consulting contract, which resulted in a credit to operations in the amount of $3,250 and the reversal of 25,000 shares of common stock to be issued.

 

During the nine months ended February 28, 2021, the Company recognized the issuance of 50,000 to a former officer, which shares were previously recorded in common stock to be issued.

 

Warrants

 

The Company values warrants using the Black-Scholes valuation model utilizing the following variables. On March 31, 2021, the Company reduced the conversion price of the Canaccord Debentures from $0.80 per unit to $0.30 per unit, increasing the warrants issuable upon conversion of the Canaccord Debentures from 8,408,400 to 22,516,374. As amended, each warrant issuable pursuant to conversion of the Canaccord Debentures is exercisable for one share of the Company’s common stock at a price equal to $0.40 per share until March 31, 2024.

 

In April 2021, the Company amended $6,229,672 in outstanding debentures to reduce the conversion price of the debentures from $0.80 per unit to $0.30 per unit, increasing the warrants issuable upon conversion of such debentures from 3,893,545 to 10,382,785. As amended, each warrant issuable pursuant to conversion of such debentures is exercisable for one share of the Company’s common stock at a price equal to 137.5% of the conversion price (presently $0.4125 per share) until July 14, 2024.

 

From December 1, 2021 through January 4, 2022 the Company issued $2,500,000 in debentures and issued 3,030,304 warrants with these debentures. Each warrant allows the holder to purchase one share of the Company’s common stock at an exercise price of $0.4125 per share for three years after its date of issuance.

 

27

 

The following table summarizes the significant terms of warrants outstanding at February 28, 2022. This table does not include the unit warrants. See Unit Warrants section below.

 

Range of

exercise

Prices

 

 

Number of

warrants

Outstanding

 

 

Weighted average

remaining

contractual

life (years)

 

 

Weighted average

exercise

price of

outstanding

Warrants

 

 

Number of

warrants

Exercisable

 

 

Weighted average

exercise

price of

exercisable

Warrants

 

$

0.41

 

 

 

3,514,797

 

 

 

0.21

 

 

$

0.41

 

 

 

3,514,797

 

 

$

0.41

 

 

0.50

 

 

 

706,500

 

 

 

0.04

 

 

 

0.50

 

 

 

706,500

 

 

 

0.50

 

 

0.60

 

 

 

3,125,000

 

 

 

0.72

 

 

 

0.60

 

 

 

3,125,000

 

 

 

0.60

 

 

 

 

 

 

7,346,297

 

 

 

0.41

 

 

$

0.50

 

 

 

7,346,297

 

 

$

0.50

 

 

Transactions involving warrants are summarized as follows. This table does not include the unit warrants. See Unit Warrants section below.

 

   

Number of

Shares

   

Weighted Average

Exercise Price

 

Warrants outstanding at May 31, 2020

    54,835,145     $ 0.53  

Granted

    -     $ -  

Exercised

    -     $ -  

Cancelled / Expired

    (837,500

)

  $ 0.75  
                 

Warrants outstanding at May 31, 2021

    53,997,645     $ 0.50  

Granted

    3,498,637     $ 0.41  

Exercised

    -     $ -  

Cancelled / Expired

    (50,149,985

)

  $ 0.53  

Warrants outstanding at February 28, 2022

    7,346,297     $ 0.50  

 

Unit Warrants

 

In February and March 2018, in connection with the Westpark offering, the Company issued five-year warrants to purchase 205,238 of the Company’s units at an exercise price of $1.25 per unit. Each unit consists of four shares of common stock and one warrant to purchase a share of common stock for $0.75 per share.

 

On June 20, 2018, in connection with the special warrant offering, the Company issued Canaccord Genuity Corp. 2,317,842 three-year broker warrants at an exercise price of C$0.45 per share as compensation. Each warrant entitles the holder to purchase one unit, which consists of one share of common stock and a warrant to purchase one share of common stock, for C$0.65 per share. These warrants were valued at $1,495,373, and this amount was charged to operations during the year ended May 31, 2019. These warrants expired on June 20, 2021.

 

On December 12, 2018, in connection with the issuance of the Canaccord Debentures, the Company issued Canaccord Genuity Corp. as compensation 1,074,720 three-year agent and advisory warrants. Each warrant entitles the holder to purchase a unit for $0.80, which unit consists of one share of common stock and a warrant to purchase one-half share of common stock at an exercise price of $1.10 per share. The Company, in connection with the issuance of the Canaccord Debentures, also issued to National Bank Financial Inc., as compensation, 268,680 three-year agent and advisory warrants. Each warrant entitles the holder to purchase a unit for $0.80, which unit consists of one share of common stock and a warrant to purchase one-half share of common stock at an exercise price of $1.10 per share. The aggregate value of these warrants was $874,457, which was charged to operations during the year ended May 31, 2019. These warrants expired on December 12, 2021.

 

Because the unit warrants are exercisable for Common Stock and warrants, they are not included in the warrant tables above.

 

28

 

Note 19 Fair Value of Financial Instruments

 

The Company has issued convertible notes containing beneficial conversion features. One of the features is a ratchet reset provision which, in general, reduces the conversion price should the Company issue equity with an effective price per share that is lower than the stated conversion price in the note. The Company accounts for the fair value of the conversion feature in accordance with ASC 815- Accounting for Derivatives and Hedging and Emerging Issues Task Force (“EITF”) 07-05- Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock (“EITF 07-05”). The Company carries the embedded derivative on its balance sheet at fair value and accounts for any unrealized change in fair value as a component of its results of operations.

 

The following summarizes the Company’s financial liabilities that are recorded at fair value on a recurring basis at February 28, 2022 and May 31, 2021:

 

   

February 28, 2022

 
   

Level 1

   

Level 2

   

Level 3

   

Total

 

Liabilities

                               

Derivative liabilities

  $ -     $ -     $ -     $ -  

 

   

May 31, 2021

 
   

Level 1

   

Level 2

   

Level 3

   

Total

 

Liabilities

                               

Derivative liabilities

  $ -     $ -     $ -     $ -  

 

Note 20 Related Party Transactions

 

As of February 28, 2022 and May 31, 2021, the Company had accrued salary due to Michael Abrams, a former officer of the Company prior to his September 1, 2015 termination, in the amount of $16,250.

 

Note 21 Income Taxes

 

The following table summarizes the Company’s income tax accrued for the three and nine months ended February 28, 2022:

 

   

For the Three Months

Ended

February 28, 2022

   

For the Nine Months

Ended

February 28, 2022

 

Loss before provision for income taxes

  $ (673,031

)

  $ (125,347

)

Provision for income taxes

  $ (324,265

)

  $ (793,322

)

Effective tax rate

    7.9

%

    16.24

%

 

Due to the accrual of taxes related to Section 280E of the Internal Revenue Code, as amended, the Company has an uncertain tax accrual that is currently being expensed as a change in estimate. The Company has net operating losses that it believes are available to it to offset this expense; however, there can be no assurance under current interpretations of tax laws for cannabis companies that the Company will be allowed to use these net operating losses to offset Section 280E tax expenses.

 

Note 22 Commitments and Contingencies

 

Lease Arrangements

 

The Company leases several facilities for office, warehouse, and retail space. Currently lease commitments are as follows:

 

 

A lease that commenced in February 2019 for 1,400 square feet of office space located at 1718 Industrial Road, Las Vegas, NV 89102, for a term of eighteen months, and for rent of $1,785 per month. In June 2020, this lease was extended to August 31, 2022, with the monthly rent increasing to $1,866.70 until September 2021, after which time it will be subject to annual increases of 3%. The lease was extended again on April 1, 2022, see Note 23.

 

29

 

 

A lease that commenced January 2018 for 1,000 square feet of storefront space plus 5,900 square feet of warehouse space located at 1800 Industrial Road, Suites 102, 160, and 180, Las Vegas, NV 89102, for a term of five years and for initial base rent of $7,500 per month, with annual increases of 3%. In February 2020, this lease was extended to February 28, 2030 and the monthly rent was increased by $600.

 

 

A lease that commenced in February 2019 for 2,504 square feet of office space located at 1800 Industrial Road, Suite 100, Las Vegas, NV 89102 for a term of eighteen months and for initial rent of $3,210 per month, with annual increases of 4%. In February 2020, this lease was extended to February 28, 2030, and the lease was modified to include annual rent increases of 3%.

 

 

A lease that commenced in January 2016 for 22,000 square feet of warehouse space located at 203 E. Mayflower Avenue, North Las Vegas, NV 89030 for a term of five years and initial rent of $11,000 per month, which amount increased to $29,000 per month on January 1, 2020. In June 2020, this lease was extended to February 28, 2026, and the monthly rent was amended as follows: $25,000 for the months of April, May, and June 2020; $22,500 for the months of March 2021 through February 2022; $23,175 for the months of March 2022 through February 2023; 23,870 for the months of March 2023 through February 2024; $24,586 for the months of March 2024 through February 2025; and $25,323 for the months of March 2025 through February 2026.

 

 

A lease that commenced on October 20, 2021 for approximately 30 acres of land for purposes of developing a cultivation facility along the Quinn River in Nevada at a cost of $3,500 per month (the “Quinn River Land Lease”). The Quinn River Land Lease has a term of 10 years beginning on the date of the first harvest generated by the Quinn River Joint Venture, or approximately 10.5 years, plus a 10 year renewal option. See note 3.

 

In connection with the Company’s planned Colorado operations, on April 17, 2015, pursuant to an Industrial Lease Agreement (the “Lease”), CLS Labs Colorado leased 14,392 square feet of warehouse and office space (the “Leased Real Property”) in a building in Denver, Colorado where certain intended activities, including growing, extraction, conversion, assembly and packaging of cannabis and other plant materials, are permitted by and in compliance with state, city and local laws, rules, ordinances and regulations. The Lease had an initial term of seventy-two (72) months and provided CLS Labs Colorado with two options to extend the term of the lease by up to an aggregate of ten (10) additional years. In August 2017, as a result of the Company’s decision to suspend its proposed operations in Colorado, CLS Labs Colorado asked its landlord to be relieved from its obligations under the Lease, but the parties have not yet reached an agreement on how to proceed.

 

In August 2017, the Company’s Colorado subsidiary received a demand letter from its Colorado landlord requesting the forfeiture of the $50,000 security deposit, $10,000 in expenses, $15,699 in remaining rent due under the lease agreement and $30,000 to buy out the remaining amounts due under the lease. These expenses, which are a liability of the Company’s Colorado subsidiary, have been accrued on the balance sheet as of February 28, 2022.

 

Note 23 Subsequent Events

 

The Company has evaluated events through the date of the financial statements and has determined that there were no additional material subsequent events.

 

A lease for office space located at 1718 Industrial Road, Las Vegas, NV 89102 was extended again on April 1, 2022, effective September 1, 2022, until August 31, 2024. The monthly rent will increase on September 1, 2022 to $2,084.14 with annual increases of 3%.

 

Subsequent to February 28, 2022, the Company has issued 50,000 to an employee which were previously subscribed.

 

30

 

Item 2. Managements 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.

 

31

 

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.

 

32

 

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.

 

33

 

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

%

    -

%

 

34

 

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.

 

35

 

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.

 

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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.