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, 2023

 

or

 

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

 

Commission File Number: 000-55546

 

CLS HOLDINGS USA, INC.

(Exact name of registrant as specified in its charter)

 

Nevada

45-1352286

(State or other jurisdiction of incorporation or organization)

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

 

1800 S. Industrial Road Suite 100, Las Vegas Nevada, 89102

(Address of principal executive offices) (Zip Code)

 

(416) 992-4539

(Registrant’s telephone number, including area code)

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

N/A

N/A

N/A

 

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

Yes ☒ No ☐

 

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

Yes ☒ No ☐

 

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

 

Large Accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer

Smaller reporting company

Emerging growth company

 

 

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

 

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

Yes ☐ No

 

State the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 72,518,142 shares of $0.0001 par value common stock outstanding as of April 5, 2023.

 

 

 

 

CLS HOLDINGS USA, INC.

 

FORM 10-Q

Quarterly Period Ended February 28, 2023

 

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, 2022 (audited)

4

 

Condensed Consolidated Statements of Operations for the Three and Nine Months ended February 28, 2023 and 2022 (Unaudited)

5

 

Condensed Consolidated Statements of Stockholders’ Deficit for the Nine Months ended February 28, 2023 and 2022 (Unaudited)

6

 

Condensed Consolidated Statements of Cash Flows for the Nine Months ended February 28, 2023 and 2022 (Unaudited)

7

 

Notes to the Consolidated Financial Statements (Unaudited)

8

Item 2.

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

33

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

50

Item 4.

Controls and Procedures

50

 

 

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

51

Item 1A.

Risk Factors

51

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

51

Item 3.

Defaults Upon Senior Securities

51

Item 4.

Mine Safety Disclosures

51

Item 5.

Other Information

51

Item 6.

Exhibits

51

 

 

SIGNATURES

52

 

 

 

 

 

EXPLANATORY NOTE

 

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

 

FORWARD-LOOKING STATEMENTS

 

This document contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements relate to, among other things, the impact of the COVID-19 virus on our business, the results of our initiatives to retain our employees and strengthen our relationships with our customers and community, the effect of our initiatives to expand market share and achieve growth, the expected development of our business and joint ventures, results of operations and financial performance, liquidity, working capital and capital requirements, the effects of the additional dilution on our common stock that may occur as a result of the amendments to our convertible debentures, and anticipated future events. The continued spread of COVID-19 could have, and in some cases already has had, an adverse impact on our business, operations and financial results, including through disruptions in our cultivation and processing activities, supply chains and sales channels, and retail dispensary operations as well as a deterioration of general economic conditions including a possible national or global recession. These forward-looking statements also relate to our ability to obtain debt or equity capital on reasonable terms, or at all, to finance our operations, and to identify, finance and close potential acquisitions and joint ventures, whether our joint venture partner will make its capital contribution, our ability to comply with applicable cannabis-related regulations and obtain regulatory approvals, market acceptance of our services and product offerings, our ability to protect and commercialize our intellectual property, our ability to use net operating losses to offset certain cannabis-related tax liabilities and our ability to grow our wholesale and processing businesses and joint ventures. In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “will,” “should,” “intends,” “expects,” “plans,” “goals,” “projects,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these terms or other comparable terminology.

 

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

 

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

 

AVAILABLE INFORMATION

 

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

 

3

 

Item 1. Financial Statements.

 

CLS HOLDINGS USA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   

February 28,

   

May 31,

 
   

2023

   

2022

 
   

(unaudited)

         

ASSETS

               

Current assets

               

Cash and cash equivalents

  $ 887,812     $ 2,551,859  

Accounts Receivable

    718,382       618,227  

Inventory

    4,349,463       3,417,602  

Prepaid expenses and other current assets

    183,742       295,869  

Total current assets

    6,139,399       6,883,557  
                 

Property, plant and equipment, net of accumulated depreciation of $2,703,369 and $2,073,449

    3,853,979       4,342,434  

Right of use assets, operating leases

    1,938,198       2,154,517  

Intangible assets, net of accumulated amortization of $559,502 and $473,308

    1,104,091       1,190,285  

Goodwill

    557,896       557,896  

Investments

    590,137       469,575  

Other assets

    198,000       229,500  
                 

Total assets

  $ 14,381,700     $ 15,827,764  
                 

LIABILITIES AND STOCKHOLDERS' DEFICIT

               

Current liabilities

               

Accounts payable and accrued liabilities

  $ 3,057,520     $ 2,317,898  

Accrued interest, current

    478,472       419,206  

Loans payable

    949,902       1,013,073  

Lease liability - operating leases, current

    362,917       309,597  

Lease liability - financing leases, current

    80,818       71,813  

Taxes Payable

    6,083,810       4,531,782  

Notes payable

    1,250,000       -  

Convertible notes payable - current

    4,003,052       19,448,821  
                 

Total current liabilities

    16,266,491       28,112,190  
                 

Noncurrent liabilities

               

Lease liability - operating leases, non-current

    1,643,224       1,893,810  

Lease liability - financing leases, non-current

    215,389       277,180  

Notes payable, non-current, net of discount of $1,097,113 and $1,681,434

    2,027,887       2,693,566  

Convertible Notes payable, non-current

    3,753,050       -  
                 

Total Liabilities

    23,906,041       32,976,746  
                 

Commitments and contingencies

    -       -  
                 

Stockholder's deficit

               

Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued

    -       -  

Common stock, $0.0001 par value; 187,500,000 shares authorized at February 28, 2023 and May 31, 2022; 72,518,142 and 32,052,021 shares issued and outstanding at February 28, 2023 and May 31, 2022

    7,253       3,206  

Additional paid-in capital

    96,142,740       77,954,748  

Common stock subscribed

    70,092       70,092  

Accumulated deficit

    (105,343,764

)

    (95,079,817

)

Stockholder's deficit attributable to CLS Holdings, Inc.

    (9,123,679

)

    (17,051,771

)

Non-controlling interest

    (400,662

)

    (97,211

)

Total stockholder's deficit

    (9,524,341

)

    (17,148,982

)

                 

Total liabilities and stockholders' deficit

  $ 14,381,700     $ 15,827,764  

 

See accompanying notes to these financial statements.

 

4

 

CLS HOLDINGS USA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

         

   

For the Three

   

For the Three

   

For the Nine

   

For the Nine

 
   

Months Ended

   

Months Ended

   

Months Ended

   

Months Ended

 
   

February 28, 2023

   

February 28, 2022

   

February 28, 2023

   

February 28, 2022

 
                                 

Revenue

  $ 5,437,302     $ 5,588,266     $ 17,556,406     $ 16,502,978  

Cost of goods sold

    2,418,609       2,701,160       8,493,072       7,989,817  

Gross margin

    3,018,693       2,887,106       9,063,334       8,513,161  
                                 
                                 

Selling, general and administrative expenses

    2,860,914       3,492,691       9,568,775       9,440,918  

Total operating expenses

    2,860,914       3,492,691       9,568,775       9,440,918  
                                 

Operating income (loss)

    157,779       (605,585

)

    (505,441

)

    (927,757

)

                                 

Other (income) expense:

                               

Interest expense, net

    648,957       589,692       2,024,532       1,416,164  

Loss on extinguishment of debt

    -       -       6,659,359       -  

Loss on equity investment

    22,476       -       176,587       -  

Gain on settlement of debt

    -       -       (2,384

)

    -  

Gain on settlement of note receivable

    -       (522,246

)

    (348,165

)

    (2,218,574

)

Total other expense

    671,433       67,446       8,509,929       (802,410

)

                                 

Loss before income taxes

    (513,654

)

    (673,031

)

    (9,015,370

)

    (125,347

)

                                 

Provision for income tax

    (516,252

)

    (324,265

)

    (1,552,028

)

    (793,322

)

                                 

Net loss

    (1,029,906

)

    (997,296

)

    (10,567,398

)

    (918,669

)

                                 

Non-controlling interest

    130,391       5,028       303,451       8,528  
                                 

Net loss attributable to CLS Holdings, Inc.

  $ (899,515

)

  $ (992,268

)

  $ (10,263,947

)

  $ (910,141

)

                                 

Net loss per share – basic

  $ (0.01

)

  $ (0.03

)

  $ (0.18

)

  $ (0.03

)

                                 

Net loss per share – diluted

  $ (0.01

)

  $ (0.03

)

  $ (0.18

)

  $ (0.03

)

                                 

Weighted average shares outstanding – basic

    72,518,141       32,039,520       56,657,781       32,024,938  
                                 

Weighted average shares outstanding – diluted

    72,518,141       32,039,520       56,657,781       32,024,938  

 

See accompanying notes to these financial statements.

 

5

 

CLS HOLDINGS USA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT

(Unaudited)

 

                   

Additional

                                 
   

Common Stock

   

Paid In

   

Stock

   

Accumulated

   

Non-controlling

         
   

Amount

   

Value

   

Capital

   

Payable

   

Deficit

   

interest

   

Total

 
                                                         

Balance, May 31, 2021

    31,805,354     $ 3,182     $ 77,570,934     $ 65,702     $ (92,736,638

)

  $ -     $ (15,096,820

)

                                                         

Common stock issued for conversion of debt

    234,167       23       280,977       -       -       -       281,000  

Common stock to be issue 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

    32,039,521     $ 3,205     $ 77,950,359     $ 74,482     $ (93,646,779

)

  $ (8,528

)

  $ (15,627,261

)

                                                         

Balance, May 31, 2022

    32,052,021     $ 3,206     $ 77,954,748     $ 70,092     $ (95,079,817

)

  $ (97,211

)

  $ (17,148,982

)

                                                         

Common stock issued for the conversion of debt

    40,465,546       4,047       11,528,633       -       -       -       11,532,680  

Rounding for reverse split

    575       -       -       -       -       -       -  

Loss on extinguishment of debt

    -       -       6,659,359       -       -       -       6,659,359  

Net loss for the nine months ended February 28, 2023

    -       -       -       -       (10,263,947

)

    (303,451

)

    (10,567,398

)

Balance, February 28, 2023

    72,518,142     $ 7,253     $ 96,142,740     $ 70,092     $ (105,343,764

)

  $ (400,662

)

  $ (9,524,341

)

 

See accompanying notes to these financial statements.

 

6

 

CLS HOLDINGS USA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   

For the Nine

   

For the Nine

 
   

Months Ended

   

Months Ended

 
   

February 28, 2023

   

February 28, 2022

 

CASH FLOWS FROM OPERATING ACTIVITIES

               

Net loss

  $ (10,567,398

)

  $ (918,669

)

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

               

Loss on equity investment

    176,587       -  

Amortization of debt discounts and fees

    597,821       132,735  

Gain on settlement of note receivable

    (348,165

)

    (2,218,574

)

Fair value of shares vested by officers

    -       8,780  

Loss on extinguishment of debt

    6,659,359       -  

Gain on debt settlement

    (2,384

)

    -  

Depreciation and amortization expense

    716,114       535,361  

Bad debt expense

    (4,437

)

    2,329  

Changes in assets and liabilities:

               

Accounts receivable

    (95,718

)

    (160,067

)

Prepaid expenses and other current assets

    143,627       (6,385

)

Inventory

    (931,861

)

    (1,114,556

)

Right of use asset

    263,064       240,736  

Accounts payable and accrued expenses

    739,622       266,417  

Accrued interest

    327,169       95,050  

Funds held in escrow

    -       -  

Deferred tax liability

    1,552,028       793,322  

Operating lease liability

    (244,011

)

    (213,827

)

Net cash used in operating activities

    (1,018,583

)

    (2,557,348

)

                 

CASH FLOWS FROM INVESTING ACTIVITIES

               

Payments to purchase property, plant and equipment

    (141,465

)

    (165,875

)

Investment in Quinn River

    (297,149

)

    -  

Cash paid for construction deposit on grow facility

    -       (82,500

)

Proceeds from collection of note receivable

    348,165       2,218,574  

Net cash provided by (used in) investing activities

    (90,449

)

    1,970,199  
                 

CASH FLOWS FROM FINANCING ACTIVITIES

               

Proceeds from loan payable

    1,717,115       808,800  

Repayments of loan payable

    (1,869,344

)

    (566,339

)

Proceeds from debenture offering

    -       2,500,000  

Principal payments on notes payable

    -       (365,991

)

Repayments on convertible debt

    (350,000

)

    -  

Principal payments on finance leases

    (52,786

)

    -  

Net cash provided by (used in) financing activities

    (555,015

)

    2,376,470  
                 

Net increase (decrease) in cash and cash equivalents

    (1,664,047

)

    1,789,321  
                 

Cash and cash equivalents at beginning of period

    2,551,859       1,665,263  
                 

Cash and cash equivalents at end of period

  $ 887,812     $ 3,454,584  
                 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

               

Interest paid

  $ 1,188,397     $ 1,221,173  

Income taxes paid

  $ -     $ -  
                 

NONCASH INVESTING AND FINANCING ACTIVITIES:

               

Shares issued for conversion of notes payable

  $ 11,532,680     $ 281,000  
                 

Initial ROU asset and lease liability - operating

  $ 46,745     $ 229,412  

Original issue discount on notes payable

  $ -     $ 1,875,000  

Fair value of warrants issued with debenture offering

  $ -     $ 98,448  

Capitalized Interest

  $ 3,283     $ -  

 

See accompanying notes to these financial statements.

 

7

 

CLS HOLDINGS USA, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

February 28, 2023

(Unaudited)

 

Note 1 Nature of Business and Significant Accounting Policies

 

Basis of Presentation

 

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

 

Principals of Consolidation

 

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

 

Nature of Business

 

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

 

On November 12, 2014, CLS Labs acquired 2,500,000 shares, or 55.6%, of the outstanding shares of common stock of Adelt from its founder, Larry Adelt. On that date, Jeffrey Binder, the Chairman, President and Chief Executive Officer of CLS Labs, was appointed Chairman, President and Chief Executive Officer of the Company. On November 20, 2014, Adelt adopted amended and restated articles of incorporation, thereby changing its name to CLS Holdings USA, Inc. Effective December 10, 2014, the Company effected a reverse stock split of its issued and outstanding common stock at a ratio of 1-for-0.625 (the “Reverse Split”), wherein 0.625 shares of the Company’s common stock were issued in exchange for each share of common stock issued and outstanding. As a result, 1,562,500 shares of the Company’s common stock were issued to CLS Labs in exchange for the 2,500,000 shares that it owned by virtue of the above-referenced purchase from Larry Adelt.

 

On April 29, 2015, the Company, CLS Labs and CLS Merger Inc., a Nevada corporation and wholly owned subsidiary of CLS Holdings (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) and completed a merger, whereby CLS Merger Inc. merged with and into CLS Labs, with CLS Labs remaining as the surviving entity (the “Merger”). Upon the consummation of the Merger, the shares of the common stock of CLS Holdings owned by CLS Labs were extinguished and the former stockholders of CLS Labs were issued an aggregate of 3,750,000 shares of common stock in CLS Holdings in exchange for their shares of common stock in CLS Labs. As a result of the Merger, the Company acquired the business of CLS Labs and abandoned its previous business.

 

The Company has been issued a U.S. patent with respect to Its proprietary method of extracting cannabinoids from cannabis plants and converting the resulting cannabinoid extracts into concentrates such as oils, waxes, edibles and shatter. These concentrates may be ingested in a number of ways, including through vaporization via electronic cigarettes (“e-cigarettes”), and used for a variety of pharmaceutical and other purposes. The Company has not commercialized its patented proprietary process or otherwise earned any revenues from it. The Company is currently exploring ways in which to generate revenue from the patent or the sale of the patent.

 

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

 

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 5,514,706 shares of its common stock (the “Purchase Price Shares”) (collectively, the “Closing Consideration”). The cash payment of $5,995,543 was less than the $6,200,000 payment originally contemplated because the Company assumed an additional $204,457 of liabilities. The Company used the proceeds of a Canadian private securities offering to fund the cash portion of the Closing Consideration. The Company then applied for regulatory approval to own the additional 90% in membership interests in the Oasis LLCs, which it received on December 12, 2018. The Company received final regulatory approval to own its interest in the Oasis LLCs through Alternative Solutions under the revised structure of the transaction on April 26, 2022.

 

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

 

On June 14, 2021, the parties to the IGH lawsuit entered into a confidential settlement agreement to resolve the action and a secured promissory note dated and executed by IGH in favor of the Company effective on June 11, 2021 (the “IGH Settlement Note”). Pursuant to the IGH Settlement Note, IGH paid the Company $3,000,000, $500,000 of which was paid on or before June 21, 2021. A second payment of $500,000 was paid on or before July 12, 2021. The remaining $2,000,000 and accrued interest was paid in 12 equal monthly installments beginning on August 12, 2021, pursuant to the terms of the promissory note. During the year ended May 31, 2022, the Company received $2,740,820 under the IGH Settlement Note, which included $2,666,670 in principal and $74,150 in accrued interest. During the nine months ended February 28, 2023, the Company received $348,165 under the IGH Settlement Note, which included $333,333 in principal and $14,832 in accrued interest. As of February 28, 2023, the IGH Settlement Note had been repaid in full. The Company records amounts paid under the IGH Settlement Note as gains when payments are received.

 

9

 

On October 20, 2021, the Company entered into a management services agreement (the “Quinn River Joint Venture Agreement”) through its 50% owned subsidiary, Kealii Okamalu, LLC (“Kealii Okamalu”), with CSI Health MCD LLC (“CSI”) and a commission established by the authority of the Tribal Council of the Fort McDermitt Paiute and Shoshone Tribe (the “Tribe”). The purpose of the Quinn River Joint Venture Agreement is to establish a business (the “Quinn River Joint Venture”) to grow, cultivate, process and sell cannabis and related products. The Quinn River Joint Venture Agreement has a term of 10 years plus a 10-year renewal term from the date the first cannabis crop produced is harvested and sold; the first sale of product produced by the Quinn River Joint Venture occurred on September 22, 2022. Pursuant to the Quinn River Joint Venture Agreement, Kealii Okamalu leases approximately 20-30 acres of the Tribe’s land located along the Quinn River at a cost of $3,500 per quarter and managed the design, finance and construction of a cannabis cultivation facility on such tribal lands (the “Cultivation Facility”). Kealii Okamalu also manages the ongoing operations of the Cultivation Facility and related business, including, but not limited to, cultivation of cannabis crops, personnel staffing, product packaging, testing, marketing and sales. Packaged products are branded as “Quinn River Farms.” The Company has provided up to 10,000 square feet of warehouse space at its Las Vegas facility for the Quinn River product and has preferred vendor status, including the right to purchase cannabis flower and the business’s cannabis trim at favorable prices. Kealii Okamalu is expected to ultimately contribute $6 million towards the construction of the Cultivation Facility and the working capital for the Quinn River Joint Venture. This amount will be repaid from a portion of the net income of the Quinn River Joint Venture otherwise payable to CSI and the Tribe at the rate of $750,000 per quarter for eight quarters. After repayment to Kealii Okamalu of the initial investment amount of approximately $6 million, Kealii Okamalu will receive one-third of the net profits of the Quinn River Joint Venture. At February 28, 2023, Kealii Okamalu has contributed approximately $2.95 million to the Quinn River Joint Venture.

 

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

 

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

 

Use of Estimates

 

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

 

10

 

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 $887,812 and $2,551,859 as of February 28, 2023 and May 31, 2022, respectively. The reduction in cash and cash equivalents is largely a function of the financial demands of the Tribal Joint Venture during this nine month period.

 

Allowance for Doubtful Accounts

 

The Company generates the majority of its revenues and corresponding accounts receivable from the sale of cannabis, and cannabis related products. The Company evaluates the collectability of its accounts receivable considering a combination of factors. In circumstances where it is aware of a specific customer’s inability to meet its financial obligations to it, the Company records a specific reserve for bad debts against amounts due in order to reduce the net recognized receivable to the amount it reasonably believes will be collected. For all other customers, the Company recognizes reserves for bad debts based on past write-off experience and the length of time the receivables are past due. The Company had ($4,437) and $2,329 of bad debt expense (recoveries) during the three months ended February 28, 2023 and 2022, respectively. The Company had ($4,437) and $2,329 of bad debt (recoveries) expense during the nine months ended February 28, 2023 and 2022, respectively.

 

Inventory

 

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

 

11

 

Non-Controlling Interests

 

The Company reports “non-controlling interest in subsidiary” as a component of equity, separate from parent’s equity, on the Consolidated Balance Sheets. In addition, the Company’s Consolidated Statements of Operations includes “net income (loss) attributable to non-controlling interest.” During the three months ended February 28, 2023 and 2022, the Company reported a non-controlling interest in the amount of $130,391 and $5,028, respectively, representing 50% of the (income) loss incurred by its partially owned subsidiary, Kealii Okamalu. During the nine months ended February 28, 2023 and 2022, the Company reported a non-controlling interest in the amount of $303,451 and $8,528, respectively, representing 50% of the loss incurred by its partially owned subsidiary, Kealii Okamalu.

 

Variable Interest Entities

 

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

 

Concentrations of Credit Risk

 

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

 

Advertising and Marketing Costs

 

All costs associated with advertising and promoting products are expensed as incurred. Total recognized advertising and marketing expenses were $119,327 and $299,154 for the three months ended February 28, 2023 and 2022, respectively. Total recognized advertising and marketing expenses were $517,452 and $1,087,692 for the nine months ended February 28, 2023 and 2022, respectively.

 

Research and Development

 

Research and development expenses are charged to operations as incurred. The Company incurred research and development costs of $196 and $1,800 for the three months ended February 28, 2023 and 2022, respectively. The Company incurred research and development costs of $879 and $12,308 for the nine months ended February 28, 2023 and 2022, 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.

 

12

 

Revenue Recognition

 

Revenue from the sale of cannabis products is recognized by Oasis at the point of sale, at which time payment is received, the product is delivered, and the Company’s performance obligation has been met. Management estimates an allowance for sales returns.

 

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

 

 

Premium organic medical cannabis sold wholesale to licensed retailers

 

 

 

 

Recreational marijuana cannabis products sold wholesale to licensed distributors and retailers

 

 

 

 

Extraction products such as oils and waxes derived from in-house cannabis production

 

 

 

 

Processing and extraction services for licensed medical cannabis cultivators in Nevada

 

 

 

 

High quality cannabis strains in the form of vegetative cuttings for sale to licensed medical cannabis cultivators in Nevada

 

Effective June 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from commercial sales of products and licensing agreements by applying the following steps: (1) identifying the contract with a customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to each performance obligation in the contract; and (5) recognizing revenue when each performance obligation is satisfied.

 

Disaggregation of Revenue

 

The following table represents a disaggregation of revenue for the three and nine months ended February 28, 2023 and 2022:

 

   

For the Three

   

For the Three

 
   

Months Ended

   

Months Ended

 
   

February 28, 2023

   

February 28, 2022

 

Cannabis Dispensary

    3,592,261       3,333,229  

Cannabis Production

    1,908,014       2,255,037  
    $ 5,437,302     $ 5,588,266  

 

   

For the Nine

   

For the Nine

 
   

Months Ended

   

Months Ended

 
   

February 28, 2023

   

February 28, 2022

 

Cannabis Dispensary

    11,210,622       10,670,203  

Cannabis Production

    6,345,784       5,832,775  
    $ 17,556,406     $ 16,502,978  

 

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, 2023 and 2022, the Company had the following potentially dilutive instruments outstanding: at February 28, 2023, a total of 42,679,702 shares (21,962,699 issuable upon the exercise of warrants, 256,550 issuable upon the exercise of unit warrants, 20,430,453 issuable upon the conversion of convertible notes payable and accrued interest, and 30,000 in stock to be issued); and at February 28, 2022, a total of 19,062,846 shares (1,836,574 issuable upon the exercise of warrants, 760,323 issuable upon the exercise of unit warrants, 16,423,449 issuable upon the conversion of convertible notes payable and accrued interest, and 42,500 in stock to be issued).

 

13

 

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, 2023. For the three and nine months ended February 28, 2023, the Company excluded from the calculation of fully diluted earnings per share the following instruments which were anti-dilutive: shares issuable pursuant to the conversion of notes payable and accrued interest, shares issuable pursuant to the exercise of warrants, and 30,000 shares of common stock issuable.

 

Income Taxes

 

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

 

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

 

Commitments and Contingencies

 

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

 

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

 

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

 

Recent Accounting Pronouncements

 

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

 

Note 2 Going Concern

 

As shown in the accompanying financial statements, the Company has incurred net losses from operations resulting in an accumulated deficit of $105,343,764 as of February 28, 2023. The ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management intends to finance operating costs over the next twelve months with revenues from operations. The Company has reported positive operating income for the third quarter of 2023.

 

14

 

Note 3 Joint Venture and Options Transaction

 

In Good Health

 

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

 

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

 

On June 14, 2021, the parties to the IGH lawsuit entered into a confidential settlement agreement to resolve the action and the IGH Settlement Note. Pursuant to the IGH Settlement Note, IGH paid the Company $3,000,000, $500,000 of which was paid on or before June 21, 2021. A second payment of $500,000 was paid on or before July 12, 2021. The remaining $2,000,000 and accrued interest was paid in 12 equal monthly installments beginning on August 12, 2021, pursuant to the terms of the promissory note. During the year ended May 31, 2022, the Company received $2,740,820 under the IGH Settlement Note, which included $2,666,670 in principal and $74,150 in accrued interest. During the nine months ended February 28, 2023, the Company received $348,165 under the IGH Settlement Note, which included $333,333 in principal and $14,832 in accrued interest. As of February 28, 2023, the IGH Settlement Note had been repaid in full. The Company records amounts paid under the IGH Settlement Note as gains when payments are received.

 

15

 

Quinn River Joint Venture

 

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

 

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

 

During the year ended May 31, 2022, Kealii Okamalu made cash investments in the aggregate amount of $581,714 in the Quinn River Joint Venture. The Company also purchased $949,939 of fixed assets for use by the Quinn River Joint Venture which are on the balance sheet of Kealii Okamalu. During the year ended May 31, 2022, the Quinn River Joint Venture recorded a loss in the amount of $336,416. One-third of this amount, or $112,139, was charged to the financial statements of Kealii Okamalu and recorded as a loss on equity investment in the Company’s financial statements for the year ended May 31, 2022, reducing the Company’s equity investment in the Quinn River Joint Venture from $581,714 to $469,575 at May 31, 2022.

 

During the nine months ended February 28, 2023, Kealii Okamalu made investments in the aggregate amount of $1,249,273 in the Quinn River Joint Venture; this amount was reduced by $952,125 representing the value of inventory transferred from the Quinn River Joint Venture to the Company. The Company also purchased $84,327 of fixed assets for use by the Quinn River Joint Venture which are on the balance sheet of Kealii Okamalu. During the nine months ended February 28, 2023, the Quinn River Joint Venture recorded a loss in the amount of $529,761. One-third of this amount, or $176,587, was charged to the financial statements of Kealii Okamalu and recorded as a loss on equity investment in the Company’s financial statements for the nine months ended February 28, 2023. The Company’s net equity investment in the Quinn River Joint Venture was $590,137 at February 28, 2023.

 

Note 4 Accounts Receivable

 

Accounts receivable was $718,382 and $618,227 at February 28, 2023 and May 31, 2022, respectively. The Company had bad debt expense (recoveries) of ($4,437) and $2,329 during the three months ended February 28, 2023 and 2022. The Company had bad debt (recoveries) expense of ($4,437) and $2,329 during the nine months ended February 28, 2023 and 2022. No allowance for doubtful accounts was necessary during the three and nine months ended February 28, 2023 and 2022.

 

Note 5 Inventory

 

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

 

   

February 28,

   

May 31,

 
   

2023

   

2022

 

Raw materials

  $ 487,489     $ 297,563  

Finished goods

    3,861,974       3,120,039  

Total

  $ 4,349,463     $ 3,417,602  

 

16

 

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

 

Note 6 Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets consisted of the following at February 28, 2023 and May 31, 2022:

 

   

February 28,

   

May 31,

 
   

2023

   

2022

 

Deposits

  $ -       2,016  

Prepaid expenses

    183,742       293,853  

Total

  $ 183,742     $ 295,869  

 

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

 

Note 7 Notes Receivable

 

IGH Note Receivable

 

On October 31, 2018, in connection with an option to purchase transaction (see note 4 for details), the Company loaned $5,000,000 pursuant to the IGH Note to IGH.

 

By letter dated February 26, 2020, the Company informed IGH that as a result of its breaches of the IGH Option, which remained uncured, an event of default had occurred under the IGH Note. The Company advised IGH that it was electing to cause the IGH Note to bear interest at the default rate of 15% per annum effective February 26, 2020 and to accelerate all amounts due under the Note. This dispute, including whether IGH breached the IGH Option and whether CLS was entitled to collect default interest, was in litigation.

 

On June 14, 2021, the parties to the IGH lawsuit entered into a confidential settlement agreement to resolve the action and the IGH Settlement Note. Pursuant to the IGH Settlement Note, IGH paid the Company $3,000,000, $500,000 of which was paid on or before June 21, 2021. A second payment of $500,000 was paid on or before July 12, 2021. The remaining $2,000,000 and accrued interest was paid in 12 equal monthly installments beginning on August 12, 2021, pursuant to the terms of the promissory note. During the year ended May 31, 2022, the Company received $2,740,820 under the IGH Settlement Note, which included $2,666,670 in principal and $74,150 in accrued interest. During the nine months ended February 28, 2023, the Company received $348,165 under the IGH Settlement Note, which included $333,333 in principal and $14,832 in accrued interest. As of February 28, 2023, the IGH Settlement Note had been repaid in full. The Company records amounts paid under the IGH Settlement Note as gains when payments are received.

 

Note 8 Property, Plant and Equipment

 

Property, plant and equipment consisted of the following at February 28, 2023 and May 31, 2022:

 

   

February 28,

2023

   

May 31,

2022

 

Office equipment

  $ 136,476     $ 132,859  

Furniture and fixtures

    148,358       148,358  

Machinery & Equipment

    2,561,290       2,447,715  

Leasehold improvements

    3,711,224       3,686,951  

Less: accumulated depreciation

    (2,703,369

)

    (2,073,449

)

Property, plant, and equipment, net

  $ 3,853,979     $ 4,342,434  

 

The Company made payments in the amounts of $141,465 and $165,875 for property and equipment during the nine months ended February 28, 2023 and May 31, 2022, respectively.

 

Depreciation expense totaled $210,187 and $150,883 for the three months ended February 28, 2023 and 2022, respectively. Depreciation expense totaled $629,920 and $449,189 for the nine months ended February 28, 2023 and 2022, respectively.

 

17

 

Note 9 Right of Use Assets and Liabilities Operating Leases

 

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

 

The Company’s lease expense for the three months ended February 28, 2023 and 2022 was entirely comprised of operating leases and amounted to $82,858 and $73,874, respectively. The Company’s lease expense for the nine months ended February 28, 2023 and 2022 was entirely comprised of operating leases and amounted to $244,021 and $323,218, respectively. The Company’s right of use (“ROU”) asset amortization for the three months ended February 28, 2023 and 2022 was $88,997 and $82,479, respectively. The Company’s right of use (“ROU”) asset amortization for the three months ended February 28, 2023 and 2022 was $216,319 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 of use assets of $4,159,621 and liabilities in the amount of $4,116,221 through February 28, 2022. During the nine months ended February 28, 2023, the Company entered into an agreement to extend the lease term of its property located at 1718 Industrial Road from August 31, 2022 to August 31, 2024, resulting in an increase in right of use assets and lease liabilities in the amount of $46,745.

 

On May 17, 2022, pursuant to the Quinn River Joint Venture Agreement (see note 4 for details), the Company, through CLS Nevada, Inc., entered into an agreement (the “Quinn River Lease”) to use approximately 20 acres of land for purposes of building and operating a facility to grow cannabis. The lease has a term of 9 years, with two-year renewal options. Rent is $3,500 per quarter. The initial amount of the right of use asset and operating lease liability under the Quinn River Lease was $221,469.

 

Right of use assets – operating leases are summarized below:

 

   

February 28,

2023

 

Amount at inception of leases

  $ 4,159,621  

Amount amortized

    (2,221,423

)

Balance – February 28, 2023

  $ 1,938,198  

 

Operating lease liabilities are summarized below:

 

Amount at inception of leases

  $ 4,116,221  

Amount amortized

    (2,110,080

)

Balance – February 28, 2023

  $ 2,006,141  

 

Warehouse and offices

  $ 1,722,874  

Land

    208,599  

Office equipment

    6,725  

Balance – February 28, 2023

  $ 1,938,198  
         
         

Lease liability

  $ 2,006,141  

Less: current portion

    (362,917

)

Lease liability, non-current

  $ 1,643,224  

 

Maturity analysis under these lease agreements is as follows:

 

Twelve months ended February 28, 2024

  $ 524,554  

Twelve months ended February 28, 2025

    523,265  

Twelve months ended February 28, 2026

    526,358  

Twelve months ended February 28, 2027

    226,296  

Twelve months ended February 28, 2028

    230,641  

Thereafter

    568,775  

Total

  $ 2,599,889  

Less: Present value discount

    (593,748

)

Lease liability

  $ 2,006,141  

 

18

 

Note 10 Intangible Assets

 

Intangible assets consisted of the following at February 28, 2023 and May 31, 2022:

 

   

February 28, 2023

 
   

Gross

   

Accumulated

Amortization

   

Net

 

Intellectual Property

  $ 319,600     $ (149,147

)

  $ 170,453  

License & Customer Relations

    990,000       (231,000

)

    759,000  

Tradenames - Trademarks

    301,000       (140,467

)

    106,533  

Non-Compete Agreements

    27,000       (27,000

)

    -  

Domain Names

    25,993       (11,888

)

    14,105  

Total

  $ 1,663,593     $ (559,502

)

  $ 1,104,091  

 

   

May 31, 2022

 
           

Accumulated

         
   

Gross

   

Amortization

   

Net

 

Intellectual Property

  $ 319,600     $ (125,177

)

  $ 194,423  

License & Customer Relations

    990,000       (193,875

)

    796,125  

Tradenames - Trademarks

    301,000       (117,892

)

    183,108  

Non-compete Agreements

    27,000       (27,000

)

    -  

Domain Names

    25,993       (9,364

)

    16,629  

Total

  $ 1,663,593     $ (473,308

)

  $ 1,190,285  

 

Total amortization expense charged to operations for the three months ended February 28, 2023 and 2022 was $28,734 and $28,023, respectively. Total amortization expense charged to operations for the nine months ended February 28, 2023 and 2022 was $86,194 and $86,172, respectively.

 

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

 

 

 

 

2024

 

$

114,896

 

2025

 

 

114,896

 

2026

 

 

114,896

 

2027

 

 

114,896

 

2028

 

 

112,321

 

Thereafter

 

 

532,186

 

 

 

$

1,104,091

 

 

Note 11 Goodwill

 

Goodwill in the amount of $557,896 is carried on the Company’s balance sheet at February 28, 2023 and May 31, 2022 in connection with the acquisition of Alternative Solutions on June 27, 2018.

 

Goodwill Impairment Test

 

The Company assessed its intangible assets as of May 31, 2022 and 2021 for purposes of determining if an impairment existed as set forth in ASC 350 – Intangibles – Goodwill and Other and ASC 360 – Property Plant and Equipment. Pursuant to ASC 360, the Company determined that the fair value of its intangible assets exceeded the carrying value of goodwill at February 28, 2023 and May 31, 2022. As a result, no impairment was recorded. At February 28, 2023 and May 31, 2022, the net amount of goodwill on the Company’s balance sheet was $557,896.

 

19

 

Note 12 Other Assets

 

Other assets included the following as of February 28, 2023 and May 31, 2022:

 

   

February 28,

   

May 31,

 
   

2023

   

2022

 

Security deposits

  $ 198,000     $ 229,500  
    $ 198,000     $ 229,500  

 

Note 13 Accounts Payable and Accrued Liabilities

 

Accounts payable and accrued liabilities consisted of the following at February 28, 2023 and May 31, 2022:

 

   

February 28,

2023

   

May 31,

2022

 

Trade accounts payable

  $ 2,145,357     $ 1,414,074  

Accrued payroll and payroll taxes

    272,250       323,254  

Accrued liabilities

    391,882       580,570  

Legal fees in dispute (a)

    248,031       -  

Total

  $ 3,057,520     $ 2,317,898  

 

 

a.

Amount represents invoices received by the Company from prior legal counsel for services. As of February 28, 2023, the Company has completed its investigation of these invoices and has determined not to approve them for payment. Furthermore, on January 4, 2023, the company filed a Florida Bar Association Complaint against the lawyer who provided the services. The Bar Complaint seeks sanctions for “Excessive and Unreasonable Legal Fees”, “Violation of the Attorney-Client Privilege” and “Intentional Delay and Harm to the Company’s Interest”.

 

Note 14 Loans Payable

 

Leaflink Financing Agreement

 

The Company is a party to an accounts receivable financing agreement with a lender (the “Short Term Financing Agreement”) for two of its subsidiaries. During the three months ended February 28, 2023, the Company received cash proceeds in the amount of $0 from additional loans under the Short-Term Financing Agreement, made payments in the amount of $235,000 and incurred fees in the amount of $0. During the nine months ended February 28, 2022, the Company received cash proceeds in the amount of $650,115 from additional loans under the Short-Term Financing Agreement, made payments in the amount of $1,585,962, and incurred fees in the amount of $75,559. At February 28, 2023, and May 31, 2022, the balance due under the Short Term Financing Agreement was $152,785 and $1,013,073, respectively. The loans are due in 30 days and have a discount fee of 3%.

 

2022 Financing Agreement CBR

 

Effective September 30, 2022, we entered into a Business Loan and Security Agreement with CBR Capital LLC to borrow $900,000. The loan is repayable in 48 weekly installments in the amount of $13,312.50 for weeks 1-8 and $29,287.50 for weeks 9-48. CBR Capital LLC has stated that it is aware of the Canaccord Debentures and the U.S. Convertible Debentures and will agree to subordinate the CBR security interest to these debenture holders.

 

During the nine months ended February 28, 2023, the Company received cash proceeds in the amount of $873,000 from the loan agreement. During the three and nine months ended February 28, 2023, the Company made payments in the amount of $364,763 and $457,950, respectively. Of these payments $219,159 was principal and $145,604 was interest for the three months ended February 28, 2023. Of these payments $224,811 was principal and $233,139 was interest for the nine months ended February 28, 2023. At the inception of the loan, the Company recorded a discount in the amount of $27,000 related to prepaid fees. During the three and nine months ended February 28, 2023, the Company amortized $7,313 and $11,250, respectively, of these fees to interest expense, the balance of the discount remaining at February 22, 2023 is $15,750. At February 28, 2023, and May 31, 2022, the balance due under the CBR Agreement was $659,439 and $0 net of discount, respectively

 

20

 

2022 Financing Agreement TVT

 

Effective October 21, 2022, we entered into a Purchase and Sale of Future Receipts Agreement with TVT Business Funding LLC to borrow $200,000. The loan is repayable in 48 weekly installments in the amount of $5,916.67.

 

During the nine months ended February 28, 2023, the Company received cash proceeds in the amount of $194,000 from the loan agreement. During the three and nine months ended February 28, 2023 and 2022, the Company made payments in the amount of $76,917 and $106,500, respectively. Of these payments $43,876 was principal and $33,041 was interest for the three months ended February 28, 2023. Of these payments $58,572 was principal and $47,928 was interest for the nine months ended February 28, 2023. At the inception of the loan, the Company recorded a discount in the amount of $6,000 related to prepaid fees. During the three and nine months ended February 28, 2023, the Company amortized $1,625 and $2,250, respectively, of these fees to interest expense, the balance of the discount remaining at February 28, 2023 is $3,750. At February 28, 2023, and May 31, 2022, the balance due under the TVT Agreement was $137,678 and $0 net of discount, respectively

 

Note 15 Convertible Notes Payable

 

   

February 28, 2023

   

May 31, 2022

 

Convertible debenture in the principal amount of $4,000,000 (the “U.S. Convertible Debenture 1”) dated October 31, 2018, which bears interest, payable quarterly, at a rate of 8% per annum, with interest during the first eighteen months following issuance being payable by increasing the then-outstanding principal amount of the U.S. Convertible Debenture 1. The U.S. Convertible Debenture 1 was to mature on a date that was three years following issuance. The U.S. Convertible Debenture 1 was convertible into units (the “Convertible Debenture Units”) at a conversion price of $3.20 per Convertible Debenture Unit. Each Convertible Debenture Unit consisted of (i) one share of the Company’s common stock, and (ii) one-half of one warrant, with each warrant exercisable for three years to purchase a share of common stock at a price of $4.40. On July 26, 2019, U.S. Convertible Debenture 1 was amended such that, should the Company issue or sell common stock or equity securities convertible into common stock at a price less than the conversion price of the U.S. Convertible Debenture 1, the conversion price of U.S. Convertible Debenture 1 would be reduced to such issuance price, and the exercise price of the warrant issuable in connection with U.S. Convertible Debenture 1 would be exercisable at a price equal to 137.5% of the adjusted conversion price at the time of conversion. The U.S. Convertible Debenture 1 has other features, such as mandatory conversion in the event the common stock trades at a particular price over a specified period of time and required redemption in the event of a “Change in Control” of the Company. The U.S. Convertible Debenture 1 is an unsecured obligation of the Company and ranks pari passu in right of payment of principal and interest with all other unsecured obligations of the Company. The Company recorded a discount in the amount of $3,254,896 on the U.S. Convertible Debenture 1. During the three and nine months ended February 28, 2023, the Company accrued interest in the amounts of $36,036 and $171,169 on the U.S. Convertible Debenture 1, respectively. During the three and nine months ended February 28, 2023, the Company made interest payments in the amounts of $0 and $90,089, respectively. On April 15, 2021, the U.S. Convertible Debenture 1 was amended as follows: (i) the conversion price of the debenture was reduced to $1.20 per unit; and (ii) the maturity date was extended from October 31, 2021 to October 31, 2022. This amendment was accounted for as an extinguishment of debt, and the Company recorded a loss in the amount of $2,038,803 during the year ended May 31, 2021 in connection with the amendment. On September 15, 2022, the U.S. Convertible Debenture 1 was further amended as follows: (i) the conversion price of debentures with a principal amount of $2,702,674 was reduced to $0.285 per unit, and these debentures along with accrued interest in the amount of $45,044 were converted to 9,641,118 shares of common stock and warrants to purchase 4,820,560 shares of common stock; (ii) the conversion price of the remaining debentures with a principal amount of $1,801,783 was reduced to $0.40 per share; (iii) the maturity date of 50% of the remaining debentures with a principal amount of $900,891.50 was extended to December 31, 2023, and the maturity date of 50% of the remaining debentures with a principal amount of $900,891.50 was extended to December 31, 2024; and (iv) the conversion price of the warrants issuable upon conversion of the debentures was reduced to $0.40. The value of the warrants will be determined when the issuance becomes probable. This amendment was accounted for as an extinguishment of debt, and a loss in the amount of $1,689,368 was recorded on this transaction.

  $ 1,801,783     $ 4,504,457  

 

21

 

   

February 28, 2023

   

May 31, 2022

 

Convertible debenture in the principal amount of $1,000,000 (the “U.S. Convertible Debenture 2”) dated October 31, 2018, which bears interest, payable quarterly, at a rate of 8% per annum, with interest during the first eighteen months following issuance being payable by increasing the then-outstanding principal amount of the U.S. Convertible Debenture 2. The U.S. Convertible Debenture 2 was to mature on a date that was three years following issuance. The U.S. Convertible Debenture 2 was convertible into Convertible Debenture Units at a conversion price of $3.20 per Convertible Debenture Unit. Each Convertible Debenture Unit consisted of (i) one share of the Company’s common stock, and (ii) one-half of one warrant, with each warrant exercisable for three years to purchase a share of common stock at a price of $4.40. On July 26, 2019, U.S. Convertible Debenture 2 was amended such that, should the Company issue or sell common stock or equity securities convertible into common stock at a price less than the conversion price of the U.S. Convertible Debenture 2, the conversion price of U.S. Convertible Debenture 2 would be reduced to such issuance price, and the exercise price of the warrant issuable in connection with U.S. Convertible Debenture 2 would be exercisable at a price equal to 137.5% of the adjusted conversion price at the time of conversion. The U.S. Convertible Debenture 2 has other features, such as mandatory conversion in the event the common stock trades at a particular price over a specified period of time and required redemption in the event of a “Change in Control” of the Company. The U.S. Convertible Debenture 2 is an unsecured obligation of the Company and ranks pari passu in right of payment of principal and interest with all other unsecured obligations of the Company. The Company recorded a discount in the amount of $813,724 on the U.S. Convertible Debenture 2. During the three and nine months ended February 28, 2023, the Company accrued interest in the amounts of $9,009 and $42,792 on the U.S. Convertible Debenture 2, respectively. During the three and nine months ended February 28, 2023, the Company made interest payments in the amounts of $0 and $22,522, respectively. On April 15, 2021, the U.S. Convertible Debenture 2 was amended as follows: (i) the conversion price of the debentures was reduced to $1.20 per unit; and (ii) the maturity date was extended from October 31, 2021 to October 31, 2022. This amendment was accounted for as an extinguishment of debt, and the Company recorded a loss in the amount of $509,700 during the year ended May 31, 2021. On September 15, 2022, the U.S. Convertible Debenture 2 was further amended as follows: (i) the conversion price of debentures with a principal amount of $675,668 was reduced to $0.285 per unit, and these debentures along with accrued interest in the amount of $11,261 were converted to 2,410,279 shares of common stock and warrants to purchase 1,205,140 shares of common stock; (ii) the conversion price of the remaining debentures with a principal amount of $450,446 was reduced to $0.40 per share; (iii) the maturity date of 50% of the remaining debentures with a principal amount of $225,223 was extended to December 31, 2023, and the maturity date of 50% of the remaining debentures with a principal amount of $225,223 was extended to December 31, 2024; and (iv) the conversion price of the warrants issuable upon conversion of the debentures was reduced to $0.40. The value of the warrants will be determined when the issuance becomes probable. This amendment was accounted for as an extinguishment of debt, and a loss in the amount of $422,331 was recorded on this transaction.

    450,446       1,126,114  

 

22

 

   

February 28, 2023

   

May 31, 2022

 

Convertible debenture in the principal amount of $532,000 (the “U.S. Convertible Debenture 4”) dated October 25, 2018, which bears interest, payable quarterly, at a rate of 8% per annum, with interest during the first eighteen months following issuance being payable by increasing the then-outstanding principal amount of the U.S. Convertible Debenture 4. The U.S. Convertible Debenture 4 was to mature on a date that was three years following issuance. The U.S. Convertible Debenture 4 was convertible into Convertible Debenture Units at a conversion price of $3.20 per Convertible Debenture Unit. Each Convertible Debenture Unit consisted of (i) one share of the Company’s common stock, and (ii) one-half of one warrant, with each warrant exercisable for three years to purchase a share of common stock at a price of $4.40. The value of the warrants will be recorded when the issuance becomes probable. On July 26, 2019, U.S. Convertible Debenture 4 was amended such that, should the Company issue or sell common stock or equity securities convertible into common stock at a price less than the conversion price of the U.S. Convertible Debenture 4, the conversion price of U.S. Convertible Debenture 4 would be reduced to such issuance price, and the exercise price of the warrant issuable in connection with U.S. Convertible Debenture 4 would be exercisable at a price equal to 137.5% of the adjusted conversion price at the time of conversion. The U.S. Convertible Debenture 4 has other features, such as mandatory conversion in the event the common stock trades at a particular price over a specified period of time and required redemption in the event of a “Change in Control” of the Company. The U.S. Convertible Debenture 4 is an unsecured obligation of the Company and ranks pari passu in right of payment of principal and interest with all other unsecured obligations of the Company. The Company recorded a discount in the amount of $416,653 on the U.S. Convertible Debenture 4. During the three and nine months ended February 28, 2023, the Company accrued interest in the amounts of $10,500 and $35,009 on the U.S. Convertible Debenture 4, respectively. During the three and nine months ended February 28, 2023, the Company made interest payments in the amounts of $0 and $23,964, respectively. On April 19, 2021, the U.S. Convertible Debenture 4 was amended as follows: (i) the conversion price of the debenture was reduced to $1.20 per unit; and (ii) the maturity date was extended from October 25, 2021 to October 25, 2022. This amendment was accounted for as an extinguishment of debt, and the Company recorded a loss in the amount of $271,164 during the year ended May 31, 2021. On October 25, 2022, the Company received a notice of demand from the lender, placing the U.S. Convertible Debt 4 into default status. On November 1, 2022, the Company entered into a forbearance agreement with the lender (the “Forbearance Agreement”) with the following terms: (i) the Company will pay the lender the amount of $150,000 on November 2, 2022, and an additional $50,000 each month for the following nine months, or a total of $600,000; (ii) the default interest rate of 12% will be applied on the existing principal balances until paid in full; (iii) lender shall forbear from taking any further action based upon the existing default. As a result of this agreement, the Company capitalized $3,283 of accrued interest. During the three and nine months ended February 28, 2023, the Company made payments in the aggregate amount of $150,000 and $350,000, respectively, pursuant to Forbearance Agreement. The Company recognized a gain in the amount of $2,384 on this transaction during the nine months ended February 28, 2023.

    250,000       599,101  

 

23

 

   

February 28, 2023

   

May 31, 2022

 

Convertible debentures payable in the aggregate principal amount of $12,012,000 (the “Canaccord Debentures”) dated December 12, 2018, which bear interest, payable quarterly, at a rate of 8% per annum, with interest during the first eighteen months following issuance being payable by increasing the then-outstanding principal amount of the Canaccord Debentures. The Canaccord Debentures were to mature on a date that was three years following issuance. The Canaccord Debentures were convertible into Convertible Debenture Units at a conversion price of $3.20 per Convertible Debenture Unit. Each Convertible Debenture Unit consisted of (i) one share of the Company’s common stock, and (ii) one-half of one warrant, with each warrant exercisable for three years to purchase a share of common stock at a price of $4.40. The Canaccord Debentures have other features, such as mandatory conversion in the event the common stock trades at a particular price over a specified period of time and required redemption in the event of a “Change in Control” of the Company. The Canaccord Debentures are unsecured obligations of the Company and rank pari passu in right of payment of principal and interest with all other unsecured obligations of the Company. During the three months ended November 30, 2019, in two separate transactions, principal in the aggregate amount of $25,857 was converted into an aggregate of 8,081 shares of the Company’s common stock, and warrants to purchase 4,040 shares of common stock. There were no gains or losses recorded on these conversions because they were done in accordance with the terms of the original agreement. No discount was recorded for the fair value of the warrants issued. Because the market price of the Company’s common stock was less than the conversion price on the date of issuance of the Canaccord Debentures, a discount was not recorded on the Canaccord Debentures. During the three and nine months ended February 28, 2023, the Company accrued interest in the amounts of $105,077 and $501,089 on the Canaccord Debentures, respectively. During the three and nine months ended February 28, 2023, the Company made interest payments in the amounts of $0 and $264,383, respectively. On March 31, 2021, the Canaccord Debentures were amended as follows: (i) the conversion price of the debentures was reduced to $1.20 per unit; (ii) the maturity date was extended from December 12, 2021 to December 12, 2022; (iii) the mandatory conversion threshold was reduced from a daily volume weighted average trading price of greater than $4.80 per share to $2.40 per share for the preceding ten consecutive trading days; and (iv) the exercise price of the warrants issuable upon conversion was reduced from $4.40 to $1.60 and the expiration of the warrants extended until March 31, 2024. This amendment was accounted for as an extinguishment of debt, and the Company recorded a loss in the amount of $3,286,012 during the year ended May 31, 2021. During the year ended May 31, 2022, principal in the aggregate amount of $281,000 was converted into an aggregate of 234,167 shares of the Company’s common stock, and warrants to purchase 117,084 shares of common stock. There were no gains or losses recorded on these conversions because they were done in accordance with the terms of the original agreement. On September 15, 2022, the Canaccord Debentures were further amended as follows: (i) the conversion price of debentures with a principal amount of $7,965,278 was reduced to $0.285 per unit, and these debentures along with accrued interest in the amount of $132,755 were converted to 28,414,149 shares of common stock and warrants to purchase 14,207,075 shares of common stock; (ii) the conversion price of the remaining debentures with a principal amount of $52,53,873 was reduced to $0.40 per share; (iii) the maturity date of 50% of the remaining debentures with a principal amount of $2,626,936.50 was extended to December 31, 2023, and the maturity date of 50% of the remaining debentures with a principal amount of $2,626,936.50 was extended to December 31, 2024; and (iv) the conversion price of the warrants issuable upon conversion of the debentures was reduced to $0.40. The value of the warrants will be determined when the issuance becomes probable. This amendment was accounted for as an extinguishment of debt, and a loss in the amount of $4,547,660 was recorded on this transaction.

    5,253,873       13,219,149  
                 

Total - Convertible Notes Payable

  $ 7,756,102     $ 19,448,821  

Less: Discount

    (-

)

    (-

)

Convertible Notes Payable, Net of Discounts

  $ 7,756,102     $ 19,448,821  

 

24

 

   

February 28, 2023

   

May 31, 2022

 

Total - Convertible Notes Payable, Net of Discounts, Current Portion, net of discount

  $ 4,003,052     $ 19,448,821  

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

  $ 3,753,050     $ -  

 

Discounts on notes payable amortized to interest expense – 3 months ended February 28, 2023 and 2022, respectively

  $ -     $ -  

 

Discounts on notes payable amortized to interest expense – 9 months ended February 28, 2023 and 2022, respectively

  $ -     $ -  

 

Note 16 Notes Payable

 

   

February 28, 2023

   

May 31, 2022

 

Debenture in the principal amount of $250,000 (the “Debenture 1”) dated December 1, 2021, which bears interest, payable quarterly commencing six months after issuance, at a rate of 15% per annum. Principal on Debenture 1 is due in two equal installments 18 months after issuance and at maturity on July 10, 2024. With the Debenture, the purchaser received warrants to purchase 75,758 shares of common stock at an exercise price of $1.65 per share of common stock. The Company shall make additional quarterly payments under Debenture 1 beginning 90 days after the end of its first fiscal quarter after January 10, 2025, and for the next five years, on an annual basis, equal to the greater of (a) 15% of the original principal amount, or (b) the purchaser’s pro rata portion of 5% of the distributions the Company receives as a result of the Quinn River Joint Venture during the prior fiscal year. The Company recorded a discount in the amount of $17,223 on Debenture 1. During the three and nine months ended February 28, 2023, $1,667 and $5,000 of this discount was charged to operations, respectively. The Company recorded an original issue discount in the amount of $187,500 on Debenture 1. During the three and nine months ended February 28, 2023, $18,145 and $54,435 of this original issue discount was charged to operations, respectively. During three and nine months ended February 28, 2023, the Company accrued interest in the amounts of $9,375 and $28,125 on Debenture 1, respectively. During the three and nine months ended February 28, 2023, the Company made interest payments in the amounts of $9,375 and $40,625, respectively.

  $ 250,000     $ 250,000  
                 

Debenture in the principal amount of $250,000 (the “Debenture 2”) dated December 21, 2021, which bears interest, payable quarterly commencing six months after issuance, at a rate of 15% per annum. Principal on Debenture 2 is due in two equal installments 18 months after issuance and at maturity on July 10, 2024. With the Debenture, the purchaser received warrants to purchase 75,758 shares of common stock at an exercise price of $1.65 per share of common stock. The Company shall make additional quarterly payments under Debenture 2 beginning 90 days after the end of its first fiscal quarter after January 10, 2025, and for the next five years, on an annual basis, equal to the greater of (a) 15% of the original principal amount, or (b) the purchaser’s pro rata portion of 5% of the distributions the Company receives as a result of the Quinn River Joint Venture during the prior fiscal year. The Company recorded a discount in the amount of $10,428 on Debenture 2. During the three and nine months ended February 28, 2023, $1,009 and $3,027 of this discount was charged to operations, respectively. The Company recorded an original issue discount in the amount of $187,500 on Debenture 2. During the three and nine months ended February 28, 2023, $18,145 and $54,435 of this original issue discount was charged to operations, respectively. During the three and nine months ended February 28, 2023, the Company accrued interest in the amounts of $9,375 and $28,125 on Debenture 2, respectively. During the three and nine months ended February 28, 2023, the Company made interest payments in the amounts of $9,375 and $38,542, respectively.

    250,000       250,000  

 

25

 

   

February 28, 2023

   

May 31, 2022

 

Debenture in the principal amount of $500,000 (the “Debenture 3”) dated December 21, 2021, which bears interest, payable quarterly commencing six months after issuance, at a rate of 15% per annum. Principal on Debenture 3 is due in two equal installments 18 months after issuance and at maturity on July 10, 2024. With the Debenture, the purchaser received warrants to purchase 151,516 shares of common stock at an exercise price of $1.65 per share of common stock. The Company shall make additional quarterly payments under Debenture 3 beginning 90 days after the end of its first fiscal quarter after January 10, 2025, and for the next five years, on an annual basis, equal to the greater of (a) 15% of the original principal amount, or (b) the purchaser’s pro rata portion of 5% of the distributions the Company receives as a result of the Quinn River Joint Venture during the prior fiscal year. The Company recorded a discount in the amount of $19,335 on Debenture 3. During the three and nine months ended February 28, 2023, $1,871 and $5,613 of this discount was charged to operations, respectively. The Company recorded an original issue discount in the amount of $375,000 on Debenture 3. During the three and nine months ended February 28, 2023, $36,290 and $108,871 of this original issue discount was charged to operations, respectively. During the three and nine months ended February 28, 2023, the Company accrued interest in the amounts of $18,750 and $56,250 on Debenture 3, respectively. During the three and nine months ended February 28, 2023, the Company made interest payments in the amounts of $18,750 and $76,875, respectively.

    500,000       500,000  
                 

Debenture in the principal amount of $500,000 (the “Debenture 4”) dated January 4, 2022, which bears interest, payable quarterly commencing six months after issuance, at a rate of 15% per annum. Principal on Debenture 4 is due in two equal installments 18 months after issuance and at maturity on July 10, 2024. With the Debenture, the purchaser received warrants to purchase 151,516 shares of common stock at an exercise price of $1.65 per share of common stock. The Company shall make additional quarterly payments under Debenture 4 beginning 90 days after the end of its first fiscal quarter after January 10, 2025, and for the next five years, on an annual basis, equal to the greater of (a) 15% of the original principal amount, or (b) the purchaser’s pro rata portion of 5% of the distributions the Company receives as a result of the Quinn River Joint Venture during the prior fiscal year. The Company recorded a discount in the amount of $17,154 on Debenture 4. During the three and nine months ended February 28, 2023, $1,715 and $5,146 of this discount was charged to operations, respectively. The Company recorded an original issue discount in the amount of $375,000 on Debenture 4. During the three and nine months ended February 28, 2023, $37,500 and $112,500 of this original issue discount was charged to operations, respectively. During the three and nine months ended February 28, 2023, the Company accrued interest in the amounts of $18,750 and $56,250 on Debenture 4, respectively. During the three and nine months ended February 28, 2023, the Company made interest payments in the amounts of $18,750 and $74,167, respectively.

    500,000       500,000  

 

26

 

   

February 28, 2023

   

May 31, 2022

 

Debenture in the principal amount of $500,000 (the “Debenture 5”) dated January 4, 2022, which bears interest, payable quarterly commencing six months after issuance, at a rate of 15% per annum. Principal on Debenture 5 is due in two equal installments 18 months after issuance and at maturity on July 10, 2024. With the Debenture, the purchaser received warrants to purchase 151,516 shares of common stock at an exercise price of $1.65 per share of common stock. The Company shall make additional quarterly payments under Debenture 5 beginning 90 days after the end of its first fiscal quarter after January 10, 2025, and for the next five years, on an annual basis, equal to the greater of (a) 15% of the original principal amount, or (b) the purchaser’s pro rata portion of 5% of the distributions the Company receives as a result of the Quinn River Joint Venture during the prior fiscal year. The Company recorded a discount in the amount of $17,154 on Debenture 5. During the three and nine months ended February 28, 2023, $1,715 and $5,146 of this discount was charged to operations, respectively. The Company recorded an original issue discount in the amount of $375,000 on Debenture 5. During the three and nine months ended February 28, 2023, $37,500 and $112,500 of this original issue discount was charged to operations, respectively. During the three and nine months ended February 28, 2023, the Company accrued interest in the amounts of $18,750 and $56,250 on Debenture 5, respectively. During the three and nine months ended February 28, 2023, the Company made interest payments in the amounts of $18,750 and $74,167, respectively.

    500,000       500,000  
                 

Debenture in the principal amount of $500,000 (the “Debenture 6”) dated January 4, 2022, which bears interest, payable quarterly commencing six months after issuance, at a rate of 15% per annum. Principal on Debenture 6 is due in two equal installments 18 months after issuance and at maturity on July 10, 2024. With the Debenture, the purchaser received warrants to purchase 151,516 shares of common stock at an exercise price of $1.65 per share of common stock. The Company shall make additional quarterly payments under Debenture 6 beginning 90 days after the end of its first fiscal quarter after January 10, 2025, and for the next five years, on an annual basis, equal to the greater of (a) 15% of the original principal amount, or (b) the purchaser’s pro rata portion of 5% of the distributions the Company receives as a result of the Quinn River Joint Venture during the prior fiscal year. The Company recorded a discount in the amount of $17,154 on Debenture 6. During the three and nine months ended February 28, 2023, $1,715 and $5,146 of this discount was charged to operations, respectively. The Company recorded an original issue discount in the amount of $375,000 on Debenture 6. During the three and nine months ended February 28, 2023, $37,500 and $112,500 of this original issue discount was charged to operations, respectively. During the three and nine months ended February 28, 2023, the Company accrued interest in the amounts of $18,750 and $56,280 on Debenture 6, respectively. During the three and nine months ended February 28, 2023, the Company made interest payments in the amounts of $18,750 and $74,167, respectively.

    500,000       500,000  
                 

Total

  $ 2,500,000     $ 2,500,000  

Original Issue Discount

    1,875,000       1,875,000  

Notes Payable, Gross

    4,375,000       4,375,000  

Less: Discount

    (1,097,113

)

    (1,681,434

)

Notes Payable, Net of Discount

  $ 3,277,887     $ 2,693,566  

 

Discounts on notes payable amortized to interest expense – 3 months ended February 28, 2023 and 2022, respectively

  $ 194,774     $ -  

 

Discounts on notes payable amortized to interest expense – 9 months ended February 28, 2023 and 2022, respectively

  $ 584,321       132,735  

 

27

 

Aggregate maturities of notes payable and convertible notes payable as of February 28, 2023 are as follows:

 

For the twelve months ended February 28,

 

2024

 

$

5,253,051

 

2025

 

 

5,003,051

 

2026

 

 

375,000

 

2027

 

 

375,000

 

2028

 

 

1,125,000

 

Thereafter

 

 

-

 

Total

 

$

12,131,102

 

 

During the year ended May 31, 2022, the Company offered for sale a maximum of $5,500,000 of debentures (the “2021 Debentures”) and warrants to purchase shares of the Company’s common stock at a price of $1.65 per share in an aggregate amount equal to one-half of the aggregate purchase price for the 2021 Debentures (the “2021 Debenture Warrants”) (collectively, the “November 2021 Offering”). During the year ended May 31, 2022, the Company received the amount of $2,500,000 pursuant to the November 2021 Offering and issued an aggregate of 757,576 warrants to purchase its common stock at an exercise price of $1.65 per share to the investors.

 

Note 17 Lease Liabilities - Financing Leases

 

   

February 28,

2023

   

May 31,

2022

 
   

(unaudited)

         

Financing lease obligation under a lease agreement for extraction equipment dated March 14, 2022 in the original amount of $359,900 payable in forty-eight monthly installments of $10,173 including interest at the rate of 15.89%. During the three months ended February 28, 2023, the Company made principal and interest payments on this lease obligation in the amounts of $18,292 and $12,227, respectively. During the nine months ended February 28, 2023, the Company made principal and interest payments on this lease obligation in the amounts of $52,786 and $38,771, respectively.

  $ 296,207     $ 348,993  
                 

Current portion

  $ 80,818     $ 71,813  

Long-term maturities

    215,389       277,180  

Total

  $ 296,207     $ 348,993  

 

Aggregate maturities of lease liabilities – financing leases as of February 28, 2023 are as follows:

 

For the period ended February 28,

 

2024

 

$

80,818

 

2025

 

 

94,605

 

2026

 

 

110,744

 

2027

 

 

10,040

 

2028

 

 

-

 

Thereafter

 

 

-

 

Total

 

$

296,207

 

 

Note 18 Stockholders Equity

 

The Company’s authorized capital stock consists of 187,500,000 shares of common stock, par value $0.0001, at February 28, 2023 and 2022, and 5,000,000 shares of preferred stock, par value $0.001 per share.

 

On September 15, 2022, the Company effected a reverse stock split of its issued and outstanding common stock (“the “Reverse Split”) at a ratio of 1-for-4, whereby four shares of the Company’s common stock issued and outstanding were exchanged for one share. The number of shares of common stock issued and outstanding immediately before the Reverse Split was 290,070,272; the number of shares outstanding immediately after the reverse split was 72,517,570, a decrease of 217,552,702 shares. All share and per-share information in these financial statements have been adjusted to reflect the effects of the Reverse Split. As a result of the split, an additional 576 shares were issued due to rounding.

 

28

 

Common stock transactions for the nine months ended February 28, 2023

 

Common Stock and Warrants Issued upon Conversion of Notes Payable:

 

On September 15, 2022, the Company issued 28,414,149 shares and three-year warrants to acquire 14,207,075 shares of common stock at a price of $0.40 per share as a result of the mandatory conversion provided in the amendments to the Canaccord Debentures. The conversion was for the total amount of $8,098,033, of which $7,965,278 was principal and $132,755 was accrued interest. (See note 15 for details). A loss in the amount of $4,547,660 was recorded in connection with the extinguishment of the Canaccord Debentures. No gain or loss was recorded on the issuance of the shares because the conversion was made pursuant to the terms of the Restructured Canaccord Debenture Agreement.

 

On September 15, 2022, the Company issued 12,051,397 shares and three-year warrants to acquire 6,025,700 shares of common stock at a price of $0.40 per share as a result of the mandatory conversion provided in the amendments to the U.S. Convertible Debenture holders. The conversion was for the total amount of $3,434,647, of which $3,378,342 was principal and $56,305 was accrued interest. (See note 15 for details). A loss in the amount of $2,111,699 was recorded in connection with the extinguishment of the U.S. Convertible Debentures 1 and 2. No gain or loss was recorded on the issuance of the shares because the conversion was made pursuant to the terms of the Restructured U.S. Convertible Debentures 1 and 2 Agreements.

 

Other Warrant Transactions

 

On September 15, 2022, the Company amended $18,846,721 in outstanding debentures to reduce the conversion price of the debentures from $1.20 per unit to $0.40 per unit, increasing the warrants issuable upon conversion of such debentures from 3,400,652 to 6,801,298. As amended, each warrants issuable pursuant to the conversion of such debentures is exercisable for one share of the Company’s common stock at a price of $0.40 per share.

 

Common stock transactions for the nine months ended February 28, 2022

 

Common Stock and Warrants Issued upon Conversion of Notes Payable:

 

On June 17, 2021, the Company issued 234,167 shares of common stock and three-year warrants to acquire 117,083 shares of common stock at a price of $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 25,000 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.

 

Other Warrant transactions

 

The Company values warrants using the Black-Scholes valuation model utilizing the following variables. On March 31, 2021, the Company reduced the conversion price of the Canaccord Debentures from $3.20 per unit to $1.20 per unit, increasing the warrants issuable upon conversion of the Canaccord Debentures from 2,102,100 to 5,629,094. As amended, each warrant issuable pursuant to conversion of the Canaccord Debentures is exercisable for one share of the Company’s common stock at a price equal to $1.60 per share until March 31, 2024.

 

In April 2021, the Company amended $6,229,672 in outstanding debentures to reduce the conversion price of the debentures from $3.20 per unit to $1.20 per unit, increasing the warrants issuable upon conversion of such debentures from 973,387 to 2,595,697. As amended, each warrant issuable pursuant to conversion of such debentures is exercisable for one share of the Company’s common stock at a price equal to 137.5% of the conversion price (presently $1.65 per share) until July 14, 2024.

 

From December 1, 2021, through January 4, 2022, the Company issued $2,500,000 in debentures and issued 757,576 warrants in connection with these debentures. Each warrant allows the holder to purchase one share of the Company’s common stock at an exercise price of $1.65 per share for three years after its date of issuance.

 

29

 

The following table summarizes the significant terms of warrants outstanding at February 28, 2023. This table does not include the unit warrants. See Unit Warrants section below.

 

Range of

exercise

Prices

 

 

Number of

warrants

Outstanding

 

 

Weighted

average

remaining

contractual

life (years)

 

 

Weighted

average

exercise

price of

outstanding

Warrants

 

 

Number of

warrants

Exercisable

 

 

Weighted

average

exercise

price of

exercisable

Warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

0.40

 

 

 

20,232,775

 

 

 

2.55

 

 

 

0.40

 

 

 

20,232,775

 

 

 

0.40

 

 

1.60

 

 

 

191,094

 

 

 

2.55

 

 

$

1.60

 

 

 

191,094

 

 

$

1.60

 

 

1.65

 

 

 

757,580

 

 

 

1.83

 

 

 

1.65

 

 

 

757,580

 

 

 

1.65

 

 

2.40

 

 

 

781,250

 

 

 

0.21

 

 

 

2.40

 

 

 

781,250

 

 

 

2.40

 

 

 

 

 

 

21,962,699

 

 

 

2.44

 

 

$

0.53

 

 

 

21,962,699

 

 

$

0.53

 

 

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

 

   

Number of

Shares

   

Weighted

Average

Exercise

Price

 

Warrants outstanding at May 31, 2021

    13,499,411     $ 2.12  

Granted

    874,666     $ 1.65  

Exercised

    -     $ -  

Cancelled / Expired

    (12,644,153

)

  $ 2.09  

Warrants outstanding at May 31, 2022

    1,729,924     $ 1.98  

Granted

    20,232,775     $ 0.40  

Exercised

    -     $ -  

Cancelled / Expired

    -     $ -  

Warrants outstanding at February 28, 2023

    21,962,699     $ 0.53  

 

Unit Warrants

 

In February and March 2018, in connection with the Westpark offering, the Company issued five-year warrants to purchase 51,310 of the Company’s units at an exercise price of $5.00 per unit. Each unit consists of four shares of common stock and one warrant to purchase a share of common stock for $3.00

 

On June 20, 2018, in connection with the special warrant offering, the Company issued Canaccord Genuity Corp. 579,461 three-year broker warrants at an exercise price of C$1.80 per share as compensation. Each warrant entitles the holder to purchase one unit, which consists of one share of common stock and a warrant to purchase one share of common stock, for C$2.60 per share. These warrants were valued at $1,495,373, and this amount was charged to operations during the year ended May 31, 2019. These warrants expired on June 20, 2021.

 

On December 12, 2018, in connection with the issuance of the Canaccord Debentures, the Company issued Canaccord Genuity Corp., as compensation 268,680 three-year agent and advisory warrants. Each warrant entitles the holder to purchase a unit for $3.20, which unit consists of one share of common stock and a warrant to purchase one-half share of common stock at an exercise price of $4.40 per share. The Company, in connection with the issuance of the Canaccord Debentures, also issued to National Bank Financial Inc., as compensation, 67,170 three-year agent and advisory warrants. Each warrant entitles the holder to purchase a unit for $3.20, which unit consists of one share of common stock and a warrant to purchase one-half share of common stock at an exercise price of $4.40 per share. The aggregate value of these warrants was $874,457, which was charged to operations during the year ended May 31, 2019. These warrants expired on December 12, 2021.

 

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

 

30

 

Note 19 Related Party Transactions

 

As of February 28, 2023 and May 31, 2022, the Company had accrued salary due to Michael Abrams, a former officer of the Company prior to his September 1, 2015 termination, in the amount of $16,250.

 

On August 17, 2022, the Company granted 50,000 shares of restricted common stock to Charlene Soco, an officer of the Company, effective February 4, 2022. The shares were fully vested, and the restrictions removed, on December 31, 2022

 

During the three months ended February 28, 2023, the Company made payments of $5,000 to each of its three directors for their participation on the Board, for a total of $15,000. During the nine months ended February 28, 2023, the Company made payments of $10,000 to each of its three directors for their participation on the Board, for a total of $30,000.

 

As of May, 2019 the Company entered into a monthly retainer arrangement with a company called The Workshop LLC located in Miami Florida. The Workshop LLC provided services related to marketing and advertising for the Company and its subsidiaries, including design work for marketing materials. The Workshop LLC is owned by Jordan Binder, the son of the former CEO of the Company, Jeff Binder. Jeff Binder resigned as CEO effective August 23rd, 2022 after serving seven years in that position. As of December 31, 2022 the retainer agreement between The Workshop LLC and the Company was ended.

 

Note 20 Income Taxes

 

The following table summarizes the Company’s income tax accrued for the three and nine months ended February 28, 2023:

 

   

For the Three

Months Ended

February 28, 2023

   

For the Three

Months Ended

February 28, 2022

 

Loss before provision for income taxes

  $ (513,654

)

  $ (673,031

)

Provision for income taxes

  $ (516,252

)

  $ (324,265

)

Effective tax rate

    100.5

%

    48.2

%

 

   

For the Nine

Months Ended

February 28, 2023

   

For the Nine

Months Ended

February 28, 2022

 

Loss before provision for income taxes

  $ (9,015,370

)

  $ (125,347

)

Provision for income taxes

  $ (1,552,028

)

  $ (793,322

)

Effective tax rate

    17.2

%

    632.1

%

 

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

 

Note 21 Commitments and Contingencies

 

Lease Arrangements

 

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

 

 

A lease that commenced in February 2019 for 1,400 square feet of office space located at 1718 Industrial Road, Las Vegas, NV 89102, for a term of eighteen months, and for rent of $1,785 per month. In June 2020, this lease was extended to August 31, 2022, with the monthly rent increasing to $1,866.70 until September 2021, after which time it will be subject to annual increases of 3%. The lease was extended again on April 1, 2022, effective September 1, 2022 until August 31, 2024. The monthly rent will increase on September 1, 2022 to $2,084.14 with annual increases of 3%. (See Note 23 for details).

 

 

 

 

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

 

31

 

 

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

 

 

 

 

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

 

 

 

 

A lease that commenced on May 17, 2022 for approximately 20 acres of land for purposes of developing a cultivation facility along the Quinn River in Nevada at a cost of $3,500 per quarter beginning on or before May 31, 2022 (the “Quinn River Land Lease”). The Quinn River Land Lease has a term of 9 years, with two-year renewal options. The lessee under this Lease is CLS Nevada, Inc. See note 3.

 

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

 

In August 2017, the Company’s Colorado subsidiary received a demand letter from its Colorado landlord requesting the forfeiture of the $50,000 security deposit, $10,000 in expenses, $15,699 in remaining rent due under the lease agreement and $30,000 to buy out the remaining amounts due under the lease. These expenses, which are a liability of the Company’s Colorado subsidiary, have been accrued on the balance sheet as of May 31, 2022.

 

Note 22 Subsequent Events

 

Effective March 1, 2023, the Company and Mr. Glashow entered into a three-year employment agreement pursuant to which Mr. Glashow continued serving as the Company’s Chief Executive Officer and commenced serving as the Company’s Chairman of the Board. Under the Agreement, Mr. Glashow is entitled to receive an annual salary of $325,000; a monthly amount of $1,500 for health insurance and health related expenses; a monthly amount for home office expenses incurred; and an automobile allowance of $1,200 monthly. Further, he is entitled to receive a performance bonus equal to 2% of the Company’s annual EBITDA up to a maximum annual cash compensation of $1 million including Base Salary. Effective March 1, 2023, and in connection with the Agreement, Mr. Glashow entered into an Employee Confidentiality, Invention and Non-Competition Agreement. Pursuant thereto, Mr. Glashow agreed: (i) not to compete with the Company during the term of his employment and for a period of one year thereafter; (ii) not to release or disclose the Company’s confidential information; and (iii) to assign the rights of all work product to the Company, among other terms.

 

 

32

 

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.

 

On April 17, 2015, CLS Labs took its first step toward commercializing its proprietary methods and processes by entering into agreements through its wholly owned subsidiary, CLS Labs Colorado, with certain Colorado entities. During 2017, we suspended our plans to proceed with the Colorado Arrangement due to regulatory delays and have not yet determined if or when we will pursue them again.

 

We have been issued a U.S. patent with respect to our proprietary method of extracting cannabinoids from cannabis (hemp) plants and converting the resulting cannabinoid extracts into concentrates such as oils, waxes, edibles and shatter. These concentrates may be ingested in a number of ways, including through vaporization via electronic cigarettes, and used for a variety of pharmaceutical and other purposes. Internal testing of this extraction method and conversion process has revealed that it produces a cleaner, higher quality product and a significantly higher yield than the cannabinoid extraction processes currently existing in the marketplace. We have not yet commercialized our proprietary process and the extraction and production process utilized in the patent is currently prohibited in Nevada. The Company is currently pursuing options to generate revenue from the patent, including the possible sale of the patent.

 

We intend to generate revenues through: (i) the processing of cannabis for others, and (ii) the purchase of cannabis (or cultivation through our joint venture) and the processing and sale of cannabis-related products. We plan to accomplish this through the acquisition of companies, the creation of joint ventures, through licensing agreements, and through fee-for-service arrangements with growers and dispensaries of cannabis products. We believe that we have established a position as one of the premier cannabinoid extraction and processing companies in the industry. We have already created our own brand of concentrates for consumer use, which we sell wholesale to cannabis dispensaries. We believe that we have created a “gold standard” national brand by standardizing the testing, compliance and labeling of our products in an industry currently comprised of small, local businesses with erratic and unreliable product quality, testing practices and labeling. We also plan to offer consulting services through Cannabis Life Sciences Consulting, LLC, which will generate revenue by providing consulting services to cannabis-related businesses, including growers, dispensaries and laboratories, and driving business to our processing facilities. Finally, we intend to grow through select acquisitions in secondary and tertiary markets, targeting newly regulated states that we believe offer a competitive advantage. Our goal at this time is to become a successful regional cannabis company.

 

On December 4, 2017, we entered into the Acquisition Agreement with Alternative Solutions to acquire the outstanding equity interests in the Oasis LLCs. Pursuant to the Acquisition Agreement, as amended, we paid a non-refundable deposit of $250,000 upon signing, which was followed by an additional payment of $1,800,000 on February 5, 2018, for an initial 10% of Alternative Solutions and each of the subsidiaries. At the closing of our purchase of the remaining 90% of the ownership interests in Alternative Solutions and the Oasis LLCs, which occurred on June 27, 2018, we paid the following consideration: $5,995,543 in cash, a $4.0 million promissory note due in December 2019, and $6,000,000 in shares of our common stock. The cash payment of $5,995,543 was less than the $6,200,000 payment originally contemplated because we assumed an additional $204,457 of liabilities. The Oasis Note, which was repaid in full in December 2019, was secured by all of the membership interests in Alternative Solutions and the Oasis LLCs and by the assets of the Oasis LLCs. At that time, we applied for regulatory approval to own an interest in the Oasis LLCs, which approval was received on June 21, 2018. Just prior to closing, the parties agreed that we would instead acquire all of the membership interests in Alternative Solutions, the parent of the Oasis LLCs, from its members, and the membership interests in the Oasis LLCs owned by members other than Alternative Solutions. We received final regulatory approval to own our interest in the Oasis LLCs through Alternative Solutions under the final structure of the transaction on April 26, 2022.

 

33

 

On October 31, 2018, the Company, CLS Massachusetts, Inc., a Massachusetts corporation and a wholly-owned subsidiary of the Company (“CLS Massachusetts”), and In Good Health, Inc., a Massachusetts corporation (“IGH”), entered into an Option Agreement (the “IGH Option Agreement”). Under the terms of the IGH Option Agreement, CLS Massachusetts had an exclusive option to acquire all of the outstanding capital stock of IGH (the “IGH Option”) during the period beginning on the earlier of the date that is one year after the effective date of the conversion and December 1, 2019 and ending on the date that was 60 days after such date. (See Note 3 for more detail).

 

On October 31, 2018, as consideration for the IGH Option, we made a loan to IGH, in the principal amount of $5,000,000, subject to the terms and conditions set forth in that certain loan agreement, dated as of October 31, 2018 between IGH as the borrower and the Company as the lender. The loan was evidenced by a secured promissory note of IGH, which bore interest at the rate of 6% per annum and was to mature on October 31, 2021.

 

On February 4, 2020, CLS Massachusetts exercised the IGH Option and IGH subsequently asserted that CLS Massachusetts’ exercise was invalid. By letter dated February 26, 2020, we informed IGH that as a result of its breaches of the IGH Option, which remained uncured, an event of default had occurred under the IGH Note. We advised IGH that we were electing to cause the IGH Note to bear interest at the default rate of 15% per annum effective February 26, 2020 and to accelerate all amounts due under the IGH Note. On February 27, 2020, IGH informed CLS Massachusetts that it did not plan to make further payments under the IGH Note on the theory that the break-up fee excused additional payments.

 

On June 14, 2021, the parties to the IGH lawsuit entered into a confidential settlement agreement to resolve the action and a secured promissory note dated and executed by IGH in favor of us and effective June 11, 2021 (the “IGH Settlement Note”). Pursuant to the IGH Settlement Note, IGH paid us $3,000,000, $1,000,000 of which was paid on or before July 12, 2021. The remaining $2,000,000 and accrued interest was paid in 12 equal monthly installments, which began on August 12, 2021. During the year ended May 31, 2022, we received $2,740,820 under the IGH Settlement Note, which included $2,666,670 in principal and $74,150 in accrued interest. During the nine months ended February 28, 2023, we received $348,165 was due under the IGH Settlement Note, which included $333,333 in principal and $14,382 in accrued interest. As of February 28, 2023, the IGH Settlement Note has been paid in full. We record amounts paid under the IGH Settlement Note as gains when payments are received.

 

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

 

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

 

During the year ended May 31, 2022, Kealii Okamalu made cash investments in the aggregate amount of $581,714 in the Quinn River Joint Venture. The Company also purchased $949,939 of fixed assets for use by the Quinn River Joint Venture which are on the balance sheet of Kealii Okamalu. During the year ended May 31, 2022, the Quinn River Joint Venture recorded a loss in the amount of $336,416. One-third of this amount, or $112,139, was charged to the financial statements of Kealii Okamalu and recorded as a loss on equity investment in the Company’s financial statements for the year ended May 31, 2022, reducing the Company’s equity investment in the Quinn River Joint Venture from $581,714 to $469,575 at May 31, 2022.

 

34

 

During the nine months ended February 28, 2023, Kealii Okamalu made investments in the aggregate amount of $1,249,273 in the Quinn River Joint Venture; this amount was reduced by $952,125 representing the value of inventory transferred from the Quinn River Joint Venture to the Company. The Company also purchased $84,327 of fixed assets for use by the Quinn River Joint Venture which are on the balance sheet of Kealii Okamalu. During the nine months ended February 28, 2023, the Quinn River Joint Venture recorded a loss in the amount of $526,761. One-third of this amount, or $176,587, was charged to the financial statements of Kealii Okamalu and recorded as a loss on equity investment in the Company’s financial statements for the nine months ended February 28, 2023. The Company’s net equity investment in the Quinn River Joint Venture was $590,137 at February 28, 2023

 

COVID-19 Update

 

Since mid-2019 there have been many uncertainties regarding the Novel Coronavirus (“COVID-19”) pandemic, including the scope of scientific and health issues, the anticipated duration of the pandemic, and the extent of local and worldwide social, political, and economic disruption. The COVID-19 pandemic has had far-reaching impacts on many aspects of our operations, directly and indirectly, including consumer behavior, customer store traffic, production capabilities, timing of product availability, our people, and the market generally. The COVID-19 pandemic has resulted in regional quarantines, labor stoppages and shortages, changes in consumer purchasing patterns, mandatory or elective shut-downs of restaurants, retail locations and other public gatherings, disruptions to supply chains, including the inability of our suppliers and service providers to deliver materials and services on a timely basis, or at all, severe market volatility, liquidity disruptions, and overall economic instability, which, in many cases, have had adverse impacts on our business, financial condition and results of operations.

 

In light of the situation relating to the COVID-19 pandemic, we took certain precautionary measures intended to help minimize the risk to our Company, employees, and customers, including the following:

 

We identified safety precautions that we implemented in our facilities from March 2020, and into 2022.

Although our facilities continued to operate, we evaluated their operations in case we had to shut down operations temporarily at any time in the future.

 

During the year ended December 31, 2022, we made the determination that COVID-19 possessed no continued serious risk to our employees and our business, and we returned to operating under pre-COVID-19 protocols.

 

Results of Operations for the Three Months Ended February 28, 2023 and February 28, 2022

 

The table below sets forth our select expenses as a percentage of revenue for the applicable periods:

 

   

Three Months

Ended

   

Three Months

Ended

 
   

February 28, 2023

   

February 28, 2022

 

Revenue

    100

%

    100

%

Cost of Goods Sold

    44

%

    48

%

Gross Margin

    56

%

    52

%

Selling, General, and Administrative Expenses

    53

%

    63

%

Gain on Settlement of Notes Receivable

    -

%

    9

%

Provision for Income Tax

    9

%

    6

%

 

The table below sets forth certain statistical and financial highlights for the applicable periods:

 

   

Three Months

Ended

   

Three Months

Ended

 
   

February 28, 2023

   

February 28, 2022

 

Number of Customers Served (Dispensary)

    77,859       66,016  

Revenue

  $ 5,437,302     $ 5,588,266  

Gross Profit

  $ 3,018,693     $ 2,887,106  

Gain on Note Receivable

  $ -     $ 522,246  

Net Loss

  $ (899,515

)

  $ (992,268

)

EBITDA (1)

  $ 504,615     $ 100,595  

 

35

 

 

(1)

 

EBITDA is a non-GAAP financial performance measures and should not be considered as alternatives to net income(loss) or any other measure derived in accordance with GAAP. This non-GAAP measure has limitations as an analytical tool and should not be considered in isolation or as substitutes for analysis of our financial results as reported in accordance with GAAP. Because not all companies use identical calculations, these presentations may not be comparable to other similarly titled measures of other companies. As required by the rules of the SEC, we provide below a reconciliation of this non-GAAP financial measure contained herein to the most directly comparable measure under GAAP. Management believes that EBITDA provides relevant and useful information, which is widely used by analysts, investors and competitors in our industry as well as by our management. By providing this non-GAAP profitability measure, management intends to provide investors with a meaningful, consistent comparison of our profitability measures for the periods presented.

 

Reconciliation of net loss for the three months ended February 28, 2023 and 2022 to EBITDA:

 

   

Three Months

Ended

February 28, 2023

   

Three Months

Ended

February 28, 2022

 

Net Loss attributable to CLS Holdings, Inc.

  $ (899,515

)

  $ (992,268

)

Add:

               

Interest expense, net

  $ 648,957     $ 589,692  

Provision for income taxes

  $ 516,252     $ 324,265  

Depreciation and amortization

  $ 238,921     $ 178,906  

EBITDA

  $ 504,615     $ 100,595  

 

Revenues

 

We had revenue of $5,437,302 during the three months ended February 28, 2023, a decrease of $150,964, or 3%, compared to revenue of $5,588,266 during the three months ended February 28, 2022. Our cannabis dispensary accounted for $3,529,261, or 65%, of our revenue for the three months ended February 28, 2023, an increase of $196,032, or 6%, compared to $3,333,229 during the three months ended February 28, 2022. Dispensary revenue increased during the third quarter of fiscal year 2023 because our average sales per day increased from $37,036 during the third quarter of fiscal year 2022 to $39,214 during the third quarter of fiscal year 2023. Our cannabis production accounted for $1,908,041, or 35%, of our revenue for the three months ended February 28, 2023, a decrease of $346,996 or 15%, compared to $2,255,037 for the three months ended February 28, 2022. The decrease in production revenues for the third quarter of fiscal year 2023 was primarily due to the fact that the overall cannabis market in Nevada has seen a decrease in wholesale pricing, coupled with a slowdown in nonessential expenditures that comes with inflation and an uncertain economy.

 

Cost of Goods Sold