UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
or
Commission File Number:
(Exact name of registrant as specified in its charter)
| | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(
(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 |
| | |
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated filer ☐ | Accelerated filer ☐ |
| | Smaller reporting company |
| Emerging growth company |
|
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:
CLS HOLDINGS USA, INC.
FORM 10-Q
Quarterly Period Ended November 30, 2023
TABLE OF CONTENTS
|
|
Page |
|
|
|
|
|
|
3 |
||
|
|
|
|
|
3 |
||
|
|
|
|
|
PART I. FINANCIAL INFORMATION |
|
|
|
Item 1. |
4 |
|
|
|
Condensed Consolidated Balance Sheets as of November 30, 2023 (Unaudited) and May 31, 2023 (audited) |
4 |
|
|
5 |
|
|
|
6 |
|
|
|
7 |
|
|
|
8 |
|
|
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
33 |
|
Item 3. |
44 |
|
|
Item 4. |
44 |
|
|
|
|
|
|
PART II. OTHER INFORMATION |
|
|
|
Item 1. |
45 |
|
|
Item 1A. |
45 |
|
|
Item 2. |
45 |
|
|
Item 3. |
45 |
|
|
Item 4. |
45 |
|
|
Item 5. |
45 |
|
|
Item 6. |
45 |
|
|
|
|
|
|
46 |
||
EXPLANATORY NOTE
Unless otherwise noted, references in this report to “CLS Holdings USA, Inc.,” the “Company,” “we,” “our” or “us” means CLS Holdings USA, Inc. and its subsidiaries.
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements relate to, among other things, the impact of the COVID-19 virus on our business, the results of our initiatives to retain our employees and strengthen our relationships with our customers and community, the effect of our initiatives to expand market share and achieve growth, the expected development of our business and joint ventures, results of operations and financial performance, liquidity, working capital and capital requirements, the effects of the additional dilution on our common stock that may occur as a result of the amendments to our convertible debentures, and anticipated future events. The continued spread of COVID-19 could have, and in some cases already has had, an adverse impact on our business, operations and financial results, including through disruptions in our cultivation and processing activities, supply chains and sales channels, and retail dispensary operations as well as a deterioration of general economic conditions including a possible national or global recession. These forward-looking statements also relate to our ability to obtain debt or equity capital on reasonable terms, or at all, to finance our operations, and to identify, finance and close potential acquisitions and joint ventures, whether our joint venture partner will make its capital contribution, our ability to comply with applicable cannabis-related regulations and obtain regulatory approvals, market acceptance of our services and product offerings, our ability to protect and commercialize our intellectual property, our ability to use net operating losses to offset certain cannabis-related tax liabilities and our ability to grow our wholesale and processing businesses and joint ventures. In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “will,” “should,” “intends,” “expects,” “plans,” “goals,” “projects,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these terms or other comparable terminology.
These forward-looking statements are only predictions, are uncertain and involve substantial known and unknown risks, uncertainties and other factors which may cause our (or our industry’s) actual results, levels of activity or performance to be materially different from any expected future results, levels of activity or performance expressed or implied by these forward-looking statements.
We cannot guarantee future results, levels of activity or performance. You should not place undue reliance on these forward-looking statements, which speak only as of the date that they were made. These cautionary statements should be considered together with any written or oral forward-looking statements that we may issue in the future. Except as required by applicable law, we do not intend to update any of the forward-looking statements to conform these statements to reflect actual results, later events or circumstances or to reflect the occurrence of unanticipated events.
AVAILABLE INFORMATION
We file certain reports under the Securities Exchange Act of 1934 (the “Exchange Act”). Such filings include annual and quarterly reports. The reports we file with the Securities and Exchange Commission (“SEC”) are available on the SEC’s website at (http://www.sec.gov).
Item 1. Financial Statements.
CLS HOLDINGS USA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
|
November 30, |
May 31, |
|||||||
|
2023 |
2023 |
|||||||
|
(unaudited) |
||||||||
|
ASSETS |
||||||||
|
Current assets |
||||||||
|
Cash and cash equivalents |
$ | $ | ||||||
|
Accounts Receivable |
||||||||
|
Inventory |
||||||||
|
Prepaid expenses and other current assets |
||||||||
|
Total current assets |
||||||||
| Property, plant and equipment, net of accumulated depreciation of $ |
||||||||
|
Right of use assets, operating leases |
||||||||
| Intangible assets, net of accumulated amortization of $ |
||||||||
|
Goodwill |
||||||||
|
Other assets |
||||||||
|
Total assets |
$ | $ | ||||||
|
LIABILITIES AND STOCKHOLDERS' DEFICIT |
||||||||
|
Current liabilities |
||||||||
|
Accounts payable and accrued liabilities |
$ | |||||||
|
Accrued interest, current |
||||||||
|
Loans payable |
||||||||
|
Lease liability - operating leases, current |
||||||||
|
Lease liability - financing leases, current |
||||||||
|
Taxes Payable |
||||||||
|
Notes payable |
||||||||
| Convertible notes payable - current, net of discount of $ |
||||||||
|
Convertible notes payable, related party - current |
||||||||
|
Total current liabilities |
||||||||
|
Noncurrent liabilities |
||||||||
|
Lease liability - operating leases, non-current |
||||||||
|
Lease liability - financing leases, non-current |
||||||||
| Notes payable, non-current, net of discount of $ |
||||||||
|
Convertible notes payable, non-current |
||||||||
|
Convertible notes payable, related party - non-current |
||||||||
|
Total Liabilities |
||||||||
|
Commitments and contingencies |
||||||||
|
Stockholder's deficit |
||||||||
| Preferred stock, $ |
||||||||
| Common stock, $ |
||||||||
|
Additional paid-in capital |
||||||||
|
Common stock subscribed |
||||||||
|
Accumulated deficit |
( |
) | ( |
) | ||||
|
Stockholder's deficit attributable to CLS Holdings, Inc. |
( |
) | ( |
) | ||||
|
Non-controlling interest |
( |
) | ( |
) | ||||
|
Total stockholder's deficit |
( |
) | ( |
) | ||||
|
Total liabilities and stockholders' deficit |
$ | $ | ||||||
See accompanying notes to these financial statements.
CLS HOLDINGS USA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
For the Three |
For the Three |
For the Six |
For the Six |
|||||||||||||
|
Months Ended |
Months Ended |
Months Ended |
Months Ended |
|||||||||||||
|
November 30, 2023 |
November 30, 2022 |
November 30, 2023 |
November 30, 2022 |
|||||||||||||
|
Revenue |
$ | $ | $ | $ | ||||||||||||
|
Cost of goods sold |
||||||||||||||||
|
Gross margin |
||||||||||||||||
|
Selling, general and administrative expenses |
||||||||||||||||
|
Total operating expenses |
||||||||||||||||
|
Operating income (loss) |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
|
Other (income) expense: |
||||||||||||||||
|
Interest expense, net |
||||||||||||||||
|
Employee retention tax credit income |
( |
) | ||||||||||||||
|
Loss on extinguishment of debt |
||||||||||||||||
|
(Gain) Loss on equity investment |
( |
) | ||||||||||||||
|
Gain on settlement of debt |
( |
) | ( |
) | ||||||||||||
|
Gain on settlement of accounts payable |
( |
) | ||||||||||||||
|
Gain on settlement of note receivable |
( |
) | ||||||||||||||
|
Total other (income) expense |
( |
) | ||||||||||||||
|
Income (Loss) before income taxes |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
|
Provision for income tax |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
|
Net loss |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
|
Non-controlling interest |
( |
) | ( |
) | ( |
) | ||||||||||
|
Net loss attributable to CLS Holdings, Inc. |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
|
Net loss per share - basic |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
|
Net loss per share - diluted |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
|
Weighted average shares outstanding - basic |
||||||||||||||||
|
Weighted average shares outstanding - diluted |
||||||||||||||||
See accompanying notes to these financial statements.
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, August 31, 2022 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||||||||||
|
Common stock issued for the conversion of debt |
- | - | - | |||||||||||||||||||||||||
|
Rounding for reverse split |
- | - | - | - | - | - | ||||||||||||||||||||||
|
Loss on extinguishment of debt |
- | - | - | - | - | |||||||||||||||||||||||
|
Loss for the three months ended November 30, 2022 |
- | - | - | - | ( |
) | ( |
) | ||||||||||||||||||||
|
Balance, November 30, 2022 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||||||||||
|
Balance, May 31, 2022 |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||
|
Common stock issued for the conversion of debt |
- | - | - | |||||||||||||||||||||||||
|
Rounding for reverse split |
- | - | - | - | - | - | ||||||||||||||||||||||
|
Loss on extinguishment of debt |
- | - | - | - | - | |||||||||||||||||||||||
|
Loss for the six months ended November 30, 2022 |
- | - | - | - | ( |
) | ( |
) | ( |
) | ||||||||||||||||||
|
Balance, November 30, 2022 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||||||||||
|
Balance, August 31, 2023 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||||||||||
|
Discount on convertible notes payable |
- | - | - | - | - | |||||||||||||||||||||||
|
Loss for the three months ended November 30, 2023 |
- | - | - | - | ( |
) | ( |
) | ||||||||||||||||||||
|
Balance, November 30, 2023 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||||||||||
|
Balance, May 31, 2023 |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||
|
Discount on convertible notes payable |
- | - | - | - | - | |||||||||||||||||||||||
|
Loss for the six months ended November 30, 2023 |
- | - | - | - | ( |
) | ( |
) | ||||||||||||||||||||
|
Balance, November 30, 2023 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||||||||||
See accompanying notes to these financial statements.
CLS HOLDINGS USA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
For the Six |
For the Six |
|||||||
|
Months Ended |
Months Ended |
|||||||
|
November 30, 2023 |
November 30, 2022 |
|||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
|
Net loss |
$ | ( |
) | $ | ( |
) | ||
|
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
|
Loss on equity investment |
||||||||
|
Amortization of debt discounts and fees |
||||||||
|
Loss on extinguishment of debt |
||||||||
|
Gain on settlement of note receivable |
( |
) | ||||||
|
Gain on settlement of debt |
( |
) | ||||||
|
Gain on settlement of accounts payable |
( |
) | ||||||
|
Depreciation and amortization expense |
||||||||
|
Bad debt expense |
||||||||
|
Changes in assets and liabilities: |
||||||||
|
Accounts receivable |
( |
) | ( |
) | ||||
|
Prepaid expenses and other current assets |
||||||||
|
Inventory |
( |
) | ||||||
|
Right of use asset |
||||||||
|
Accounts payable and accrued expenses |
||||||||
|
Accrued interest |
||||||||
|
Deferred tax liability |
||||||||
|
Operating lease liability |
( |
) | ( |
) | ||||
|
Net cash used in operating activities |
( |
) | ||||||
|
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
|
Payments to purchase property, plant and equipment |
( |
) | ( |
) | ||||
|
Payment for construction security deposit |
( |
) | ||||||
|
Investment in Quinn River |
( |
) | ||||||
|
Proceeds from collection of note receivable |
||||||||
|
Net cash provided by (used in) investing activities |
( |
) | ( |
) | ||||
|
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
|
Proceeds from loan payable |
||||||||
|
Repayments of loan payable |
( |
) | ( |
) | ||||
|
Principal payments on notes payable |
( |
) | ||||||
|
Repayments on convertible debt |
( |
) | ( |
) | ||||
|
Principal payments on finance leases |
( |
) | ( |
) | ||||
|
Net cash used in financing activities |
( |
) | ||||||
|
Net decrease in cash and cash equivalents |
( |
) | ||||||
|
Cash and cash equivalents at beginning of period |
||||||||
|
Cash and cash equivalents at end of period |
$ | $ | ||||||
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
||||||||
|
Interest paid |
$ | $ | ||||||
|
Income taxes paid |
$ | $ | ||||||
|
NONCASH INVESTING AND FINANCING ACTIVITIES: |
||||||||
|
Shares issued for conversion of notes payable |
$ | $ | ||||||
|
Capitalized interest |
$ | $ | ||||||
|
Discount on convertible notes payable |
$ | $ | ||||||
|
Initial ROU asset and lease liability - operating |
$ | $ | ||||||
See accompanying notes to these financial statements.
CLS HOLDINGS USA, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November 30, 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.; its direct and indirect wholly owned operating subsidiaries, CLS Nevada, Inc., (“CLS Nevada”), CLS Labs, Inc. (“CLS Labs”), CLS Labs Colorado, Inc. (“CLS Colorado”), CLS Massachusetts, Inc. (“CLS Massachusetts”), and Alternative Solutions, LLC (“Alternative Solutions”); and wholly owned inactive subsidiaries CLS Labs Colorado, Inc. (“CLS Colorado”) and CLS Massachusetts, Inc. (“CLS Massachusetts”). 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 CLS CBD in which the company owns a
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.
We currently operate a retail marijuana dispensary within walking distance to the Las Vegas Strip and a small-scale cultivation facility, as well as a product manufacturing facility and a wholesale distribution operation in North Las Vegas. The vertically integrated business model drives strong margins to the bottom line on a portion of sales at the dispensary.
Our retail dispensary is a single location operation in Nevada and occupies over 5,000 square feet. This location, which is easily accessible by tourists, is currently open 19.5 hours per day for walk-in service. Curbside and in store express pick up is available between the hours of 8:00am and 12:00am. Oasis dispensary also delivers cannabis to residents between the hours of 8:00 AM and 10:00 PM. The central location provides logistical convenience for delivery to all parts of the Las Vegas valley.
Our wholesale operations, which occupies approximately 10,000 square feet of a 22,000 square foot warehouse, began sales to third parties in August 2017 and completed construction and received a certificate of occupancy for its state-of-the-art extraction facility in December of 2019. We have made sales to over 85 external customers as of November 30, 2023. Our existing product line includes vaporizers, tinctures, ethanol produced THC distillate, and live and cured hydrocarbon concentrates. At present, the City Trees cultivation facility only grows breeding stock to preserve valuable genetics and does not offer its crops for sale or processing. As a result, all raw materials for manufacturing are sourced from third parties.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassification
Certain reclassifications, not affecting previously reported net income or cash flows, have been made to the previously issued financial statements to conform to the current period presentation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less to be cash equivalents. The Company had cash and cash equivalents of $
Allowance for Doubtful Accounts
The Company generates the majority of its revenues and corresponding accounts receivable from the sale of cannabis, and cannabis related products. The Company evaluates the collectability of its accounts receivable considering a combination of factors. In circumstances where it is aware of a specific customer’s inability to meet its financial obligations to it, the Company records a specific reserve for bad debts against amounts due in order to reduce the net recognized receivable to the amount it reasonably 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 $
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
|
Years |
||||
|
Office equipment |
||||
|
Furniture & fixtures |
||||
|
Machinery & equipment |
||||
|
Leasehold improvements |
|
|||
Repairs and maintenance expenditures are charged to operations as incurred. Major improvements and replacements, which extend the useful life of an asset, are capitalized and depreciated over the remaining estimated useful life of the asset. When assets are retired or sold, the cost and related accumulated depreciation are eliminated and any resulting gain or loss is reflected in operations.
Long-Lived Assets
The Company reviews its property and equipment and any identifiable intangibles including goodwill for impairment on an annual basis utilizing the guidance set forth in the Statement of Financial Accounting Standards Board ASC 350 “Intangibles – Goodwill and Other” and ASC 360 “Property, Plant, and Equipment.” At November 30, 2023, the net carrying value of goodwill on the Company’s balance sheet remained at $
Employee Retention Tax Credit
Under the provisions of the extension of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Company was eligible for a refundable employee retention tax credit (the “ERTC”), subject to certain criteria. As ERTCs are not within the scope of ASC 740, Income Taxes, the Company has chosen to account for the ERTCs by analogizing to the International Standard IAS 20, Accounting/or Government Grants and Disclosure of Government Assistance (“IAS 20”). In accordance with IAS 20, an entity recognizes government grants only when there is reasonable assurance that the entity will comply with the conditions attached to them and the grants will be received. During the three and six months ended November 30, 2023, the Company received an aggregate of $
Comprehensive Income
ASC 220-10-15 “Reporting Comprehensive Income,” establishes standards for reporting and displaying of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, ASC 220-10-15 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company does not have any items of comprehensive income in any of the periods presented.
Non-Controlling Interests
The Company reports “non-controlling interest in subsidiary” as a component of equity, separate from parent’s equity, on the Consolidated Balance Sheets. In addition, the Company’s Consolidated Statements of Operations includes “net income (loss) attributable to non-controlling interest.” During the three months ended November 30, 2023 and 2022, the Company reported a non-controlling interest in the amount of ($
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.
Concentrations of Credit Risk
The Company maintains its cash in bank deposit accounts and other accounts, the balances of which at times may be uninsured or exceed federally insured limits. From time to time, some of the Company’s funds are also held by escrow agents; these funds may not be federally insured. The Company continually monitors its banking relationships and consequently has not experienced any losses in such accounts.
Advertising and Marketing Costs
All costs associated with advertising and promoting products are expensed as incurred. Total recognized advertising and marketing expenses were $
Research and Development
Research and development expenses are charged to operations as incurred. The Company incurred research and development costs of $
Fair Value of Financial Instruments
Pursuant to Accounting Standards Codification (“ASC”) No. 825–- Financial Instruments, the Company is required to estimate the fair value of all financial instruments included on its balance sheets. The carrying amounts of the Company’s cash and cash equivalents, notes receivable, convertible notes payable, accounts payable and accrued expenses, none of which is held for trading, approximate their estimated fair values due to the short-term maturities of those financial instruments.
A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:
Level 1–- Quoted prices in active markets for identical assets or liabilities.
Level 2–- Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable, either directly or indirectly.
Level 3–- Significant unobservable inputs that cannot be corroborated by market data.
Revenue Recognition
Revenue from the sale of cannabis products is recognized by Oasis at the point of sale, at which time payment is received, the product is delivered, and the Company’s performance obligation has been met. Management estimates an allowance for sales returns.
The Company also recognizes revenue from Serenity Wellness Products LLC and Serenity Wellness Growers LLC, d/b/a City Trees (“City Trees”). City Trees recognizes revenue from the sale of the following cannabis products and services to licensed dispensaries, cultivators and distributors within the State of Nevada:
|
|
● |
Premium organic medical cannabis sold wholesale to licensed retailers |
|
|
|
|
|
|
● |
Recreational marijuana cannabis products sold wholesale to licensed distributors and retailers |
|
|
|
|
|
|
● |
Extraction products such as oils and waxes derived from in-house cannabis production |
|
|
|
|
|
|
● |
Processing and extraction services for licensed medical cannabis cultivators in Nevada |
|
|
|
|
|
|
● |
High quality cannabis strains in the form of vegetative cuttings for sale to licensed medical cannabis cultivators in Nevada |
Effective June 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from commercial sales of products and licensing agreements by applying the following steps: (1) identifying the contract with a customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to each performance obligation in the contract; and (5) recognizing revenue when each performance obligation is satisfied.
Disaggregation of Revenue
|
For the Three |
For the Three |
|||||||
|
Months Ended |
Months Ended |
|||||||
|
November 30, 2023 |
November 30, 2022 |
|||||||
|
Cannabis Dispensary |
||||||||
|
Cannabis Production |
||||||||
| $ | $ | |||||||
|
For the Six |
For the Six |
|||||||
|
Months Ended |
Months Ended |
|||||||
|
November 30, 2023 |
November 30, 2022 |
|||||||
|
Cannabis Dispensary |
||||||||
|
Cannabis Production |
||||||||
| $ | $ | |||||||
Basic and Diluted Earnings or Loss Per Share
Basic net earnings per share is based on the weighted average number of shares outstanding during the period, while fully diluted net earnings per share is based on the weighted average number of shares of common stock and potentially dilutive securities assumed to be outstanding during the period using the treasury stock method. Potentially dilutive securities consist of options and warrants to purchase common stock, and convertible debt. Basic and diluted net loss per share are computed based on the weighted average number of shares of common stock outstanding during the period. At November 30, 2023 and 2022, the Company had the following potentially dilutive instruments outstanding: at November 30, 2023, a total of
The Company uses the treasury stock method to calculate the impact of outstanding stock options and warrants. Stock options and warrants for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on earnings per common share and, accordingly, are excluded from the calculations.
A net loss causes all outstanding stock options and warrants to be anti-dilutive. As a result, the basic and dilutive losses per common share are the same for the three and six months ended November 30, 2023 and 2022. For the three and six months ended November 30, 2023 and 2022, the Company excluded from the calculation of fully diluted earnings per share the following instruments which were anti-dilutive: shares issuable pursuant to the conversion of notes payable and accrued interest, shares issuable pursuant to the exercise of warrants, and 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 $
Note 3: Joint Venture
On October 20, 2021, the Company entered into a management services agreement (the “Quinn River Joint Venture Agreement”) through its
The Company is the manager of and holds a 50% ownership interest in Kealii Okamalu. Kealii Okamalu is a VIE which the Company consolidates. The Quinn River Joint Venture is not a legal entity but rather a business operated by Kealii Okamalu. The Company uses the equity method of accounting to record one-third of the profit or loss generated by the Quinn River Joint Venture, which accrues to Kealii Okamalu. Since the Company is a 50% owner of Kealii Okamalu, 50% of the profit or loss of Kealii Okamalu is recorded as minority interest in the Company’s statement of operations.
During the year ended May 31, 2022, Kealii Okamalu made cash investments in the aggregate amount of $
During the year ended May 31, 2023, Kealii Okamalu made cash investments in the aggregate amount of $
The Company’s partner in Kealii Okamalu LLC has defaulted on the LLC Operating Agreement and the Quinn River Joint Venture Agreement by failing to make any of its required $3 million capital contribution. As a result of the default by the Company’s partner in Kealii Okamalu LLC, the Tribal Council has formally terminated the Quinn River Joint Venture Agreement. Prior to the termination, the Company removed all of its assets from the tribal land and all of the assets owned by Kealii Okamalu. Although the Company and the Tribal Council have worked over the last few months to explore a new 50/50 partnership with the Tribe, the Company has elected not to continue to pursue an agreement since the economic benefits of doing so are negligible, at best, in the current market. The Company does not believe it is likely to recover its investment in Kealii Okamalu and has recorded an impairment charge in the amount of $
|
Deposits and prepaid expenses |
$ | |||
|
Fixed assets |
||||
|
Right of use assets |
||||
|
Equity investment in Quinn River |
||||
|
Total impairment |
$ |
Following the impairment charge the net book value of the Company’s investment in Kealii Okamalu and the Quinn River Joint Venture at November 30, 2023 is $
Note 4: Accounts Receivable
Accounts receivable was $
Note 5: Inventory
|
November 30, |
May 31, |
|||||||
|
2023 |
2023 |
|||||||
|
Raw materials |
$ | $ | ||||||
|
Finished goods |
||||||||
|
Total |
$ | $ | ||||||
Raw materials consist of cannabis plants and the materials that are used in our production process prior to being tested and packaged for consumption. Finished goods consist of pre-packaged materials previously purchased from other licensed cultivators and our manufactured edibles and extracts.
Note 6: Prepaid Expenses and Other Current Assets
|
November 30, |
May 31, |
|||||||
|
2023 |
2023 |
|||||||
|
Prepaid expenses |
||||||||
|
Employee receivable |
||||||||
|
Total |
$ | $ | ||||||
Prepaid expenses primarily of (i) annual license fees charged by the State of Nevada; (ii) insurance costs; (iii) supplies; (iv) rent; and (v) board fees.
Note 7: Note Receivable
On October 31, 2018, the Company loaned $
By letter dated February 26, 2020, the Company informed IGH that as a result of its breaches of the IGH Option, which remained uncured, an event of default had occurred under the IGH Note. The Company advised IGH that it was electing to cause the IGH Note to bear interest at the default rate of
On June 14, 2021, the parties to the IGH lawsuit entered into a confidential settlement agreement to resolve the action and the IGH Settlement Note. Pursuant to the IGH Settlement Note, IGH paid the Company $
Note 8: Property, Plant and Equipment
|
November 30, 2023 |
May 31, 2023 |
|||||||
|
Office equipment |
$ | $ | ||||||
|
Furniture and fixtures |
||||||||
|
Machinery & Equipment |
||||||||
|
Leasehold improvements |
||||||||
|
Less: accumulated depreciation |
( |
) |
( |
) |
||||
|
Property, plant, and equipment, net |
$ | $ | ||||||
The Company made payments in the amounts of $
Depreciation expense totaled $
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
The Company’s lease expense for the three months ended November 30, 2023 and 2022 was entirely comprised of operating leases and amounted to $
The Company’s right of use (“ROU”) asset amortization for the three months ended November 30, 2023 and 2022 was $
The Company has recorded total right of use assets of $
|
November 30, 2023 |
||||
|
Amount at inception of leases |
$ | |||
|
Amount amortized |
( |
) |
||
|
Prior Period Impairment of Quinn River Lease |
( |
) |
||
|
Balance – November 30, 2023 |
$ | |||
|
Amount at inception of leases |
$ | |||
|
Amount amortized |
( |
) |
||
|
Balance – November 30, 2023 |
$ |
|
Warehouse and offices |
$ | |||
|
Land |
||||
|
Office equipment |
||||
|
Balance – November 30, 2023 |
$ | |||
|
Lease liability |
$ | |||
|
Less: current portion |
( |
) |
||
|
Lease liability, non-current |
$ |
|
Twelve months ended November 30, 2024 |
$ | |||
|
Twelve months ended November 30, 2025 |
||||
|
Twelve months ended November 30, 2026 |
||||
|
Twelve months ended November 30, 2027 |
||||
|
Twelve months ended November 30, 2028 |
||||
|
Thereafter |
||||
|
Total |
$ | |||
|
Less: Present value discount |
( |
) |
||
|
Lease liability |
$ |
Note 10: Intangible Assets
|
November 30, 2023 |
||||||||||||||||
|
Accumulated |
||||||||||||||||
|
Gross |
Amortization |
Impairment |
Net |
|||||||||||||
|
License & Customer Relations |
$ | $ | ( |
) |
$ | |||||||||||
|
Tradenames - Trademarks |
( |
) |
||||||||||||||
|
Domain Names |
( |
) |
||||||||||||||
|
Total |
$ | $ | ( |
) |
$ | |||||||||||
|
May 31, 2023 |
||||||||||||||||
|
Accumulated |
||||||||||||||||
|
Gross |
Amortization |
Impairment |
Net |
|||||||||||||
|
Intellectual Property |
$ | $ | ( |
) |
$ | ( |
) |
$ | ||||||||
|
License & Customer Relations |
( |
) |
( |
) |
||||||||||||
|
Tradenames - Trademarks |
( |
) |
( |
) |
||||||||||||
|
Non-compete Agreements |
( |
) |
||||||||||||||
|
Domain Names |
( |
) |
||||||||||||||
|
Total |
$ | $ | ( |
) |
$ | ( |
) |
$ | ||||||||
Total amortization expense charged to operations for the three months ended November 30, 2023 and 2022 was $
|
Amount to be amortized during the twelve months ended November 30, |
||||
|
2024 |
$ | |||
|
2025 |
||||
|
2026 |
||||
|
2027 |
||||
|
2028 |
||||
|
Thereafter |
||||
| $ |
Note 11: Goodwill
Goodwill in the amount of $
Goodwill Impairment Test
The Company assessed its intangible assets as of May 31, 2022 and 2021 for purposes of determining if an impairment existed as set forth in ASC 350 – Intangibles – Goodwill and Other and ASC 360 – Property Plant and Equipment. Pursuant to ASC 360, the Company determined that the fair value of its intangible assets exceeded the carrying value of goodwill at November 30, 2023 and May 31, 2023. As a result, no impairment was recorded. At November 30, 2023 and May 31, 2023, the net amount of goodwill on the Company’s balance sheet was $
Note 12: Other Assets
|
November 30, |
May 31, |
|||||||
|
2023 |
2023 |
|||||||
|
Construction deposit |
$ | $ | ||||||
|
Security deposits |
||||||||
| $ | $ | |||||||
During the three months ended November 30, 2023, the Company paid a deposit in the amount of $
Note 13: Accounts Payable and Accrued Liabilities
|
November 30, 2023 |
May 31, 2023 |
|||||||
|
Trade accounts payable |
$ | $ | ||||||
|
Accrued payroll and payroll taxes |
||||||||
|
Accrued liabilities |
||||||||
|
Total |
$ | $ | ||||||
Note 14: Loans Payable
2022 Financing Agreement CBR
Effective September 30, 2022, the Company entered into a Business Loan and Security Agreement with CBR Capital LLC to borrow $
During the year ended May 31, 2023, the Company received cash proceeds in the amount of $
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 $
During the year ended May 31, 2023, the Company received cash proceeds in the amount of $
Note 15: Convertible Notes Payable
|
November 30, 2023 |
May 31, 2023 |
|||||||
| Convertible debenture in the principal amount of $ |
||||||||
|
November 30, 2023 |
May 31, 2023 |
|||||||
| Convertible debenture in the principal amount of $ |
||||||||
|
November 30, 2023 |
May 31, 2023 |
|||||||
Convertible debentures payable in the aggregate principal amount of $ |
||||||||
| November 30, 2023 | May 31, 2023 | |||||||
| Four unsecured convertible debentures dated November 30, 2023 in the aggregate principal amount of $ |
$ | |||||||
|
Convertible Notes Payable |
$ | $ | ||||||
|
November 30, 2023 |
May 31, 2023 |
|||||||
|
Total – Convertible Notes Payable, Net of Discounts, Current Portion |
$ | $ | ||||||
|
Total – Convertible Notes Payable, Net of Discounts, Long-term Portion |
$ | $ | ||||||
Note 16: Convertible Notes Payable – Related Party
|
November 30, 2023 |
May 31, 2023 |
|||||||
| Convertible debenture in the principal amount of $ |
$ | $ | ||||||
|
November 30, 2023 |
May 31, 2023 |
|||||||
|
Total – Convertible Notes Payable - Related Party, Current Portion |
$ | $ | ||||||
|
Total – Convertible Notes Payable – Related Party, Long-term Portion |
$ | $ | ||||||
Note 17: Notes Payable
|
November 30, 2023 |
May 31, 2023 |
|||||||
| Debenture in the principal amount of $ |
$ | $ | ||||||
| Debenture in the principal amount of $ |
||||||||
|
November 30, 2023 |
May 31, 2023 |
|||||||
| Debenture in the principal amount of $ |
||||||||
| Debenture in the principal amount of $ |
||||||||
|
November 30, 2023 |
May 31, 2023 |
|||||||
| Debenture in the principal amount of $ |
||||||||
| Debenture in the principal amount of $ |
||||||||
|
Total |
||||||||
|
Original Issue Discount |
||||||||
|
Notes Payable, Gross |
||||||||
|
Less: Discount |
( |
) |
( |
) |
||||
|
Notes Payable, Net of Discount |
||||||||
|
November 30, 2023 |
May 31, 2023 |
|||||||
|
Total – Notes Payable, Net of Discounts, Current Portion |
$ | $ | ||||||
|
Total – Notes Payable, Net of Discounts. Long Term Portion |
$ | $ | ||||||
During the three months ended November 30, 2023 and 2022, the Company amortized discounts to interest expense in the amount of $
Aggregate maturities of notes payable and convertible notes payable, and convertible notes payable – related parties as of November 30, 2023 are as follows (not including unamortized debt discounts in the amount of $
For the twelve months ended November 30,
|
2024 |
$ | |||
|
2025 |
||||
|
2026 |
||||
|
2027 |
||||
|
2028 |
||||
|
Thereafter |
||||
|
Total |
$ |
Note 18: Lease Liabilities - Financing Leases
|
November 30, 2023 |
May 31, 2023 |
|||||||
| Financing lease obligation under a lease agreement for extraction equipment dated March 14, 2022 in the original amount of $ |
$ | $ | ||||||
| Financing lease obligation under an agreement for equipment dated June 20, 2022 in the original amount of $ |
$ | |||||||
|
Total |
$ | $ | ||||||
|
Current portion |
$ | $ | ||||||
|
Long-term maturities |
||||||||
|
Total |
$ | $ | ||||||
For the period ended November 30,
|
2024 |
$ | |||
|
2025 |
||||
|
2026 |
||||
|
2027 |
||||
|
2028 |
||||
|
Thereafter |
||||
|
Total |
$ |
Note 19: Stockholders’ Equity
At the Company's annual meeting of stockholders on November 28, 2023, the Company’s shareholders voted to increase the number of shares of authorized common stock from
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
Common stock transactions for the three months ended November 30, 2023
None.
Common stock transactions for the three months ended November 30, 2022
Common Stock and Warrants Issued upon Conversion of Notes Payable:
On September 15, 2022, the Company issued
On September 15, 2022, the Company issued
Other Warrant Transactions
From December 1, 2021, through January 4, 2022, the Company issued $
On September 15, 2022, the Company amended $
|
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 |
|||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||
| $ | $ | |||||||||||||||||||||
|
Number of Shares |
Weighted Average Exercise Price |
|||||||
|
Warrants outstanding at May 31, 2022 |
$ | |||||||
|
Granted |
$ | |||||||
|
Exercised |
$ | |||||||
|
Cancelled / Expired |
( |
) |
$ | |||||
|
Warrants outstanding at May 31, 2023 |
$ | |||||||
|
Granted |
$ | |||||||
|
Exercised |
$ | |||||||
|
Cancelled / Expired |
$ | |||||||
|
Warrants outstanding at November 30, 2023 |
$ | |||||||
Unit Warrants
In February and March 2018, in connection with the Westpark offering, the Company issued five-year warrants to purchase
Because the unit warrants are exercisable for Common Stock and warrants, they are not included in the warrant tables above.
Note 20: Related Party Transactions
As of November 30, 2023 and May 31, 2023, 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 $
During the six months ended November 30, 2023, the Company made payments of $
During six months ended November 30, 2023, the Company’s Board of Directors authorized a bonus for its Chief Executive Officer in the amount of $
During the six months ended November 30, 2023, the Company accrued interest in the amount of $
Note 21: Income Taxes
The following table summarizes the Company’s income tax accrued for the three and six and months ended November 30, 2023 and 2022:
The Company accounts for income taxes under FASB ASC 740-10, which provides for an asset and liability approach of accounting for income taxes. Under this approach, deferred tax assets and liabilities are recognized based on anticipated future tax consequences, using currently enacted tax laws, attributed to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts calculated for income tax purposes.
|
Three Months Ended November 30, |
||||||||
|
2023 |
2022 |
|||||||
|
Revenue |
$ | $ | ||||||
|
Directly attributable costs |
( |
) |
( |
) |
||||
|
Deferred |
||||||||
|
Tax rate |
% |
% |
||||||
|
Tax expense |
$ | $ | ||||||
|
Six Months Ended November 30, |
||||||||
|
2023 |
2022 |
|||||||
|
Revenue |
$ | $ | ||||||
|
Directly attributable costs |
( |
) |
( |
) |
||||
|
Deferred |
||||||||
|
Tax rate |
% |
% |
||||||
|
Tax expense |
$ | $ | ||||||
Note: Change in uncertain tax position with all tax expense recorded in current year due to change in estimate. No prior year net operating loss was considered.
Due to the accrual of taxes related to Section 280E of the Internal Revenue Code, as amended, the Company has an uncertain tax accrual that is currently being expensed as a change in estimate. The Company has net operating losses that it believes are available to it to offset this expense; however, there can be no assurance under current interpretations of tax laws for cannabis companies that the Company will be allowed to use these net operating losses to offset Section 280E tax expenses.
Note 22: Commitments and Contingencies
Legal Matters
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of the date of filing of this report, there were no pending or threatened lawsuits.
Integrity Global Security
On October 20, 2022, Integrity Global Security Inc. (“IGS”) filed a Complaint in the Eighth Judicial District Court, Case No. A-22-860152-C, against Serenity alleging Breach of Contract and Breach of Covenant of Good Faith and Fair Dealing. In its Complaint, IGS alleged that Serenity owes IGS the amount of $
In response to IGS’s Complaint, Serenity filed an Answer on December 8, 2022, and a Countercomplaint against IGS asserting claims for Breach of Contract, Breach of the Implied Covenant of Good Faith and Fair Dealing, Negligence, Respondent Superior, Intentional Interference with Prospective Economic Advantage and Negligent Hiring, Training, and Supervision for actions related to a violent attack by an IGS employee against a Serenity employee. Serenity amended its Counterclaim on January 20, 2023, to include more information related to Serenity’s damages sustained as a result of IGS’s actions.
IGS filed a Motion to Dismiss Serenity’s Counterclaims on February 10, 2023, which Serenity opposed. However, on May 4, 2023, the morning of the Motion to Dismiss oral argument, IGS’s counsel advised Serenity’s counsel and the Court that IGS was voluntarily withdrawing its Motion to Dismiss. The Court granted IGS’s voluntary withdrawal of the Motion to Dismiss and IGS subsequently filed an Answer to Serenity’s Counterclaim on May 18, 2023.
Shortly thereafter the parties’ counsel attended an Early Case Conference on May 18, 2023, and the parties began exchanging information related to relevant witnesses, documents, and computations of damages. IGS served Serenity with Interrogatories, Requests for Admissions, and Requests for Production of Documents on or about July 20, 2023, while Serenity served IGS with their own Interrogatories and Requests for Production of Documents on or about August 11, 2023. Before any of the parties answered the propounded discovery requests served by the other party, the parties agreed to attend a Judicial Settlement Conference with the Eighth Judicial District Court. Accordingly, the parties entered into a Stipulation to Stay Discovery Pending a Judicial Settlement Conference, which was granted and entered by the Eighth Judicial District Court on September 20, 2023.
The parties are awaiting available dates from the Eighth Judicial District Court for the Judicial Settlement Conference. Until the parties attend the Judicial Settlement Conference, this matter is stayed. See note 23.
Lease Arrangements
The Company leases several facilities for office, warehouse, and retail space. Currently lease commitments are as follows:
|
| ● | A lease that commenced in February 2019 for |
|
|
|
|
|
| ● | A lease that commenced January 2018 for |
|
| ● | A lease that commenced in February 2019 for |
|
|
|
|
|
| ● | A lease that commenced in January 2016 for |
|
|
|
|
|
| ● | A lease that commenced on May 17, 2022 for approximately |
|
| ● | A lease that commenced in October 2023 for |
In connection with the Company’s planned Colorado operations, on April 17, 2015, pursuant to an Industrial Lease Agreement (the “Lease”), CLS Labs Colorado leased
In August 2017, the Company’s Colorado subsidiary received a demand letter from its Colorado landlord requesting the forfeiture of the $
Note 23: Subsequent Events
Conversion of November 2023 Debentures
On December 6, 2023 the Company elected to convert the debt owed under the November 30, 2023 Debentures. As a result of the conversion an additional
Amendment to Convertible Debentures and Warrants
On December 28, 2023, the Company executed a Supplemental Indenture (the “December 28, 2023 Indenture Supplement”) to amend that certain debenture indenture by and between the Company and Odyssey Trust Company, as Trustee, dated as of December 12, 2018, as supplemented March 31, 2021, as further supplemented September 15, 2022 (collectively, the “Debenture Indenture”), in order to amended the terms of its outstanding $
On December 28, 2023, the Company also executed a Notice of Amendment to Warrant Terms to extend the terms of the warrants to December 28, 2026.
Integrity Global Security Settlement
On January 2, 2024, the Company reached agreements with IGS whereby
The Company has evaluated events through the date of the financial statements and has determined that there were no additional material subsequent events.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
History
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. On April 29, 2015, we entered into a merger agreement with CLS Labs and a newly-formed, wholly owned subsidiary of the Company (the “Merger Sub”) and effected the Merger (the “Merger”). Upon the consummation of the Merger, the separate existence of the Merger Sub ceased and CLS Labs, the surviving corporation in the Merger, became a wholly owned subsidiary of the Company, with the Company acquiring the stock of CLS Labs. As a result of the Merger, we acquired the business of CLS Labs and abandoned our previous business.
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.
We have been issued a U.S. patent with respect to our proprietary method of extracting cannabinoids from cannabis plants and converting the resulting cannabinoid extracts into concentrates such as oils, waxes, edibles and shatter. We have not commercialized our proprietary process and due to the current Nevada State laws governing these types of extraction methods, we do not intend to commercialize the proprietary process in the future. CLSH is engaged in attempting to find a buyer for the patent who may be able to use it in another state or another application.
The Quinn River Joint Venture Agreement
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. At that time, we applied for regulatory approval to own an interest in the Oasis LLCs, which approval the CCB Granted 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. The CCB granted final regulatory approval for us to own our interest in the Oasis LLCs through Alternative Solutions under the final structure of the transaction on April 26, 2022.
On October 20, 2021, we entered into a management services agreement (the “Quinn River Joint Venture Agreement”) through our 50% owned subsidiary, Kealii Okamalu LLC, 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 was 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 had an initial term of 10 years plus a 10-year renewal option from the date the first cannabis crop was harvested and sold. Pursuant to the Quinn River Joint Venture Agreement, Kealii Okamalu LLC was 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 and manage the design, finance and construction of a cannabis cultivation facility on such tribal lands (the “JV Cultivation Facility”). In 2022 and 2023 Kealii Okamalu LLC managed the ongoing operations of the JV Cultivation Facility and related business, including, but not limited to, cultivation of cannabis crops, personnel staffing, product packaging, testing, marketing and sales. Packaged products were branded as “Quinn River Farms.” We provided 10,000 square feet of warehouse space at our Las Vegas facility, and the Quinn River Joint Venture granted us preferred vendor status including the right to purchase cannabis flower and the Quinn River Joint Venture’s cannabis trim at favorable prices. Kealii Okamalu LLC was expected to contribute $6 million towards the construction of the JV Cultivation Facility and the working capital for the Quinn River Joint Venture. This amount was to be repaid from the portion of the net profits of the Quinn River Joint Venture otherwise payable to CSI and the Tribe at the rate of $750,000 per quarter for eight quarters. Kealii Okamalu LLC was to receive one-third of the net profits of the Quinn River Joint Venture. We were the manager of and held a 50% ownership interest in Kealii Okamalu LLC. Kealii Okamalu LLC is a variable interest entity which we consolidate. The Quinn River Joint Venture was not a legal entity but rather a business operated by Kealii Okamalu LLC. The Quinn River Joint Venture completed its first harvest during the year ended May 31, 2023, from which the Company purchased inventory in the amount of $952,124.
As of the year ended May 31, 2023, the Company’s 50% partner in Kealii Okamalu LLC had defaulted on its obligations under both the Kealii Okamalu LLC Operating Agreement and the Quinn River Joint Venture Agreement by failing to make any of its required capital contribution of $3 million. As a result of the partner’s breach, the Quinn River Joint Venture Agreement was officially terminated in July of 2023. Kealii Okamalu LLC is no longer an active operating entity. The Company does not believe it is likely to recover its investment in Kealii Okamalu LLC and has made an impairment charge in the amount of $1,590,742 against these assets during the year ended May 31, 2023.
Current Business and Outlook
We generate revenues through: (i) our retail dispensary (Oasis), and (ii) our City Trees cultivation and processing of cannabis and wholesale of cannabis-related products for Oasis and third-parties. We continue to explore opportunities for growth through the acquisition of companies, the creation of joint ventures, licensing agreements, and fee-for-service arrangements with growers and dispensaries of cannabis products. We believe that we can ultimately establish a position as one of the premier cannabinoid extraction and processing companies in the industry. We have created our own brand of concentrates for consumer use, which we sell wholesale to cannabis dispensaries. We are attempting to create a “gold standard” national brand by standardizing the testing, compliance and labeling of our products in an industry currently comprised of small, local businesses with erratic and unreliable product quality, testing practices and labeling.
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.
Results of Operations for the Three Months Ended November 30, 2023 and 2022
The table below sets forth our select expenses as a percentage of revenue for the applicable periods:
|
Three Months Ended |
Three Months Ended |
|||||||
|
November 30, 2023 |
November 30, 2022 |
|||||||
|
Revenue |
100 |
% |
100 |
% |
||||
|
Cost of Goods Sold |
58 |
% |
52 |
% |
||||
|
Gross Margin |
42 |
% |
48 |
% |
||||
|
Selling, General, and Administrative Expenses |
50 |
% |
56 |
% |
||||
|
Gain on Settlement of Notes Receivable |
- |
% |
(3 |
)% |
||||
|
Loss on Extinguishment of Debt |
- |
% |
110 |
% |
||||
|
Interest expense |
8 |
% |
10 |
% |
||||
|
Provision for Income Tax |
9 |
% |
9 |
% |
||||
The table below sets forth certain statistical and financial highlights for the applicable periods:
|
Three Months Ended |
Three Months Ended |
|||||||
|
November 30, 2023 |
November 30, 2022 |
|||||||
|
Number of Customers Served (Dispensary) |
68,586 | 83,744 | ||||||
|
Revenue |
$ | 5,197,214 | $ | 6,074,177 | ||||
|
Gross Profit |
$ | 2,171,619 | $ | 2,925,237 | ||||
|
Selling, General, and Administrative Expenses |
$ | 2,606,918 | $ | 3,428,352 | ||||
Revenues
We had revenue of $5,197,214 during the three months ended November 30, 2023, a decrease of $876,963, or 14%, compared to revenue of $6,074,177 during the three months ended November 30, 2022. Our cannabis dispensary accounted for $3,104,064, or 60%, of our revenue for the three months ended November 30, 2023, a decrease of $688,740, or 18%, compared to $3,792,804 during the three months ended November 30, 2022. Dispensary revenue decreased during the second quarter of fiscal year 2024 because our average sales per day decreased from $41,679 during the second quarter of fiscal year 2023 to $34,111 during the second quarter of fiscal year 2024. Our cannabis production accounted for $2,093,150, or 40%, of our revenue for the three months ended November 30, 2023, a decrease of $188,223 or 8%, compared to $2,281,373 for the three months ended November 30, 2022. The decrease in production revenues for the second quarter of fiscal year 2024 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
Our cost of goods sold for the three months ended November 30, 2023 was $3,025,595, a decrease of $123,345, or 4%, compared to cost of goods sold of $3,148,940 for the three months ended November 30, 2022. The decrease in cost of goods sold for the three months ended November 30, 2023 was due primarily due to a decrease in sales. Cost of goods sold was 58.2% of sales during the three months ended November 30, 2023 resulting in a gross margin of 41.8%. Cost of goods sold was 51.8% of sales during the three months ended November 30, 2022 resulting in a gross margin of 48.2%. Cost of goods sold during the second quarter of the 2024 fiscal year primarily consisted of product cost of $2,478,392, labor and overhead of $417,254, supplies and materials of $121,474, and licenses and fees of $8,475. Cost of goods sold during the second quarter of the 2023 fiscal year primarily consisted of product cost of $2,697,590, labor and overhead of $278,149, supplies and materials of $132,426, and licenses and fees of $40,775.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, or SG&A, decreased by $821,434, or approximately 24%, to $2,606,918 during the three months ended November 30, 2023, compared to $3,428,352 for the three months ended November 30, 2022. The decrease in SG&A expenses for the three months ended November 30, 2023 was primarily due to the Company’s efforts to reduce payroll, legal and office related costs, and sales and marketing expenses.
SG&A expense during the three months ended November 30, 2023 was primarily attributable to an aggregate of $2,205,118 in costs associated with operating the Oasis LLCs, a decrease of $720,967 compared to $2,926,085 during the three months ended November 30, 2022. The major components of the decrease were as follows: sales and marketing costs of $103,048 compared to $299,154; lease, facilities, and office costs of $525,014 compared to $662,294; and payroll and related costs of $1,170,765 compared to $1,220,960. The reductions in costs were primarily the result of our cost cutting efforts. The decrease in SG&A expense for the second quarter was partially offset by an increase in professional fees to $186,144 compared to $68,714 and a decrease in the absorption of costs into cost of goods sold and inventory in the amount of $677,311.
Finally, SG&A decreased by $100,467 during the three months ended November 30, 2023 as a result of an decrease in the expenses associated with the ongoing implementation of other aspects of our business plan and our general corporate overhead to $401,800 from $502,267 during the three months ended November 30, 2022. The major components of this decrease compared to the second quarter of fiscal 2023 was a decrease in payroll and related costs to $106,354 during the current period from $165,488 during the comparable period of the prior year.
Interest Expense, Net
Our interest expense was $410,841 for the three months ended November 30, 2023, a decrease of $198,064, or 33%, compared to $608,905 for the six months ended November 30, 2022. The decrease consisted primarily of a decrease in the amount of $102,286 in connection with the payment of principal due on our short-term financing arrangements, and a decrease of $59,947 in connection with our convertible debentures related to the conversion of $11,343,619 of principal to equity on September 15, 2022. Interest expense also decreased by $32,056 due to a decrease in the amortization of discounts on our notes payable.
Loss on Extinguishment of Debt
During the three months ended November 30, 2022, certain of our convertible debentures were amended to (i) permit mandatory conversion of $11,343,619 in principal plus $189,061 in accrued interest into units at a reduced rate of $0.285 per unit; (ii) decrease the conversion price of the remaining debentures to $0.40 per unit; (iii) reduce the mandatory conversion VWAP provision from $2.40 to $0.80; and (iv) change the maturity date so that half of the remaining balance matures on December 31, 2023 and the remaining on December 31, 2024. We recognized a loss on the amendment of the debt in the amount of $6,659,359 in connection with these amendments during the second quarter of fiscal 2023. There was no comparable transaction in the current period.
Gain on Equity Investment
During the three months ended November 30, 2022, we had income on equity investment in the amount of $80,319 in connection with our interest in the Quinn River Joint Venture; there was no comparable transaction in the current period.
Gain on Settlement of Debt
During the three months ended November 30, 2022, our U.S. Convertible Debenture 4 in the amount $599,101 in principal and accrued interest in the amount of $3,283, went into default. We entered into a forbearance agreement with the lender, whereby we would pay the amount of $600,000 in installments beginning in November of 2022 through August of 2023. As a result of this agreement, we recognized a gain on the settlement of debt in the amount of $2,384. There was no comparable transaction in the current period.
Provision for Income Taxes
We recorded a provision for income taxes in the amount of $456,040 during the three months ended November 30, 2023 compared to $516,691 during the three months ended November 30, 2022. Although we have net operating losses that we believe are available to us to offset this entire tax liability, which arises under Section 280E of the Code because we are a cannabis company, as a conservative measure, we have accrued this liability.
Net Loss
For the reasons above, our net loss for the three months ended November 30, 2023 was $1,302,180 compared to a net loss of $8,215,954 for the three months ended November 30, 2022, a decrease of $6,903,187, or 84%.
Non-Controlling Interest
During the three months ended November 30, 2023 and 2022, the income (loss) associated with the non-controlling interest in Kealii Okamalu was ($92) and ($10,587), respectively. This amount is comprised of the third-party portion of the operating loss of the Quinn River Joint Venture and our loss on equity investment.
Net Loss Attributable to CLS Holdings USA, Inc.
Our net loss attributable to CLS Holdings USA, Inc. for the three months ended November 30, 2023 was $1,302,272 compared to a net loss of $8,215,954 for the three months ended November 30, 2022, a decrease of $6,913,682 or 84%.
Non-GAAP Measures
EBITDA and Adjusted EBITDA are 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. These non-GAAP measure have limitations as analytical tools 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 these non-GAAP financial measures 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. Management also believes that adjusting EBITDA for the effects of non-recurring transactions may provide insight into the nature of the core business. By providing these non-GAAP profitability measure, management intends to provide investors with a meaningful, consistent comparison of our profitability measures for the periods presented.
|
Three Months Ended November 30, 2023 |
Three Months Ended November 30, 2022 |
|||||||
|
Net Loss attributable to CLS Holdings, Inc. |
$ | (1,302,272 |
) |
$ | (8,215,954 |
) |
||
|
Add: |
||||||||
|
Interest expense, net |
410,841 | 608,905 | ||||||
|
Provision for taxes |
456,040 | 516,691 | ||||||
|
Depreciation and amortization |
165,874 | 240,258 | ||||||
|
EBITDA (1) |
$ | (269,517 |
) |
$ | (6,850,100 |
) |
||
|
Less non-recurring gains and losses: |
||||||||