UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
or
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| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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(
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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.
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| Large Accelerated filer ☐ | Accelerated filer ☐ |
| Smaller reporting company | |
| Emerging growth company |
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State the number of shares outstanding of each
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CLS HOLDINGS USA, INC.
FORM 10-Q
Quarterly Period Ended February 28, 2025
TABLE OF CONTENTS
EXPLANATORY NOTE
Unless otherwise noted, references in this report to “CLS Holdings USA, Inc.,” the “Company,” “we,” “our” or “us” means CLS Holdings USA, Inc. and its subsidiaries.
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements relate to, among other things, the impact of the COVID-19 virus on our business, the results of our initiatives to retain our employees and strengthen our relationships with our customers and community, the effect of our initiatives to expand market share and achieve growth, the expected development of our business and joint ventures, results of operations and financial performance, liquidity, working capital and capital requirements, the effects of the additional dilution on our common stock that may occur as a result of the amendments to our convertible debentures, and anticipated future events. 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, | |||||||
| 2025 | 2024 | |||||||
| 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 | ||||||||
| Due to related party | ||||||||
| Lease liability - operating leases, current | ||||||||
| Lease liability - financing leases, current | ||||||||
| Taxes Payable | ||||||||
| Notes payable, current | ||||||||
| Notes payable - related party, current | ||||||||
| Convertible notes payable, 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 $ | ||||||||
| Notes payable - related party, non-current | ||||||||
| Convertible notes payable, 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.
4
CLS HOLDINGS USA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months Ended | For the Three Months Ended | For the Nine Months Ended | For the Nine Months Ended | |||||||||||||
| February 28, 2025 | February 29, 2024 | February 28, 2025 | February 29, 2024 | |||||||||||||
| 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) on settlement of debt | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| (Gain) on settlement of accounts payable | ( | ) | ||||||||||||||
| 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.
5
CLS HOLDINGS USA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(Unaudited)
| Common Stock | Additional Paid In |
Stock | Stock | Accumulated | Non-controlling | |||||||||||||||||||||||||||
| Amount | Value | Capital | Payable | Receivable | Deficit | Interest | Total | |||||||||||||||||||||||||
| Balance, November 30, 2023 | - | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||||
| Conversion of notes payable | - | - | - | - | ||||||||||||||||||||||||||||
| Discounts on notes payable | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Shares issued to officer as compensation | - | - | - | - | ||||||||||||||||||||||||||||
| Amortization of employee stock options | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Common stock to be returned in settlement of notes payable | - | - | - | - | ( |
) | - | - | ( |
) | ||||||||||||||||||||||
| Extinguishment of debt | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Loss for the three months ended February 29, 2024 | - | - | - | - | - | ( |
) | ( |
) | |||||||||||||||||||||||
| Balance, February 29, 2024 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||||||||||||||
| Balance, May 31, 2023 | $ | $ | $ | $ | - | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||||||||||||
| Conversion of notes payable | - | - | - | - | ||||||||||||||||||||||||||||
| Discounts on notes payable | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Shares issued to officer as compensation | - | - | - | - | ||||||||||||||||||||||||||||
| Amortization of employee stock options | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Common stock to be returned in settlement of notes payable | - | - | - | - | ( |
) | - | - | ( |
) | ||||||||||||||||||||||
| Extinguishment of debt | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Loss for the nine months ended February 29, 2024 | - | - | - | - | - | ( |
) | ( |
) | |||||||||||||||||||||||
| Balance, February 29, 2024 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||||||||||||||
| Balance, November 30, 2024 | $ | $ | $ | $ | - | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||||||||||||
| Amortization of employee stock options | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Loss for the three months ended February 28, 2025 | - | - | - | - | - | ( |
) | - | ( |
) | ||||||||||||||||||||||
| Balance, February 28, 2025 | $ | $ | $ | $ | - | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||||||||||||
| Balance, May 31, 2024 | $ | $ | $ | $ | - | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||||||||||||
| Conversion of notes payable | - | - | - | - | ||||||||||||||||||||||||||||
| Shares purchased from related party | ( |
) | ( |
) | ( |
) | - | - | - | - | ( |
) | ||||||||||||||||||||
| Shares and warrants cancelled in debt settlement | ( |
) | ( |
) | ( |
) | - | - | - | - | ( |
) | ||||||||||||||||||||
| Amortization of employee stock options | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Loss for the nine months ended February 28, 2025 | - | - | - | - | - | ( |
) | - | ( |
) | ||||||||||||||||||||||
| Balance, February 28, 2025 | $ | $ | $ | $ | - | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||||||||||||
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, 2025 | February 29, 2024 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Share-based compensation | ||||||||
| Amortization of debt discounts and fees | ||||||||
| Loss on extinguishment of debt | ||||||||
| Loss on inventory write-off | ||||||||
| Depreciation and amortization expense | ||||||||
| Gain on settlement of accounts payable | ( | ) | ||||||
| Gain on settlement of debt | ( | ) | ( | ) | ||||
| 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) provided by operating activities | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Payments to purchase property, plant and equipment | ( | ) | ( | ) | ||||
| Payment for construction security deposit | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Cash received from the issuance of convertible notes payable | ||||||||
| Cash received from issuance of note payable - related party | ||||||||
| Cash received from issuance of note payable | ||||||||
| Principal payment on notes and buyback of shares | ( | ) | ||||||
| Principal payments on convertible notes payable | ( | ) | ( | ) | ||||
| Principal payments on notes payable | ( | ) | ( | ) | ||||
| Principal payments on notes payable -related party | ( | ) | ||||||
| Proceeds of loan payable | ||||||||
| Repayments of loan payable | ( | ) | ||||||
| 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 | $ | $ | ||||||
| Initial ROU asset and lease liability - operating | $ | $ | ||||||
| Discount on convertible note payable | $ | $ | ||||||
| Cancellation of shares held by related party | $ | $ | ||||||
| Extinguishment of debt - Navy debentures | $ | $ | ||||||
| Gain on restructure of debentures | $ | $ | ||||||
| Conversion of notes payable to common stock | $ | $ | ||||||
| Loss on conversion of debentures to common stock | $ | $ | ||||||
| Transfer from prepaid expenses to fixed assets | $ | $ | ||||||
See accompanying notes to these financial statements.
7
CLS HOLDINGS USA, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2025
(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 8:00 AM and 12:00 AM. 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 88 external customers as of February 28, 2025. 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, Cash Equivalents, and Restricted Cash
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
$
8
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 bad debt
expense of $
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. During the three months ended
February 28, 2025, the Company wrote-off inventory in the amount of $
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 | ||||
| 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 February 28, 2025, 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 months ended February 28, 2025 and February 29, 2024, the Company received an aggregate of $
9
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.”
There was
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.
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.
10
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, 2025 and February 29, 2024:
| For the Three | For the Three | |||||||
| Months Ended | Months Ended | |||||||
| February 28, 2025 | February 29, 2024 | |||||||
| Cannabis Dispensary | ||||||||
| Cannabis Production | ||||||||
| $ | $ | |||||||
| For the Nine | For the Nine | |||||||
| Months Ended | Months Ended | |||||||
| February 28, 2025 | February 29, 2024 | |||||||
| Cannabis Dispensary | ||||||||
| Cannabis Production | ||||||||
| $ | $ | |||||||
Basic and Diluted Earnings or Loss Per Share
Basic net earnings per share
is based on the weighted average number of shares outstanding during the period, while fully diluted net earnings per share is based on
the weighted average number of shares of common stock and potentially dilutive securities assumed to be outstanding during the period
using the treasury stock method. Potentially dilutive securities consist of options and warrants to purchase common stock, and convertible
debt. Basic and diluted net loss per share are computed based on the weighted average number of shares of common stock outstanding during
the period. At February 28, 2025 and February 29, 2024, the Company had the following potentially dilutive instruments outstanding: at
February 28, 2025, 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.
11
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 months ended February 28, 2025 and 2024. For the three and nine months ended February 28, 2025 and 2024, 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
In November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures”. The amendments improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The ASU is effective for annual reporting periods beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024 with early adoption permitted and can be applied on either a prospective or retroactive basis. The Company does not believe the adoption of this guidance will have a material effect on its Consolidated Financial Statements and segment disclosures.
In November 2024, the FASB issued ASU 2024-03, “Disaggregation of Income Statement Expenses (DISE)” which requires disaggregated disclosure of income statement expenses for public business entities. The ASU does not change the expense captions an entity presents on the face of the income statement; rather, it requires disaggregation of certain expense captions into specified categories in disclosures within the footnotes to the financial statements. ASU 2024-03 is effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027. Early adoption is permitted. The Company does not believe the adoption of this guidance will have a material effect on its Consolidated Financial Statements and segment disclosures.
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 have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
12
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: Accounts Receivable
Accounts receivable was $
Note 4: 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, | |||||||
| 2025 | 2024 | |||||||
| 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 5: Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following at February 28, 2025 and May 31, 2024:
| February 28, | May 31, | |||||||
| 2025 | 2024 | |||||||
| Prepaid license fees | ||||||||
| Other prepaid expenses | ||||||||
| 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 6: Property, Plant and Equipment
Property, plant and equipment consisted of the following at February 28, 2025 and May 31, 2024:
| February 28, 2025 |
May 31, 2024 |
|||||||
| 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
$
13
Note 7: 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 February 28, 2025 and February 29, 2024 was entirely comprised of operating leases and amounted to
$
The Company’s right
of use (“ROU”) asset amortization for the three months ended February 28, 2025 and February 29, 2024 was $
The Company has recorded total
right of use assets of $
Right of use assets – operating leases are summarized below:
| February 28, 2025 |
||||
| Amount at inception of leases | $ | |||
| Amount amortized | ( |
) | ||
| Prior Period Impairment of Quinn River Lease | ( |
) | ||
| Balance – February 28, 2025 | $ | |||
Operating lease liabilities are summarized below:
| Amount at inception of leases | $ | |||
| Amount amortized | ( | ) | ||
| Balance – February 28, 2025 | $ | |||
| Warehouse and offices | $ | |||
| Land | ||||
| Office equipment | ||||
| Balance – February 28, 2025 | $ | |||
| Lease liability | $ | |||
| Less: current portion | ( | ) | ||
| Lease liability, non-current | $ |
Maturity analysis under these lease agreements is as follows:
| Twelve months ended February 28, 2025 | $ | |||
| Twelve months ended February 28, 2026 | ||||
| Twelve months ended February 28, 2027 | ||||
| Twelve months ended February 29, 2028 | ||||
| Twelve months ended February 28, 2029 | ||||
| Thereafter | ||||
| Total | $ | |||
| Less: Present value discount | ( | ) | ||
| Lease liability | $ |
14
Note 8: Intangible Assets
Intangible assets consisted of the following at February 28, 2025 and May 31, 2024:
| February 28, 2025 | ||||||||||||||||
| Accumulated | ||||||||||||||||
| Gross | Amortization | Impairment | Net | |||||||||||||
| License & Customer Relations | $ | $ | ( | ) | ||||||||||||
| Tradenames - Trademarks | ( | ) | ||||||||||||||
| Domain Names | ( | ) | ||||||||||||||
| Total | $ | $ | ( | ) | $ | |||||||||||
| May 31, 2024 | ||||||||||||||||
| Accumulated | ||||||||||||||||
| Gross | Amortization | Impairment | Net | |||||||||||||
| License & Customer Relations | ( | ) | ||||||||||||||
| Tradenames - Trademarks | ( | ) | ||||||||||||||
| Domain Names | ( | ) | ||||||||||||||
| Total | $ | $ | ( | ) | $ | $ | ||||||||||
Total amortization expense
charged to operations for the three months ended February 28, 2025 and 2024 was $
Remaining amortization expense for intangible assets as of February 28, 2025 is as follows:
| 2025 | $ | |||
| 2026 | ||||
| 2027 | ||||
| $ |
Note 9: Goodwill
Goodwill in the amount of
$
Goodwill Impairment Test
The Company assessed its intangible
assets as of May 31, 2024 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 May 31, 2024. As a result, no impairment was recorded. At February 28, 2025 and May
31, 2024, the net amount of goodwill on the Company’s balance sheet was $
Note 10: Other Assets
Other assets included the following as of February 28, 2025 and May 31, 2024:
| February 28, | May 31, | |||||||
| 2025 | 2024 | |||||||
| Security deposits | ||||||||
| $ | $ | |||||||
Note 11: Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consisted of the following at February 28, 2025 and May 31, 2024:
| February 28, 2025 |
May 31, 2024 |
|||||||
| Trade accounts payable | $ | $ | ||||||
| Accrued payroll and payroll taxes | ||||||||
| Accrued liabilities | ||||||||
| Total | $ | $ | ||||||
15
Note 12: Due to Related Party
On November 1, 2024, the Company
acquired and cancelled
Note 13: Notes Payable
On September 10, 2024, the Company made a payment
in the amount of $
| U.S. Convertible Debenture 1 | $ | |||
| U.S. Convertible Debenture 2 | ||||
| Debenture 6 | ||||
| Common stock and warrants – fair value | ||||
| Cash payment | ( | ) | ||
| Gain | $ |
| February 28, 2025 | May 31, 2024 | |||||||
Debenture 2 Debenture in the principal amount of $
On May 31, 2023, the Debenture 2 was amended as follows: (1) the first payment of principal and interest on June 30, 2023, followed by quarterly payment of principal and interest on September 30, 2023, beginning October 31, 2023, the Company is required to pay the note holder principal and Interest monthly through the maturity date.
On December 31, 2023, the Debenture 2 was amended as follows: The original issue discount in
the amount of $
During the three and nine months ended February 28,
2025, the Company amortized discounts on the Debenture 2 in the aggregate amount of $ | ||||||||
Debenture 6 Debenture in the principal amount of $
On May 31, 2023, the Debenture 6 was amended as follows: (1) the maturity date was extended to
On December 31, 2023, the Debenture 6 was amended as follows: The original issue discount in the amount of $375,000 was reduced to $
During the three months and six ended February 28, 2025, the Company amortized discounts in the amount of $ | ||||||||
16
Promissory Note 6 (“PN 6”) PN6 in the principal amount of $ |
| February 28, 2025 |
May 31, 2024 |
|||||||
Promissory Note 15 (“PN 15”) PN15 in the principal amount of $ |
||||||||
| Notes Payable | $ | $ | ||||||
| Less: Discount | ( |
) | ||||||
| Notes Payable, Net of Discount | $ | $ | ||||||
| February 28, 2025 | May 31, 2024 | |||||||
| Total Notes Payable, Current Portion | $ | $ | ||||||
| Total Notes Payable, Long-term Portion, net of discount | $ | $ | ||||||
17
Note 14: Convertible Notes Payable
| February 28, 2025 | May 31, 2024 | |||||||
US Convertible Debenture 2 (Navy Capital Green Fund) Convertible debenture in the principal amount of $
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 $
On April 15, 2021, the U.S. Convertible Debenture 2 was amended as follows:
On September 15, 2022, the U.S. Convertible Debenture 2 was amended as follows:
On December 29, 2023, the U.S. Convertible Debenture 2 was amended as follows: | $ | |||||||
18
| February 28, 2025 | May 31, 2024 | |||||||
Canaccord Debentures Convertible debentures payable in the aggregate principal amount of $
On March 31, 2021, the Canaccord Debentures were amended as follows:
On September 15, 2022, the Canaccord Debentures were further amended as follows:
On December 28, 2023, the Canaccord Debentures were amended as follows:
On January 4, 2024, debenture holders exercised Put Rights with regard to the Canaccord Debentures with a principal amount of $
On December 27, 2024, the Company executed a Supplemental Indenture 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 supplemented September 15, 2022, and as supplemented December 28, 2023, in order to amended the terms of its outstanding $
During the three and nine months ended February 28, 2025, the Company capitalized interest in the amount of $17,307 and $82,237, respectively. On January 17, 2025, the Company exercised the option to redeem all outstanding Canaccord Debentures in the amount of $1,678,633 including capitalized interest for cash in the amount of $1,006,800. The Company recorded a gain in the amount of $671,833 on this transaction. At February 28, 2025, all amounts due under Canaccord Debenture have been paid in full. | ||||||||
19
| February 28, 2025 | May 31, 2024 | |||||||
US Convertible Debenture 1 (Navy Capital Green Co-Invest Fund) Convertible debenture in the principal amount of $
On April 15, 2021, the U.S. Convertible Debenture 1 was amended as follows:
On September 15, 2022, the U.S. Convertible Debenture 1 was further amended as follows:
On December 29, 2023, the U.S. Convertible Debenture 1 was amended as follows: (i) the conversion price of the debentures was reduced to $ | ||||||||
| Total Convertible Notes Payable | $ | $ | ||||||
| February 28, 2025 | May 31, 2024 | |||||||
| Total – Convertible Notes Payable, Current Portion | $ | $ | ||||||
| Total – Convertible Notes Payable, Long-term Portion | $ | $ | ||||||
20
Note 15: Notes Payable – Related Party
| February 28, 2025 | May 31, 2024 | |||||||
Promissory Note 1 (“APN1”) PN1 Debenture in the principal amount of $ | $ | $ | ||||||
Promissory Note 2 (“PN2”) PN2 in the principal amount of $ | ||||||||
Promissory Note 3 (“PN3”) PN3 in the principal amount of $ | ||||||||
Promissory Note 4 (“PN4”) PN4 in the principal amount of $ | ||||||||
Promissory Note 5 (“PN5”) PN5 in the principal amount of $ | ||||||||
Promissory Note 8 (“PN8”) PN8 in the principal amount of $ | ||||||||
21
| February 28, 2025 | May 31, 2024 | |||||||
Promissory Note 9 (“PN9”) PN9 in the principal amount of $ | ||||||||
Promissory Note 10 (“PN10”) PN10 in the principal amount of $ | ||||||||
Promissory Note 11 (“PN11”) PN11 in the principal amount of $ | ||||||||
Promissory Note PN12 in the principal amount of $ | ||||||||
Promissory Note 13 (“PN13”) PN13 in the principal amount of $ | ||||||||
Promissory Note 14 (“PN14”) PN14 in the principal amount of $ | ||||||||
Promissory Note 16 (“PN16”) PN16 in the principal amount of $ | ||||||||
| Total | $ | $ | ||||||
22
| February 28, 2025 | May 31, 2024 | |||||||
| Total Notes Payable – Related Party, Current Portion | $ | $ | ||||||
| Total Notes Payable – Related Party, Long Term Portion | $ | $ | ||||||
Aggregate maturities of notes payable, convertible notes payable, and notes payable – related parties as of February 28, 2025 are as follows:
For the twelve months ended February 28,
| 2026 | $ | |||
| 2027 | ||||
| Total | $ |
Note 16: Lease Liabilities - Financing Leases
| February 28, 2025 | May 31, 2024 | |||||||
| 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 | $ | $ | ||||||
Aggregate maturities of lease liabilities – financing leases as of February 28, 2025 are as follows:
For the period ended February 28,
| 2026 | $ | |||
| 2027 | ||||
| Total | $ |
23
Note 17: Stockholders’ Equity
The Company’s authorized
capital stock consists of
Common stock transactions for the nine months ended February 28, 2025
On August 30, 2024, the Company
issued
On September 10, 2024, the
Company settled three notes payable in the aggregate principal amount of $
On November 1, 2024, the Company
acquired and cancelled
Common stock transactions for the nine months ended February 29, 2024
None.
Warrants
Warrants for the nine months ended February 28, 2025:
The following table summarizes the significant terms of warrants outstanding at February 28, 2025. This table does not include the unit warrants. See Unit Warrants section below.
| Range of exercise Prices | Number of warrants Outstanding | Weighted average remaining contractual life (years) | Weighted average exercise price of outstanding Warrants | Number of warrants Exercisable | Weighted average exercise price of exercisable Warrants | |||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||
| $ | $ | |||||||||||||||||||||
Transactions involving warrants are summarized as follows. This table does not include the unit warrants. See Unit Warrants section below.
| Number of Shares |
Weighted Average Exercise Price |
|||||||
| Warrants outstanding at May 31, 2023 | $ | |||||||
| Granted | $ | |||||||
| Exercised | $ | |||||||
| Cancelled / Expired | ( |
) | $ | |||||
| Warrants outstanding at May 31, 2024 | $ | |||||||
| Granted | ||||||||
| Exercised | $ | |||||||
| Cancelled / Expired | ( |
) | $ | |||||
| Warrants outstanding at February 28, 2025 | $ | |||||||
Stock Options
Stock options for the nine months ended February 28, 2025
During the nine months ended
February 28, 2025,
24
The following table summarizes the significant terms of options outstanding at February 28, 2025.
| Range of exercise Prices | Number of options Outstanding | Weighted average remaining contractual life (years) | Weighted average exercise price of outstanding Options | Number of Options Exercisable | Weighted average exercise price of exercisable Option | |||||||||||||||||
| $ | $ | $ | ||||||||||||||||||||
Transactions involving options are summarized as follows.
| Number of Shares |
Weighted Average Exercise Price |
|||||||
| Options outstanding at May 31, 2024 | $ | |||||||
| Granted | $ | |||||||
| Exercised | $ | |||||||
| Cancelled / Expired | ( |
) | $ | |||||
| Options outstanding at February 28, 2025 | $ | |||||||
The Company valued options using the Black-Scholes valuation model utilizing the following variables during the nine months ended February 28, 2025:
| February 28, | ||||
| 2025 | ||||
| Volatility | % | |||
| Dividends | $ | |||
| Risk-free interest rates | % | |||
| Expected term (years) | ||||
Stock options for the nine months ended February 29, 2024
None.
During the three and nine months ended February 28, 2025, the Company
charged $
The aggregate intrinsic value
of options outstanding and exercisable at February 28, 2025 and February 29, 2024 was $
25
Note 18: Gain on Settlement of Debt
On August 28, 2024, the Company
raised $
On September 10, 2024, the
Company utilized the proceeds of PN9 to settle three notes payable in the aggregate principal amount of $
The Company valued the warrants using the Black-Scholes valuation model utilizing the following variables during the nine months ended February 28, 2025:
| February 28, | ||||
| 2025 | ||||
| Volatility | % | |||
| Dividends | $ | |||
| Risk-free interest rates | % | |||
| Expected term (years) | ||||
On December 27, 2024, the
Company executed a Supplemental Indenture to amend that certain debenture indenture by and between the Company and Odyssey Trust Company
in order to amended the terms of its outstanding $
On January 17, 2025, the Company exercised the
option to redeem all outstanding Canaccord Debentures in the amount of $
Note 19: Related Party Transactions
As of February 28, 2025 and
May 31, 2024, 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 three months ended
February 28, 2025, the Company made payments of $
The Company’s CEO has waived his board fees for the period.
On November 1, 2024, the Company
acquired and cancelled
On August 28, 2024 the Company
issued PN9, a note payable to a related party, in the principal amount of $
26
On October 15, 2024 the Company
issued PN10, a note payable to a related party, in the principal amount of $
On December 6, 2024 the Company
issued PN11, a note payable to a related party, in the principal amount of $
On January 7, 2025 the Company
issued PN12, a note payable to a related party, in the principal amount of $
On January 7, 2025 the Company
issued PN13, a note payable to a related party, in the principal amount of $
On January 7, 2025 the Company
issued PN14, a note payable to a related party, in the principal amount of $
On February 26, 2025 the Company issued PN16, a note payable to a related
party, in the principal amount of $
At February 28, 2025, there
are
Note 20: Income Taxes
The following table summarizes the Company’s income tax accrued for the three and nine months ended February 28, 2025 and 2024:
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.
The components of the income tax provision include:
| Three Months Ended | ||||||||
| February 28, 2025 | February 29, 2024 | |||||||
| Revenue | $ | $ | ||||||
| Directly attributable costs | ( | ) | ( | ) | ||||
| Deferred | ||||||||
| Tax rate | % | % | ||||||
| Tax expense | $ | $ | ||||||
| Nine Months Ended | ||||||||
| February 28, 2025 | February 29, 2024 | |||||||
| 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.
27
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.
During the three months ended
February 28, 2025, the Company received a notification from the Internal Revenue Service (“IRS”) that the Company has been
assessed the amount of $
Note 21: 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.
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 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 22: Subsequent Events
During March and April 2025,
the Company received a total of $
28
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.
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 February 28, 2025 and 2024
The table below sets forth our selected expenses as a percentage of revenue for the applicable periods:
| Three Months Ended | Three Months Ended | |||||||
| February 28, 2025 |
February 29, 2024 |
|||||||
| Revenue | 100 | % | 100 | % | ||||
| Cost of Goods Sold | 60 | % | 57 | % | ||||
| Gross Margin | 40 | % | 43 | % | ||||
| Selling, General, and Administrative Expenses | 50 | % | 52 | % | ||||
| Interest expense | 3 | % | 5 | % | ||||
| Provision for Income Tax | 11 | % | 9 | % | ||||
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The table below sets forth certain statistical and financial highlights for the applicable periods:
| Three Months Ended | Three Months Ended | |||||||
| February 28, 2025 |
February 29, 2024 |
|||||||
| Number of Customers Served (Dispensary) | 48,978 | 64,368 | ||||||
| Revenue | $ | 3,854,603 | $ | 4,926,457 | ||||
| Gross Profit | $ | 1,543,227 | $ | 2,126,959 | ||||
| Selling, General, and Administrative Expenses | $ | 1,936,396 | $ | 2,565,239 | ||||
Revenues
We had revenue of $3,854,603 during the three months ended February 28, 2025, a decrease of $1,071,854, or 22%, compared to revenue of $4,926,457 during the three months ended February 29, 2024. Our cannabis dispensary accounted for $2,362,343, or 61%, of our revenue for the three months ended February 28, 2025, a decrease of $624,881, or 21%, compared to $2,987,224 during the three months ended February 29, 2024. Dispensary revenue decreased during the third quarter of fiscal year 2025 because our average sales per day decreased from $32,827 during the third quarter of fiscal year 2024 to $26,248 during the third quarter of fiscal year 2025. Our cannabis production accounted for $1,492,260, or 39%, of our revenue for the three months ended February 28, 2025, a decrease of $446,973 or 23%, compared to $1,939,223 for the three months ended February 29, 2024.
Cost of Goods Sold
Our cost of goods sold for the three months ended February 28, 2025 was $2,311,376, a decrease of $488,122, or 17%, compared to cost of goods sold of $2,799 498 for the three months ended February 29, 2024. The decrease in cost of goods sold for the three months ended February 28, 2025 was primarily due to a decrease in sales. Cost of goods sold was 60% of sales during the three months ended February 28, 2025 resulting in a gross margin of 40%. Cost of goods sold was 56.8% of sales during the three months ended February 29, 2024 resulting in a gross margin of 43.2%. Cost of goods sold during the third quarter of the 2025 fiscal year primarily consisted of product cost of $1,477,131, labor and overhead of $564,652, supplies and materials of $61,413, and licenses and fees of $3,000. We also wrote-off inventory in the amount of $205,180 due to quality control issues with a vendor; without this write-off, our gross margin would have been 45.4%. Cost of goods sold during the third quarter of the 2024 fiscal year primarily consisted of product cost of $2,210,390, labor and overhead of $467,486, supplies and materials of $113,147, and licenses and fees of $8,475.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, or SG&A, decreased by $628,843, or approximately 25%, to $1,936,396 during the three months ended February 28, 2025, compared to $2,565,239 for the three months ended February 29, 2024. The decrease in SG&A expenses for the three months ended February 28, 2025 was primarily due to our across-the-board cost-cutting efforts.
SG&A expense during the three months ended February 28, 2025 was primarily attributable to an aggregate of $1,502,892 in costs associated with operating the Oasis LLCs, a decrease of $414,648 compared to $1,917,540 during the three months ended February 29, 2024. The major components of the decrease were as follows: payroll and related costs of $1,025,150 compared to $1,181,169; office and facilities cost of $399,201 compared to $490,314; professional fees of $41,955 compared to $103,886; taxes and licenses of $138,245 compared to $174,409; sales and marketing costs of $75,527 compared to $103,356; and travel and entertainment of $77,525 compared to $95,572. The amount of SG&A expense allocated to cost of goods sold decreased by $10,944 during the current quarter compared to the prior year, from $413,221 to $402,777.
Finally, SG&A decreased by $214,194 during the three months ended February 28, 2025 as a result of an increase in the expenses associated with the ongoing implementation of other aspects of our business plan and our general corporate overhead to $433,506 from $647,700 during the three months ended February 29, 2024. The major component of this increase compared to the third quarter of fiscal 2024 was a decrease professional fees in the amount of $171,571 which were incurred in relation to our refinancing efforts during the prior year. Other components of the decrease in SG&A during the current year include a decrease in marketing and investor relations of $24,596 and a decrease in non-cash compensation in the amount of $23,891.
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Interest Expense, Net
Our interest expense was $114,889 for the three months ended February 28, 2025, a decrease of $133,072, or 54%, compared to $247,961 for the three months ended February 29, 2024. The decrease consisted primarily of a decrease in the amount of $72,032 related to interest on our notes and debentures due to decreased principal balances, and a decrease of $61,040 in the amortization of the discounts on notes payable. These discounts have been fully amortized.
Loss on Extinguishment of Debt
During the three months ended February 29, 2024, we restructured and / or redeemed certain of our convertible debentures, as follows: (A) The terms of certain convertible debenture were restructured, including (i) the conversion price of the debentures was reduced to $0.07 per unit; (ii) the conversion price of warrants underlying the units issuable upon conversion was reduced to $0.10 per share; (iii) the maturity date was extended to January 31, 2028. This restructuring included the redemption of convertible debentures in the principal amount of $3,875,095 at a discount of 40% for a cash payment in the amount of $2,325,036. These transactions resulted in a net loss on extinguishment of debt in the amount of $4,493,218 due to the increase in the calculated value of the conversion features and warrants of the remaining debentures at the reduced exercise prices. We also restructured the principal amounts and due dates of six additional debentures with an aggregate principal amount of $3,897,916 resulting in a gain on extinguishment of debt in the amount of $1,088,308. There were no comparable transactions in the current period.
Gain on settlement of debt
During the three months ended February 28, 2025, the Company executed a Supplemental Indenture 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 supplemented September 15, 2022, and as supplemented December 28, 2023, in order to amended the terms of its outstanding $1,378,778 original principal amount unsecured convertible debentures Canaccord Debentures issued December 12, 2018 to provide the Company an option to redeem all outstanding Canaccord Debentures in cash at a redemption price equal to $600 per $1,000 principal amount of Canaccord Debentures; any accrued but unpaid interest through to and including the redemption date shall not be paid and shall be cancelled. See note 22. On January 17, 2025, the Company exercised the option to redeem all outstanding Canaccord Debentures in the amount of $1,678,633 including capitalized interest for cash in the amount of $1,006,800. The Company recorded a gain in the amount of $671,833 on this transaction.
During the three months ended February 29, 2024, we redeemed certain other debentures and convertible debentures as follows: (A) We redeemed three debentures with an aggregate principal amount of $1,325,000 along with 13,174,402 shares of our common stock and warrants to purchase 454,548 shares of common stock for a cash payment in the amount of $1,250,000; we recognized a gain on extinguishment of debt in the amount of $596,949 in connection with this transaction. (B) We also converted eight debentures with an aggregate principal amount of $2,030,000 into a total of 64,132,135 shares of common stock. A loss on settlement of debt in the aggregate amount of $428,112 was recorded on these transactions. There were no comparable transactions in the previous period.
Provision for Income Taxes
We recorded a provision for income taxes in the amount of $442,655 during the three months ended February 28, 2025 compared to $446,662 during the three months ended February 29, 2024, an increase of $4,007 or 1%. 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 February 28, 2025 was $278,880 compared to a net loss of $4,368,975 for the three months ended February 29, 2025, a decrease of $4,090,096, or 94%.
Non-Controlling Interest
During the three months ended February 28, 2025 and 2024, the loss associated with the non-controlling interest in Kealii Okamalu was $0 and $1668, 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 February 28, 2025 was $278,880 compared to a net loss of $4,369,144 for the three months ended February 29, 2024, a decrease of $4,090,264 or 94%.
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Results of Operations for the Nine months Ended February 28, 2025 and February 29, 2024
The table below sets forth our selected expenses as a percentage of revenue for the applicable periods:
| Nine Months Ended | Nine Months Ended | |||||||
| February 28, 2025 |
February 29, 2024 |
|||||||
| Revenue | 100 | % | 100 | % | ||||
| Cost of Goods Sold | 58 | % | 57 | % | ||||
| Gross Margin | 42 | % | 43 | % | ||||
| Selling, General, and Administrative Expenses | 48 | % | 52 | % | ||||
| Interest expense | 4 | % | 7 | % | ||||
| Provision for Income Tax | 11 | % | 9 | % | ||||
The table below sets forth certain statistical and financial highlights for the applicable periods:
| Nine Months Ended | Nine Months Ended | |||||||
| February 28, 2025 |
February 29, 2024 |
|||||||
| Number of Customers Served (Dispensary) | 172,387 | 204,520 | ||||||
| Revenue | $ | 12,821,038 | $ | 15,238,198 | ||||
| Gross Profit | $ | 5,363,521 | $ | 6,572,504 | ||||
| Selling, General, and Administrative Expenses | $ | 6,216,328 | $ | 7,902,057 | ||||
Revenues
We had revenue of $12,821,038 during the nine months ended February 28, 2025, a decrease of $2,417,160, or 16%, compared to revenue of $15,238,198 during the nine months ended February 29, 2024. Our cannabis dispensary accounted for $8,136,274, or 63%, of our revenue for the nine months ended February 28, 2025, a decrease of $1,263,556, or 13%, compared to $9,399,830 during the nine months ended February 29, 2024. Dispensary revenue decreased during the third quarter of fiscal year 2025 because our average sales per day decreased from $34,432 during the third quarter of fiscal year 2024 to $29,803 during the third quarter of fiscal year 2025. Our cannabis production accounted for $4,684,764, or 37%, of our revenue for the nine months ended February 28, 2025, a decrease of $1,153,604 or 20%, compared to $5,838,368 for the nine months ended February 29, 2024.
Cost of Goods Sold
Our cost of goods sold for the nine months ended February 28, 2025 was $7,457,517, a decrease of $1,208,177, or 14%, compared to cost of goods sold of $8,665,694 for the nine months ended February 29, 2024. The decrease in cost of goods sold for the nine months ended February 28, 2025 was primarily due to a decrease in sales. Cost of goods sold was 58.2% of sales during the nine months ended February 28, 2025 resulting in a gross margin of 41.8%. Cost of goods sold was 56.9% of sales during the nine months ended February 29, 2024 resulting in a gross margin of 43.1%. Cost of goods sold during the third quarter of the 2025 fiscal year primarily consisted of product cost of $5,531,518, labor and overhead of $1,476,136, supplies and materials of $234,025, and licenses and fees of $10,658. We also wrote-off inventory in the amount of $205,180 due to quality control issues with a vendor; without this write-off, our gross margin would have been 43.4%. Cost of goods sold during the nine months ended February 29, 2024 primarily consisted of product cost of $7,088,792, labor and overhead of $1,215,867, supplies and materials of $335,610, and licenses and fees of $24,425.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses, or SG&A, decreased by $1,685,729, or approximately 21%, to $6,216,328 during the nine months ended February 28, 2025, compared to $7,902,057 for the nine months ended February 29, 2024. The decrease in SG&A expenses for the nine months ended February 28, 2025 was primarily due to our across-the-board cost-cutting efforts.
SG&A expense during the nine months ended February 28, 2025 was primarily attributable to an aggregate of $4,783,607 in costs associated with operating the Oasis LLCs, a decrease of $1,544,930 compared to $6,358,982 during the nine months ended February 29, 2024. The major components of the decrease were as follows: professional fees of $124,508 compared to $520,902; payroll and related costs of $3,241,045 compared to $3,523,653; office and facilities expenses of $1,366,322 compared to $1,565,653; taxes and licenses of $430,863 compared to $543,452; depreciation and amortization of $226,452 compared to $337,830; travel of $230,845 compared to $327,368; sales, marketing, and advertising of $248,692 compared to $321,865; and insurance of $223,438 compared to $288,557. The amount of SG&A expense allocated to cost of goods sold decreased by $10,944 during the nine months ended February 28, 2025 compared to the nine months ended February 29, 2024 current quarter compared to the prior year, from $413,221 to $402,777.
Finally, SG&A decreased by $140,797 during the nine months ended February 28, 2025 as a result of a decrease in the expenses associated with the ongoing implementation of other aspects of our business plan and our general corporate overhead to $1,432,724 from $1,573,521 during the nine months ended February 29, 2024. The major components of this decrease compared to the third quarter of fiscal 2024 was a decrease in payroll and related costs of $122,596, a decrease in professional fees in the amount of $42,177, and a decrease of $31,601 related to sales and marketing costs.
Interest Expense, Net
Our interest expense was $570,007 for the nine months ended February 28, 2025, a decrease of $546,267, or 48.9%, compared to $1,116,274 for the nine months ended February 29, 2024. The decrease consisted of a decrease in the amount of $288,366 related to interest on our notes and debentures due to decreased principal balances; a decrease of $199,484 in amortization of the discount on notes payable due to decreased principal balances; a decrease of $57,950 in interest on short-term financing due to decreased principal balances; and a decrease of $11,007 in the amortization of discounts on notes payable. These discounts have been fully amortized as of February 28, 2025.
Employee Retention Tax Credit
During the nine months ended February 28, 2025, the Company received the amount of $50,103 under the provisions of the extension of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) compared to $924,862 during the prior period, a decrease of $874,759 or 95%.
Loss on Extinguishment of Debt
During the nine months ended February 29, 2024, we restructured and / or redeemed certain of our convertible debentures, as follows: (A) The terms of certain convertible debenture were restructured, including (i) the conversion price of the debentures was reduced to $0.07 per unit; (ii) the conversion price of warrants underlying the units issuable upon conversion was reduced to $0.10 per share; (iii) the maturity date was extended to January 31, 2028. This restructuring included the redemption of convertible debentures in the principal amount of $3,875,095 at a discount of 40% for a cash payment in the amount of $2,325,036. These transactions resulted in a net loss on extinguishment of debt in the amount of $4,493,218 due to the increase in the calculated value of the conversion features and warrants of the remaining debentures at the reduced exercise prices. We also restructured the principal amounts and due dates of six additional debentures with an aggregate principal amount of $3,897,916 resulting in a gain on extinguishment of debt in the amount of $1,088,308. There were no comparable transactions in the current period.
Gain on settlement of debt
During the nine months ended February 28, 2025, we recorded a gain on settlement of debt in the amount of $949,793 related to the payment of notes payable in the principal amount of $2,868,282 for a cash payment in the amount of $2,600,000. In addition, the noteholders returned for cancellation a total of 15,488,901 shares of the Company’s common stock and warrants to purchase 6,177,216 shares of the Company’s common stock. The cancelled shares were valued at the closing price of the Company’s common stock on the date of the cancellation, or $0.044 per share for a total value of $677,374.
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During the nine months ended February 28, 2025, the Company executed a Supplemental Indenture 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 supplemented September 15, 2022, and as supplemented December 28, 2023, in order to amended the terms of its outstanding $1,378,778 original principal amount unsecured convertible debentures Canaccord Debentures issued December 12, 2018 to provide the Company an option to redeem all outstanding Canaccord Debentures in cash at a redemption price equal to $600 per $1,000 principal amount of Canaccord Debentures; any accrued but unpaid interest through to and including the redemption date shall not be paid and shall be cancelled. See note 22. On January 17, 2025, the Company exercised the option to redeem all outstanding Canaccord Debentures in the amount of $1,678,633 including capitalized interest for cash in the amount of $1,006,800. The Company recorded a gain in the amount of $671,833 on this transaction.
During the three months ended February 29, 2024, we redeemed certain other debentures and convertible debentures as follows: (A) We redeemed three debentures with an aggregate principal amount of $1,325,000 along with 13,174,402 shares of our common stock and warrants to purchase 454,548 shares of common stock for a cash payment in the amount of $1,250,000; we recognized a gain on extinguishment of debt in the amount of $596,949 in connection with this transaction. (B) We also converted eight debentures with an aggregate principal amount of $2,030,000 into a total of 64,132,135 shares of common stock. A loss on settlement of debt in the aggregate amount of $428,112 was recorded on these transactions.
Gain on settlement of accounts payable
During the nine months ended February 29, 2024, we settled an outstanding vendor account in the amount of $8,375 for a cash payment of $4,000 representing a gain in the amount of $4,375. There was no comparable transaction in the current period.
Provision for Income Taxes
We recorded a provision for income taxes in the amount of $1,436,329 during the nine months ended February 28, 2025 compared to $1,380,226 during the nine months ended February 29, 2024, an increase of $56,103 or 4%. 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 nine months ended February 28, 2025 was $1,187,414 compared to a net loss of $6,132,889 for the nine months ended February 29, 2024, a decrease of $4,945,475, or 81%.
Non-Controlling Interest
During the nine months ended February 28, 2025 and February 29, 2024, the income (loss) associated with the non-controlling interest in Kealii Okamalu was $0 and ($2,368), 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 nine months ended February 28, 2025 was $1,187,414 compared to a net loss of $6,135,257 for the nine months ended February 29, 2024, a decrease of $4,947,843 or 81%.
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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 February 28, 2025 |
Three Months Ended February 29, 2024 |
|||||||
| Net Loss attributable to CLS Holdings, Inc. | $ | (278,880 | ) | $ | (4,369,144 | ) | ||
| Add: | ||||||||
| Interest expense, net | 114,889 | 247,961 | ||||||
| Provision for taxes | 442,655 | 446,662 | ||||||
| Depreciation and amortization | 116,180 | 165,874 | ||||||
| EBITDA (1) | $ | 394,844 | $ | (3,508,647 | ) | |||
| Less non-recurring gains and losses: | ||||||||
| Loss on extinguishment of debt | $ | - | $ | 3,404,910 | ||||
| Loss on impairment of inventory | 205,180 | - | ||||||
| Gain on settlement of debt | (671,833 | ) | (168,837 | ) | ||||
| Adjusted EBITDA (2) | $ | (71,809 | ) | $ | (272,574 | ) | ||
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| Nine Months Ended February 28, 2025 |
Nine Months Ended February 29, 2024 |
|||||||
| Net Loss attributable to CLS Holdings, Inc. | $ | (1,187,414 | ) | $ | (6,135,257 | ) | ||
| Add: | ||||||||
| Interest expense, net | 570,007 | 1,116,274 | ||||||
| Provision for taxes | 1,436,329 | 1,380,226 | ||||||
| Depreciation and amortization | 372,710 | 498,131 | ||||||
| EBITDA (1) | $ | 1,191,632 | $ | (3,140,626 | ) | |||
| Less non-recurring gains and losses: | ||||||||
| Gain on settlement of accounts payable | $ | - | $ | (4,375 | ) | |||
| Loss on impairment of inventory | 205,180 | - | ||||||
| Gain on settlement of debt | (1,621,626 | ) | $ | (168,837 | ) | |||
| Employee retention tax credit | (50,103 | ) | (924,862 | ) | ||||
| Loss on extinguishment of debt | - | 3,404,910 | ||||||
| Adjusted EBITDA (2) | $ | (274,917 | ) | $ | (833,790 | ) | ||
| (1) | Net loss plus interest, taxes, depreciation, and amortization. |
| (2) | EBITDA adjusted for non-recurring gains, losses, and impairments. |
Liquidity and Capital Resources
Since our inception we have funded our operations and capital spending primarily through the issuance of debt and common stock. At February 28, 2025, we had cash of $220,683 and a working capital deficit of $14,586,258; at April 2, 2025, we had cash of $507,638. We generated cash flow from operating activities of $321,052 for the nine months ended February 28, 2025, compared to $588,850 for the nine months ended February 29, 2024. As of February 28, 2025, we had an accumulated deficit of $114,554,464. The Company’s auditors have included a going concern qualification in their audit report for the years ended May 31, 2024 and 2023.
During the past two years, we have been involved in a focused effort to reduce our debt burden through a combination of settlements, restructurings, principal payments, and conversions of debt to common stock. The following table illustrates the results of these efforts:
Principal balance of debt:
| February 28, 2025 |
November 30, 2024 |
August 31, 2024 |
May 31, 2024 |
May 31, 2023 |
May 31, 2022 |
|||||||||||||||||||
| Convertible notes payable including related party | $ | - | $ | 1,661,326 | $ | 3,985,481 | $ | 4,001,431 | $ | 7,606,102 | $ | 19,448,821 | ||||||||||||
| Current portion | $ | - | $ | 126,043 | $ | 375,025 | $ | 302,005 | $ | 3,853,051 | $ | 9,448,821 | ||||||||||||
| Notes Payable and Debentures | $ | 225,352 | $ | 163,600 | $ | 704,830 | $ | 741,052 | $ | 3,472,661 | $ | 4,375,000 | ||||||||||||
| Current portion | $ | 180,768 | $ | 128,898 | $ | 125,107 | $ | 139,345 | $ | 1,439,584 | $ | - | ||||||||||||
| Notes Payable, Related Party | $ | 2,929,218 | $ | 2,180,484 | $ | 2,254,750 | $ | 2,067,023 | $ | - | $ | - | ||||||||||||
| Current portion | $ | 2,008,209 | $ | 1,514,362 | $ | 1,415,392 | $ | 988,472 | $ | - | $ | - | ||||||||||||
| Total | $ | 3,154,570 | $ | 4,005,410 | $ | 6,945,061 | $ | 6,809,506 | $ | 11,078,763 | $ | 23,823,821 | ||||||||||||
| Current portion | $ | 2,188,977 | $ | 1,769,303 | $ | 1,915,524 | $ | 1,429,822 | $ | 5,292,635 | $ | 9,448,821 | ||||||||||||
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We have continued and intend to continue these efforts to further reduce our debt burden in the coming year. During the nine months ended February 28, 2025, we raised $2,600,000 from the issuance of a note payable to a related party; $2,200,000 of this amount was converted to 56,847,545 shares of common stock during the period, and $400,000 remains on the balance sheet as a note payable at February 28, 2025. The $2,600,000 was used to retire debt in the aggregate principal amount of $2,868,282 in September 2024. We believe we have resources in place with existing and prospective lenders to continue to reduce our debt burden, though there can be no guarantee that this will be the case. We also raised an additional $1,275,000 from the issuances of debentures to related parties; these proceeds were used to retire $1,678,633 of convertible debt at a 60% discount with a net payment of $1,006,800.
Our working capital deficit is due primarily to accruals for taxes payable under Section 280E of the Internal Revenue Code in the amount of $10,331,192 at February 28, 2025. It is the Company’s position that these taxes will not ultimately be owed. Removing this amount from the calculation of net working capital results in a working capital deficit of $4,255,066 at February 28, 2025.
The Company continues to generate positive cash flow from operating activities, which were $321,052 for the nine months ended February 28, 2025 compared to $588,850 for the nine months ended February 29, 2024. We intend to continue to focus on operational activities in order to further improve our cash flow.
We have one potential capital expenditure project planned for fiscal 2025, which is our proposed 3,700 square foot cannabis consumption lounge and 300 square foot outdoor patio area to be attached to the Oasis dispensary. We expect this project to require a capital expenditure in the range of $500,000 to $1,000,000, depending upon various buildout decisions.
We believe the resources are available to execute our business plan in the coming year from existing and prospective investors and from internally generated cash flow, though there is no guarantee that this will be the case.
Going Concern
Our financial statements were prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplate the realization of assets and liquidation of liabilities in the normal course of business. With the exception of the first quarter of fiscal 2022, we have incurred losses from operations since inception, and have an accumulated deficit of $114,554,464 as of February 28, 2025, compared to $113,367,050 as of May 31, 2024. We had a working capital deficit of $14,586,258 as of February 28, 2025, compared to a working capital deficit of $10,928,252 as of May 31, 2024. The report of our independent auditors for the year ended May 31, 2024 contained a going concern qualification.
Our ability to continue as a going concern must be considered in light of the problems, expenses, and complications frequently encountered by early-stage companies.
Our ability to continue as a going concern is dependent on our ability to generate sufficient cash from operations to meet our cash needs and finance our ongoing operations. There can be no assurance that cash generated by our future operations will be adequate to meet our needs.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
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Critical Accounting Estimates
Management uses various estimates and assumptions in preparing our financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Accounting estimates that are the most important to the presentation of our results of operations and financial condition, and which require the greatest use of judgment by management, are designated as our critical accounting estimates. We have the following critical accounting estimates:
| ● | Estimates and assumptions regarding the deductibility of expenses for purposes of Section 280E of the Internal Revenue Code: Management evaluates the expenses of its manufacturing and retail operations and makes certain judgments regarding the deductibility of various expenses under Section 280E of the Internal Revenue Code based on its interpretation of this regulation and its subjective assumptions about the categorization of these expenses. | |
| ● | Estimates and assumptions used in the valuation of derivative liabilities: Management utilizes a lattice model to estimate the fair value of derivative liabilities. The model includes subjective assumptions that can materially affect the fair value estimates. | |
| ● | Estimates and assumptions used in the valuation of intangible assets. In order to value our intangible assets, management prepares multi-year projections of revenue, costs of goods sold, gross margin, operating expenses, taxes and after tax margins relating to the operations associated with the intangible assets being valued. These projections are based on the estimates of management at the time they are prepared and include subjective assumptions regarding industry growth and other matters. |
Recently Issued Accounting Standards
Accounting standards promulgated by the Financial Accounting Standards Board (the “FASB”) are subject to change. Changes in such standards may have an impact on our future financial statements. The following are a summary of recent accounting developments.
In November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures”. The amendments improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The ASU is effective for annual reporting periods beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024 with early adoption permitted and can be applied on either a prospective or retroactive basis. The Company does not believe the adoption of this guidance will have a material effect on its Consolidated Financial Statements and segment disclosures.
In November 2024, the FASB issued ASU 2024-03, “Disaggregation of Income Statement Expenses (DISE)” which requires disaggregated disclosure of income statement expenses for public business entities. The ASU does not change the expense captions an entity presents on the face of the income statement; rather, it requires disaggregation of certain expense captions into specified categories in disclosures within the footnotes to the financial statements. ASU 2024-03 is effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027. Early adoption is permitted. The Company does not believe the adoption of this guidance will have a material effect on its Consolidated Financial Statements and segment disclosures.
There are various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
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Item 3. Quantitative and Qualitative Disclosure about Market Risk.
This item is not applicable as we are currently considered a smaller reporting company.
Item 4. Controls and Procedures.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit pursuant to the requirements of the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, among other things, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Securities Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures
Andrew Glashow, our Chief Executive Officer, and Principal Financial and Accounting Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. The Company believes it now has an adequate number of trained personnel to resolve any segregation of duties deficiencies. Based on the evaluation, Mr. Glashow concluded that:
| ● | We do not have an independent body to oversee our internal controls over financial reporting due to our limited resources. |
We plan to rectify these weaknesses by hiring additional accounting personnel once we have additional resources to do so.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal controls over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 1A. Risk Factors.
The Effects of Climate Change Could Adversely Affect the Quantity and Quality of Our Crops and the Cost and Availability of Energy to Our Dispensary Operations.
The effect of climate change is causing an increase in the cost of electricity to operate our dispensary operation and if temperatures remain high, could result in rationing of electricity, which could necessitate a reduction in operating hours at our dispensary.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.
Item 6. Exhibits.
| 31.1 | Certification by the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification by the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | Inline XBRL Instance Document | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL) |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| CLS HOLDINGS USA, INC. | ||
| Date: April 14, 2025 | By: | /s/ Andrew Glashow |
| Andrew Glashow | ||
| Chairman of the Board of Directors and Chief Executive Officer | ||
| (Principal Executive, Financial and Accounting Officer) | ||
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