UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 

 
FORM 10-Q
 

 
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended February 28, 20172018
 
or
 
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
 
Commission File Number: 333-174705
 
CLS HOLDINGS USA, INC.
(Exact name of registrant as specified in its charter)
 
Nevada
45-1352286
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)

1435 Yarmouth Street, Boulder, Colorado 8030411767 South Dixie Highway, Suite115, Miami, Florida 33156
(Address of principal executive offices) (Zip Code)

(888) 438-9132
Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes     No
  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes     No


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

(Check One):
Large acceleratedAccelerated filer 
Accelerated filer                   
Non-accelerated filer    
(Do not check if a smaller reporting company)
Smaller reporting company 
(Do not check if a smaller reporting company)
Emerging growth company 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes     No
 
State the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 22,035,98448,482,972 shares (post reverse-split) of $0.0001 par value common stock outstanding as of April 6, 2017.   
2, 2018.

 
CLS HOLDINGS USA, INC.

FORM 10-Q
Quarterly Period Ended February 28, 20172018
 
TABLE OF CONTENTS
 
 Page
  
  3
  
PART I. FINANCIAL INFORMATION 
Item 1.  4
   4
   5
  6
 7
Item 2.2330
Item 3.3041
Item 4.3042
  
PART II. OTHER INFORMATION 
Item 1.3143
Item 1A.3143
Item 2.3143
Item 3.3143
Item 4.3143
Item 5.3143
Item 6.3143
  
3244
 
 


Table of Contents

EXPLANATORY NOTE
 
Unless otherwise noted, references in this registration statement 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 anticipated future events, future results of operations or future financial performance. These forward-looking statements include, but are not limited to, statements relating to the adequacy of our capitalability to finance our planned operations and proposed acquisitions, market acceptance of our services and product offerings, our ability to attract and retain key personnel, and our ability to protect our intellectual property. 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 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 annual, quarterly and special reports and other information with the SECSecurities and Exchange Commission (“SEC”) that can be inspected and copied at the public reference facility maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549-0405. Information regarding the public reference facilities may be obtained from the SEC by telephoning 1-800-SEC-0330. The Company’s filings are also available through the SEC’s Electronic Data Gathering Analysis and Retrieval System, which is publicly available through the SEC’s website (www.sec.gov). Copies of such materials may also be obtained by mail from the public reference section of the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549-0405 at prescribed rates.
 
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Table of Contents
PART I – FINANCIAL INFORMATION
 
Item 1. Financial Statements.
 
CLS HOLDINGS USA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

 February 28,  May 31, 
 2017  2016  February 28,  May 31, 
 (Unaudited)     2018  2017 
ASSETS       (unaudited)    
Current assets            
Cash and cash equivalents $5,940  $88,244  $22,733  $78,310 
Prepaid expenses  22,791   6,742   12,598   1,410 
Other current assets  23,431   - 
Total current assets  28,731   94,986   58,762   79,720 
                
Investment  2,050,000   - 
Security deposit  50,000   50,000   -   50,000 
Property, plant and equipment, net of accumulated depreciation of $1,561 and $892  1,113   1,782 
Construction in progress  141,739   106,726 
Intangible assets, net of accumulated amortization of $720 and $396  1,438   1,762 
Property, plant and equipment, net of accumulated depreciation of $2,453 and $1,784  221   890 
Intangible assets, net of accumulated amortization of $1,152 and $828  1,006   1,330 
                
Total assets $223,021  $255,256  $2,109,989  $131,940 
                
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities                
Accounts payable and accrued liabilities $569,959  $431,017  $671,807  $581,765 
Accrued compensation, related party  128,750   267,493   108,834   53,750 
Notes Payable  410,000   - 
Due to related party  17,930   17,930   17,930   17,930 
Accrued interest  57,518   41,116   9,602   20,171 
Accrued interest, related party  199,190   68,148   193,988   106,022 
Notes payable, related parties  167,000   -   152,174   699,208 
Convertible notes payable, net of discount of $419,584 and $227,475  147,082   72,525 
Convertible notes payable, related party, net of discount of $285,470 and $95,477  731,156   22,678 
Convertible notes payable, net of discount of $826,775 and $57,644  141,225   252,356 
Convertible notes payable, related party, net of discount of $98,382 and $0  114,803   - 
Derivative liability  167,372   418,537   974,175   95,276 
                
Total current liabilities  2,185,957   1,339,444   
2,794,538
   1,826,478 
                
Noncurrent liabilities                
Convertible notes payable, net of discount of $9,078 and $390,021  15,924   43,312 
Convertible notes payable, related parties, net of discount of $338,191 and $1,018,657  1,095,433   230,718 
Notes payable, related parties  -   72,750 
Convertible notes payable, related parties, net of discount of $623,847 and $0  615,574   192,000 
                
Total Liabilities  3,297,314   1,686,224   3,410,112   2,018,478 
                
Commitments and contingencies  -   -   -   - 
                
Stockholder’s equity                
Common stock, $0.0001 par value; 250,000,000 shares authorized; 21,178,176 and 20,350,003 shares issued and outstanding at February 28, 2017 and May 31, 2016, respectively  2,118   2,035 
Common stock, $0.0001 par value; 250,000,000 shares authorized; 43,186,944 and 32,852,944 shares issued and outstanding at February 28, 2018 and May 31, 2017, respectively  4,319   3,286 
Preferred stock, $0.001 par value; 20,000,000 shares authorized; no shares issued  -   -   -   - 
Additional paid-in capital  3,104,675   2,627,183   13,224,661   7,032,836 
Stock payable  65,700   65,700 
Common stock subscriptions receivable  (69,102)  - 
Common stock subscribed  123,950   68,950 
Accumulated deficit  (6,246,786)  (4,125,886)  
(14,583,951
)  (8,991,610)
Total stockholder’s equity (deficit)  (3,074,293)  (1,430,968)  
(1,300,123
)  (1,886,538)
                
Total liabilities and stockholders’ equity (deficit) $223,021  $255,256  $2,109,989  $131,940 

See accompanying notes to these financial statements.

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CLS HOLDINGS USA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 For the Three  For the Three  For the Nine  For the Nine 
 Months Ended  Months Ended  Months Ended  Months Ended  For the Three  For the Thee  For the Nine  For the Nine 
 February 28,  February 29,  February 28,  February 29,  Months Ended  Months Ended  Months Ended  Months Ended 
 2017  2016  2017  2016  February 28, 2018  February 28, 2017  February 28, 2018  February 28, 2017 
                        
Revenue $-  $-  $-  $-  $-  $-  $-  $- 
Cost of goods sold  -   -   -   -   -   -   -   - 
Gross margin  -   -   -   -   -   -   -   - 
                                
Selling, general and administrative expenses  144,204   406,323   482,071   917,726   838,047   144,204   1,136,468   482,071 
Professional fees  99,867   343,818   603,098   767,420   376,924   99,867   695,086   603,098 
Total operating expenses  244,071   750,141   1,085,169   1,685,146   1,214,971   244,071   1,831,554   1,085,169 
                                
Operating loss  (244,071)  (750,141)  (1,085,169)  (1,685,146)  (1,214,971)  (244,071)  (1,831,554)  (1,085,169)
                                
Other (income) expense:                                
Interest expense  381,149   106,599   1,395,511   177,464   1,434,314   381,149   2,316,145   1,395,511 
Gain on settlement of debt  -   -   (3,480)  - 
Loss on modification of debt  -   -   33,334   -   -   -   29,145   33,334 
Loss on note exchange  -   -   404,082   - 
Loss on extinguishment of debt  -   -   989,032   - 
Change in fair value of derivative  (244,848)  -   (393,114)  -   (148,227)  (244,848)  25,863   (393,114)
Total other expense  136,301   106,599   1,035,731   177,464   1,286,087   136,301   3,760,787   1,035,731 
  -                             
Income (Loss) before income taxes  (380,372)  (856,740)  (2,120,900)  (1,862,610)  (2,501,058)  (380,372)  (5,592,341)  (2,120,900)
                                
Income tax expense  -   -   -   -   -   -   -   - 
                                
Net income (loss) $(380,372) $(856,740) $(2,120,900) $(1,862,610) $(2,501,058) $(380,372) $(5,592,341) $(2,120,900)
                                
Net income (loss) per share - basic $(0.02) $(0.04) $(0.10) $(0.09) $(0.06) $(0.02) $(0.16) $(0.10)
                                
Net income (loss) per share - diluted $(0.02) $(0.04) $(0.10) $(0.09) $(0.06) $(0.02) $(0.16) $(0.10)
                                
Weighted average shares outstanding - basic  20,465,360   20,182,640   20,388,033   20,081,901   39,126,944   20,465,360   35,654,299   20,388,033 
                                
Weighted average shares outstanding - diluted  20,465,360   20,182,640   20,388,033   20,081,901   39,126,944   20,465,360   35,654,299   20,388,033 

See accompanying notes to these financial statements.

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CLS HOLDINGS USA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

  For the Nine  For the Nine 
  Months Ended  Months Ended 
  February 28,  February 29, 
  2017  2016 
CASH FLOWS FROM OPERATING ACTIVITIES      
Net income (loss) $(2,120,900) $(1,862,610)
Adjustments to reconcile net loss to net cash used in operating activities:        
Imputed interest  804   807 
Change in fair value of derivative  (393,114)  - 
Loss on modification of debt  33,334   - 
Issuance of stock for services  -   115,050 
Stock-based compensation  -   327,500 
Amortization of debt discounts  1,197,998   114,489 
Depreciation and amortization expense  993   957 
Changes in assets and liabilities:        
Prepaid expenses  (16,049)  17,638 
Accounts payable and accrued expenses  137,699   198,464 
Deferred liabilities  -   47,888 
Accrued compensation, related party  112,500   106,250 
Due to related parties  -   (525)
Accrued interest, related party  131,042   39,647 
Accrued interest  16,402   22,521 
         
Net cash used in operating activities  (899,291)  (871,924)
         
CASH FLOWS FROM INVESTING ACTIVITIES        
Payments to acquire equipment  -   (2,674)
Payment for construction in progress  (35,013)  (41,803)
         
Net cash used in investing activities  (35,013)  (44,477)
         
CASH FLOWS FROM FINANCING ACTIVITIES        
Proceeds from related party convertible notes payable  150,000   345,000 
Proceeds from related party notes payable  838,000   392,750 
Repayments of related party notes payable  (61,000)  - 
Repayments of convertible notes payable  (75,000)  - 
         
Net cash provided by financing activities  852,000   737,750 
         
Net increase in cash and cash equivalents  (82,304)  (178,651)
         
Cash and cash equivalents at beginning of period  88,244   208,821 
         
Cash and cash equivalents at end of period $5,940  $30,170 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
Interest paid $49,265  $- 
Income taxes paid $-  $- 
         
NON-CASH INVESTING AND FINANCING ACTIVITIES:        
Convertible note issued for unpaid accrued salary $250,000  $- 
Related party notes payable reclassified as related party convertible notes payable $222,750  $- 
Discount on convertible notes payable due to derivatives $518,720  $945,000 
Extinguishment of debt – related party $254,114  $- 
Common stock issued for conversion of notes payable $222,657  $- 
Transfer principle from related party notes payable to related party convertible notes payable $-  $945,000 

   For the Nine  For the Nine 
  Months Ended  Months Ended 
  February 28, 2017  February 28, 2016 
CASH FLOWS FROM OPERATING ACTIVITIES      
Net income (loss) $(5,592,341) $(2,120,900)
Adjustments to reconcile net loss to net cash used in operating activities:        
Imputed interest  804   804 
Change in fair value of derivative  25,863   (393,114)
Share-based compensation  55,000   - 
Warrants issued to placement agent  610,414   - 
Loss on modification of debt  29,145   33,334 
(Gain) loss on note exchange  404,082   - 
Loss on extinguishment of debt  989,032   - 
Gain on settlement of debt  (3,480)  - 
Amortization of debt discounts  1,391,110   1,197,998 
Amortization of deferred financing costs  22,569   - 
Depreciation and amortization expense  993   993 
Changes in assets and liabilities:        
Other assets  50,000   - 
Prepaid expenses  (11,188)  (16,049)
Other current assets  (46,000)  - 
Accounts payable and accrued expenses  937,895   137,699 
Accrued compensation  167,584   112,500 
Due to related parties  -   - 
Accrued interest, related party  87,966   131,042 
 Deferred rent  (49,565)  - 
Accrued interest  21,045   16,402 
Net cash used in operating activities  (909,072)  (899,291)
         
CASH FLOWS FROM INVESTING ACTIVITIES        
Payment for investment in Oasis LLCs  (2,050,000)  - 
Payment for construction in progress  -   (35,013)
Net cash used in investing activities  (2,050,000)  (35,013)
         
CASH FLOWS FROM FINANCING ACTIVITIES        
Proceeds from related party convertible notes payable  601,070   150,000 
Proceeds from related party notes payable  -   838,000 
Proceeds from convertible notes  880,000   - 
Proceeds from notes payable  410,000   - 
Principal payments on related party notes payable  -   (61,000)
Repayments of convertible notes payable  -   (75,000)
Proceeds from sale of equity  1,012,425   - 
Net cash provided by financing activities  2,903,495   852,000 
         
Net increase in cash and cash equivalents  (55,577)  (82,304)
         
Cash and cash equivalents at beginning of period  78,310   88,244 
         
Cash and cash equivalents at end of period $22,733  $5,940 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
Interest paid $-  $- 
Income taxes paid $-  $- 
         
NON-CASH INVESTING AND FINANCING ACTIVITIES:        
Convertible note issued for unpaid accrued salary $112,500  $250,000 
Related party notes payable reclassified as related party convertible notes payable $1,116,856  $222,750 
Beneficial conversion feature on convertible notes payable $1,681,946  $- 
Note payable exchanged for common stock $936,478  $518,720 
Shares issued for settlement of accounts payable $6,000  $- 
Extinguishment of debt $   $254,114 
Discount on convertible notes payable due to derivative $1,321,862  $- 
Common stock issued for conversion of notes payable $-  $222,657 
See accompanying notes to these financial statements. 

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CLS HOLDINGS USA, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
February 28, 20172018
(Unaudited)

Note 1 – Nature of Business and Significant Accounting Policies

Nature of Business

CLS Holdings USA, Inc. (the “Company”) was originally incorporated as Adelt Design, Inc. (“Adelt”) on March 31, 2011 to manufacture and market carpet binding art. Production and marketing of carpet binding art never commenced.
 
On November 12, 2014, CLS Labs, Inc. (“CLS Labs”) acquired 10,000,000 shares, or 55.6%, of the outstanding shares of common stock of Adelt from its founder, Larry Adelt. On that date, Jeffrey Binder, the Chairman, President and Chief Executive Officer of CLS Labs, was appointed Chairman, President and Chief Executive Officer of the Company. On November 20, 2014, Adelt adopted amended and restated articles of incorporation, thereby changing its name to CLS Holdings USA, Inc. Effective December 10, 2014, the Company effected a reverse stock split of its issued and outstanding common stock at a ratio of 1-for-0.625 (the “Reverse Split”), wherein 0.625 shares of the Company’s common stock were issued in exchange for each share of common stock issued and outstanding. As a result, 6,250,000 shares of the Company’s common stock were issued to CLS Labs in exchange for the 10,000,000 shares that it owned by virtue of the above-referenced purchase from Larry Adelt.

On April 29, 2015, the Company, CLS Labs and CLS Merger Inc., a Nevada corporation and wholly owned subsidiary of CLS Holdings  (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) and completed a merger, whereby CLS Merger Inc. merged with and into CLS Labs, with CLS Labs remaining as the surviving entity (the “Merger”). Upon the consummation of the Merger, the shares of the common stock of CLS Holdings owned by CLS Labs were extinguished and the former stockholders of CLS Labs were issued an aggregate of 15,000,000 (post Reverse Split) shares of common stock in CLS Holdings in exchange for their shares of common stock in CLS Labs. As a result of the Merger, the Company acquired the business of CLS Labs and abandoned its previous business.
 
The Company has been issued a patent pendingallowance with respect to its proprietary method of extracting cannabinoids from cannabis plants and converting the resulting cannabinoid extracts into concentrates such as oils, waxes, edibles and shatter. These concentrates may be ingested in a number of ways, including through vaporization via electronic cigarettes (“e-cigarettes”), and used for a variety of pharmaceutical and other purposes. Internal testing of this extraction method and conversion process has revealed that it produces a cleaner, higher quality product and a significantly higher yield than the cannabinoid extraction processes currently existing in the marketplace. The Company has not commercialized its patent pending proprietary process or otherwise earned any revenues.  The Company plans to generate revenues through licensing, fee-for-service and joint venture arrangements related to its patent pending proprietary method of extracting cannabinoids from cannabis plants and converting the resulting cannabinoid extracts into saleable concentrates.

The Company has adopted a fiscal year end of May 31st.

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.

Principals of Consolidation

The accompanying consolidated financial statements include the accounts of CLS Holdings USA, Inc., and its wholly owned operating subsidiaries, CLS Labs, Inc. and CLS Labs Colorado, Inc.  All material intercompany transactions have been eliminated upon consolidation of these entities.

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.

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Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities of three months or less to be cash equivalents.  The Company had cash and cash equivalents of $5,940$22,733 and $88,244$78,310 as of February 28, 20172018 and May 31, 2016,2017, respectively.

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 the estimated useful lives.  Computer equipment is being depreciated over a three-year period.

Concentrations of Credit Risk

The Company maintains its cash in bank deposit accounts, the balances of which at times may exceed federally insured limits. The Company continually monitors its banking relationships and consequently has not experienced any losses in such accounts.

Advertising and Marketing Costs

Advertising and marketing costs are expensed as incurred. The Company incurred no advertising and marketing costs for the three and nine months ended February 28, 20172018 and February 29, 2016.2017.

Research and Development

Research and development expenses are charged to operations as incurred. The Company incurred no research and development costs for the three and nine months ended February 28, 20172018 and February 29, 2016,2017, respectively.

Income Taxes

The Company accounts for income taxes using the asset and liability method, which requires the establishment of deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided to the extent deferred tax assets may not be recoverable after consideration of the future reversal of deferred tax liabilities, tax planning strategies, and projected future taxable income.
 
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 amount of the Company’s cash and cash equivalents, note receivable, notes payable, accounts payable and accrued expenses, none of which is held for trading, approximates 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.
 
Derivative Financial Instruments

Derivatives are recorded on the condensed consolidated balance sheet at fair value. The conversion features of the convertible notes are embedded derivatives and are separately valued and accounted for on the consolidated balance sheet with changes in fair value recognized during the period of change as a separate component of other income/expense. Fair values for exchange-traded securities and derivatives are based on quoted market prices. The pricing model the Company useduses for determining the fair value of its derivatives is the Lattice Model. Valuations derived from this model are subject to ongoing internal and external verification and review. The model uses market-sourced inputs such as interest rates and stock price volatilities. Selection of these inputs involves management’s judgment and may impact net income (see note 11).

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Revenue Recognition

For revenue from product sales, the Company recognizes revenue using four basic criteria that must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) areis based on management’s judgment regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required.

The Company has not generated revenue to date.
 
Basic and Diluted 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 is computed based on the weighted average number of shares of common stock outstanding during the period.
 
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 calculation.

A net loss causes all outstanding stock options and warrants to be antidilutive. As a result, the basic and dilutive losses per common share are the same for the three and nine months ended February 28, 20172018 and February 29, 2016.2017.

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 assesses 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
 
Accounting standards promulgated by the Financial Accounting Standards Board (“FASB”) are subject to change. Changes in such standards may have an impact on the Company’s future financial statements. The following areis a summary of recent accounting developments.

In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). The update requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by long-term leases. The update also requires certain qualitative and quantitative disclosures about the amount, timing and uncertainty of cash flows arising from leases. Accounting by lessors will remain largely unchanged. This update is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. Adoption will require a modified retrospective approach beginning with the earliest period presented. The Company is currently evaluating the potential impact of the update on its financial statements.


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In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), to reduce the complexity of certain aspects of the accounting for employee share-based payment transactions. ASU 2016-09 involves changes in several aspects of the accounting for share-based payment transactions, including the accounting for the income tax consequences of share-based awards.  For public companies, ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted.  The Company does not expect the adoption of this standard to have a material impact on the Company’s consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). The update addresses eight specific cash flow issues and is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update will be effective for reporting periods beginning after December 15, 2017, including interim periods within thosethe reporting periods.period. Early adoption is permitted. The Company is currently evaluating the potential impact of the update on its financial statements.
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In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, current U.S. GAAP requires the performance of procedures to determine the fair value at the impairment testing date of assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, the amendments under this ASU require the goodwill impairment test to be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The ASU becomes effective for the Company on January 1, 2020. The amendments in this ASU will be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed.
In May 2017, the FASB issued ASU No. 2017-09, Stock Compensation - Scope of Modification Accounting, which provides guidance on which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The ASU requires that an entity account for the effects of a modification unless the fair value (or calculated value or intrinsic value, if used), vesting conditions and classification (as equity or liability) of the modified award are all the same as for the original award immediately before the modification. The ASU becomes effective for the Company on January 1, 2018, and will be applied prospectively to an award modified on or after the adoption date. Early adoption is permitted, including adoption in any interim period. The Company is currently assessing the impact that this standard will have on any awards that are modified once this standard is adopted.

Management does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the accompanying unaudited condensed consolidated financial statements.
 
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 $6,246,786$14,583,951 as of February 28, 2017.2018. Further losses are anticipated in the development of itsthe Company’s business raising substantial doubt about the Company’s ability to continue as a going concern. The ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management intends to finance operating costs over the next twelve months with loans, the proceeds from the sale of securities, and/or revenues from operations. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty. 

Note 3 – Prepaid Expenses
 
Prepaid expenses consisted of the following at February 28, 20172018 and May 31, 2016:2017:
 
 February 28,  May 31,  February 28,  May 31, 
 2017  2016  2018  2017 
Prepaid rent $16,381  $- 
Prepaid legal fees  6,410   6,742  $1,410  $1,410 
Prepaid expenses  11,188   - 
Total $22,791  $6,742  $12,598  $1,410 

Note 4 – Construction in Progress

The Company has construction in progress, in the amount of $141,739 and $106,726 at February 28, 2017 and May 31, 2016 on improvements to its leased facility in Colorado.  As of February 28, 2017, the Company had yet to start amortizing these improvements.

Note 54 – Security Deposit

The Company had a security deposit in the amount of $0 and $50,000 at February 28, 20172018 and May 31, 2016.2017, respectively.  This amount consisted of a deposit to secure office and warehouse space.

In August of 2017, the Company received a demand letter from the landlord requesting the forfeiture of the $50,000 security deposit, $10,000 in expenses, $15,699 in remaining rent due under the lease agreement and $30,000 to buy out the remaining amounts due under the lease; during the six months ended November 30, 2017, the Company wrote-off the security deposit in the amount of $50,000.

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Note 65 – Property, Plant and Equipment
 
Property, plant and equipment consisted of the following at February 28, 20172018 and May 31, 2016.2017.

 February 28,  May 31,  February 28,  May 31, 
 2017  2016  2018  2017 
Computer equipment $2,674  $2,674  $2,674  $2,674 
Property and equipment, gross   2,674   2,674   2,674   2,674 
Less: accumulated depreciation  (1,561)  (892)  (2,453)  (1,784)
Property and equipment, net  $1,113  $1,782  $221  $890 

Depreciation expense totaled $223 and $223 for the three months ended February 28, 2018 and 2017 respectively. Depreciation expense totaled $669 and $669 for the nine months ended February 28, 2018 and 2017 respectively.
Note 6 – Deferred Financing Costs

During the nine months ended February 28, 2018, the Company had deferred financing costs of $45,700 related to a convertible notes payable.  During the three and nine months ended February 28, 20172018, the Company amortized $19,450 and $22,569 of these deferred costs. As of February 29, 2016, respectively.28, 2018, the Company had $23,431 of deferred financing costs remaining.

Note 7 – Intangible Assets

Intangible assets consisted of the following at February 28, 20172018 and May 31, 2016.2017.
 
 February 28,  May 31,  February 28,  May 31, 
 2017  2016  2018  2017 
Domain name $2,158  $2,158  $2,158  $2,158 
  2,158   2,158   2,158   2,158 
Less: accumulated amortization  (720)  (396)  (1,152)  (828)
Intangible assets, net $1,438  $1,762  $1,006  $1,330 

Total amortization expense charged to operations for the three months ended February 28, 2018 and 2017 was $108 and $108, respectively. Total amortization expense charged to operations for the nine months ended February 28, 2018 and 2017 was $108$324 and $324, respectively,  and $108 and $288 for the three and nine months ended February 29, 2016, respectively.   The domain name is being amortized over a period of 60 months.
 
Note 8 – Investment in Oasis LLCs
On December 4, 2017, the Company and Alternative Solutions, LLC (“Alternative Solutions”) entered into a Membership Interest Purchase Agreement (the “Acquisition Agreement”) for the Company to acquire the outstanding equity interests in three subsidiaries (collectively, the “Oasis LLCs”), Serenity Wellness Center LLC d/b/a/ Oasis Medical Cannabis, Serenity Wellness Growers LLC, and Serenity Wellness Products LLS, from Alternative Solutions.  Pursuant to the Acquisition Agreement, the Company paid a non-refundable deposit of $250,000 upon signing, which was followed by an additional payment of $1,800,000 on February 5, 2018, for an initial 10% of each of the subsidiaries. As of February 28, 2018, the Company had a total investment of $2,050,000 in the Oasis LLCs.
The closing consideration that the Company must pay to acquire the remaining 90% of the subsidiaries, is equal to cash in the amount of $6,200,000, a $4.0 million promissory note due in December 2019, and $6,000,000 in shares of the Company’s common stock.
The number of shares shall equal $6,000,000 divided by the lower of $1.00 or the conversion price to receive one share of the Company’s common stock in its next equity offering that it commences in 2018 that exceeds $6 million, multiplied by 80%.  The promissory note will be secured by a first priority security interest over the assets of each of the Oasis LLCs, including the Company’s 10% equity interest in the three subsidiaries, and the Company shall deliver to Alternative Solutions a confession of judgment that will become effective in the event of any event of default under the promissory note.
Assuming the Company closes on the acquisition, in May 2020, Alternative Solutions will be entitled to a $1,000,000 payment from the Company, if the existing dispensary operated by an Oasis LLC has maintained an average revenue of $20,000 per day during the 2019 calendar year.
The sale, assignment, transfer, pledge or other disposition of any interest in the Oasis LLCs or Alternative Solutions is ineffective unless approved in advance by the State of Nevada and any municipality in which the three subsidiaries’ operations is licensed.
Note 89 – Accounts Payable and Accrued Liabilities

The Company had accountsAccounts payable and accrued liabilities consisted of $569,959 and $431,017the following at February 28, 20172018 and May 31, 2016, respectively, which consist of legal fees, deferred rent liability and other trade payables.2017.
 
  February 28,  May 31, 
  2018  2017 
 Trade payables $575,546  $497,213 
Accrued payroll and related liabilities  40,562   34,987 
 Deferred rent liability  55,699   49,565 
 Total accounts payable and accrued liabilities $671,807  $581,765 
Note 910 – Related Party Transactions
 
As of February 28, 20172018 and May 31, 2016,2017, the Company owed the amount of $112,500$37,500 and $250,000,$37,500, respectively, to Jeffrey Binder, its President and Chief Executive Officer, for accrued salary. For the three and nine months ended February 28, 2017,2018, unpaid accrued salary in the amount of $250,000$37,500 and $112,500, respectively, was transferred to a convertible promissory note due to Mr. Binder (see note 11)9).
As of February 28, 2018 and May 31, 2017, the Company owed the amount of $14,584 and $0, respectively, to David Lamadrid, its President and Chief Financial Officer.

As of February 28, 2018 and May 31, 2017, the Company had accrued salary due to Alan Bonsett, a former officer of the Company prior to his October 1, 2017 separation, in the amount of $37,500 and $0, respectively.
 
As of February 28, 20172018 and May 31, 2016,2017, the Company had accrued salary due to Michael Abrams, a former officer of the Company prior to his September 1, 2015 termination, in the amount of $16,250.

As of February 28, 20172018 and May 31, 2016,2017, the Company had related party payables in the amount of $17,930 due to officers and directors related to expenses paid on behalf of the Company. The Company imputed interest at the rate of 6% per annum on these liabilities, and recorded imputed interest expense on these liabilities in the amounts of $804$265 and $807$804 during the three and nine months ended February 28, 20172018 and February 29, 2016,2017, respectively.  These interest accruals were charged to additional paid-in capital.
On April 17, 2015, prior to Alan Bonsett’s appointment as Chief Operating Officer, the Company, through CLS Labs Colorado, entered into an arrangement with PRH (the “Colorado Arrangement”) to, among other things, (i) license its proprietary technology, methods and processes to PRH in Colorado in exchange for a fee; (ii) sub-lease warehouse and office space in Denver, Colorado to PRH whereby PRH can grow, extract and process cannabis and other plant products in exchange for lease payments totaling an aggregate of $1,067,067 over a seventy-two (72) month term; (iii) build a processing facility and lease such facility, including equipment, to PRH in exchange for a monthly fee; and (iv) loan $500,000 to PRH to be used by PRH in connection with its financing of the building out, equipping, and development of a marijuana grow facility. Mr. Bonsett, as an owner of PRH, will indirectly receive the benefits of the Colorado Arrangement.  PRH entered into an arrangement with a third-party grower to grow marijuana at a location that is contiguous to PRH’s leased real property.  The grower obtained zoning approval, a certificate of occupancy to begin planting cannabis and operating the grow facility, and a Colorado Retail Marijuana Cultivation Facility License before commencing planting in December 2015, and the grow facility is now fully operational.
Additionally, upon Mr. Bonsett’s employment on August 1, 2015 to serve as the Company’s Chief Operating Officer, he received a one-time signing bonus of 250,000 (post Reverse-Split) shares of restricted common stock of the Company, with a fair value of $327,500, which became fully vested one year from the effective date of the agreement.

Related Party Notes Payable

The Company has convertible notes payable and notes payable outstanding to Jeffrey Binder, an officer and director, to Frank Koretsky, a director; and to Newcan Investment Partners, LLC, an entity affiliated withthat is wholly owned by Frank Koretsky.  SeeKoretsky, a director (see note 11.10).

Note 11 – Notes Payable

Notes Payable
 
During the nine months ended
On February 28, 2017,7, 2018, the Company issued a $150,000 convertible note payable to CLS CO 2016, LLC an entity affiliated with Frank Koretsky,Todd Blatt in the amount of $210,000.  This note accrues interest at a directorrate of the Company.  See note 11.

During the nine months ended6% per annum and is due on February 28, 2017 the Company incurred $580,000 in notes payable to Newcan Investment Partners LLC,  an entity affiliated with Frank Koretsky, a director of the Company.  See note 11.7, 2019.  During the three months ended February 28, 2017, $460,0002018, the Company accrued interest in notesthe amount of $725 on this note.

On February 7, 2018, the Company issued a note payable was converted to AJG Group in the amount of $200,000.  This note accrues interest at a convertible promissoryrate of 6% per annum and is due on February 7, 2019.  During the three months ended February 28, 2018, the Company accrued interest in the amount of $690 on this note.

Note 10 –
Related Party Convertible Notes Payable

On May 31, 2017, the Company entered into an Omnibus Loan Amendment Agreement (the “Omnibus Loan Amendment”) with Jeffrey I. Binder, Frank Koretsky, Newcan Investment Partners LLC and CLS CO 2016, LLC (collectively, the “Insiders”).  Pursuant to the Omnibus Loan Amendment, the Company agreed with the Insiders to amend certain terms of loans the Insiders made to the Company for working capital purposes, which loans were initially demand loans, and, except for loans made in 2017, were later memorialized as convertible loans (the “Insider Loans”), in exchange for the agreement of the Insiders to convert all Insider Loans where funds were advanced prior to January 1, 2017, which totaled $2,537,750, plus $166,490 of accrued interest thereon, into an aggregate of 10,816,960 shares of the Company’s common stock at $0.25 per share, and forego the issuance of warrants to purchase the Company’s common stock upon conversion.  This resulted in the issuance of an additional 7,609,910 shares compared to the original number of shares issuable upon conversion of the Insider Loans prior to the Omnibus Loan Agreement. The Company valued the shares at $0.125, which was the market price of the Company’s stock at the conversion date, and charged the amount of $951,239 to loss on modification of debt during the twelve months ended May 31, 2017. The Company entered into the Omnibus Loan Amendment in order to ease the debt burden on the Company and prevent it from defaulting on the Insider Loans.
 
  February 28,  May 31, 
  2017  2016 
Notes payable to Jeffrey Binder, an officer and director of the Company, for advances to fund operations (the “Binder Funding Notes”). The Binder Funding Notes bear interest at a rate of 6% for loans made through November 30, 2017, and at a rate of 10% for loans made after November 30, 2016.  The Binder Funding Notes  have no maturity date and are due on demand.  During the nine months ended February 28, 2017, Mr. Binder advanced a total of $118,000 to the Company, and the Company repaid Mr. Binder $61,000 under the Binder Funding Note;   $12,750 of this amount was transferred out of the Binder Funding Notes and used to fund a new convertible note payable to Mr. Binder (See “Binder Convertible Note 3” below).  During the three and nine months ended February 28, 2017, the Company accrued interest in the amount of $166 and $237, respectively, on the Binder Funding Notes.
 $47,000  $2,750 
         
Notes payable to Newcan Investment Partners, LLC (“Newcan”), an entity owned by Frank Koretsky, a director of the Company, for advances to fund operations (the “Koretsky Funding Notes”). The Koretsky Funding Notes bear interest at a rate of 6% for loans made through November 30, 2017, and at a rate of 10% for loans made after November 30, 2016.   The Koretsky Funding Notes  have no maturity date and are due on demand.  During the nine months ended February 28, 2017, Frank Koretsky advanced $140,000 and Newcan Investment Partners, LLC advanced $580,000to the Company under the Koretsky Funding Notes; during the nine months ended February 28, 2017, $210,000 was transferred out of the Koretsky Funding Notes and used to fund a new convertible note payable to Mr. Koretsky (see “Koretsky Convertible Note 3” below) and $460,000 was transferred out of the Koretsky Funding Notes and used to fund new convertible notes payable to Newcan (see “Newcan Convertible Notes 1 and 2” below).  During the three and nine months ended February 28, 2017, the Company accrued interest in the amount of $1,102 and $7,890, respectively, on the Koretsky Funding Notes.
  120,000   70,000 
         
Total – Notes Payable, Related Parties $167,000  $72,750 
Current portion $167,000  $- 
 Long term portion $-  $72,750 
Pursuant to the Omnibus Loan Amendment, the following amendments were made to the Insider Loans: (a) the Company reduced the conversion price on the Insider Loans from between $0.75 and $1.07 per share of common stock to $0.25 per share of common stock, in those cases where the conversion price was greater than $0.25, which reduced conversion price exceeded the closing price of the common stock during the three months prior to the Omnibus Loan Amendment; (b) the Company deleted the requirement to issue warrants to purchase the Company’s common stock upon conversion of the Insider Loans; (c) the Company amended one Insider Loan to permit conversion of only the portion of the Insider Loan related to services that were provided to it prior to January 1, 2017; and (d) the Company amended the terms of the Insider Loans where funds were advanced on or after January 1, 2017, which Insider Loans were not converted into the Company’s common stock, to provide for, where not already the case, a 10% interest rate per annum, a $0.25 conversion price per share of common stock, and the deletion of the requirement that the Company issue warrants to purchase its common stock upon conversion of such Insider Loans.

On January 10, 2018, effective December 1, 2017, the Company entered into an Omnibus Amendment to Convertible Notes (the “Second Omnibus Loan Agreement”) with Jeffrey I. Binder, an officer and director of the Company, and Newcan Investment Partners LLC, an entity owned by Frank Koretsky, a director of the Company. The Second Omnibus Loan Agreement provides that the conversion price of all outstanding convertible promissory notes issued to either Mr. Binder or Newcan Investment Partners, LLC as of the date of the Agreement would be increased from $0.25 to $0.3125 per share of common stock.  The remaining terms of such notes remain unchanged.
  February 28,  May 31, 
  2017  2016 
Unsecured convertible note issued to Jeffrey Binder, an officer and director of the Company, dated January 12, 2016 and due January 1, 2019 (the “Binder Convertible Note 1”).  The Binder Convertible Note 1 was funded with $50,000 of advances Mr. Binder made to the Company under the Binder Funding Notes.  This note bears interest at the rate of 6% per annum. No payments are required until January 1, 2017, at which time all accrued interest becomes due and payable.  Commencing on April 1, 2017, the first of eight principal payments in the amount of $6,250 will become due; subsequent principal payments will become due on the first day of each July, October, January, and April until paid in full. This note and accrued interest under the note may be converted, in whole or in part, into one “Unit” for each  $0.75 converted, with each Unit consisting of one (1) share of common stock and a three-year warrant to purchase (1) share of common stock at a price of $1.00 per share (post Reverse-Split).  The Company recognized a discount of $50,000 on the value of the beneficial conversion feature at the time of issuance of this note.  During the nine months ended February 28, 2017, $18,561 of this discount was charged to operations.  During the three and nine months ended February 28, 2017 the Company accrued interest in the amount of $740 and $2,244, respectively, on this note.  50,000   50,000 
         
Unsecured convertible note issued to Jeffrey Binder, an officer and director of the Company, dated April 8, 2016 and due April 1, 2019 (the “Binder Convertible Note 2”).  The Binder Convertible Note 2 was funded with $42,500 of advances Mr. Binder made to the Company under the Binder Funding Notes.  This note bears interest at the rate of 6% per annum through February 29, 2016 and 10% per annum thereafter. No payments are required until April 1, 2017, at which time all accrued interest becomes due and payable.  Commencing on July 1, 2017, the first of eight principal payments in the amount of $5,313 will become due; subsequent principal payments will become due on the first day of each October, January, April, and July until paid in full.  This note and accrued interest under the note may be converted, in whole or in part, into one “Unit” for each  $1.07 converted, with each Unit consisting of one (1) share of common stock and a five-year warrant to purchase (1) share of common stock at a price of $1.07 per share (post Reverse-Split).  The Company recognized a discount of $37,840 on the value of the beneficial conversion feature at the time of issuance of this note.  During the nine months ended February 28, 2017, $14,048 of this discount was charged to operations.  During the three and nine months ended February 28, 2016, the Company accrued interest in the amount of $1,048 and $3,179, respectively,  on this note.  42,500   42,500 
         
Unsecured convertible note issued to Jeffrey Binder, an officer and director of the Company, dated July 20, 2016 and due July 1, 2019 (the “Binder Convertible Note 3”).  The Binder Convertible Note 3 was funded with the conversion of $250,000 of unpaid accrued salary due to Mr. Binder and $12,750 of advances Mr. Binder made to the Company under the Binder Funding Notes.  This note bears interest at the rate of 10% per annum. No payments are required until July 1, 2017, at which time all accrued interest becomes due and payable.  Commencing on October 1, 2017, the first of eight principal payments in the amount of $32,844 will become due; subsequent principal payments will become due on the first day of each, January, April, July and October until paid in full.  This note and accrued interest under the note may be converted, in whole or in part, into one “Unit” for each  $1.07 converted, with each Unit consisting of one (1) share of common stock and a five-year warrant to purchase (1) share of common stock at a price of $1.07 per share (post Reverse-Split).  During the three and nine months ended February 28, 2017, the Company accrued interest in the amount of $6,479 and $16,120, respectively, on this note.  262,750   - 
         
Unsecured convertible note issued to Frank Koretsky, a director of the Company, dated January 12, 2016 and due January 1, 2019 (the “Koretsky Convertible Note 1”).   The Koretsky Convertible Note 1 was funded with $895,000 of advances Mr. Koretsky made to the Company under the Koretsky Funding Notes.  This note bears interest at the rate of 6% per annum. No payments are required until January 1, 2017, at which time all accrued interest becomes due and payable.  Commencing on April 1, 2017, the first of eight principal payments in the amount of $111,875 will become due; subsequent principal payments will become due on the first day of each July, October, January, and April until paid in full. This note and accrued interest under the note may be converted, in whole or in part, into one “Unit” for each  $0.75 converted, with each Unit consisting of one (1) share of common stock and a five-year warrant to purchase (1) share of common stock at a price of $1.00 per share (post Reverse-Split).  The Company recognized a discount of $895,000 on the value of the beneficial conversion feature at the time of issuance of this note.  During the three and nine months ended February 28, 2017, $110,745 and  $332,234, respectively, of this discount was charged to operations.  During the three and nine months ended February 28, 2017, the Company accrued interest in the amount of $13,241 and $40,164, respectively, on this note.  895,000   895,000 
The following tables summarize the Company’s loan balances at February 28, 2018 and May 31, 2017:

  February 28,  May 31, 
  2018  2017 
       
Notes payable to Jeffrey Binder, an officer and director of the Company, for advances to fund operations (the “Binder Funding Notes”). The Binder Funding Notes bear interest at a rate of 6% for loans made through November 30, 2016, and at a rate of 10% for loans made after November 30, 2016.  The Binder Funding Notes have no maturity date and are due on demand.   During the twelve months ended May 31, 2016, Mr. Binder advanced a total of $95,250 to the Company under the Binder Funding Notes; during the year ended May 31, 2016, $92,500 of this amount was transferred out of the Binder Funding Notes and used to fund two new convertible notes payable to Mr. Binder (See Binder Convertible Notes 1 and 2 below).  During the twelve months ended May 31, 2016, the Company accrued interest in the amount of $1,308 on the Binder Funding Notes. In July 2016, the remaining principal balance of $2,750 in the Binder Funding Notes was transferred to a new Convertible Note payable to Mr. Binder (the “Binder Convertible Note 3”).
 
During the twelve months ended May 31, 2017, Mr. Binder advanced a total of $145,850 to the Company under the Binder Funding Notes. Also during the year ended May 31, 2017, Mr. Binder loaned the Company an additional $49,700; which was credited to the Binder Funding Notes.  Also during the year ended May 31, 2017, principal in the amount of $59,750 and accrued interest in the amount of $813 was transferred out of the Binder Funding Notes and used to fund two new convertible notes payable to Mr. Binder (See Binder Convertible Notes 3 and 4 below).  Also during the year ended May 31, 2017, the Company made principal payments in the aggregate amount of $61,000 under the Binder Funding Notes. During the year ended May 31, 2017, the Company accrued interest in the amount of $1,910 on the Binder Funding Notes. Effective May 31, 2017, pursuant to the Omnibus Loan Agreement, a conversion feature was added to the Binder Funding Notes whereby principal and accrued interest is convertible into common stock of the Company at a rate of $0.25 per share.
 
During the three months ended August 31, 2017, Mr. Binder advanced a total of $47,767 to the Company under the Binder Funding Notes. During the three months ended August 31, 2017, interest in the amount of $2,466 was accrued on the Binder Funding Notes.  Also during the three months ended August 31, 2017, principal in the amount of $77,550 and accrued interest in the amount of $3,630 were transferred from the Binder Funding Notes to a new convertible note payable to Mr. Binder (the “Binder Convertible Note 5”), and principal in the amount of $47,767 was transferred from the Binder Funding Notes to a new Convertible Note payable to Mr. Binder (the “Binder Convertible Note 6”).
 
During the three months ended November 30, 2017, Mr. Binder advanced a total of $112,862 to the Company under the Binder Funding Notes. A discount in the amount of $70,790 related to the beneficial conversion feature of the Binder Funding Notes was charged to additional paid-in capital and amortized to interest expense.  During these three months ended November 30, 2017, interest in the amount of $642 was accrued on the Binder Funding Notes.  Also during the three months ended November 30, 2017, principal in the amount of $27,021 and accrued interest in the amount of $122 was transferred from the Binder Funding Notes to a new convertible note payable to Mr. Binder (the “Binder Convertible Note 7”).
 
Effective December 1, 2017, pursuant to the Second Omnibus Loan Amendment, the conversion price was increased from $0.25 per share to $0.3125 per share and a discount in the amount of $35,023 related to the revaluation of the beneficial conversion feature of the Binder Funding Notes was charged to additional paid-in capital and amortized to interest expense.
 
During three months ended February 28, 2018, Mr. Binder advanced a total of $194,191 to the Company under the Binder Funding Notes.  During the three months ended February 28, 2018, interest in the amount of $2,433 was accrued on the Finder Funding Notes.  A discount in the amount of $194,191 related to the beneficial conversion feature of the Binder Funding Notes was charged to additional paid-in capital and amortized to interest expense.  Also, during the three months ended February 28, 2018, principal in the amount of $127,860 and accrued interest in the amount of $1,437 was transferred from the Binder Funding Notes to a new convertible note payable to Mr. Binder (the “Binder Convertible Note 8”).
 $152,174  $77,550 

  
February 28,
2018
  
May 31,
2017
 
       
Note payable to Frank Koretsky, a director of the Company, for advances to fund operations (the “Koretsky Funding Notes”). The Koretsky Funding Notes bear interest at a rate of 6% for loans made through November 30, 2016, and at a rate of 10% for loans made after November 30, 2016.  The Koretsky Funding Notes have no maturity date and are due on demand.   During the twelve months ended May 31, 2017, Mr. Koretsky advanced $550,000 to the Company under the Koretsky Funding Notes. Also during the twelve months ended May 31, 2017, $210,000 of principal and $1,346 of accrued interest was transferred out of the Koretsky Funding Notes and used to fund a new convertible notes payable to Mr. Koretsky.  Also during the twelve months ended May 31, 2017, principal and accrued interest in the amounts of $410,000 and $4,046, respectively, were transferred out of the Koretsky Funding Notes and contributed to the Newcan Funding Notes (see Newcan Funding Notes, below).   -   - 
         
Notes payable to Newcan Investment Partners, LLC (“Newcan”), an entity owned by Frank Koretsky, a director of the Company, for advances to fund operations (the “Newcan Funding Notes”). The Newcan Funding Notes bear interest at a rate of 10%. The Newcan Funding Notes have no maturity date and are due on demand. During the twelve months ended May 31, 2017, principal and interest in the amount of $410,000 and $4,046, respectively, were transferred from the Koretsky Funding Notes into the Newcan Funding Notes.  Also during the year ended May 31, 2017, Newcan advanced $791,658 to the Company under the Newcan Funding Notes. Also during the year ended May 31, 2017, principal in the amount of $460,000 and accrued interest in the amount of $7,747, respectively, were transferred from the Newcan Finding Notes and used to fund the Newcan Convertible Notes 2 and 3 (see below); also during the year ended May 31, 2017, principal and accrued interest in the amounts of $120,000 and $2,121, respectively, were transferred out of the Newcan Funding Notes in order to fund the Newcan Convertible Note 3; see below.  During the twelve months ended May 31, 2017, the Company accrued interest in the amount of $13,434 on this note.  Effective May 31, 2017, pursuant to the Omnibus Loan Agreement, a conversion feature was added to the Newcan Funding Notes whereby principal and accrued interest is convertible into common stock of the Company at a rate of $0.25 per share.
 
During the three months ended August 31, 2017, Newcan advanced $70,000 to the Company under the Newcan Funding Notes.  Also during the three months ended August 31, 2017, interest in the amount of $14,964 was accrued on the Newcan Funding Notes.  Also during the three months ended August 31, 2017, principal in the amount of $621,658 and accrued interest in the amount of $23,856 were transferred to a new Convertible Note payable to Newcan (the “Newcan Convertible Note 4”), and principal in the amount of $70,000 was transferred to a new Convertible Note payable to Newcan (the “Newcan Convertible Note 5”).
 
During the three months ended November 30, 2017, Newcan advanced $45,000 to the Company under the Newcan Funding Notes.  Also during the three months ended November 30, 2017, interest in the amount of $247 was accrued on the Newcan Funding Notes. A discount in the amount of $58,600 related to the beneficial conversion feature of the Binder Funding Notes was charged to additional paid-in capital and amortized to interest expense.  Also, during the three months ended November 30, 2017, principal in the amount of $30,000 and accrued interest in the amount of $148 were transferred to a new Convertible Notes payable to Newcan (the “Newcan Convertible Note 6”).
 
Effective December 1, 2017, pursuant to the Second Omnibus Loan Amendment, the conversion price was increased from $0.25 per share to $0.3125 per share and a discount in the amount of $6,120 related to the revaluation of the beneficial conversion feature of the Newcan Funding Notes was charged to additional paid-in capital and amortized to interest expense.
 
During the three months ended February 28, 2018, Newcan advanced $100,000 to the Company under the Newcan Funding Notes. Also during the three months ended February 28, 2018, interest in the amount of $915 was accrued on the Newcan Funding Notes. A discount  in the amount of $70,400 related to the beneficial conversion feature of the Newcan Funding Notes was charged to additional paid-in capital and amortized to interest expense.  Also, during the three months ended February 28, 2018, principal in the amount of $115,000 and accrued interest in the amount of $1,014 were transferred to a new Convertible Notes payable to Newcan (the “Newcan Convertible Note 6”).
  -   621,658 
         
Total – Demand Convertible Notes Payable, Related Parties $152,174  $699,208 
Current portion $152,174  $699,208 
 Long term portion $-  $- 
  February 28,  May 31, 
  2017  2016 
Unsecured convertible note issued to Frank Koretsky, a director of the Company, dated April 11,  2016 and due April 1, 2019 (the “Koretsky Convertible Note 2”). The Koretsky Convertible Note 2 was funded with $380,000 of advances Mr. Koretsky made to the Company under the Koretsky Funding Notes.  This note bears interest at the rate of 6% per annum through February 29, 2016 and 10% per annum thereafter. No payments are required until April 1, 2017, at which time all accrued interest becomes due and payable.  Commencing on July 1, 2017, the first of eight principal payments in the amount of $47,500 will become due; subsequent principal payments will become due on the first day of each October, January, April, and July until paid in full. This note and accrued interest under the note may be converted, in whole or in part, into one “Unit” for each  $1.07 converted, with each Unit consisting of one (1) share of common stock and a five-year warrant to purchase (1) share of common stock at a price of $1.07 per share (post Reverse-Split).  The Company recognized a discount of $338,336 on the value of the beneficial conversion feature at the time of issuance of this note.  During the three and nine months ended February 28, 2017, $41,867 and $125,602, respectively, of this discount was charged to operations.  During the three and  nine months ended February 28, 2017, the Company accrued interest in the amount of $9,370 and $28,422, respectively, on this note.  380,000   380,000 
         
Unsecured convertible note issued to Frank Koretsky, a director of the Company, dated July 20, 2016 and due July 1, 2019 (the “Koretsky Convertible Note 3”).  The Koretsky Convertible Note 3 was funded with $210,000 of advances Mr. Koretsky made to the Company under the Koretsky Funding Notes.  This note bears interest at the rate of 10% per annum. No payments are required until July 1, 2017, at which time all accrued interest becomes due and payable.  Commencing on October 1, 2017, the first of eight principal payments in the amount of $32,844 will become due; subsequent principal payments will become due on the first day of each, January, April, July and October until paid in full.  This note and accrued interest under the note may be converted, in whole or in part, into one “Unit” for each  $1.07 converted, with each Unit consisting of one (1) share of common stock and a five-year warrant to purchase (1) share of common stock at a price of $1.07 per share (post Reverse-Split).  During the three and nine months ended February 28, 2017, the Company accrued interest in the amount of $5,178 and $13,728, respectively, on this note.  210,000   - 
         
Unsecured convertible note issued to CLS CO 2016, LLC an entity affiliated with Frank Koretsky, a director of the Company, dated August 3, 2016 and due August 1, 2018 (the “CLS CO 2016 Note”).  This note has a face amount of $150,000 and bears interest at the rate of 15% per annum. All interest accruing on this Note through the first anniversary of this Note shall be added to principal.  Commencing on November 1, 2017, the Company shall pay the outstanding principal balance in four (4) equal quarterly installments, together with accrued interest, in arrears, until paid in full.  This note and accrued interest under the note may be converted, in whole or in part, into one “Unit” for each  $1.07 converted, with each Unit consisting of one (1) share of common stock and a five-year warrant to purchase (1) share of common stock at a price of $1.07 per share (post Reverse-Split).  During the three and nine months ended February 28, 2017, the Company accrued interest in the amount of $5,548 and $12,884, respectively, on this note.  150,000   - 

 
  February 28,  May 31, 
  2017  2016 
Unsecured convertible note issued to Newcan  dated January 10, 2017 and due January 2, 2020 (the “Newcan Note 1”).  The Newcan Note 1 was funded with $410,000 of advances Newcan  made to the Company under the Koretsky Funding Notes.  This note bears interest at the rate of 10% per annum. No payments are required until January 2, 2018, at which time all accrued interest becomes due and payable.  Commencing on April 1, 2018, the first of eight principal payments in the amount of $51,250 will become due; subsequent principal payments will become due on the first day of each, July, October, January, and April until paid in full.  This note and accrued interest under the note may be converted, in whole or in part, into one “Unit” for each  $1.07 converted, with each Unit consisting of one (1) share of common stock and a five-year warrant to purchase (1) share of common stock at a price of $1.07 per share (post Reverse-Split).  During the three and nine months ended February 28, 2017, the Company accrued interest in the amount of $5,504 on this note.
  410,000   - 
         
Unsecured convertible note issued to Newcan Investment Partners LLC an entity affiliated with Frank Koretsky, a director of the Company, dated January 10, 2017 and due January 2, 2020 (the “Newcan Note 2”).  The Newcan Note 2 was funded with $50,000 of advances Newcan  made to the Company under the Koretsky Funding Notes.  This note bears interest at the rate of 10% per annum. No payments are required until January 2, 2018, at which time all accrued interest becomes due and payable.  Commencing on April 1, 2018, the first of eight principal payments in the amount of $6,250 will become due; subsequent principal payments will become due on the first day of each July, October, January, and April until paid in full.  This note and accrued interest under the note may be converted, in whole or in part, into one “Unit” for each  $1.07 converted, with each Unit consisting of one (1) share of common stock and a five-year warrant to purchase (1) share of common stock at a price of $1.07 per share (post Reverse-Split).  During the three and nine months ended February 28, 2017, the Company accrued interest in the amount of $671 on this note.
  50,000   - 
         
Total – Convertible Notes Payable, Related Parties $2,450,250   1,367,500 
Less: Discount  (623,661)  (1,114,104)
Convertible Notes Payable, Related Parties, Net of Discounts $1,826,589   253,396 
         
Convertible Notes Payable, Related Parties, Net of Discounts, Current Portion $731,156  $22,678 
Convertible Notes Payable, Related Parties, Net of Discounts, Long-term Portion  
1,095,433
   230,718 

  February 28,  May 31, 
  2018  2017 
       
Unsecured convertible note issued to Jeffrey Binder, an officer and director of the Company, dated March 31, 2017 (the “Binder Convertible Note 4”).  The Binder Convertible Note 4 was funded with the conversion of $112,500 of unpaid accrued salary due to Mr. Binder and $47,000 of advances Mr. Binder made to the Company under the Binder Funding Notes.  This note bears interest at the rate of 10% per annum. No interest payments are required until April 1, 2018, at which time all accrued interest becomes due and payable.  Commencing on July 1, 2018, the first of eight principal payments in the amount of $19,938 will become due; subsequent principal payments will become due on the first day of each October, January, April, and July until paid in full.  This note and accrued interest under the note may be converted, in whole or in part, into one “Unit” for each $0.25 converted, with each Unit consisting of one (1) share of common stock and a five-year warrant to purchase (1) share of common stock at a price of $0.25 per share. 
 
Pursuant to the Omnibus Loan Agreement, on May 31, 2017, the requirement to issue warrants upon conversion was deleted, and principal in the amount of $87,500 was converted into a total of 350,000 shares of common stock.  The remaining principal balance of $72,000 will be due in eight quarterly payments in the amount of $9,000 commencing July 1, 2018; subsequent principal payments will become due on the first day of each October, January, April, and July until paid in full.  During the twelve months ended May 31, 2017, the Company accrued interest in the amount of $2,666 on the Binder Convertible Note 4.
 
Effective December 1, 2017, pursuant to the Second Omnibus Loan Amendment, the conversion price was increased from $0.25 per share to $0.3125 per share and a discount was recorded in the amount of $29,376 related to the revaluation of the beneficial conversion feature of the Binder Convertible Note 4; $2,628 of this discount was amortized to interest expense during the three months ended February 28, 2018..
 
During the three and nine months ended February 28, 2018, interest in the amount of $1,775 and   $5,385 was accrued on Binder Convertible Note 4, respectively.
 $72,000  $72,000 
         
Unsecured convertible note issued to Newcan, an entity owned by Frank Koretsky, a director of the Company, dated March 31, 2017 (the “Newcan Convertible Note 3”).  The Newcan Convertible Note 3 was funded with the conversion of $120,000 of advances made to the Company under the Newcan Funding Notes.  This note bears interest at the rate of 10% per annum. No interest payments are required until April 1, 2018, at which time all accrued interest becomes due and payable.  Commencing on July 1, 2018, the first of eight principal payments in the amount of $15,000 will become due; subsequent principal payments will become due on the first day of each October, January, April, and July until paid in full.  This note and accrued interest under the note may be converted, in whole or in part, into one “Unit” for each $0.25 converted, with each Unit consisting of one (1) share of common stock and a five-year warrant to purchase (1) share of common stock at a price of $0.25 per share.  During the twelve months ended May 31, 2017, the Company accrued interest in the amount of $2,005 on the Koretsky Convertible Note 4. Pursuant to the Omnibus Loan Agreement, on May 31, 2017, the requirement to issue warrants upon conversion was deleted. 
 
Effective December 1, 2017, pursuant to the Second Omnibus Loan Amendment, the conversion price was increased from $0.25 per share to $0.3125 per share and a discount was recorded in the amount of $48,960 related to the revaluation of the beneficial conversion feature of the Newcan Convertible Note 1; $4,379 of this discount was amortized during the three months ended February 28, 2018.
 
During the three and nine months ended February 28, 2018, interest in the amount of $2,959 and $8,975 was accrued on Newcan Convertible Note 3, respectively.
  120,000   120,000 

  February 28,  May 31, 
  2017  2016 
Convertible promissory note issued to an unaffiliated third party due April 29, 2018 (the “April 2015 Note”).  During the twelve months ended May 31, 2015, the lender loaned the Company the amount of $200,000 pursuant to this note.  The April 2015 Note bears interest at a rate of 15% per annum.  On the first anniversary of this note, the all then accrued interest became due. Thereafter, the Company is required to make eight equal payments of principal together with accrued interest, quarterly in arrears, commencing on July 1, 2016 until paid in full.  The note and any accrued unpaid interest is convertible into common stock of the Company.   For each dollar converted, the note holder shall receive two shares of common stock and one three-year warrant to purchase 1.33 shares (post Reverse-Split) of common stock at $0.75 per share (post Reverse-Split).  The Company recognized a discount of $200,000 on the April 2015 Note related to the value of the beneficial conversion feature at the time of issuance.  During the nine months ended February 28, 2017, $82,390 of this discount was charged to operations.  During the three months ended February 27, 2017, the Company repaid principal in the amount of $25,000 and interest in the amount of $6,690 on this note; during the  nine months ended February 28, 2017, the Company repaid principal in the amount of $75,000 and interest in the amount of $49,265 on this note. During the three and nine months ended February 28, 2017, the Company accrued interest in the amount of $4,952 and $18,740, respectively, on this note.  125,000   200,000 
         
Convertible Promissory Notes payable to Old Main Capital, LLC (“Old Main”) dated March 18, 2016, April 22, 2016 and May 27, 2016 as amended on October 6, 2016 and November 28, 2016, for the purchase of up to $333,333 in 10% Original Issue Discount Convertible Promissory Notes (the “10% Notes”).  These notes originally bore interest at the rate of 10% per annum, which increased to 15% effective August 1, 2016. Initially, Old Main could, at its option, convert all or a portion of the notes and accrued but unpaid interest into shares of common stock at a conversion price of $0.80 per share (post Reverse-Split) (the “Fixed Conversion Price”).  The Fixed Conversion Price is subject to adjustment if, at any time while this note is outstanding, the Company should issue any equity security with an effective price per share that is lower than the Fixed Conversion Price (the “Base Conversion Price”), other than certain exempt issuances.  In such an instance, the Fixed Conversion Price will be lowered to match the Base Conversion Price.  Originally, at the earlier of October 18, 2016 or two trading days after the registration statement related to the Company’s equity line was declared effective, the Company must begin to redeem 1/24th of the face amount of the notes and any accrued but unpaid interest on a bi-weekly basis. Such amortization payments could be made, at the Company’s option, in cash or, subject to certain conditions, in common stock pursuant to a conversion rate equal to the lower of (a) $0.80 or (b) 75% of the lowest daily volume weighted average price of the common stock in the twenty consecutive trading days immediately prior to the conversion date.  The Company recognized a discount of $330,188 on the 10% Notes related to the value of the original issue discount and embedded derivative at time of issuance. 
 
On October 6, 2016, the 10% Notes were amended to increase the interest rate to 15% (effective August 1, 2016) and subsequently amended November 28, 2016 to convert the 10% Notes from installment notes to “balloon” notes, with all principal and accrued interest due on September 18, 2017.  In exchange for amending the terms of the 10% Notes, the Company increased the outstanding principal balance by 10% to $366,666. In addition the Fixed Conversion Price was changed to a variable conversion price equal to the lesser of the prior Fixed Conversion Price or 75% of the lowest VWAP in the fifteen trading days ending on the trading day immediately prior to the conversion date.  This November 28, 2016 amendment required an extinguishment analysis of the 10% Notes resulting in the gain on extinguishment of debt in the amount of $172,618 during the nine months ended February 28, 2017.  The gain on extinguishment of debt was included in additional paid in capital during the nine months ended February 28, 2017.  The 10% Notes were revalued as of the November 28, 2016 amendment and the Company recognized a discount of $366,666 on the value of the embedded derivative. During the three months ended February 28, 2017 Old Main converted an aggregate of $100,000 of principal, in six transactions, into 828,173 shares of common stock. . At February 28, 2017 and May 31, 2016, the amount of discount remaining on these notes was $264,276 and $326,132, respectively.   During the three and nine months ended February 28, 2017, the Company accrued interest in the amount of $12,649 and $34,959, respectively, on these notes.
  266,666   333,332 
February 28,
2018
May 31,
2017
Unsecured convertible note issued to Jeffrey Binder, an officer and director of the Company, dated August 23, 2017 in the original principal amount of $115,050 (the “Binder Convertible Note 5”).  The Binder Convertible Note 5 was funded with the conversion of $37,500 of unpaid accrued salary due to Mr. Binder and $77,550 of advances Mr. Binder made to the Company under the Binder Funding Notes.  This note bears interest at the rate of 10% per annum. No interest payments are required until October 1, 2018, at which time all accrued interest becomes due and payable.  Commencing on January 2, 2019, the first of eight principal payments in the amount of $14,381 will become due; subsequent principal payments will become due on the first day of each April, July, October, and January until paid in full.  This note and accrued interest under the note may be converted, in whole or in part, into one share of common stock for each $0.25 converted.  The Company recognized a discount of $46,020 on the Binder Convertible Note 5 related to the value of the beneficial conversion feature at the time of issuance; $3,824 and $4,160 of this discount was amortized during the three and six months ended November 30, 2017, respectively. During the three and six months ended November 30, 2017, interest in the amount of $2,868 and $3,121 was accrued on Binder Convertible Note 5, respectively, and $3,630 of accrued interest was transferred from the Binder Funding Notes.
Effective December 1, 2017, pursuant to the Second Omnibus Loan Amendment, the conversion price was increased from $0.25 per share to $0.3125 per share, and the discount balance in the amount of $41,859 was charged to interest expense. A new discount was recorded in the amount of $46,940 related to the value of the repriced conversion feature of Binder Convertible Note 5; $4,199 of this discount was amortized to interest expense during the three months ended February 28, 2018.
During the three and nine months ended February 28, 2018, interest in the amount of $2,837 and   $5,957 was accrued on Binder Convertible Note 5, respectively.
115,050-
Unsecured convertible note issued to Jeffrey Binder, an officer and director of the Company, dated August 23, 2017 in the original principal amount of $72,767 (the “Binder Convertible Note 6”).  The Binder Convertible Note 6 was funded with the conversion of $25,000 of unpaid accrued salary due to Mr. Binder and $47,767 of advances Mr. Binder made to the Company under the Binder Funding Notes.  This note bears interest at the rate of 10% per annum. No interest payments are required until October 1, 2018, at which time all accrued interest becomes due and payable.  Commencing on January 2, 2019, the first of eight principal payments in the amount of $9,096 will become due; subsequent principal payments will become due on the first day of each April, July, October, and January until paid in full.  This note and accrued interest under the note may be converted, in whole or in part, into one share of common stock for each $0.25 converted. The Company recognized a discount of $29,107 on the Binder Convertible Note 6 related to the value of the beneficial conversion feature at the time of issuance; $2,419 and $2,632 of this discount was amortized during the three and six months ended November 30 2017, respectively.  During the three and six months ended November 30, 2017, interest in the amount of $1,814 and $1,974 was accrued on Binder Note 6, respectively.
Effective December 1, 2017, pursuant to the Second Omnibus Loan Amendment, the conversion price was increased from $0.25 per share to $0.3125 per share, and the discount balance in the amount of $26,475 was charged to interest expense. A new discount was recorded in the amount of $29,689 related to the value of the repriced conversion feature of Binder Convertible Note 6; $2,656 of this discount was amortized to interest expense during the three months ended February 28, 2018.
During the three and nine months ended February 28, 2018, interest in the amount of $1,794 and   $3,768 was accrued on Binder Convertible Note 6, respectively.
72,767-


  February 28,  May 31, 
  2017  2016 
Convertible promissory note payable to Old Main dated March 18, 2016 and amended  on October 6, 2016 and November 28, 2016, and bearing interest at a rate of 8% (the “8% Note”).  The 8% Note was issued for Old Main’s commitment to enter into an equity line transaction with the Company and prepare all of the related transaction documents.  Originally, Old Main could, at its option, convert all or a portion of the note and accrued but unpaid interest into shares of common stock at a conversion price of $1.07 per share (post Reverse-Split) (the “8% Fixed Conversion Price”).  The 8% Fixed Conversion Price is subject to adjustment if, at any time while this note is outstanding, the Company should issue any equity security with an effective price per share that is lower than the 8% Fixed Conversion Price (the “8% Base Conversion Price”), other than certain exempt issuances.  In such an instance, the 8% Fixed Conversion Price will be lowered to match the 8% Base Conversion Price.   Originally, at the earlier of February 3, 2017 or the effectiveness of the registration statement related to the Company’s equity line, the Company must begin to redeem 1/6th of the face amount of the note and any accrued but unpaid interest on a monthly basis. Such amortization payment could be made, at its option, in cash or, subject to certain conditions, in common stock pursuant to a conversion rate equal to the lower of (a) $1.07 (post Reverse-Split) or (b) 75% of the lowest daily volume weighted average price of the common stock in the twenty consecutive trading days ending on the trading day that is immediately prior to the applicable conversion date.  The Company recognized a discount of $172,108 on the value of the embedded derivative at the time of issuance.  
 
On November 28, 2016, the 8% Note was amended converting the note from an installment note to a “balloon” note, with all principal and accrued interest due on March 18, 2017.  In addition the Fixed Conversion Price was changed to a variable conversion price equal to the lesser of the prior Fixed Conversion Price or 75% of the lowest VWAP in the fifteen trading days ending on the trading day immediately prior to the conversion date.  The November 28, 2016 amendment required an extinguishment analysis of the 8% Note resulting in  gain on extinguishment of debt in the amount of $81,496 for the nine months ended February 28, 2017.  The gain on extinguishment of debt was included in additional paid-in capital at  February 28, 2017.  The 8% Note was revalued as of the November 28, 2016 amendment and the Company recognized a discount of $169,476 on the value of the embedded derivative. At February 28, 2017 and May 31, 2016, the amount of discount remaining on these notes was $118,998 and $163,586, respectively.    During the three and nine months ended February 28, 2017, the Company accrued interest in the amount of $3,945 and $11,967, respectively, on this note.
  200,000   200,000 
         
Total - Convertible Notes Payable $591,666  $733,332 
Less: Discount  (428,660)  (587,910)
Convertible Notes Payable, Net of Discounts $163,006  $145,422 
         
Total - Convertible Notes Payable, Net of Discounts, Current Portion $147,082  $72,525 
Total - Convertible Notes Payable, Net of Discounts, Long-term Portion $15,924  $43,312 
         
Discounts on notes payable amortized to interest expense: $1,197,998  $286,317 
February 28,
2018
May 31,
2017
Unsecured convertible note issued to Newcan, an entity owned by Frank Koretsky, a director of the Company, dated August 23, 2017 in the original principal amount of $621,658 (the “Newcan Convertible Note 4”).  The Newcan Convertible Note 4 was funded with the conversion of $621,658 of advances Newcan made to the Company under the Newcan Funding Notes.  This note bears interest at the rate of 10% per annum. No interest payments are required until October 1, 2018, at which time all accrued interest becomes due and payable.  Commencing on January 2, 2019, the first of eight principal payments in the amount of $69,074 will become due; subsequent principal payments will become due on the first day of each April, July, October, and January until paid in full.  This note and accrued interest under the note may be converted, in whole or in part, into one share of common stock for each $0.25 converted. The Company recognized a discount of $248,663 on the Newcan Convertible Note 4 related to the value of the beneficial conversion feature at the time of issuance.
 
Effective December 1, 2017, pursuant to the Second Omnibus Loan Amendment, the conversion price was increased from $0.25 per share to $0.3125 per share, and the discount balance in the amount of $226,181 was charged to interest expense. A new discount was recorded in the amount of $253,636 related to the value of the repriced conversion feature of Newcan Convertible Note 4; $22,687 of this discount was amortized to interest expense during the three months ended February 28, 2018.
During the three and nine months ended February 28, 2018, interest in the amount of $15,239 and   $32,190 was accrued on Newcan Convertible Note 4, respectively.
621,658-
Unsecured convertible note issued to Newcan, an entity owned by Frank Koretsky, a director of the Company, dated August 23, 2017 in the original principal amount of $70,000 (the “Newcan Convertible Note 5”).  The Newcan Convertible Note 5 was funded with the conversion of $70,000 of advances Newcan made to the Company under the Newcan Funding Notes.  This note bears interest at the rate of 10% per annum. No interest payments are required until October 1, 2018, at which time all accrued interest becomes due and payable.  Commencing on January 2, 2019, the first of eight principal payments in the amount of $8,750 will become due; subsequent principal payments will become due on the first day of each April, July, October, and January until paid in full.  This note and accrued interest under the note may be converted, in whole or in part, into one share of common stock for each $0.25 converted. The Company recognized a discount of $28,000 on the Newcan Convertible Note 5 related to the value of the beneficial conversion feature at the time of issuance.
Effective December 1, 2017, pursuant to the Second Omnibus Loan Amendment, the conversion price was increased from $0.25 per share to $0.3125 per share, and the discount balance in the amount of $25,468 was charged to interest expense. A new discount was recorded in the amount of $28,560 related to the value of the repriced conversion feature of Newcan Convertible Note 5; $2,555 of this discount was amortized to interest expense during the three months ended February 28, 2018.
During the three and nine months ended February 28, 2018, interest in the amount of $1,726 and   $3,625 was accrued on Newcan Convertible Note 5, respectively.
70,000-

February 28,
2018
May 31,
2017
Unsecured convertible note issued to Newcan, an entity owned by Frank Koretsky, a director of the Company, dated October 9, 2017 in the original amount of $30,000 (the “Newcan Convertible Note 6”). The Newcan Convertible Note 6 was funded with the conversion of $30,000 of advances Newcan made to the Company under the Newcan Funding Notes.  This note bears interest at the rate of 10% per annum.  No interest payments are required until January 2, 2019, at which time all accrued interest becomes due and payable.  Commencing on April 1, 2019, the first of eight principal payments in the amount of $3,750 will become due; subsequent principal payments will become due on the first day of each July, October, January and April until paid in full.  This note and accrued interest under the note may be converted, in whole or in part, into one share of common stock for each $0.25 converted.  The Company recognized a discount of $15,808 on the Newcan Convertible Note 6 related to the value of the beneficial conversion feature at the time of issuance.
Effective December 1, 2017, pursuant to the Second Omnibus Loan Amendment, the conversion price was increased from $0.25 per share to $0.3125 per share, and the discount balance in the amount of $11,430 was charged to interest expense. A new discount was recorded in the amount of $12,240 related to the value of the repriced conversion feature of Newcan Convertible Note 6; $1,095 of this discount was amortized to interest expense during the three months ended February 28, 2018.
During the three and nine months ended February 28, 2018, interest in the amount of $740 and   $1,167 was accrued on Newcan Convertible Note 6, respectively.
30,000-
Unsecured convertible note issued to Jeffery Binder, an officer and director of the Company, dated October 9, 2017 in the original principal amount of $39,521 (the “Binder Convertible Note 7”).  The Binder Convertible Note 7 was funded with the conversion of $12,500 of unpaid accrued salary due to Mr. Binder and $27,021 of advances Mr. Binder made to the Company under the Binder Funding Notes.  This note bears interest at the rate of 10% per annum.  No interest payments are required until January 2, 2019, at which time all accrued interest becomes due and payable.  Commencing April 1, 2019, the first of eight principal payments in the amount of $4,940 will become due, subsequent payments will become due on the first day of each July, October, January and April until paid in full.  This note and accrued interest under the note may be converted, in whole or in part, into one share of common stock for each $0.25 converted.  The Company recognized a discount of $12,000 on the Binder Convertible Note 7 related to the value of the beneficial conversion feature at the time of issuance.
Effective December 1, 2017, pursuant to the Second Omnibus Loan Amendment, the conversion price was increased from $0.25 per share to $0.3125 per share, and the discount balance in the amount of $15,058 was charged to interest expense. A new discount was recorded in the amount of $16,125 related to the value of the repriced conversion feature of Binder Convertible Note 7; $1,442 of this discount was amortized to interest expense during the three months ended February 28, 2018.
During the three and nine months ended February 28, 2018, interest in the amount of $974 and   $1,538 was accrued on Binder Convertible Note 7, respectively.
39,521-
  February 28,
2018
  
May 31,
2017
 
         
Unsecured convertible note issued to Newcan, an entity owned by Frank Koretsky, a director of the Company, dated, January 5, 2018 in the original amount of $115,000 (the “Newcan Convertible Note 7”).  The Newcan Convertible Note 7 was funded with the conversion of $115,000 of advances Newcan made to the Company under the Newcan Funding Notes.  This note bears interest at the rate of 10% per annum.  No interest payments are required until April 1, 2019, at which time all of the accrued interest becomes due and payable.  Commencing on July 1, 2019, the first of eight principal payments in the amount of $14,375 will become due; subsequent principal payments will become due on the first day of each October, January, April and July until paid in full.  This note and accrued interest under the note may be converted, in whole or in part, into one share of common stock for each $0.3125 converted.  The Company recognized a discount of $115,000 on the Newcan Convertible Note 7 related to the value of the beneficial conversion feature at the time of issuance. During the three months ended February 28, 2018, the Company amortized $5,254 of this discount to interest expense.
 
During the three and nine months ended February 28, 2018, interest in the amount of $1,701 was accrued on the Newcan Convertible Note 7.
  115,000   - 
         
Unsecured convertible note issued to Jeffery Binder, an officer and director of the Company, dated January 5, 2018 in the original principal amount of $165,360 (the “Binder Convertible Note 8”).  The Binder Convertible Note 8 was funded with the conversion of $37,500 of unpaid accrued salary due to Mr. Binder and $127,860 of advances Mr. Binder made to the Company under the Binder Funding Notes.  This note bears interest at the rate of 10% per annum.  No interest payments are required until April 1, 2019, at which time all accrued interest becomes due and payable.  Commencing July 1, 2019, the first of eight principal payments in the amount of $20,670 will become due; subsequent payments will become due on the first day of each October, January, April and July until paid in full.  This note and accrued interest under the note may be converted, in whole or in part, into one share of common stock for each $0.3125 converted.  The Company recognized a discount of $165,360 on the Binder Convertible Note 8 related to the value of the beneficial conversion feature at the time of issuance. During the three months ended February 28, 2018, the Company amortized $7,555 of this discount to interest expense.
 
During the three and nine months ended February 28, 2018, interest in the amount of $2,446 and $2,446 was accrued on Binder Convertible Note 8, respectively.
  165,360   - 
         
Convertible promissory note payable to David Lamadrid (the “Lamadrid Note”) dated February 20, 2018 in the principal amount of $31,250 and bearing interest at a rate of 8% per annum.  The Lamadrid Note is due eighteen months from the date of issue.  Mr. Lamadrid may, at his option, convert all or a portion of the Lamadrid Note and accrued but unpaid interest into shares of common stock at a conversion price of $0.3125 per share. The Lamadrid Note also contains a reset feature, whereby, absent certain exceptions, if the Company issues equity securities at an effective price less than $0.3125 per share of common stock, the conversion price of the Lamadrid Note will be reset to such lower price. The Company recognized a discount of $31,250 on the Lamadrid Note related to the beneficial conversion feature at the time of issuance.  During the three months ended February 28, 2018, $458 of this discount was charged to operations.  During the three months ended February 28, 2018, the Company accrued interest in the amount of $55 on this note.  31,250   - 
         
Total – Convertible Notes Payable, Related Parties $1,452,606  $192,000 
Less: Discount  (722,229)  - 
Convertible Notes Payable, Related Parties, Net of Discounts $730,377  $192,000 
         
Convertible Notes Payable, Related Parties, Net of Discounts, Current Portion $114,803  $- 
Convertible Notes Payable, Related Parties, Net of Discounts, Long-term Portion  615,574   192,000 


  
February 28,
2018
  
May 31,
2017
 
       
Convertible promissory note issued to an unaffiliated third party due April 29, 2018 (the “April 2015 Note”).  During the twelve months ended May 31, 2015, the lender loaned the Company the amount of $200,000 pursuant to this note.  The April 2015 Note bears interest at a rate of 15% per annum.  On the first anniversary of this note, the all then accrued interest became due. Thereafter, the Company is required to make eight equal payments of principal together with accrued interest, quarterly in arrears, commencing on July 1, 2016 until paid in full.  The note and any accrued unpaid interest is convertible into common stock of the Company.   For each dollar converted, the note holder shall receive two shares of common stock and one three-year warrant to purchase 1.33 shares of common stock at $0.75 per share.  The Company recognized a discount of $200,000 on the April 2015 Note related to the value of the beneficial conversion feature at the time of issuance.  During the twelve months ended May 31, 2016, $66,667 of this discount was charged to operations.  During the twelve months ended May 31, 2016, the Company accrued interest in the amount of $30,082 on this note. During the year ended May 31, 2017, the Company repaid principal in the amount of $100,000 and interest in the amount of $53,837 on this note. Also during the year ended May 31, 2017, the Company charged $100,545 of the discount to operations, and accrued interest in the amount of $22,440 on the April 2015 Note.
 
On September 20, 2017, the Company entered into an Exchange Agreement, whereby it agreed to exchange the April 2015 Note for 1,500,000 shares of its common stock. The holder of the April 2015 Note had previously sold it for $105,219, which represented the balance due by the Company, to StarForce Media, Inc., an entity that is not affiliated with the Company.  The Company recognized a loss on this exchange in the amount of $404,082, which was charged to operations during the three months ended November 30, 2017.  The Company also expensed the remaining discount in the amount of $18,155 to interest expense during the three months ended November 30, 2017.
 
During the three and nine months ended February 28, 2018 the Company accrued interest in the amount of $ 0 and  $4,603, respectively, on the April 2015 Note.
 $-  $100,000 

February 28,
2018
May 31,
2017
Convertible promissory note payable to Old Main Capital, LLC (“Old Main”) dated March 18, 2016 and bearing interest at a rate of 8% (the “8% Note”).  The 8% Note was issued for Old Main’s commitment to enter into an equity line transaction with the Company and prepare all of the related transaction documents.  Old Main may, at its option, convert all or a portion of the note and accrued but unpaid interest into shares of common stock at a conversion price of $1.07 per share (post Reverse-Split) (the “8% Fixed Conversion Price”).  The 8% Fixed Conversion Price is subject to adjustment if, at any time while this note is outstanding, the Company should issue any equity security with an effective price per share that is lower than the 8% Fixed Conversion Price (the “8% Base Conversion Price”), other than certain exempt issuances.  In such an instance, the 8% Fixed Conversion Price will be lowered to match the 8% Base Conversion Price.   The shares underlying the 8% Note are subject to a registration rights agreement.   At the earlier of September 18, 2016 or two trading days after this registration statement becomes effective, the Company must begin to redeem 1/6th of the face amount of the note and any accrued but unpaid interest on a monthly basis. Such amortization payment may be made, at its option, in cash or, subject to certain conditions, in common stock pursuant to a conversion rate equal to the lower of (a) $1.07 (post Reverse-Split) or (b) 75% of the lowest daily volume weighted average price of the common stock in the twenty consecutive trading days ending on the trading day that is immediately prior to the applicable conversion date.  The Company recognized a discount of $172,108 on the value of the embedded derivative.  
On November 28, 2016, the 8% Note was amended converting the note from an installment note to a “balloon” note, with all principal and accrued interest due on March 18, 2017.  In addition, the Fixed Conversion Price was changed to a variable conversion price equal to the lesser of the prior Fixed Conversion Price or 75% of the lowest VWAP in the fifteen trading days ending on the trading day immediately prior to the conversion date.  The November 28, 2016 amendment required an extinguishment analysis of the 8% Note resulting in gain on extinguishment of debt in the amount of $81,496 for the nine months ended February 28, 2017.  The gain on extinguishment of debt was included in additional paid-in capital at February 28, 2017.  The 8% Note was revalued as of the November 28, 2016 amendment and the Company recognized a discount of $169,476 on the value of the embedded derivative. At February 28, 2017 and May 31, 2016, the amount of discount remaining on these notes was $118,998 and $163,586, respectively. 
On March 27, 2017, the Company entered into a further amendment to the 8% Note, whereby the Company agreed to increase the outstanding amount due under the 8% Note as of March 18, 2017 by 5%, or $10,000.  In exchange for doing so, Old Main agreed to extend the maturity of the 8% Note until July 1, 2017 and to suspend conversions under the 8% Note until July 1, 2017.  Also during the year ended May 31, 2017, the Company accrued interest in the amount of $17,207 on the 8% Note.
On July 6, 2017, the 8% Note was further amended, whereby the maturity date was extended to July 15, 2017 and the outstanding balance was increased by $15,750. On August 23, 2017, the 8% Note was amended again to extend the maturity date to September 15, 2017. 
On September 23, 2017, but effective on September 15, 2017, the 8% note was further orally amended, and the outstanding balance was increased by $96,862. The Company recognized the modification of this note as an extinguishment of debt and recognized a gain on the extinguishment of $144,851.  The Company also recognized a discount on the modified note of $300,435, which was fully charged to operations during the three months ended November 30, 2017. On September 25, 2017, but effective September 15, 2017, the Company entered into an Exchange Agreement, whereby it agreed to exchange the 8% Note for 4,500,000 shares of its common stock. Old Main, the original holder of the 8% Note, had previously sold it for $382,496.  The balance due by the Company under the 8% Note at the time it was sold was $322,612. The Company recognized a loss on this exchange in the amount of $1,113,883, which was charged to operations during the nine months ended February 28, 2018.
During the three and nine months ended February 28, 2018, the Company accrued interest in the amount of $0 and $5,587, respectively, on the 8% Note, and $30,411 of the discount was amortized to interest expense during the nine months ended February 28, 2018.
-210,000

  
February 28,
2018
  
May 31,
2017
 
         
Senior Convertible promissory note payable to FirstFire Global Opportunities Fund, LLC (the “FirstFire Note”) dated November 15, 2017 and bearing interest at a rate of 5% per annum.  The lender loaned the Company $330,000 and the FirstFire Note has an original issue discount of $33,000.  The FirstFire Note is due seven months from the date of issue. FirstFire may, at its option, convert all or a portion of the FirstFire Note and accrued but unpaid interest into shares of common stock at a conversion price of $0.40 per share (the “FirstFire Fixed Conversion Price”) for the first 180 calendar days after the issue date.  After the 180th day, the conversion price shall equal the lower of (i) the FirstFire Fixed Conversion Price, or (ii) 75% multiplied by the lowest traded price of the common stock during twenty (20) consecutive trading day period immediately preceding the trading day that the Company received a notice of conversion.  During the three months ended February 28, 2018, a dilutive issuance occurred. As a result, the FirstFire Fixed Conversion Price was reduced to $0.3125 per share. The Company recognized a discount of $363,000 on the FirstFire Note related to the beneficial conversion feature at the time of issuance. During the three and nine months ended February 28, 2018, $86,362 and $116,445, respectively, of this discount was charged to operations. During the three and nine months ended February 28, 2018, the Company accrued interest in the amount of $4,475 and $5,221 on this note, respectively.
  363,000   - 
         
Convertible promissory note payable to Darling Capital, LLC (the “Darling Note”) dated February 5, 2018 and bearing interest at a rate of 8% per annum. The lender loaned the Company $500,000 and the Darling Note has an original issue discount of $50,000.  The Darling Note is due eighteen months from the date of issue.  Darling may, at its option, convert all or a portion of the Darling Note and accrued but unpaid interest into shares of common stock at a conversion price of $0.3125 per share. The Darling Note also contains a reset feature, whereby, absent certain exceptions, if the Company issues equity securities at an effective price less than $0.3125 per share of common stock, the conversion price of the Darling Note will be reset to such lower price. The Company recognized a discount of $550,000 on the Darling Note related to the beneficial conversion feature at the time of issuance.  During the three months ended February 28, 2018, $23,168 of this discount was charged to operations.  During the three months ended February 28, 2018, the Company accrued interest in the amount of $2,773 on this note.  550,000   - 
         
Convertible promissory note payable to Efrat Investments, LLC (the “Efrat Note”) dated February 12, 2018 and bearing interest at a rate of 8% per annum. The lender loaned the Company $50,000 and the Efrat Note has an original issue discount of $5,000.  The Efrat Note is due eighteen months from the date of issue.  Efrat may, at its option, convert all or a portion of the Efrat Note and accrued but unpaid interest into shares of common stock at a conversion price of $0.3125 per share. The Efrat Note also contains a reset feature, whereby, absent certain exceptions, if the Company issues equity securities at an effective price less than $0.3125 per share of common stock, the conversion price of the Efrat Note will be reset to such lower price. The Company recognized a discount of $55,000 on the Efrat Note related to the beneficial conversion feature at the time of issuance.  During the three months ended February 28, 2018, $1,612 of this discount was charged to operations.  During the three months ended February 28, 2018, the Company accrued interest in the amount of $193 on this note.  55,000   - 
         
         
         
Total - Convertible Notes Payable $968,000  $310,000 
Less: Discount  (826,775)  (57,644)
Convertible Notes Payable, Net of Discounts $141,225  $252,356 
         
Total - Convertible Notes Payable, Net of Discounts, Current Portion $141,225  $252,356 
Total - Convertible Notes Payable, Net of Discounts, Long-term Portion $-  $- 
Discounts on notes payable amortized to interest expense – 3 months ended February 28, 2018:818,254308,606
Discounts on notes payable amortized to interest expense – 9 months ended February 28, 2018:1,391,1101,197,998
Beneficial Conversion Features

The 10% Notes and the 8% Note, (collectively, the “2016 Convertible Notes”)FirstFire Note, Darling Note, Efrat Note, and Lamadrid Note contain conversion features that create derivative liabilities. The pricing model the Company useduses for determining fair value of its derivatives is the Lattice Model. Valuations derived from this model are subject to ongoing internal and external verification and review. The model uses market-sourced inputs such as interest rates and stock price volatilities. Selection of these inputs involves management’s judgment and may impact net income.  The derivative component of the 2016 Convertible Notes8% Note was valued at November 28, 2016,issuance, at conversion, at restructure, and at each period end.  See note 11.

Certain of the Company’s other convertible notes payable contain beneficial conversion features that are not derivatives, but which require valuation in order to determine the discount to the related convertible note payable. The value of these conversion features is calculated using the intrinsic value method, whereby the amount of the discount is calculated as the difference between the conversion price and the market price of the underlying common stock at the date of issuance multiplied by the second amendment to the 2016 Convertible Notes, and at period end. The following assumptions and key inputs were used for the valuationnumber of the derivative liability related to the 2016 Convertible Notes at November 28, 2016 and February 28, 2017:shares issuable.

Assumption
Expected dividends:0%
Expected volatility:93-168.3%
Expected term (years):0.55-0.80 years
Risk free interest rate:0.60-0.62
Stock price$0.17-0.59
 
Note 1112 – Stockholders’ Equity
 
The Company’s authorized capital stock consists of 250,000,000 shares of common stock, par value $0.0001 per share and 20,000,000 shares of preferred stock, par value $0.001 per share. The Company had 21,178,17643,186,944 and 20,350,00332,852,944 shares (post Reverse Split) of common stock issued and outstanding as of February 28, 20172018 and May 31, 2016,2017, respectively.
On December 10, 2014, the Company effected a reverse stock split of the Company’s issued and outstanding common stock at a ratio of 1-for-0.625, wherein 0.625 shares of common stock were issued in exchange for each share of the Company’s common stock owned by the Company’s stockholders on December 1, 2014, the record date for the reverse stock split. As a result of the reverse stock split, 11,250,000 shares (post Reverse-Split) of common stock were outstanding as of December 10, 2014. The reverse stock split did not affect the number of authorized shares of the Company’s common stock. All share and per share information contained in the financial statements has been retroactively adjusted to reflect the reverse stock split.
 
The Company recorded imputed interest of $265 and $265 during the three months ended February 28, 2018 and 2017 on related party payables due to a director and officer of the Company. The Company recorded imputed interest of $804 and $807$804 during the nine months ended February 28, 20172018 and February 29, 20162017 on related party payables due to a director and officer of the Company.

On November 28, 2016 the Company amended the 2016 Convertible Notes which was accounted for as  the extinguishment  and reissuance of the debt.  As a result, the Company recorded a gain on the extinguishment of debt in the amount of $254,114, which was included in additional paid-in  capital at February 28, 2017.

During the three months ended February 28, 2017, Old Main, holder of convertible promissory notes, converted an aggregate of $100,000 of principal, in six transactions, into 828,173 shares of common stock.  As a result of the conversions, the Company charged the amount $222,574 to additional paid-in capital. (see Note 11).
On August 1, 2015, the Company and Alan Bonsett entered into a five-year employment agreement. Pursuant to the agreement, Mr. Bonsett commenced serving as the Company’s Chief Operating Officer on August 15, 2015. Mr. Bonsett received a one-time signing bonus of 250,000 (post Reverse Split) shares of restricted common stock of the Company, which became fully vested one year from the effective date of the agreement.  The Company valued the shares at $327,500 based on the stock price at August 3, 2015 and is amortizing them over the term of the employment agreement.  During the nine months ended February 29, 2016, the Company recognized $327,500 in share based compensation.

Stock Issued for Services

On August 28, 2015,July 13, 2017, the Company issued 60,00024,000 shares of common stock valued at $45,000, to a consultant in exchange for services.  Of thesea $6,000 accrued liability for services previously provided.  This resulted in a gain on the settlement of accounts payable in the amount of $3,480.
Stock Issued for Note Exchange

On September 20, 2017, the Company entered into an Exchange Agreement, whereby it agreed to exchange the April 2015 Note for 1,500,000 shares 50,000,of its common stock valued at $37,500,$510,000. The holder of the April 2015 Note had previously sold it for $105,219, which represented the balance due by the Company, to StarForce Media, Inc., an entity that is not affiliated with the Company.  The Company recognized a loss on this exchange in the amount of $404,082, which was charged to operations during the nine months ended February 28, 2018.
On September 25, 2017, the Company entered into an Exchange Agreement, whereby it agreed to exchange the 8% Note for 4,500,000 shares of its common stock valued at $1,844,035. The Company recognized a loss on this exchange in the amount of $989,032, which was charged to operations during the nine months ended February 28, 2018.
Stock Issued with Note

On November 15, 2017, the Company issued 250,000 shares of restricted Common Stock, valued at $95,000, as a commitment fee to a convertible note holder.

Stock Issued in Offering

On December 7, 2017, the Company commenced a private offering of its securities, the terms of which were included in stock payable asamended on January 17, 2018 (the “WestPark Offering”).  The Company offered for sale a minimum of May 31, 2015.  The shares were valued based on the closing market800,000 units and a maximum of 4,000,000 units at a price of the$1.25 per unit.  Each unit consisted of four shares of common stock on the grant date.and one warrant to purchase common stock at $0.75 per share. 

On July 22, 2015, pursuant to a consulting agreement,February 7, 2018, the Company agreed to issue 5,000received gross proceeds of $1,087,500 from the WestPark Offering, of which $146,975 were expenses, resulting in net proceeds of $940,525, from the sale of units. This resulted in the issuance of 3,480,000 shares of common stock valuedand 870,000 warrants to purchase common stock at $5,750, to a consulting firm in exchange for investor relations consulting services.  price of $0.75. 
On August 17, 2015, the consulting agreement was amended, wherebyFebruary 21, 2018, the Company agreed to issue 5,000received additional gross proceeds of $100,000 from the WestPark Offering, of which $28,100 were expenses, resulting in net proceeds of $71,900, from the sale of units. This resulted in the issuance of 320,000 shares of common stock valuedand 80,000 warrants to purchase common stock at $6,650.  a price of $0.75.
On August 26, 2015,February 28, 2018, the Company extendedreceived additional gross proceeds of $81,250 from the consulting agreement and agreed to issueWestPark Offering, of which $12,148 were expenses, resulting in net proceeds of $69,102, from the consultant an additional 10,000sale of units. This resulted in the issuance of 260,000 shares of common stock valuedand 65,000 warrants to purchase common stock at $12,700.  On October 9, 2015,a price of $0.75.   At February 28, 2018, the net proceeds of this sale had not yet been received by the Company, extendedand the consulting agreement and agreed to issue the consultant an additional 10,000 sharesamount of $69,102 is recorded as common stock valued at $11,700.  On December 15, 2015, the Company extended the consulting agreement and agreed to issue the consultant an additional 10,000 shares of common stock, valued at $8,000.  All shares were valued basedsubscriptions receivable on the closing market priceCompany’s balance sheet.
Warrants 

On November 15, 2017, in connection with the Company’s sale of the common stock on the grant date.  During the year ended May 31, 2016,a convertible debenture, the Company issued 40,000 shares to this consultant, valued at $32,750.  
As of February 28, 2017, the Company had 70,000 shares ofFirstFire Global Opportunities Fund, LLC (“FirstFire”) a three-year common stock payable valued at $65,700 duepurchase warrant to two third party consultants included in stock payable on the accompanying balance sheets.  The parties are in discussions regarding whether anypurchase 350,000 shares of the Company’s common stock have been earnedat an initial exercise price of $0.75 per share.  These warrants were valued at $123,950 and it is uncertain whether any shares will be issued.were charged to operations during the nine months ended February 28, 2018.

On February 9, 2018, in connection with the Company’s sale of a convertible debenture, the Company issued Darling Capital (“Darling”) a three-year common stock purchase warrant to purchase 400,000 shares of the Company’s common stock at an initial exercise price of $0.75 per share.  These warrants were valued at $313,128 and were charged to operations during the nine months ended February 28, 2018.

On February 16, 2018, in connection with the Company’s sale of a convertible debenture, the Company issued Efrat Investments (“Efrat”) a three-year common stock purchase warrant to purchase 40,000 shares of the Company’s common stock at an initial exercise price of $0.75 per share.  These warrants were valued at $32,076 and were charged to operations during the nine months ended February 28, 2018.

On February 26, 2018, in connection with the Company’s sale of a convertible debenture, the Company issued David Lamadrid a three-year common stock purchase warrant to purchase 25,000 shares of the Company’s common stock at an initial exercise price of $0.75 per share.  These warrants were valued at $18,974 and were charged to operations during the nine months ended February 28, 2018.

On February 7, 2018, the Company issued three-year common stock purchase warrants to purchase an aggregate of 870,000 shares of the Company’s common stock at an exercise price of $0.75 per share, to investors in the WestPark Offering.

On February 21, 2018, the Company issued three-year common stock purchase warrants to purchase an aggregate of 80,000 shares of the Company’s common stock at an exercise price of $0.75 per share, to investors in the WestPark Offering.

On February 28, 2018, the Company issued three-year common stock purchase warrants to purchase an aggregate of 65,000 shares of the Company’s common stock at an exercise price of $0.75 per share, to investors in the WestPark Offering.
As of February 28, 2018, the Company was obligated to issue a five-year warrant to purchase 152,250 of the Company’s units at an exercise price of $1.25 per unit to WestPark Capital, Inc., the placement agent for the WestPark Offering.  Each unit consists of four shares of common stock and one warrant to purchase a share of common stock for $0.75 per share.  This warrant is part of the placement agent’s compensation pursuant to the placement agent agreement.  This warrant was valued at $610,414, which amount was charged to operations during the nine months ended February 28, 2018.
The following table summarizes the significant terms of warrants outstanding at February 28, 2018. These warrants were granted as part of financing agreements:
      Weighted  Weighted     Weighted 
      average  average     average 
Range of  Number of  remaining  exercise     exercise 
exercise  warrants  contractual  price of  Number of  price of 
Prices  Outstanding  life (years)  outstanding Warrants  warrants Exercisable  exercisable Warrants 
$0.75   1,480,000   2.99  $0.75   1,480,000  $0.75 
                       
     1,480,000   2.99  $0.75   1,480,000  $0.75 
Transactions involving warrants are summarized as follows:
  
Number of
Shares
  
Weighted
Average
Exercise
Price
 
Warrants outstanding at May 31, 2017  -  $- 
Granted  1,480,000  $0.75 
Exercised  -  $- 
Cancelled / Expired  -  $- 
Warrants outstanding at February 28, 2018  1,480,000  $0.75 
Note 1213 – Fair Value of Financial Instruments

In March 2016, theThe Company entered intohas issued convertible note agreementsnotes containing beneficial conversion features to Old Main, Darling, Efrat, David Lamadrid and FirstFire.  The Old Main 8% Note was satisfied during the three months ended November 30, 2017, along with the derivative liability associated with the Old Main.Main 8% Note. See note 11.  One of the features is a ratchet reset provision which, in general, reduces the conversion price should the Company issue equity with an effective price per share that is lower than the stated conversion price in the note agreement (see note 11).note. The Company accounts for the fair value of the conversion feature in accordance with ASC 815- Accounting for Derivatives and Hedging and Emerging Issues Task Force (“EITF”) 07-05- Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock (“EITF 07-05”). The Company carries the embedded derivative on its balance sheet at fair value and accounts for any unrealized change in fair value as a component of its results of operations.

The following summarizes the Company’s derivative financial liabilities that are recorded at fair value on a recurring basis at February 28, 20172018 and May 31, 2016.2017.
  February 28, 2018 
  Level 1  Level 2  Level 3  Total 
Liabilities            
Derivative liabilities $-  $-  $974,175  $974,175 

 February 28, 2017  May 31, 2017 
 Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3  Total 
Liabilities                        
Derivative liabilities $-  $-  $167,372  $167,372  $-  $-  $95,276  $95,276 

  May 31, 2016 
  Level 1  Level 2  Level 3  Total 
Liabilities            
Derivative liabilities $-  $-  $418,537  $418,537 
The estimated fair values of the Company’s derivative liabilities are as follows:

  Derivative 
  Liability 
Liabilities Measured at Fair Value   
    
Balance as of May 31, 2016 $418,537 
     
Issuances  518,720 
     
Conversions/Redemptions  (122,657)
     
Extinguishment of debt – related party  (254,114)
     
Revaluation gain  (393,114)
     
Balance as of February 28, 2017 $167,372 
  Derivative 
  Liability 
Liabilities Measured at Fair Value   
    
Balance as of May 31, 2017 $95,276 
     
Issuances  3,091,039 
     
Conversions/Redemptions  (2,238,003)
     
Revaluation loss  25,863 
     
Balance as of February 28, 2018 $974,175 

During the three months ended February 28, 2017, Old Main, holder of the 2016 Convertible Notes,  converted an aggregate of $100,000 of principal, in six transactions, into 828,173 shares of common stock.  As a result the Company charged $122,657 of derivative liability to additional paid-in capital (see Note 10).
Note 1314 – Commitment and Contingencies
 
The Company, throughIn connection with the Colorado Arrangement, on April 17, 2015, pursuant to an Industrial Lease Agreement (the “Lease”), CLS Labs Colorado leases 42,392leased 14,392 square feet of warehouse and office space (the “Leased Space”Real Property”) in a building located on 1.92 acres in Denver, Colorado. CLS Labs Colorado subleases the Leased Space to Picture Rock Holdings, LLC as part of an arrangement whereby Picture Rock Holdings, LLC and its affiliate will conductwhere certain intended activities, including growing, extraction, conversion, assembly and packaging of cannabis and other plant materials, asare permitted by and in compliance with state, city and local laws, rules, ordinances and regulations. Total expense forThe Lease has an initial term of seventy-two (72) months and provides CLS Labs Colorado with two options to extend the term of the lease was $139,827by up to an aggregate of ten (10) additional years.  In August 2017, as a result of the Company’s decision to suspend its proposed operations in Colorado, CLS Labs Colorado asked its landlord to be relieved from its obligations under the Lease, but the parties have not yet reached an agreement on how to proceed.
In August 2017, the Company’s Colorado subsidiary received a demand letter from its Colorado landlord requesting the forfeiture of the $50,000 security deposit, $10,000 in expenses, $15,699 in remaining rent due under the lease agreement and $163,024 for$30,000 to buy out the nine months endedremaining amounts due under the lease.  These expenses, which are a liability of the Company’s Colorado subsidiary, have been accrued on the balance sheet as of February 28, 2017 and February 29, 2016.2018.

Employment Agreements
 
CLS Labs and Jeffrey Binder entered into a five-year employment agreement effective October 1, 2014. Under the agreement, Mr. Binder serves as CLS Labs’ Chairman, President and Chief Executive Officer and is entitled to receive an annual salary of $150,000. Under the agreement, Mr. Binder is also entitled to receive a performance bonus equal to 2% of CLS Labs’ annual EBITDA, up to a maximum annual cash compensation of $1 million (including his base salary), and annual stock options, exercisable at the fair market value of CLS Labs’ common stock on the date of grant, in an amount equal to 2% of its annual EBITDA up to $42.5 million and 4% of its annual EBITDA in excess of $42.5 million.  On April 28, 2015, CLS Labs and the Company entered into an addendum to Mr. Binder’s employment agreement whereby Mr. Binder agreed that following the merger of CLS Labs and a subsidiary of the Company, in addition to his obligations to CLS Labs, he would serve the Company and its subsidiaries in such roles as the Company may request.  In exchange, the Company agreed to assume the obligations of CLS Labs to grant Mr. Binder annual stock options, as referenced above.  Mr. Binder continues to receive an annual salary of $150,000 from CLS Labs for serving as its Chairman, President and Chief Executive Officer.  My Binder has deferred all of the salary payable to him under his employment agreement through February 28,November 30, 2017.  On July 20, 2016, and March 31, 2017, August 23, 2017, October 9, 2017, and January 5, 2018  the Company issued Mr. Binder convertible notes in exchange for $250,000, $112,500, $62,500, $39,521, and $112,500,$37,500 respectively, in deferred salary, among other amounts owed to Mr. Binder by the Company.  As of February 28, 20172018 and May 31, 2016,2017, the Company had accrued compensation due to Mr. Binder in the amount of $112,50037,500 and $250,000.$37,500.
 
Effective August 1, 2015, the Company and Alan Bonsett entered into a five-year employment agreement. Pursuant to the agreement, Mr. Bonsett commenced serving as the Company’s Chief Operating Officer on August 15, 2015. Under the agreement, Mr. Bonsett is entitled to receive an annual salary of $150,000. Further, he is entitled to receive a performance bonus equal to 2% of the Company’s annual EBITDA, up to a maximum annual cash compensation of $1 million (including his base salary), and annual stock options, exercisable at the fair market value of the Company’s common stock on the date of grant, in an amount equal to 2% of its annual EBITDA up to $42.5 million and 4% of its annual EBITDA in excess of $42.5 million. Additionally, Mr. Bonsett received a one-time signing bonus of 250,000 (post Reverse-Split) shares of restricted common stock of the Company, valued at $327,500, which became fully vested one year from the effective date of the agreement. Mr. Bonsett, as an owner of PRH,Picture Rock Holdings, LLC (“PRH”), will indirectly receive the benefits of the Colorado Arrangement as discussed in Note 10.12. The business to be operated by PRH pursuant to the Colorado Arrangement has not yet produced revenues. Mr. Bonsett agreed to defer his salary effective July 1, 2017; at February 28, 2018, the Company had accrued compensation due to Mr. Bonsett in the amount of $37,500. On October 1, 2017, the Company and Mr. Alan Bonsett, the Company’s Chief Operating Officer, mutually agreed to end his employment with the Company.  Mr. Bonsett may provide consulting services to the Company in the future on an as needed basis.

 Effective November 30, 2017, the Company and Mr. Lamadrid entered into a one-year employment agreement. Pursuant to the agreement, Mr. Lamadrid commenced serving as the Company’s President and Chief Financial Officer on December 1, 2017. Under the agreement, Mr. Lamadrid is entitled to receive an annual salary of $175,000. Further, he is entitled to receive a performance bonus equal to 2% of the Company’s annual EBITDA, and annual restricted stock awards of the Company’s common stock in an amount equal to 3% of its annual EBITDA. Additionally, Mr. Lamadrid is entitled to a one-time signing bonus of 500,000 shares of restricted common stock of the Company, which shall become fully vested one year from the effective date of the agreement.

At February 28, 20172018 and May 31, 2016,2017, the Company had accrued salary due to Michael Abrams, a former officer of the Company, prior to his September 1, 2015 termination, in the amount of $16,250 in accrued compensation on the accompanying consolidated balance sheets.$16,250.
Note 1415 – Subsequent Events

On April 2, 2018, the Company and Alternative Solutions entered into a Third Amendment to the Membership Interest Purchase Agreement (the “Third Amendment”) and extended the date upon which the Company is to pay the “Oasis Note” by approximately one (1) year to December 31, 2019.  The Third Amendment also provides that the time period to determine average daily net revenue for the “Bonus Purchase Price”, is amended to be the calendar year ending December 31, 2019 with the payment due thereunder extended to May 30, 2020.

DuringOn April 2, 2018, the Company and Alternative Solutions also entered into a Fourth Amendment to the Membership Interest Purchase Agreement (the “Fourth Amendment”) and extended the date upon which the Company is to pay the “Closing Consideration,” to May 21, 2018.
The Closing Consideration that the Company must pay to acquire the remaining 90% of the Oasis LLCs, is equal to cash in the amount of $6,200,000, a $4.0 million promissory note due in December 2019 (the “Oasis Note”), and $6,000,000 in shares (the “Purchase Price Shares”) of the Company’s common stock (collectively, the “Closing Consideration”).
The number of Purchase Price Shares shall equal $6,000,000 divided by the lower of $1.00 or the conversion price to receive one share of the Company’s common stock in its next equity offering that commences in 2018, multiplied by 80%.  The Oasis Note will be secured by a first priority security interest over the assets of each of the Oasis LLCs and Alternative Solutions, including the Company’s 10% equity interest in the Oasis LLCs, and the Company shall deliver to Alternative Solutions a confession of judgment that will become effective in the event of any event of default under the Oasis Note.

Oasis currently owes certain amounts to a consultant known as 4Front Advisors, LLC.  If the Company makes any payments to this company post-closing, generally speaking, the Company will be entitled to  deduct the present value of such payments from the principal amount due under the Oasis Note.
Assuming the Company closes on the Acquisition Agreement, in May 2020, Alternative Solutions will be entitled to a $1,000,000 payment from the Company (the “Bonus Purchase Price”) if the existing dispensary operated by an Oasis LLC has maintained an average revenue of $20,000 per day during the 2019 calendar year.
The sale, assignment, transfer, pledge or other disposition of any interest in the Oasis LLCs or Alternative Solutions is ineffective unless approved in advance by the State of Nevada and any municipality in which the Oasis LLC’s operation is licensed.
In connection with the Oasis Acquisition, the Company plans to employ Mr. Ben Sillitoe as its COO.  The Company plans to issue him 500,000 shares of restricted common stock pursuant to his proposed employment agreement.  Upon the Company’s payment of the closing consideration, it will also be obligated to issue 500,000 shares of its restricted common stock to each of David Lamadrid, its President and Chief Financial Officer, and J.P. Barton, for introducing the Company to Alternative Solutions.
The closing of the Acquisition Agreement is subject to a number of conditions, including the Company’s ability to raise the $8,000,000 in cash required to close the transaction.  As a result, there can be no assurance that the Company will be able to close the Oasis Acquisition.
On March 2017, Old Main,2, 2018, the Company entered into a consulting agreement with Starcity Capital, LLC to assist in its investor relations for a period of three months.  Pursuant to the terms of the consulting agreement, the Company issued 117,000 shares of common stock and issued a three-year warrant to purchase up to 412,500 share of common stock at an exercise price of $0.75 per share.  The stock and warrants vest over the term of the agreement.

On March 12, 2018, the Company received conversion notices for the related party notes payable to CLS CO 2016, LLC, Newcan and Jeffery Binder.  Frank Koretsky, the holder of convertible promissory notes,the CLS CO 2016, LLC note, converted an aggregateaccrued interest in the amount of $37,500 of principal, in two transactions,$9,308 into 857,80829,786 shares of common stock. 
On March 27, 2017,Jeffery Binder converted notes with an aggregate principal amount of $464,698 and accrued interest in the Company enteredamount of $507,756 into Amendment #3 to the Convertible  Promissory Notes issued on March 18, April 22 and May 27, 2016 (the “Third Amendment”) to further amend the 2016 Convertible Notes in certain respects. In the Third Amendment, the Company agreed to (i) prepay all amounts due under the 10% Notes on or before April 1, 2017, which amount was agreed to be $372,669.95 (the “Settlement Amount”), and (ii) to increase the outstanding amount due under the 8% Note as1,624,819 shares of March 18, 2017 by 5%.  In exchange for doing so, Old Main agreed to extend the maturity of the 8% Note until July 1, 2017 and to suspend conversions under the 8% Note until July 1, 2017. If we fail to pay the Settlement Amount on or before April 1, 2017, Old Main has the right to declare the Third Amendment null and void.
On March 31, 2017, the Company issued convertible promissory notes tocommon stock.  Newcan, Investment Partners LLC, an entity owned by FrankMr. Koretsky, a directorconverted notes with an aggregate principal amount of the company,$956,658 and accrued interest in the amount of $120,000,$3,375,220 into 3,375,220 shares of common stock. Frank Koretsky also converted accrued interest on notes issued to him in the amount of $46,626 into 149,203 shares of common stock.
On March 30, 2018, the Company conducted its final closing of the WestPark Offering.  At such closing, the Company sold 441,563 units (1,413,000 shares of common stock and three-year common stock purchase warrants to purchase 353,250 shares of common stock)  for gross proceeds of $441,563.  These shares were not yet issued as of April 3, 2018.
On March 30, 2018, the Company issued a five-year warrants to purchase 205,238 units at an exercise price of $1.25 per unit to the placement agent of the WestPark Offering.  Each unit consists of four shares of common stock and a warrant to purchase one share of common stock for $0.75 per share.
On April 6, 2018, the Company issued a convertible promissory note to Jeffrey Binder, an officer and director of the Company, in the amount of $159,500$37,500.00 (the “Notes”“Binder Convertible  Note 8”), to finalize the terms of repayment with respect to certain loans made to the Company by Newcan Investment Partners LLC and Mr. Binder between January 1, 2017 and February 27, 2017, and certain compensation payable to Mr. Binder as of February 28, 2017.2018. The Notes, which otherwise contain identical terms, areNote is unsecured and bearbears interest at the rate of 10% per annum. No payments are required until April 1, 2018,2019, at which time all accrued interest becomes due and payable. Principal will be paid in eight equal quarterly installments, together with interest accrued thereon, beginning on July 1, 2018.2019. The NotesBinder Convertible Note 8 may be prepaid by the Company with no penalty at any time upon thirty days written notice.

The holder of each Note Mr. Binder may, at any time prior to payment or prepayment in full, convert all principal and accrued interest thereunder, in whole or in part, into securities of the Company. For each $0.25$0.3125 converted, the holderMr. Binder will receive one share of the Company’s common stock and a five-year warrant to purchase one share of the Company’s common stock at a price of $0.25  per share.stock.

We evaluated subsequent events after the balance sheet date through the date the financial statements were issued. We did not identify any additional material events or transactions occurring during this subsequent event reporting period that required further recognition or disclosure in these financial statements.
 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW AND OUTLOOK
 
We were incorporated on March 31, 2011 as Adelt Design, Inc. to manufacture and market carpet binding art. Production and marketing of carpet binding art never commenced.  On November 20, 2014, we adopted amended and restated articles of incorporation, thereby changing our name to CLS Holdings USA, Inc. Effective December 10, 2014, we effected a reverse stock split of our issued and outstanding common stock at a ratio of 1-for-0.625 (the “Reverse Split”), wherein 0.625 shares of our common stock were issued in exchange for each share of common stock issued and outstanding.

On April 29, 2015, the Company, CLS Labs and the Merger Sub consummated the merger, whereby the Merger Sub merged with and into CLS Labs, with CLS Labs remaining as the surviving entity. As a result of the merger, we acquired the business of CLS Labs and abandoned our previous business. As such, only the financial statements of CLS Labs are included in this annual report.

CLS Labs was originally incorporated in the state of Nevada on May 1, 2014 under the name RJF Labs, Inc. before changing its name to CLS Labs, Inc. on October 24, 2014. It was formed to commercialize a proprietary method of extracting cannabinoids from cannabis plants and converting the resulting cannabinoid extracts into concentrates such as oils, waxes, edibles and shatter. These concentrates may be ingested in a number of ways, including through vaporization via electronic cigarettes (“e-cigarettes”), and used for a variety of pharmaceutical and other purposes. Testing in conjunction with two Colorado growers of this extraction method and conversion process has revealed that it produces a cleaner, higher quality product and a significantly higher yield than the cannabinoid extraction processes currently existing in the marketplace.

On April 17, 2015, CLS Labs took its first step toward commercializing its proprietary methods and processes by entering into the Colorado Arrangement through its wholly owned subsidiary, CLS Labs Colorado, with certain Colorado entities, including PRH. CLS Labs hadRecently, we suspended our plans to proceed with the Colorado Arrangement due to regulatory delays and have not otherwiseyet determined when we will pursue it again. Instead, we plan to pursue other revenue producing opportunities, including the Acquisition Agreement with Alternative Solutions, as described below, in other states through the acquisition of cannabis and other complementary companies. We recently received a Notice of Allowance from the U.S. Patent and Trademark Office with respect to our patent application for our proprietary extraction and conversion methodology.  We have not yet commercialized itsour proprietary process prior to the merger and hashave not earned any revenues.

We intend to monetize our extraction and conversion method and generate revenuerevenues through (i) the licensing of our patent pending proprietary methods and processes to others, as in the Colorado Arrangement, (ii) the processing of cannabis for others, and (iii) the purchase of cannabis and the processing and sale of cannabis-related products.  We plan to accomplish this through the acquisition of companies, the creation of joint ventures, through licensing agreements, and through fee-for-service arrangements with growers and dispensaries of cannabis products. We believe that we can establish a position as one of the premier cannabinoid extraction and processing companies in the industry. Assuming we do so, we then intend to explore the creation of our own brand of concentrates for consumer use, which we would sell wholesale to cannabis dispensaries. We believe that we can create a “gold standard” national brand by standardizing the testing, compliance and labeling of our products in an industry currently comprised of small, local businesses with erratic and unreliable product quality, testing practices and labeling. We also plan to offer consulting services through a consulting subsidiary, CLSCannabis Life Sciences Consulting, LLC, which will generate revenue by providing consulting services to cannabis-related businesses, including growers, dispensaries and laboratories, and driving business to our processing facilities.
With our planned acquisition of Oasis Cannabis pursuant to the Acquisition Agreement, as described below, our mission has shifted to becoming a fully licensed integrated cannabis producer and retailer in Nevada and other western states.  Our strategy and business model will be similar to Canopy Growth (WEED.TO), Aurora Cannabis (ACB.TO) and GB Sciences (GBLX).  CLS stands for “Cannabis Life Sciences,” in recognition of our patent pending proprietary method of extracting various cannabinoids from the marijuana plant and converting them into products with a higher level of quality and consistency. Our business model includes licensing operations, processing operations, processing facilities, sale of products, brand creation and consulting services.

On January 4, 2018, the Attorney General of the United States issued new written guidance concerning the enforcement of federal laws relating to marijuana.  The Attorney General’s memorandum stated that previous DOJ guidance specific to marijuana enforcement, including the memorandum issued by former Deputy Attorney General James Cole on August 29, 2013 (as amended on February 14, 2014, the “Cole Memo”) is unnecessary and is rescinded, effective immediately.  The Cole Memo told federal prosecutors that in states that had legalized marijuana, they should use their prosecutorial discretion to focus not on businesses that comply with state regulations, but on illicit enterprises that create harms like selling drugs to children, operating with criminal gangs, and selling across state lines.  In addition, since 2014, the federal budget has prohibited the DOJ from using federal funds to prosecute medical cannabis businesses pursuant to a budget rider, which must be renewed annually and is presently set to expire on January 19, 2018.  The Attorney General has now advised that it will be left to the discretion of the local US attorneys in the various districts to decide how and when to enforce the federal marijuana laws.  As a result of the Attorney General’s recent guidance, it is unclear whether and how US attorneys in states with medical and/or recreational marijuana laws will enforce federal laws relating to the prohibition of the possession, ownership or sale of marijuana, among other things.  It is also unclear whether any states will challenge the Attorney General’s new pronouncement in the applicable courts.  However, as a result of the Attorney General’s new guidance, some banks, clearing brokers and other businesses may cease or limit how they do business with companies in the marijuana business to avoid a possible violation of federal law.  It is also possible that some US attorneys may begin enforcing federal laws to prevent marijuana businesses that are otherwise validly operating under state laws, from conducting business.  Thus, regardless of whether the Attorney General’s new pronouncement is enforced or found to be lawful, it could have a material adverse impact on the marijuana industry, including our business.
We had a net loss of $2,120,900$2,501,058 and $5,592,341 for the three and nine months ended February 28, 2017,2018, resulting in an accumulated deficit as of February 28, 20172018 of $6,246,786.$14,583,951. These conditions raise substantial doubt about our ability to continue as a going concern.

Results of Operations for the Three Months Ended February 28, 20172018 and February 29, 20162017

Revenues

The Company had no revenues during the three months periods ended February 28, 20172018 and February 29, 2016.28, 2017.

General and administrative expenses

General and administrative expenses decreased $262,119increased $693,843, or approximately 65%4481%, to $144,204$838,047 during the three months ended February 28, 2017,2018, compared to $406,323$144,204 for the three months ended February 29, 2016.28, 2017.  General and administrative expenses consisted primarily of general office expenses, travel costs, rent expense, compensation costs, bank charges and payroll expenses.  The decreaseincrease was primarily due to $610,414 incurred with the reductionvalue of the warrants issued to placement agent for the private offering and $55,000 in noncashstock compensation travel and advertising expenses.awarded to an officer on the Company. We expect general and administrative expenses to increase in future periods as we implement our business plan and commence operations.
Professional fees

Professional fees decreased $243,951,increased $277,057, or approximately 71%277%, to $99,867$376,924 during the three months ended February 28, 20172018 compared to $343,818 for the three months ended February 29, 2016.  This decrease was due primarily in the reduction of legal and investor relations  fees$99,867 for the three months ended February 28, 20172017.  This increase was due primarily to the greater legal and investor relations fees relating to our convertible debt and equity offerings during the three months ended February 28, 2018 compared to the prior period. We expect professional fees to increase in future periods as our business grows.
 
Interest expense
 
Interest expense for the three months ended February 28, 20172018 was $381,149,$1,434,314, an increase of $274,550$1,053,165, or 276%, compared to $106,599$381,149 for the three months ended February 29, 2016.28, 2017.  Interest expense increased primarily due to an increase$477,195 of interest expense associated with the discount and warrants issued with the Darling Note; $50,035 of interest expense associated with the discount and warrants issued with the Efrat Note; and $24,827 of interest expense associated with the discount and warrants issued with the Lamadrid Note. During the three months ended February 28, 2018, we increased the conversion price of some of the related party convertible notes, which resulted in additional amortization expense of $346,472 during the nine months ended February 28, 2018. During the three months ended February 28, 2018, we also had amortization of the discount on convertible debt, which was $308,606  during the current period compared to $81,116 for the prior year.deferred financing costs of $19,450.
 
Change in fair value of derivative liability

During the three months ended February 28, 2017, Old Main, a holder of convertible promissory notes, converted an aggregate of $100,000 in principal, in six transactions, into 828,173 shares of commons stock. As a result, weWe revalued the derivative liability related to theseour convertible notes and at February 28, 2017.2018 at $974,175.  This revaluation resulted in a gain of $148,227, a decrease of $96,621 compared to a gain of $244,848 which we included in results of operations forduring the three months ended February 28, 2017.

Net loss
 
For the reasons above, we had a net loss for the three months ended February 28, 20172018 of $380,372,$2,501,058, which is a decreasean increase of $476,368,$2,120,686, or approximately 56%558%, compared to a net loss of $856,740$380,372 during the three months ended February 29, 2016.28, 2017.

Results of Operations for the Nine Months Ended February 28, 20172018 and February 29, 20162017

Revenues

The Company had no revenues during the nine months periods ended February 28, 20172018 and February 29, 2016.28, 2017.

General and administrative expenses

General and administrative expenses decreased $435,655,increased $654,397, or approximately 47%136%, to $482,071$1,136,468 during the nine months ended February 28, 2017,2018, compared to $917,726$482,071 for the nine months ended February 29, 2016.28, 2017.  General and administrative expenses consisted primarily of general office expenses, travel costs, rent expense, compensation costs, bank charges and payroll expenses.  The decreaseincrease was primarily due to $610,414 incurred with the reductionvalue of the warrants issued to placement agent for the private offering and $55,000 in noncashstock compensation travel and advertising expenses.awarded to an officer on the Company. We expect general and administrative expenses to increase in future periods as we implement our business plan and commence operations.

Professional fees

Professional fees decreased $164,322,increased $91,988, or approximately 21%15%, to $603,098$695,086 during the nine months ended February 28, 20172018 compared to $767,420 for the nine months ended February 29, 2016.  This decrease was due primarily to the reduction of legal and investor relations  fees$603,098 for the nine months ended February 28, 20172017.  This increase was due primarily due primarily to the greater legal and investor relations fees relating to our convertible debt and equity securities offerings during the nine months ended February 28, 2018 compared to the prior period.  We expect professional fees to increase in future periods as our business grows.
 
Interest expense
 
Interest expense for the nine months ended February 28, 20172018 was $1,395,511,$2,316,145, an increase of $1,218,047$920,634, or 66%, compared to $177,464$1,395,511 for the nine months ended February 29, 2016.28, 2017.  Interest expense increased primarily due to an increase in amortization of the discount on convertible debt, which was $1,197,998$1,391,110 during the current period compared to $114,489$752,195 for the comparable period of the prior year. Interest expense also increased due to $477,195 of interest expense associated with the discount and warrants issued with the Darling Note; $50,035 of interest expense associated with the discount and warrants issued with the Efrat Note; and $24,827 of interest expense associated with the discount and warrants issued with the Lamadrid Note. During the nine months ended February 28, 2018, we increased the conversion price of some of the related party convertible notes, which resulted in additional amortization expense of $346,472 during the nine months ended February 28, 2018. During the nine months ended February 28, 2018, we also had amortization of deferred financing costs of $22,569.
Change in fair value of derivative liability

We revalued the derivative liability related to our Convertibles Notes at February 28, 2018 at $974,175.  This revaluation resulted in a loss of $25,863, a decrease in the amount of $418,977 compared to a gain of $393,114 during the nine months ended February 28, 2017.
24

Gain on settlement of debt

TableDuring the nine months ended February 28, 2018, we recognized a gain on the settlement of Contentsaccounts payable in the amount of $3,480 because we repaid an account using our common stock.  There was no comparable transaction during the nine months ended February 28, 2017.
Loss on modification of debt

During the nine months ended February 28, 2018, we recognized a loss on the modification of debt in the amount of $29,145.  This loss related to the amendment of the 8% Note.  On November 28, 2016, we entered into an amendment with Old Main regarding the 10% Notes.  In exchange for amending the terms of the 10% Notes, we agreed to increaseincreased the outstanding principal balance by 10%, resulting in a loss on the modification of 10% Notes of $33,334, which we included in results of operation for the nine months ended February 28, 2017.

Change in fair value of derivative liabilityLoss on note exchange

AsDuring the nine months ended February 28, 2018, we recognized a resultloss on the exchange of debt in the amount of $404,532.  This loss related to the exchange of the November 28, 2016 amendment toApril 2015 Note for our 2016 Convertible Notes and the conversion of $100,000 in aggregate principal on the 2016 Convertible Notes, we revalued the derivative liability related to our 2016 Convertible Notes at February 28, 2017 at $167,372.  This revaluation resulted incommon stock. There was not a gain of $393,114, which we included in results of operations forsimilar transaction during the nine months ended February 28, 2017.

Loss on extinguishment of debt

During the nine months ended February 28, 2018, we recognized a loss on the extinguishment of debt in the amount of $989,032.  This loss is related to the exchange of the 8% Note for our common stock. There was no comparable transaction during the nine months ended February 28, 2017.
Net loss
 
For the reasons above, we had a net loss for the nine months ended February 28, 20172018 of $2,120,900,$5,592,341 which is an increase in loss of $258,290,$3,471,441, or approximately 14%164%, compared to a net loss of $1,862,610$2,120,900 during the nine months ended February 29, 2016.28, 2017.

Liquidity and Capital Resources

The following table summarizes total current assets, liabilities and working capital at February 28, 20172018 compared to May 31, 2016.2017.
 
 
February 28,
2017
  
May 31,
2016
  
February 28,
2018
  
May 31,
2017
 
Current Assets $28,731  $94,986  $58,762  $79,720 
Current Liabilities $2,185,957  $1,339,444  $
2,794,538
  $1,826,478 
Working Capital (Deficit) $(2,157,226) $(1,244,458) $
(2,735,776
) $(1,746,758)
 
At February 28, 20172018 and May 31, 2016,2017, we had a working capital deficit of $2,157,226$2,735,776 and $1,244,458,$1,746,758, respectively. This working capital deficit occurred primarily because we have not yet commenced earning revenues.  We anticipate that we willplan to commence earning revenues upon the closing on our pending Acquisition Agreement with Alternative Solutions, which we believe will close in the next three months.approximately May l, 2018, assuming certain conditions are satisfied, as described below.  During the nine months ended February 28, 2017,2018, we obtained loans from our officers, directors and entities affiliated with Frank Koretsky, one of our directors, to cover operating expensesexpenses. We also obtained a loan from FirstFire to pay the initial deposit due under the Acquisition Agreement.  We obtained the funds for the second $1.8 million deposit from the proceeds of the Darling Capital loan and expenses related tofrom the Colorado Arrangement.net proceeds from the first closing of the WestPark Offering. This working capital deficit will likely continue to increase until we begin earning revenues but should not be viewed as an indicator of our future performance once we commence earning revenues. We have operated at a loss since inception. 

Cash flows used in operating activities was $909,072 during the nine months ended February 28, 2018 compared to $899,291 during the nine months ended February 28, 2017, compared to $871,924 during the nine months ended February 29, 2016.  This increase is primarily due to thean increase in the amount of amortization of debt discount associated with our convertible notes$9,781.  This increase is due primarily to an increase in accounts payable and accrued expenses at February 28, 2018 in the amount of $1,197,998,$800,196 compared to the increase in the change in fair value of the derivative liability associated with the 2016 Convertible Notes by $393,114, and the loss on modification of the 10% Notes in the amount of $33,334.prior period.
 
Cash flows used in investing activities usedwas $2,050,000 during the nine months ended February 28, 2018 compared to $35,013 during the nine months ended February 28, 2017 compared to $44,4772017.  The amounts used during the nine months ended February 29, 2016.  During28, 2018 were the initial $250,000 and $1,800,000 deposits made pursuant to the terms of the Acquisition Agreement.  The amounts used during the nine months ended February 28, 2017 we used these funds towardrelated to construction ofin progress at our Colorado facility.  processing facility, which has been put on hold.
 
Cash flows fromprovided by financing activities provided $2,903,495 during the nine months ended February 28, 2018 compared to $852,000 during the nine months ended February 28, 2017 compared to $737,750 during the nine months ended February 29, 2016.2017.  The increase in cash flows from financing activities during the nine months ended February 28, 2017,2018, was primarily due to our needsale of the convertible notes to borrow additional  funds from our officers, directorsDarling, Efrat and entities affiliated with oneDavid Lamadrid and the sale of our directors, because we had not yet commenced earning revenue.  

On April 29, 2015, we issued a convertible promissory note (the “April 2015 Note”) to an unaffiliated individualequity securities in the amount of $200,000.  Interest accrues on the April 2015 Note at a rate of 15% per annum. On the first anniversary of the April 2015 Note, all then-accrued interest was due thereunder. Thereafter, principal together with accrued interest is due in eight (8) equal quarterly payments, in arrears, commencing on July 1, 2016.  All outstanding principal and any accumulated unpaid interest thereon shall be due and payable on the third anniversary of note. At the holder’s election, at any time prior to payment or prepayment of the April 2015 Note in full, all principal and accrued interest under the April 2015 Note may be converted in whole, but not in part, into our securities. For each dollar converted, the holder shall receive two shares of common stock and a three-year warrant to purchase 1.33 shares of common stock at $0.75 per share.  DuringWestPark Offering. 
Cash flows provided by financing activities provided $2,903,495 during the nine months ended February 28, 2017 we repaid $75,000 in principal and $49,265 in interest under this note.  At2018 compared to $852,000 during the nine months ended February 28, 2017, we owed $127,1872017.  The increase in principalcash flows from financing activities during the nine months ended February 28, 2018, was primarily due to the net proceeds from the WestPark offering and accrued interest underadditional convertible notes issued during the April 2015 Note.nine months ended February 28, 2018.  
Old Main Agreements

On March 18, 2016, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Old Main, whereby Old Main agreed to purchase an aggregate of up to $500,000 in subscription amount corresponding to an aggregate of up to $555,555 in principal amount of 10% Original Issuance Discount Convertible Promissory Notes (the “10% Notes”) due, subject to the terms therein, in installments as set forth below. The purchase was originally to occur, at our option, in up to five tranches, with the first tranche of $200,000 being purchased on March 18, 2016; the second tranche of $50,000 being purchased on the first Friday, which is a trading day after the date (the “Filing Date”) that a registration statement (the “Registration Statement”) registering shares of common stock of the Company issuable upon conversion or repayment of the 10% Notes, is filed with the SEC; the third tranche of $50,000 being purchased on the first Friday, which is a trading day at least three (3) trading days after the Company receives initial comments from the SEC on the Registration Statement, or the date that we are notified by the SEC that the Registration Statement will not be reviewed; and the fourth and fifth tranches of $100,000 each being purchased after the date that the Registration Statement was declared effective by the SEC (the “SEC Effective Date”).  On October 6, 2016, we amended the Purchase Agreement and related documents (the “First Amendment”) to reduce the aggregate principal amount under the 10% Notes from $555,555 to $333,333, all $300,000 in subscription amount of which has been funded and used by us for general working capital purposes.  We also increased the interest rate of the 10% Notes from 10% to 15% effective August 1, 2016.  Finally, pursuant to the First Amendment, we agreed with Old Main that we would not register the resale of the shares underlying the 2016 Convertible Notes, as defined below, pursuant to the Registration Statement but would utilize the Registration Statement solely to register the resale of shares of common stock sold by us to Old Main pursuant to the equity line agreement, as described below.
As a result of the First Amendment, effective September 1, 2016, we deferred the commencement of amortization payments on the 10% Notes by 30 days.  As amended, at the earlier of October 18, 2016 or two (2) trading days after the SEC Effective Date, we must begin to redeem 1/24th of the face amount of the 10% Notes and any accrued but unpaid interest on a bi-weekly basis. Such amortization payment may be made, at our option, in cash or, subject to certain conditions, in our common stock pursuant to a conversion rate equal to the lower of (a) $0.80 (the “Fixed Conversion Price”) or (b) 75% of the lowest daily volume weighted average price of the common stock of  (the “VWAP”) in the 20 consecutive trading days immediately prior to the applicable conversion date. At any time after the issue date of the Notes, the holder may convert the 10% Notes into shares of our common stock at the holder’s option. The conversion price will be the Fixed Conversion Price. Subject to certain exclusions, if we sell or issues its common stock or certain common stock equivalents at an effective price per share that is lower than the Fixed Conversion Price, the conversion price will be reduced to equal to such lower price.

On November 28, 2016, we entered into a Second Amendment to the 10% Notes issued on March 18, April 22 and May 27, 2016 (the “Second Amendment”) to amend the Agreements, as amended by the First Amendment, in certain respects.  Pursuant to the Second Amendment, among other things, the 10% Notes were converted from installment notes to “balloon” notes, with all principal and interest on the 10% Notes due on September 18, 2017 and the outstanding principal balances of the 10% Notes were increased by 10%; the Fixed Conversion Prices associated with the 10% Notes were changed to variable conversion prices equal to the lesser of the prior Fixed Conversion Price or 75% of the lowest VWAP in the fifteen trading days ending on the trading day immediately prior to the conversion date; our ability to repay the Notes with our common stock was deleted except pursuant to a voluntary conversion by Old Main; and Old Main was prohibited from selling, per trading day, an amount of our common stock in excess of the greater of $5,000 or 25% of the average number of shares of common stock sold per day for the five trading days preceding the day of sale multiplied by the average daily VWAP during the immediately preceding 5-trading day period.
On March 27, 2017, we entered into Amendment #3 to the Convertible  Promissory Notes issued on March 18, April 22 and May 27, 2016 (the “Third Amendment”) to further amend the Agreements, as amended by the First Amendment and Second Amendment, in certain respects.  In the Third Amendment, we agreed, among other things, to prepay all amounts due under the 10% Notes on or before April 1, 2017, which amount was agreed to be $372,669.95 (the “Settlement Amount”).  If we fail to pay the Settlement Amount on or before April 1, 2017, Old Main has the right to declare the Third Amendment null and void.
During the three months ended February 28, 2017, Old Main converted an aggregate of $100,000 in principal of the 10% Notes, in six transactions, into 828,173 share of common stock.
On March 18, 2016, we also issued Old Main an 8% Convertible Promissory Note (the “8% Note”) in the principal amount of $200,000 for Old Main’s commitment to enter into an equity line transaction with us and prepare all of the related transaction documents. The 8% Note bears interest at the rate of 8% per annum. As a result ofOn October 6, 2016, we amended the First Amendment, we also deferred8% Note, among other documents (the “First Amendment”) to defer the commencement of amortization payments on the 8% Note so that they now commencecommenced at the earlier of February 3, 2017 or on the SEC Effective Date.date the registration statement with respect to the underlying shares had been declared effective by the SEC.  On such date, we mustwere required to begin to redeem 1/6th of the face amount of the 8% Note and any accrued but unpaid interest on a monthly basis. Such amortization payment maycould be made, at theour option, of the Company, in cash or, subject to certain conditions, in our common stock of the Company pursuant to a conversion rate equal to the lower of (a) $1.07 (the “8% Note Fixed Conversion Price”) or (b) 75% of the lowest VWAP in the twenty (20) consecutive trading days ending on the trading day that is immediately prior to the applicable conversion date.  Subject to certain exclusions, if we sellhad sold or issueissued our common stock or certain common stock equivalents at an effective price per share that iswas lower than the 8% Note Fixed Conversion Price, the conversion price will bewould have been reduced to equal to such lower price.

On November 28, 2016, we entered into a Second Amendment to the 8% Note issued on March 18 (the “Second Amendment”) to amend the Agreements,8% Note, among other documents, as amended by the First Amendment, in certain respects.  Pursuant to the Second Amendment, among other things, the 8% Notes wereNote was converted from an installment notesnote to a “balloon” notes,note, with all principal and interest on the 8% NotesNote due on March 18, 2017; the Fixed Conversion PricesPrice associated with the 8% Notes wereNote was changed to a variable conversion pricesprice equal to the lesser of the prior Fixed Conversion Price or 75% of the lowest VWAP in the fifteen trading days ending on the trading day immediately prior to the conversion date; our ability to repay the Notes8% Note with our common stock was deleted except pursuant to a voluntary conversion by Old Main; and Old Main was prohibited from selling, per trading day, an amount of our common stock in excess of the greater of $5,000 or 25% of the average number of shares of common stock sold per day for the five trading days preceding the day of sale multiplied by the average daily VWAP during the immediately preceding 5-trading day period.

On March 27, 2017, we entered into the Third Amendment,third amendment to the 8% Note, which, among other things, increased the outstanding amount due under the 8% Note as of March 18, 2017 by 5%.  In exchange for doing so, Old Main agreed to extend the maturity of the 8% Note until July 1, 2017 and to suspend conversions under the 8% Note until July 1, 2017. If

On July 6, 2017, we failentered into the fourth amendment to pay the Settlement Amount8% Note (the “Fourth Amendment”) to further amend the terms of the 8% Note.  Pursuant to the Fourth Amendment, the maturity date of the 8% Note was extended to July 15, 2017 and the outstanding balance of the 8% Note as of June 30, 2017 was increased by multiplying it by 1.075.  The Fourth Amendment was effective on or before April 1,June 30, 2017.
On August 23, 2017, Old Main haswe entered into the rightfifth amendment to declare the Third8% Note (the “Fifth Amendment”) to further amend the terms of the 8% Note.  Pursuant to the Fifth Amendment, nullthe maturity date of the 8% Note was extended to September 15, 2017 and void.the outstanding balance remained unchanged.  The Fifth Amendment was effective on July 15, 2017.

On September 25, 2017, but effective as of September 15, 2017, we entered into an Exchange Agreement, whereby we agreed to exchange the 8% Note for 4,500,000 shares of our common stock. Pursuant to an oral agreement with the original holder of the 8% Note, principal due under the 8% note was increased by $96,862 to a total of $322,612 prior to the date on which the exchange of the 8% Note for common stock occurred.

On April 18, 2016, we also entered into an equity line agreement with Old Main whereby we may issue and sell to Old Main, at our option from time to time, up to $4,000,000 of our common stock at a purchase price equal to 80% of the lowest VWAP of the common stock during a five day “Valuation Period.”

On October 6, 2016, we entered into an amendment ofto the Equity Purchaseequity line Agreement to amend the new Commitment Period,commitment period, which is 24 months from the date of this amendment.  Second, the Equity Purchase Agreementequity line agreement was amended to prohibit us from delivering a subsequent Put Noticeput notice from the beginning of any “Valuation Period” until the fourth Trading Daytrading day immediately following the closing associated with the prior Put Notice.put notice.  Third, the beneficial ownership limitation was amended to increase the Beneficial Ownership Limitationbeneficial ownership limitation to 9.99% and to remove the ability of the InvestorOld Main to increase or decrease the Beneficial Ownership Limitation.beneficial ownership limitation.

FirstFire Note
On November 15, 2017, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with FirstFire Global Opportunities Fund, LLC (“FirstFire”), whereby FirstFire agreed to purchase a 5% Senior Convertible Promissory Note in the aggregate principal amount of $363,000 (the “FirstFire Note”) from us due, subject to the terms therein, due seven (7) months from the date of issuance, for a purchase price of $330,000.
The FirstFire Note bears interest at the rate of 5% per annum. Any past due accrued and unpaid interest to be paid under the FirstFire Note bears interest at the lesser of 15% per annum or the maximum rate permitted by applicable law. At any time prior to the 180th day following the date of issuance, we may prepay all or any portion of the principal amount of the FirstFire Note and any accrued and unpaid interest by paying the following amounts:  (i) within the initial 90 days after the date of issuance: 115% multiplied by the principal amount then due plus accrued interest; and (ii) from the 91st day through the 180th day after the date of issuance: 125% multiplied by the principal amount then due plus accrued interest.

The FirstFire Note is convertible at any time into shares of our common stock, at the option of the holder, at an initial conversion rate equal $0.40 per share of common stock (the “Fixed Conversion Price”).  Any time on or after the 180th day after the issuance of the FirstFire Note, the conversion price shall equal the lower of (a) the Fixed Conversion Price or (b) 75% of the lowest traded price of our common stock in the 20 consecutive trading days immediately prior to the day that we receive the applicable conversion notice. Subject to certain exclusions, if we sell or issue our common stock or certain common stock equivalents at an effective price per share that is lower than the then applicable conversion price, the conversion price will be reduced to be equal to such lower price. In the event of any event of default under the FirstFire Note, the outstanding principal amount of the FirstFire Note plus accrued but unpaid interest, multiplied by 150%, shall become immediately due and payable in common stock and/or cash, at the election of the holder.

On the closing date, we also issued FirstFire a three year common stock purchase warrant to purchase 350,000 shares of our common stock at an initial exercise price of $0.75 per share and agreed to issue FirstFire promptly following the closing date 250,000 shares of our restricted common stock as a commitment fee to enter into the Purchase Agreement and prepare all of the related transaction documents.
 
During Julythe three months ended February 28, 2018, an event occurred that triggered the reduction of the FirstFire Fixed Conversion Price from $0.40 per share to $0.3125 per share.

Darling Capital Note
On February 5, 2018, we entered into a Securities Purchase Agreement with Darling Capital LLC, (“Darling”), whereby Darling agreed to purchase a 8% Convertible Promissory Note in the aggregate principal amount of $550,000 (the “Darling Note”) from us due, subject to the terms therein, eighteen (18) months from the date of issuance, for a purchase price of $500,000.

Darling may, at its option, convert all or a portion of the Darling Note and accrued but unpaid interest into shares of common stock at a conversion price of $0.3125 per share. The Darling Note also contains a reset feature, whereby, absent certain exceptions, if the Company issues equity securities at an effective price less than $0.3125 per share of common stock, the conversion price of the Darling Note will be reset to such lower price.

On the closing date, we also issued Darling a three-year common stock purchase warrant to purchase 400,000 shares of our common stock at an initial exercise price of $0.75 per share.
Efrat Investments Note
On February 16, 2018, we entered into a Securities Purchase Agreement with Efrat Investments LLC, (“Efrat”), whereby Efrat agreed to purchase a 8% Convertible Promissory Note in the aggregate principal amount of $55,000 (the “Efrat Note”) from us due, subject to the terms therein, eighteen (18) months from the date of issuance, for a purchase price of $50,000.
Efrat may, at its option, convert all or a portion of the Efrat Note and accrued but unpaid interest into shares of common stock at a conversion price of $0.3125 per share. The Efrat Note also contains a reset feature, whereby, absent certain exceptions, if the Company issues equity securities at an effective price less than $0.3125 per share of common stock, the conversion price of the Efrat Note will be reset to such lower price.

On the closing date, we also issued Efrat a three-year common stock purchase warrant to purchase 40,000 shares of our common stock at an initial exercise price of $0.75 per share.
David Lamadrid Note

On February 26, 2018, we entered into a Securities Purchase Agreement with David Lamadrid, (“Lamadrid”), whereby Mr. Lamadrid agreed to purchase a 8% Convertible Promissory Note in the aggregate principal amount of $31,250 (the “Lamadrid Note”) from us due, subject to the terms therein, eighteen (18) months from the date of issuance.
Mr. Lamadrid may, at his option, convert all or a portion of the Lamadrid Note and accrued but unpaid interest into shares of common stock at a conversion price of $0.3125 per share. The  Lamadrid Note also contains a reset feature, whereby, absent certain exceptions, if the Company issues equity securities at an effective price less than $0.3125 per share of common stock, the conversion price of the Lamadrid Note will be reset to such lower price.

On the closing date, we also issued Mr. Lamadrid a three-year common stock purchase warrant to purchase 25,000 shares of our common stock at an initial exercise price of $0.75 per share.
Koretsky and Affiliate Notes

Between August 11, 2015 and May 31, 2017, we borrowed an aggregate of $1,657,000 from Frank Koretsky, a director of the Company, and $150,000 from CLS CO 2016, LLC and $465,000 from Newcan Investment Partners, LLC, two entities that are affiliated with Mr. Koretsky.  These loans were unsecured, accrued interest between 6% and 15% per year, were due either on demand or within three years after the date of the applicable note, and, in some cases, were convertible into shares of our common stock and warrants at rates between $.25 and 1.07 per share.  Effective on May 31, 2017, we issued convertible promissory notesentered into the Omnibus Loan Amendment Agreement, whereby the portion of these loans that was advanced prior to December 31, 2017 was converted into our common stock, together with accrued interest on these loans.  As a result of these conversions, Mr. Koretsky, CLS CO 2016 and Newcan converted an aggregate of $1,485,000, $150,000, and $460,000 in favorprincipal, and $130,069, 49,247 and $7,747 in accrued interest, into an aggregate of 6,460,276, 636,988 and 1,870,988 shares of common stock at $.25 per share.  Pursuant to the Omnibus Loan Amendment Agreement, the conversion rate on all of the loans made by Mr. Koretsky, CO CLS 2016, and Newcan was reduced, if applicable, to $.25 per share and Mr. Koretsky and his affiliates gave up the right to receive warrants upon conversion.  Thus, each of Mr. Koretsky, CLS CO 2016 and Mr. Binder.  These notes represent deferred salaryNewcan received 4,560,849, 488,159 and 1,433,841 shares of $250,000 duecommon stock in excess of what they would have received had they converted their loans into common stock prior to Mr. Binder and prior advances in the amounteffective date of $12,750 from Mr. Binder, and $210,000 in advances from Mr.the Omnibus Loan Amendment Agreement.

Effective March 31, 2017, $120,000 of the Koretsky being reclassified as convertible notes payable. These notes areFunding Notes was exchanged for Newcan Convertible Note 1.  This note is unsecured and bearbears interest at the rate of 10% per annum. No payments are required until JulyApril 1, 2017,2018, at which time all accrued interest becomes due and payable. Principal will be paidpayable in eight equal quarterly installments, together with accrued interest, beginning on OctoberJuly 1, 2017.2018. At the note holder’sNewcan’s election, at any time prior to payment or prepayment of the loans in full, all principal and accrued interest under the loans may be converted, in whole or in part, into our securities. Upon such an election, the holder will receive one “Unit” for each $1.07 converted, with each Unit consisting of one (1) share of common stock and a five-year warrant to purchase (1) share of common stock at a pricethe rate of $1.07 per share.one share for each $0.25 converted.

On August 3, 2016, we borrowed $150,000After excluding the loans from Mr. Koretsky, CLS CO 2016 and Newcan that were converted into our common stock effective as of May 31, 2017, there was a balance of $120,000 in loans that remained outstanding as of December 31, 2016.  This amount consisted of the $120,000 principal balance of the Koretsky Funding Loans (which were exchanged for Newcan Convertible Note 1 on March 31, 2017).  Prior to May 31, 2017, Newcan advanced an entity affiliated with Mr. Koretsky.   This note isadditional $621,658 of unsecured book entry loans.  During the three months ended August 31, 2017, $621,658 was transferred out of the Newcan Funding Notes and bearsused to fund Newcan Convertible Note 4.  In addition, during the three months ended August 31, 2017, Newcan loaned the Company an additional $70,000 under the Newcan Funding Notes; this amount was transferred out of the Newcan Funding Notes and used to fund Newcan Convertible Note 5. These loans bear interest at the rate of 15%10% per annum. Allannum and are convertible into our common stock at the rate of one share for each $0.25 converted.  No payments are required until October 1, 2018, at which time all accrued interest accruing during the first year will be added to principal.  Commencing on November 1, 2017, principalbecomes due and payable. Principal will be payable in foureight equal quarterly installments, together with accrued interest.interest, beginning on January 2, 2019. At the note holder’sNewcan’s election, at any time prior to payment or prepayment of the loanNewcan Convertible Note 4 or 5 in full, all principal and accrued interest under the loanNewcan Convertible Note 4 or 5 may be converted, in whole or in part, into our securities. Upon such an election, the holder will receive one “Unit” for each $1.07 converted, with each Unit consisting of one (1) share of common stock and a five-year warrant to purchase (1) share of common stock at a pricethe rate of $1.07 per share.one share for each $0.25 converted.

 
On January 10,October 9, 2017, the Company issued convertible promissory notes to Newcan Investment Partners LLC, an entity owned solely by Frank Koretsky, who is a directorexchanged $30,000 in principal of the Company,Newcan Funding Notes (advanced in the amount of $410,000 and $50,000 and bearSeptember 2017) for Newcan Convertible Note 6.  This note bears interest at the rate of 10% per annum thereafter.annum.  No payments are required until January 2, 2018,2019, at which time all accrued interest becomes due and payable.  Commencing on April 1, 2018,2019, the first of eight principal payments will be payablebecome due; subsequent principal payments will become due on the first day of each July, October, January and April until paid in eight equal quarterly installments, together with accrued interest. At thefull.  This note holder’s election, at any time prior to payment or prepayment of the loan in full, all principal and accrued interest under the loanthereunder may be converted, in whole or in part, into our securities. Upon such an election, the holder will receive one “Unit” for each $1.07 converted, with each Unit consisting of one (1) share of common stock and a five-year warrant to purchase (1) share of common stock at a price of $1.07 per share.for each $0.25 converted.

On March 31,2017,January 5, 2018, we issued a convertible promissory notesnote to Newcan Investment Partners LLC, an entity owned by Frank Koretsky, a director of the company, in the amount of $120,000 (the “Koretsky Note”), and to Jeffrey Binder, an officer and director of the Company, in the amount of $159,500 (the “Binder Note” and, together with the Koretsky Note, the “Notes”),$115,000 to finalize the terms of repayment with respect to certain loans made to us by Newcan between October 13, 2017 and December 27, 2017 (the “Newcan Convertible Note 7).  This note is unsecured and bears interest at the rate of 10% per annum. No payments are required until April 1, 2019, at which time all accrued interest becomes due and payable. Principal will be paid in eight equal quarterly installments, together with interest accrued thereon, beginning on July 1, 2019. The note may be prepaid by us with no penalty at any time upon thirty days written notice.
On January 10, 2018, effective December 1, 2017, we entered into the Second Omnibus Loan Agreement with Newcan, an entity owned by Frank Koretsky, a director of the Company, and Mr. Binder. The Second Omnibus Loan Agreement provides that the conversion price of all outstanding convertible promissory notes issued to Newcan as of the date of the agreement would be increased from $0.25 to $0.3125 per share of common stock.  The remaining terms of such notes remain unchanged.
Binder Notes

Between June 1, 2015 and May 31, 2017, we borrowed an aggregate of $251,800 from Jeffrey Binder, a director and officer of the Company.  These loans were unsecured, accrued interest between 6% and 10% per year, were due either on demand or within three years after the date of the applicable note, and, in some cases, were convertible into shares of our common stock and warrants at rates between $.25 and 1.07 per share.  Effective on May 31, 2017, we entered into the Omnibus Loan Amendment Agreement, whereby the portion of these loans that was advanced prior to May 31, 2017 was converted into our common stock, together with accrued interest on these loans.  As a result of these conversions, Mr. Binder converted an aggregate of $442,750 in principal and $19,427 in accrued interest, into an aggregate of 1,848,708 shares of common stock at $.25 per share.  Pursuant to the Omnibus Loan Amendment Agreement, the conversion rate on all of the loans made by Newcan Investment Partners LLCMr. Binder was reduced, if applicable, to $.25 per share and Mr. Binder between January 1,gave up the right to receive warrants upon conversion.  Thus, Mr. Binder received 1,127,061 shares of common stock in excess of what he would have received had he converted his loans into common stock prior to the effective date of the Omnibus Loan Amendment Agreement.

Effective March 31, 2017, $47,000 of the Binder Funding Notes and February 27, 2017, and certain compensation payable$25,000 of accrued salary due to Mr. Binder as of February 28, 2017. The Notes, which otherwise contain identical terms, arewere exchanged for Binder Convertible Note 4.  This note is unsecured and bearbears interest at the rate of 10% per annum. No payments are required until April 1, 2018, at which time all accrued interest becomes due and payable. Principal will be payable in eight equal quarterly installments, together with accrued interest, beginning on July 1, 2018. At Mr. Binder’s election, at any time prior to payment or prepayment of the loans in full, all principal and accrued interest under the loans may be converted, in whole or in part, into our common stock at the rate of one share for each $0.25 converted.
All of Mr. Binder’s loans that were outstanding as of December 31, 2016 were converted to common stock effective May 31, 2017, including all of his accrued deferred salary as of December 31, 2016.  As of May 31, 2017, there was a balance of $149,550 in loans from Mr. Binder that remained outstanding.  This amount consisted of the $72,000 principal balance of Binder Convertible Note 4, which related to advances made and salary accrued after January 1, 2017, and an additional $77,550 of unsecured, book entry loans.  During the three months ended August 31, 2017, Mr. Binder advanced a total of $47,767 to the Company under the Binder Funding Notes. Also during the three months ended August 31, 2017, principal in the amount of $77,550, accrued salary due to Mr. Binder in the amount of $37,500, and accrued interest in the amount of $2,246 were transferred from the Binder Funding Notes to fund Binder Convertible Note 5, and principal in the amount of $47,767, accrued salary due to Mr. Binder in the amount of $25,000, and accrued interest in the amount of $1,384 were transferred from the Binder Funding Notes to fund Binder Convertible Note 6.  The Binder Convertible Notes 5 and 6 are unsecured and bear interest at the rate of 10% per annum. No payments are required until October 1, 2018, at which time all accrued interest becomes due and payable. Principal will be payable in eight equal quarterly installments, together with accrued interest, beginning on January 2, 2019. At Mr. Binder’s election, at any time prior to payment or prepayment of the Binder Convertible Note 5 or 6 in full, all principal and accrued interest under the Binder Convertible Note 5 or 6 may be converted, in whole or in part, into our common stock at the rate of one share for each $0.25 converted.
On October 9, 2017, Mr. Binder, an officer and director of the Company, exchanged $39,521 in principal of Binder Funding Notes (advanced in September and October 2017) for Binder Convertible Note 7.  This amount included $12,500 of accrued but unpaid salary due by the Company to Mr. Binder.  This note bears interest at the rate of 10% per annum.  No payments are required until January 2, 2019, at which time all accrued interest becomes due and payable.  Commencing on April 1, 2019, the first of eight principal payments will become due; subsequent principal payments will become due on the first day of each July, October, January and April until paid in full.  This note and accrued interest thereunder may be converted, in whole or in part, into one share of common stock for each $0.25 converted.
On January 5, 2018, we issued a convertible promissory note to Mr. Binder in the amount of $165,360 to finalize the terms of repayment with respect to certain loans made to us by Mr. Binder between November 6, 2017 and December 27, 2017, and certain compensation payable to Mr. Binder as of November 30, 2017 (the “Binder Convertible Note 8). This note is unsecured and bears interest at the rate of 10% per annum. No payments are required until April 1, 2019, at which time all accrued interest becomes due and payable. Principal will be paid in eight equal quarterly installments, together with interest accrued thereon, beginning on July 1, 2018.2019. The Notesnote may be prepaid by the Companyus with no penalty at any time upon thirty days written notice.
 
On January 10, 2018, effective December 1, 2017, we entered into the Second Omnibus Loan Agreement with Jeffrey I. Binder, an officer and director of the Company and Newcan. The Second Omnibus Loan Agreement provides that the conversion price of all outstanding convertible promissory notes issued to Mr. Binder as of the date of the agreement would be increased from $0.25 to $0.3125 per share of common stock.  The remaining terms of such notes remain unchanged.
$37,500.00, to Mr. Binder with respect to certain compensation payable to Mr. Binder as of February 28, 2018. Binder Convertible Note 8 is unsecured and bears interest at the rate of 10% per annum. No payments are required until April 1, 2019, at which time all accrued interest becomes due and payable. Principal will be paid in eight equal quarterly installments, together with interest accrued thereon, beginning on July 1, 2019. The holder of each Notenote may be prepaid by us with no penalty at any time upon thirty days written notice. Mr. Binder may, at any time prior to payment or prepayment in full, convert all principal and accrued interest thereunder, in whole or in part, into securities of the Company.our securities. For each $.25$0.3125 converted, the holderMr. Binder will receive one share of the Company’s common stock.
Omnibus Loan Amendment Agreement and Second Omnibus Loan Amendment
On May 31, 2017, we entered into an Omnibus Loan Amendment Agreement (the “Omnibus Loan Amendment”) with Jeffrey I. Binder, Frank Koretsky, Newcan Investment Partners LLC and CLS CO 2016, LLC (collectively, the “Insiders”).  Pursuant to the Omnibus Loan Amendment, we agreed with the Insiders to amend certain terms of loans the Insiders made to us for working capital purposes, which loans were initially demand loans, and, except for certain loans made in 2017, were later memorialized as convertible loans (the “Insider Loans”), in exchange for the agreement of the Insiders to convert all Insider Loans where funds were advanced prior to January 1, 2017, which total $2,537,750, plus $166,490 of accrued interest thereon, into an aggregate of 10,816,960 shares of our common stock, and forego the issuance of warrants to purchase our common stock upon conversion.  This resulted in the issuance of an additional 7,609,910 shares compared to the original number of shares issuable upon conversion of the Insider Loans prior to the Omnibus Loan Agreement. We valued the shares at $0.125, which was the market price of our stock at the conversion date, and charged the amount of $951,239 to loss on modification of debt during the twelve months ended May 31, 2017.

We entered into the Omnibus Loan Amendment in order to ease the debt burden on us and prevent us from defaulting on the Insider Loans. Pursuant to the Omnibus Loan Amendment, the following amendments were made to the Insider Loans: (a) we reduced the conversion price on the Insider Loans from between $0.75 and $1.07 per share of common stock to $0.25 per share of common stock, in those cases where the conversion price was greater than $0.25, which reduced conversion price exceeds the closing price of the common stock during the last three months; (b) we deleted the requirement to issue warrants to purchase our common stock upon conversion of the Insider Loans; (c) we amended one Insider Loan to permit conversion of only the portion of the Insider Loan related to services that were provided to us prior to January 1, 2017; and (d) we amended the terms of the Insider Loans where funds were advanced on or after January 1, 2017, which Insider Loans were not converted into our common stock, to provide for, where not already the case, a five-year10% interest rate per annum, a $0.25 conversion price per share of common stock, and the deletion of the requirement that we issue warrants to purchase our common stock upon conversion of such Insider Loans.
On January 10, 2018, effective December 1, 2017, we entered into the Second Omnibus Loan Agreement with Jeffrey I. Binder, an officer and director of the Company, and Newcan, an entity owned by Frank Koretsky, a director of the Company. The Second Omnibus Loan Agreement provides that the conversion price of all outstanding convertible promissory notes issued to either Mr. Binder or Newcan as of the date of the Agreement would be increased from $0.25 to $0.3125 per share of common stock.  The remaining terms of such notes remain unchanged.

During February and March 2018, we held four closings of the WestPark Offering, whereby we sold units for $1.25 per unit.  Each unit consisted of four shares of common stock and one warrant to purchase one share of the Company’sour common stock atfor $0.75 per share.  We sold a pricetotal of $.25 per share.
1,368,250 units in the WestPark Offering for aggregate gross proceeds of $1,710,313, and aggregate net proceeds of $1,460,918 after deduction of placement agent commissions, a non-accountable expense allowance and expenses associated with the offering.
 
Over the next twelve months we will require significant additional capital to cover our projected cash flow deficits due to the Colorado Arrangement and related agreements, the repayment of the April 2015 Note, payments on the 2016 Convertible Notes, payments on the loansloan from Jeffrey Binder and Frank Koretsky,FirstFire, the implementation of our business plan, including the acquisition of Oasis Cannabis, and the development  ofother alternative revenue sources.  Additionally, we anticipate that we will devote resources to research and development related to the refinement of our patent pending proprietary methods and processes and development of new products. We estimate research and development costs of between $50,000 and $100,000 during the next 12 months.  Finally, during the next 18-24 months, we plan to construct and open two to three processing facilities for use either by a licensee or by us directly.  We anticipate that the build out and opening of each processing facility will require between $1,000,000 and $3,000,000 in capital, with additional capital required for liquidity to cover personnel, equipment, and other operating expenses with respect to each opened facility. 
 
We currently have two employees, Jeffrey Binder, who serves as our Chairman President and Chief Executive Officer;Officer, and Alan Bonsett,David Lamadrid, who serves as our President and Chief OperatingFinancial Officer.   In an effort to assist us conserve cash, Mr. Binder converted all his accrued salary due to him through February 28, 20172018 into a convertible promissory note and a promissory note.notes.  Mr. Binder has deferred all of his salary to date forBonsett, our former Chief Operating Officer, left the fiscal year ending May 31,Company effective October 1, 2017.

We do not currently have the capital necessary to meet our liquidity needs, fund our capital requirements or implement our business plan. We intend to fund our cash flow and capital requirements during the next year from the proceeds of the Equity Line,equity line, the sale of our debt and equity securities, by obtaining additional loans and with cash generated throughfrom the operations in connection with the Colorado Arrangement.of companies we may acquire, such as Oasis Cannabis.  There can be no assurance that we will be able to meet our needs, however, as we have not yet received any commitments for the purchase of our equity securities or for additional loans.  Further,loans and although we have entered into a definitive agreement to acquire Oasis Cannabis, as described below, the closing of such agreement is subject to numerous conditions, including our ability to raise the required cash.  Because we do not yet know when our processing facility in Colorado will become operational, and accordingly, when we will commence receiving revenues under the Licensing Agreement and Equipment lease from PRH.  We have been advised that the solutions to be usedre-visit commencing operations in our proprietary conversion process are not included in Colorado’s list of designated solutions that may be used for cannabis extraction.  We have advised the state that the solutions will be used in the conversion, not the extraction, process.  The matter has been referred to the Colorado, attorney general’s office for consideration.  We cannot complete the construction of our processing facility until this matter is resolved.  Based on our internal review, similar requirements relating to either extraction or processing do not exist in other relevant states.  Assuming this issue is resolved favorably to us, we would anticipate completion of our Colorado processing facility and the commencement of operations by PRH within six months after such resolution, and we would anticipate the receipt of revenues from PRH between 30 and 90 days after it commences operations.  As a result of these uncertainties, there can be no assurance that PRH will ever generate sufficient cash to repay the $500,000 loan from CLS Labs Colorado or to meet PRH’s obligations under the Licensing Agreement or Equipment Lease. Further, due to the delays we encountered with the construction of our Colorado processing facility, we have placed our proposed Colorado operations on hold and will pursue revenue producing opportunities in other states.  We anticipate that we willmay incur operating losses during the next twelve months.months unless we close on the Oasis Acquisition. 
 
Oasis Cannabis Transaction
On December 4, 2017, CLS Holdings USA, Inc. (the “Company,” “CLS” or “we”) and Alternative Solutions, LLC (“Alternative Solutions”) entered into a Membership Interest Purchase Agreement (the “Acquisition Agreement”) for CLS to acquire (the “Oasis Acquisition”) the outstanding equity interests in three subsidiaries of Alternative Solutions (collectively, the “Oasis LLCs”).  Pursuant to the Acquisition Agreement, CLS paid a non-refundable deposit of $250,000 upon signing, which was to be followed by an additional payment of $1,800,000 within 45 days (75 days if an extension fee of $200,000 is paid by CLS) for an initial 10% of each of the Oasis LLCs.

On January 16, 2018, CLS and Alternative Solutions entered into a First Amendment to the Membership Interest Purchase Agreement (the “First Amendment”) and extended the date upon which the $1,800,000 is to be paid to January 29, 2018 at 5:00 p.m. PST.

On January 25, 2018, CLS and Alternative Solutions entered into a Second Amendment to the Membership Interest Purchase Agreement (the “Second Amendment”) and further extended the date upon which the $1,800,000 is to be paid to February 5, 2018 at 5:00 p.m. PST.

On April 2, 2018, CLS and Alternative Solutions entered into a Third Amendment to the Membership Interest Purchase Agreement (the “Third Amendment”) and extended the date upon which CLS is to pay the “Oasis Note” by approximately one (1) year to December 31, 2019.  The Third Amendment also provides that the time period to determine average daily net revenue for the “Bonus Purchase Price”, is amended to be the calendar year ending December 31, 2019 with the payment due thereunder extended to May 30, 2020.

On April 2, 2018, CLS and Alternative Solutions also entered into a Fourth Amendment to the Membership Interest Purchase Agreement (the “Fourth Amendment”) and extended the date upon which CLS is to pay the “Closing Consideration,” to May 21, 2018.

The Closing Consideration that we must pay to acquire the remaining 90% of the Oasis LLCs, is equal to cash in the amount of $6,200,000, a $4.0 million promissory note due in December 2019 (the “Oasis Note”), and $6,000,000 in shares (the “Purchase Price Shares”) of our common stock (collectively, the “Closing Consideration”).

The number of Purchase Price Shares shall equal $6,000,000 divided by the lower of $1.00 or the conversion price to receive one share of our common stock in our next equity offering that commences in 2018, multiplied by 80%.  The Oasis Note will be secured by a first priority security interest over the assets of each of the Oasis LLCs and Alternative Solutions, including our 10% equity interest in the Oasis LLCs, and CLS shall deliver to Alternative Solutions a confession of judgment that will become effective in the event of any event of default under the Oasis Note.
Oasis currently owes certain amounts to a consultant known as 4Front Advisors, LLC.  If we make any payments to this company post-closing, generally speaking, we will be entitled to  deduct the present value of such payments from the principal amount due under the Oasis Note.
Assuming we close on the Acquisition Agreement, in May 2020, Alternative Solutions will be entitled to a $1,000,000 payment from us (the “Bonus Purchase Price”) if the existing dispensary operated by an Oasis LLC has maintained an average revenue of $20,000 per day during the 2019 calendar year.

The sale, assignment, transfer, pledge or other disposition of any interest in the Oasis LLCs or Alternative Solutions is ineffective unless approved in advance by the state of Nevada and any municipality in which the Oasis LLC’s operation is licensed.
In connection with the Oasis Acquisition, we plan to employ Mr. Ben Sillitoe as our COO.  We plan to issue him 500,000 shares of restricted common stock pursuant to his proposed employment agreement.  Upon our payment of the closing consideration, we will also become obligated to issue 500,000 shares of our restricted common stock to each of David Lamadrid, our President and Chief Financial Officer, and J.P. Barton, for introducing us to Alternative Solutions.
The closing of the Acquisition Agreement is subject to a number of conditions, including our ability to raise the $8,000,000 in cash required to close the transaction.  As a result, there can be no assurance that we will be able to close the Oasis Acquisition.
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. We have incurred continuous losses from operations since inception, have an accumulated deficit of $6,246,786$14,583,951 and had a working capital deficit of $2,157,226$2,735,776 at February 28, 2017.2018. In addition, we do not currently have the cash resources to meet our operating commitments during the next twelve months. Our ability to continue as a going concern must be considered in light of the problems, expenses, and complications frequently encountered by developmental 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, to borrow capital and to sell equity to support the opening ofour plans to acquire operating businesses, open processing facilities and to finance ongoing operations. There can be no assurance, however, that we will be successful in our efforts to raise additional debt or equity capital and/or that cash generated by our future operations will be adequate to meet our needs. These factors, among others, indicate that we may be unable to continue as a going concern for a reasonable period of time.

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.

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 used in the valuation of derivative liability: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.
 
Recently Issued Accounting Standards 
 
Accounting standards promulgated by the Financial Accounting Standards Board (“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 February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). The update requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by long-term leases. The update also requires certain qualitative and quantitative disclosures about the amount, timing and uncertainty of cash flows arising from leases. Accounting by lessors will remain largely unchanged. This update is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. Adoption will require a modified retrospective approach beginning with the earliest period presented. We are currently evaluating the potential impact of the update on our financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), to reduce the complexity of certain aspects of the accounting for employee share-based payment transactions. ASU 2016-09 involves changes in several aspects of the accounting for share-based payment transactions, including the accounting for the income tax consequences of share-based awards.  For public companies, ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted.  We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.

In August 2016, the FASBFinancial Accounting Standards Board (the “FASB”) issued ASU 2016-15, Statement of Cash Flows (Topic 230). The update addresses eight specific cash flow issues and is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update will be effective for reporting periods beginning after December 15, 2017, including interim periods within the reporting period. Early adoption is permitted. We are currently evaluating the potential impact of the update on our financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, current U.S. GAAP requires the performance of procedures to determine the fair value at the impairment testing date of assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, the amendments under this ASU require the goodwill impairment test to be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The ASU becomes effective for us on January 1, 2020. The amendments in this ASU will be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed.
In May 2017, the FASB issued ASU No. 2017-09, Stock Compensation - Scope of Modification Accounting, which provides guidance on which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The ASU requires that an entity account for the effects of a modification unless the fair value (or calculated value or intrinsic value, if used), vesting conditions and classification (as equity or liability) of the modified award are all the same as for the original award immediately before the modification. The ASU becomes effective for us on January 1, 2018, and will be applied prospectively to an award modified on or after the adoption date. Early adoption is permitted, including adoption in any interim period. We are currently assessing the impact that this standard will have on any awards that are modified once this standard is adopted.

Management does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the accompanying unaudited condensed consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosure Aboutabout 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

Jeffrey Binder, our Chief Executive Officer, hasand David Lamadrid, our Chief Financial Officer, have 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.  Based on thetheir evaluation, Mr. Binder and Mr. Lamadrid concluded that our disclosure controls and procedures are not effective in timely alerting himthem to material information relating to us that is required to be included in our periodic SEC filings and ensuring that information required to be disclosed by us in the reports we file or submit under the Act is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, or person performing similar functions, as appropriate to allow timely decisions regarding required disclosure, for the following reasons:
 
·We do not have an independent board of directors or audit committee or adequate segregation of duties; and
 
·We do not have an independent body to oversee our internal controls over financial reporting and lack segregation of duties due to our limited resources.
 
We plan to rectify these weaknesses by implementing an independent board of directors and 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.


PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

We know of no material pending legal proceedings to which the Company is a party or of which any of its property is the subject. In addition, we do not know of any such proceedings contemplated by any governmental authorities.

Item 1A. Risk Factors.
 
This item is not applicable as we are currently considered a smaller reporting company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 
None.On February 7, 21 and 28, the Company effected closings of its private securities offering conducted by WestPark Capital, Inc., as placement agent, whereby it sold an aggregate of $1,268,750 in units to a total of 15 investors in a private offering exempt from registration under Rule 506(c) of Regulation D, promulgated under the Securities Act of 1933, as amended.  Each unit consisted of four shares of the Company’s common stock and one warrant to purchase one share of common stock for $0.75.  The price per unit was $1.25.  The net proceeds to the Company, after deducting the placement agent’s commissions, the non-accountable expense allowance and actual expenses, was $1,081,528.  The offering was exempt pursuant to Rule 506(c) because it was a private offering in which only verified accredited investors were permitted to purchase units.
 
Item 3. Defaults Uponupon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

None.

Item 5. Other Information.

None.

Item 6. Exhibits.
 
31.1 
  
31.2 
  
32.1
32.2
  
101.INSXBRL Instance Document
  
101.SCHXBRL Taxonomy Extension Schema
  
101.CALXBRL Taxonomy Extension Calculation Linkbase
  
101.DEFXBRL Taxonomy Extension Definition Linkbase
  
101.LABXBRL Taxonomy Extension Label Linkbase
  
101.PREXBRL Taxonomy Extension Presentation Linkbase
 


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 12, 2017
16, 2018
By:/s/ Jeffrey I. Binder 
  Jeffrey I. Binder 
  
Chairman President and Chief Executive Officer
(Principal Executive OfficerOfficer)
Date: April 16, 2018By:/s/ David Lamadrid
David Lamadrid
President and Chief Financial Officer
(Principal Financial and Accounting Officer) 
 

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32