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 1934For the quarterly period ended November 30, 2017February 29, 2024
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934Commission File Number: 333-174705000-55546
CLS HOLDINGS USA, INC.
(Exact name of registrant as specified in its charter)
Nevada | 45-1352286 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
516 S. 4th Street, Las Vegas Nevada, 89101
(Address of principal executive offices) (Zip Code)
(416) 992-4539
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
N/A | N/A | N/A |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically 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 (§232.405 of this chapter) 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated filer ☐ | Accelerated filer ☐ |
Non-accelerated filer ☐ | Smaller reporting company ☒ |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
State the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 39,126,944137,675,276 shares of $0.0001 par value common stock outstanding as of January 9, 2018.April 8, 2024.
CLS HOLDINGS USA, INC.
FORM 10-Q
Quarterly Period Ended November 30, 2017February 29, 2024
TABLE OF CONTENTS
Page | ||
3 | ||
3 | ||
PART I. FINANCIAL INFORMATION | ||
Item 1. | 4 | |
4 | ||
5 | ||
6 | ||
7 | ||
8 | ||
Item 2. | 31 | |
Item 3. | 42 | |
Item 4. | 42 | |
PART II. OTHER INFORMATION | ||
Item 1. | 43 | |
Item 1A. | 43 | |
Item 2. | 43 | |
Item 3. | 43 | |
Item 4. | 43 | |
Item 5. | 43 | |
Item 6. | 43 | |
44 | ||
EXPLANATORY NOTE
Unless otherwise noted, references in this registration statementreport 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, futureamong other things, the impact of the COVID-19 virus on our business, the results of our initiatives to retain our employees and strengthen our relationships with our customers and community, the effect of our initiatives to expand market share and achieve growth, the expected development of our business and joint ventures, results of operations orand financial performance, liquidity, working capital and capital requirements, the effects of the additional dilution on our common stock that may occur as a result of the amendments to our convertible debentures, and anticipated future financial performance.events. These forward-looking statements include, but are not limitedalso relate to statements relatingour ability to the adequacy of ourobtain debt or equity capital on reasonable terms, or at all, to finance our planned operations, and to identify, finance and close potential acquisitions and joint ventures, whether our joint venture partner will make its capital contribution, our ability to comply with applicable cannabis-related regulations and obtain regulatory approvals, market acceptance of our services and product offerings, our ability to attractprotect and retain key personnel,commercialize our intellectual property, our ability to use net operating losses to offset certain cannabis-related tax liabilities and our ability to protectgrow our intellectual property.wholesale and processing businesses and joint ventures. In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “will,” “should,” “intends,” “expects,” “plans,” “goals,” “projects,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these terms or other comparable terminology.
These forward-looking statements are only predictions, are uncertain and involve substantial known and unknown risks, uncertainties and other factors which may cause our (or our industry’s) actual results, levels of activity or performance to be materially different from any expected future results, levels of activity or performance expressed or implied by these forward-looking statements.
We cannot guarantee future results, levels of activity or performance. You should not place undue reliance on these forward-looking statements, which speak only as of the date that they were made. These cautionary statements should be considered together with any written or oral forward-looking statements that we may issue in the future. Except as required by applicable law, we do not intend to update any of the forward-looking statements to conform these statements to reflect actual results, later events or circumstances or to reflect the occurrence of unanticipated events.
AVAILABLE INFORMATION
We file certain reports under the Securities Exchange Act of 1934 (the “Exchange Act”). Such filings include annual and quarterly and specialreports. The reports and other informationwe file with the Securities 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 throughon 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.(http://www.sec.gov).
Item 1. Financial Statements.
CLS HOLDINGS USA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| November 30, | May 31, | |||||||
| 2017 | 2017 | |||||||
| ASSETS | (unaudited) | |||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 259,189 | $ | 78,310 | ||||
| Prepaid expenses | 26,410 | 1,410 | ||||||
| Other current assets | 36,381 | - | ||||||
| Total current assets | 321,980 | 79,720 | ||||||
| Security deposit | - | 50,000 | ||||||
| Property, plant and equipment, net of accumulated depreciation of $2,230 and $1,784 | 444 | 890 | ||||||
| Intangible assets, net of accumulated amortization of $1,044 and $828 | 1,114 | 1,330 | ||||||
| Total assets | $ | 323,538 | $ | 131,940 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | 669,554 | $ | 581,765 | ||||
| Accrued compensation, related party | 91,250 | 53,750 | ||||||
| Due to related party | 17,930 | 17,930 | ||||||
| Accrued interest | 746 | 20,171 | ||||||
| Accrued interest, related party | 158,303 | 106,022 | ||||||
| Notes payable, related parties | 100,841 | 699,208 | ||||||
| Convertible notes payable, net of discount of $332,917 and $57,644 | 30,083 | 252,356 | ||||||
| Convertible notes payable, related party, net of discount of $0 and $0 | 48,000 | - | ||||||
| Derivative liability | 353,093 | 95,276 | ||||||
| Total current liabilities | 1,469,800 | 1,826,478 | ||||||
| Noncurrent liabilities | ||||||||
| Convertible notes payable, related parties, net of discount of $346,471 and $0 | 746,525 | 192,000 | ||||||
| Total Liabilities | 2,216,325 | 2,018,478 | ||||||
| Commitments and contingencies | - | - | ||||||
| Stockholder’s equity | ||||||||
| Common stock, $0.0001 par value; 250,000,000 shares authorized; 39,126,944 and 32,852,944 shares issued and outstanding at November 30, 2017 and May 31, 2017, respectively | 3,913 | 3,286 | ||||||
| Preferred stock, $0.001 par value; 20,000,000 shares authorized; no shares issued | - | - | ||||||
| Additional paid-in capital | 10,117,243 | 7,032,836 | ||||||
| Stock payable | 68,950 | 68,950 | ||||||
| Accumulated deficit | (12,082,893 | ) | (8,991,610 | ) | ||||
| Total stockholder’s equity (deficit) | (1,892,787 | ) | (1,886,538 | ) | ||||
| Total liabilities and stockholders’ equity (deficit) | $ | 323,538 | $ | 131,940 | ||||
February 29, | May 31, | |||||||
2024 | 2023 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 698,877 | $ | 998,421 | ||||
Accounts Receivable | 954,020 | 431,204 | ||||||
Inventory | 2,385,724 | 3,012,932 | ||||||
Prepaid expenses and other current assets | 82,911 | 148,953 | ||||||
Total current assets | 4,121,532 | 4,591,510 | ||||||
Property, plant and equipment, net of accumulated depreciation of $3,162,030 and $2,687,146 | 2,488,853 | 2,913,077 | ||||||
Right of use assets, operating leases | 1,578,759 | 1,641,577 | ||||||
Intangible assets, net of accumulated amortization of $172,156 and $588,217 | 185,837 | 209,088 | ||||||
Goodwill | 557,896 | 557,896 | ||||||
Other assets | 197,500 | 157,500 | ||||||
Total assets | $ | 9,130,377 | $ | 10,070,648 | ||||
LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
Current liabilities | ||||||||
Accounts payable and accrued liabilities | $ | 3,380,315 | $ | 2,728,572 | ||||
Accrued interest | 3,600 | 634,594 | ||||||
Loans payable | - | 471,380 | ||||||
Lease liability - operating leases, current | 433,465 | 374,004 | ||||||
Lease liability - financing leases, current | 98,210 | 86,887 | ||||||
Taxes Payable | 8,132,683 | 6,752,457 | ||||||
Notes payable | 1,190,703 | 1,439,584 | ||||||
Convertible notes payable - current | 58,498 | 2,952,160 | ||||||
Convertible notes payable, related party - current | 233,993 | 900,891 | ||||||
Total current liabilities | 13,531,467 | 16,340,529 | ||||||
Noncurrent liabilities | ||||||||
Lease liability - operating leases, non-current | 1,431,776 | 1,544,283 | ||||||
Lease liability - financing leases, non-current | 124,767 | 200,280 | ||||||
Notes payable, non-current, net of discount of $37,072 and $1,291,887 | 1,809,483 | 2,033,077 | ||||||
Convertible notes payable, non-current | 2,001,587 | 2,852,159 | ||||||
Convertible notes payable, related party - non-current | 1,745,986 | 900,892 | ||||||
Total Liabilities | 20,645,066 | 23,871,220 | ||||||
Commitments and contingencies | - | - | ||||||
Stockholder's deficit | ||||||||
Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued | - | - | ||||||
Common stock, $0.0001 par value; 345,000,000 shares authorized at February 29, 2024 and 187,500,000 at May 31, 2023; 137,675,276 shares and 72,543,141 issued and outstanding at February 29, 2024 and May 31, 2023, respectively | 13,768 | 7,255 | ||||||
Additional paid-in capital | 105,152,891 | 96,147,784 | ||||||
Common stock subscribed | 65,702 | 65,702 | ||||||
Common stock receivable | (592,848 | ) | - | |||||
Accumulated deficit | (115,014,703 | ) | (108,879,446 | ) | ||||
Stockholder's deficit attributable to CLS Holdings, Inc. | (10,375,190 | ) | (12,658,705 | ) | ||||
Non-controlling interest | (1,139,499 | ) | (1,141,867 | ) | ||||
Total stockholder's deficit | (11,514,689 | ) | (13,800,572 | ) | ||||
Total liabilities and stockholders' deficit | $ | 9,130,377 | $ | 10,070,648 | ||||
See accompanying notes to these financial statements.
CLS HOLDINGS USA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three | For the Three | For the Nine | For the Nine | |||||||||||||
Months Ended | Months Ended | Months Ended | Months Ended | |||||||||||||
February 29, 2024 | February 28, 2023 | February 29, 2024 | February 28, 2023 | |||||||||||||
Revenue | $ | 4,926,457 | $ | 5,437,302 | $ | 15,238,198 | $ | 17,556,406 | ||||||||
Cost of goods sold | 2,799,498 | 2,871,557 | 8,665,694 | 9,164,914 | ||||||||||||
Gross margin | 2,126,959 | 2,565,745 | 6,572,504 | 8,391,492 | ||||||||||||
Selling, general and administrative expenses | 2,565,239 | 2,407,966 | 7,902,057 | 8,896,933 | ||||||||||||
Total operating expenses | 2,565,239 | 2,407,966 | 7,902,057 | 8,896,933 | ||||||||||||
Operating income (loss) | (438,280 | ) | 157,779 | (1,329,553 | ) | (505,441 | ) | |||||||||
Other (income) expense: | ||||||||||||||||
Interest expense, net | 247,961 | 648,957 | 1,116,274 | 2,024,532 | ||||||||||||
Employee retention tax credit income | - | - | (924,862 | ) | - | |||||||||||
Loss on extinguishment of debt | 3,404,910 | - | 3,404,910 | 6,659,359 | ||||||||||||
(Gain) Loss on equity investment | - | 22,476 | - | 176,587 | ||||||||||||
(Gain) on settlement of debt | (168,837 | ) | - | (168,837 | ) | (2,384 | ) | |||||||||
(Gain) on settlement of accounts payable | - | - | (4,375 | ) | - | |||||||||||
(Gain) on settlement of note receivable | - | - | - | (348,165 | ) | |||||||||||
Total other (income) expense | 3,484,034 | 671,433 | 3,423,110 | 8,509,929 | ||||||||||||
Income (Loss) before income taxes | (3,922,314 | ) | (513,654 | ) | (4,752,663 | ) | (9,015,370 | ) | ||||||||
Provision for income tax | (446,662 | ) | (516,252 | ) | (1,380,226 | ) | (1,552,028 | ) | ||||||||
Net loss | (4,368,976 | ) | (1,029,906 | ) | (6,132,889 | ) | (10,567,398 | ) | ||||||||
Non-controlling interest | (168 | ) | 130,391 | (2,368 | ) | 303,451 | ||||||||||
Net loss attributable to CLS Holdings, Inc. | $ | (4,369,144 | ) | $ | (899,515 | ) | $ | (6,135,257 | ) | $ | (10,263,947 | ) | ||||
Net loss per share - basic | $ | (0.04 | ) | $ | (0.01 | ) | $ | (0.07 | ) | $ | (0.19 | ) | ||||
Net loss per share - diluted | $ | (0.04 | ) | $ | (0.01 | ) | $ | (0.07 | ) | $ | (0.19 | ) | ||||
Weighted average shares outstanding - basic | 118,630,461 | 72,518,141 | 87,849,514 | 56,657,781 | ||||||||||||
Weighted average shares outstanding - diluted | 118,630,461 | 72,518,141 | 87,849,514 | 56,657,781 | ||||||||||||
| For the Three | For the Thee | For the Six | For the Six | |||||||||||||
| Months Ended | Months Ended | Months Ended | Months Ended | |||||||||||||
| November 30, 2017 | November 30, 2016 | November 30, 2017 | November 30, 2016 | |||||||||||||
| Revenue | $ | - | $ | - | $ | - | $ | - | ||||||||
| Cost of goods sold | - | - | - | - | ||||||||||||
| Gross margin | - | - | - | - | ||||||||||||
| Selling, general and administrative expenses | 85,218 | 163,122 | 298,421 | 337,867 | ||||||||||||
| Professional fees | 172,161 | 197,050 | 318,162 | 503,231 | ||||||||||||
| Total operating expenses | 257,379 | 360,172 | 616,583 | 841,098 | ||||||||||||
| Operating loss | (257,379 | ) | (360,172 | ) | (616,583 | ) | (841,098 | ) | ||||||||
| Other (income) expense: | ||||||||||||||||
| Interest expense | 806,965 | 756,292 | 881,831 | 1,014,362 | ||||||||||||
| Gain on settlement of debt | - | - | (3,480 | ) | - | |||||||||||
| Loss on modification of debt | - | 33,334 | 29,145 | 33,334 | ||||||||||||
| Loss on note exchange | 404,082 | - | 404,082 | - | ||||||||||||
| Loss on extinguishment of debt | 989,032 | - | 989,032 | - | ||||||||||||
| Change in fair value of derivative | 68,140 | (24,345 | ) | 174,090 | (148,266 | ) | ||||||||||
| Total other expense | 2,268,219 | 765,281 | 2,474,700 | 899,430 | ||||||||||||
| Income (Loss) before income taxes | (2,525,598 | ) | (1,125,453 | ) | (3,091,283 | ) | (1,740,528 | ) | ||||||||
| Income tax expense | - | - | - | - | ||||||||||||
| Net income (loss) | $ | (2,525,598 | ) | $ | (1,125,453 | ) | $ | (3,091,283 | ) | $ | (1,740,528 | ) | ||||
| Net income (loss) per share - basic | $ | (0.07 | ) | $ | (0.06 | ) | $ | (0.09 | ) | $ | (0.09 | ) | ||||
| Net income (loss) per share - diluted | $ | (0.07 | ) | $ | (0.06 | ) | $ | (0.09 | ) | $ | (0.09 | ) | ||||
| Weighted average shares outstanding - basic | 35,039,032 | 20,350,003 | 33,946,441 | 20,350,003 | ||||||||||||
| Weighted average shares outstanding - diluted | 35,039,032 | 20,350,003 | 33,946,441 | 20,350,003 | ||||||||||||
See accompanying notes to these financial statements.
CLS HOLDINGS USA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSSTOCKHOLDERS’ DEFICIT
(Unaudited)
| For the Six | For the Six | |||||||
| Months Ended | Months Ended | |||||||
| November 30, 2017 | November 30, 2016 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income (loss) | $ | (3,091,283 | ) | $ | (1,740,528 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Imputed interest | 539 | 539 | ||||||
| Change in fair value of derivative | 174,090 | (148,266 | ) | |||||
| 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 | 572,856 | 889,392 | ||||||
| Amortization of deferred financing costs | 3,119 | - | ||||||
| Depreciation and amortization expense | 662 | 662 | ||||||
| Changes in assets and liabilities: | ||||||||
| Other assets | 50,000 | - | ||||||
| Prepaid expenses | (25,000 | ) | (16,049 | ) | ||||
Other current assets | (39,500 | ) | - | |||||
| Accounts payable and accrued expenses | 383,583 | 135,976 | ||||||
| Accrued compensation | 112,500 | 75,000 | ||||||
| Due to related parties | - | 251 | ||||||
| Accrued interest, related party | 52,281 | 80,311 | ||||||
| Deferred rent | (49,565 | ) | - | |||||
| Accrued interest | 12,189 | 1,545 | ||||||
| Net cash used in operating activities | (424,750 | ) | (687,833 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Payment for construction in progress | - | (35,013 | ) | |||||
| Net cash used in investing activities | - | (35,013 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from related party convertible notes payable | - | 150,000 | ||||||
| Proceeds from related party notes payable | 275,629 | 621,000 | ||||||
| Proceeds from convertible notes | 330,000 | - | ||||||
| Principal payments on related party notes payable | - | (61,000 | ) | |||||
| Repayments of convertible notes payable | - | (50,000 | ) | |||||
| Net cash provided by financing activities | 605,629 | 660,000 | ||||||
| Net increase in cash and cash equivalents | 180,879 | (62,846 | ) | |||||
| Cash and cash equivalents at beginning of period | 78,310 | 88,244 | ||||||
| Cash and cash equivalents at end of period | $ | 259,189 | $ | 25,398 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Interest paid | $ | - | $ | - | ||||
| Income taxes paid | $ | - | $ | - | ||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Convertible note issued for unpaid accrued salary | $ | 75,000 | $ | 250,000 | ||||
| Related party notes payable reclassified as related party convertible notes payable | $ | 873,996 | $ | 222,750 | ||||
| Note payable exchanged for common stock | $ | 936,478 | $ | - | ||||
| Beneficial conversion feature on convertible notes payable | $ | 508,988 | $ | 518,720 | ||||
| Shares issued for settlement of accounts payable | $ | 6,000 | $ | - | ||||
| Extinguishment of debt | $ | - | $ | 254,114 | ||||
| Discount on convertible notes payable due to derivative | $ | 802,381 | $ | - | ||||
Additional | ||||||||||||||||||||||||||||||||
Common Stock | Paid In | Stock | Stock | Accumulated | Minority | |||||||||||||||||||||||||||
Amount | Value | Capital | Payable | Receivable | Deficit | Interest | Total | |||||||||||||||||||||||||
Balance, May 31, 2022 | $ | 32,052,021 | $ | 3,206 | $ | 77,954,748 | $ | 70,092 | $ | (95,079,817 | ) | $ | (97,211 | ) | $ | (17,148,982 | ) | |||||||||||||||
Loss for the three months ended August 31, 2022 | - | - | - | - | (1,148,478 | ) | (183,647 | ) | (1,332,125 | ) | ||||||||||||||||||||||
Balance, August 31, 2022 | $ | 32,052,021 | $ | 3,206 | $ | 77,954,748 | $ | 70,092 | $ | (96,228,295 | ) | $ | (280,858 | ) | $ | (18,481,107 | ) | |||||||||||||||
Common stock issued for the conversion of debt | 40,465,544 | 4,047 | 11,528,633 | - | - | - | 11,532,680 | |||||||||||||||||||||||||
Rounding for reverse split | 576 | - | - | - | - | - | - | |||||||||||||||||||||||||
Loss on extinguishment of debt | 6,659,359 | - | - | - | 6,659,359 | |||||||||||||||||||||||||||
Loss for the three months ended November 30, 2022 | - | - | - | - | (8,215,954 | ) | 10,587 | (8,205,367 | ) | |||||||||||||||||||||||
Balance, November 30, 2022 | $ | 72,518,141 | $ | 7,253 | $ | 96,142,740 | $ | 70,092 | $ | (104,444,249 | ) | $ | (270,271 | ) | $ | (8,494,435 | ) | |||||||||||||||
Loss for the three months ended February 28, 2023 | - | - | - | - | (899,515 | ) | (130,391 | ) | (1,029,906 | ) | ||||||||||||||||||||||
Balance, February 28, 2023 | $ | 72,518,141 | $ | 7,253 | $ | 96,142,740 | $ | 70,092 | $ | (105,343,764 | ) | $ | (400,662 | ) | $ | (9,524,341 | ) | |||||||||||||||
| - | - | - | ||||||||||||||||||||||||||||||
Balance, May 31, 2022 | $ | 32,052,021 | $ | 3,206 | $ | 77,954,748 | $ | 70,092 | $ | - | $ | (95,079,817 | ) | $ | (97,211 | ) | $ | (17,148,982 | ) | |||||||||||||
Common stock issued for the conversion of debt | 40,465,544 | 4,047 | 11,528,633 | - | - | - | - | 11,532,680 | ||||||||||||||||||||||||
Loss on extinguishment of debt | - | - | 6,659,359 | - | - | - | - | 6,659,359 | ||||||||||||||||||||||||
Rounding for reverse split | 576 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Loss for the nine months ended February 28, 2023 | - | - | - | - | - | (10,263,947 | ) | (303,451 | ) | (10,567,398 | ) | |||||||||||||||||||||
Balance, February 28, 2023 | $ | 72,518,141 | $ | 7,253 | $ | 96,142,740 | $ | 70,092 | $ | - | $ | (105,343,764 | ) | $ | (400,662 | ) | $ | (9,524,341 | ) | |||||||||||||
Balance, May 31, 2023 | $ | 72,543,141 | $ | 7,255 | $ | 96,147,784 | $ | 65,702 | $ | - | $ | (108,879,446 | ) | $ | (1,141,867 | ) | $ | (13,800,572 | ) | |||||||||||||
Loss for the three months ended August 31, 2023 | - | - | - | - | - | (463,841 | ) | 2,108 | (461,733 | ) | ||||||||||||||||||||||
Balance, August 31, 2023 | $ | 72,543,141 | $ | 7,255 | $ | 96,147,784 | $ | 65,702 | $ | - | $ | (109,343,287 | ) | $ | (1,139,759 | ) | $ | (14,262,305 | ) | |||||||||||||
Discount on convertible notes payable | - | - | 62,400 | - | - | - | - | 62,400 | ||||||||||||||||||||||||
Loss for the three months ended November 30, 2023 | - | - | - | - | - | (1,302,272 | ) | 92 | (1,302,180 | ) | ||||||||||||||||||||||
Balance, November 30, 2023 | $ | 72,543,141 | $ | 7,255 | $ | 96,210,184 | $ | 65,702 | $ | - | $ | (110,645,559 | ) | $ | (1,139,667 | ) | $ | (15,502,085 | ) | |||||||||||||
Conversion of notes payable | 64,132,135 | 6,413 | 2,167,587 | - | - | - | - | 2,174,000 | ||||||||||||||||||||||||
Discounts on notes payable | - | - | 221,712 | - | - | - | - | 221,712 | ||||||||||||||||||||||||
Shares issued to officer as compensation | 1,000,000 | 100 | 38,700 | - | - | - | - | 38,800 | ||||||||||||||||||||||||
Amortization of employee stock options | - | - | 6,439 | - | - | - | - | 6,439 | ||||||||||||||||||||||||
Common to be returned in settlement of notes payable | - | - | - | - | (592,848 | ) | - | - | (592,848 | ) | ||||||||||||||||||||||
Extinguishment of debt | - | - | 6,508,269 | - | - | - | - | 6,508,269 | ||||||||||||||||||||||||
Loss for the three months ended February 29, 2024 | - | - | - | - | (4,369,144 | ) | 168 | (4,368,976 | ) | |||||||||||||||||||||||
Balance, February 29, 2024 | $ | 137,675,276 | $ | 13,768 | $ | 105,152,891 | $ | 65,702 | $ | (592,848 | ) | $ | (115,014,703 | ) | $ | (1,139,499 | ) | $ | (11,514,689 | ) | ||||||||||||
Balance, May 31, 2023 | 72,543,141 | 7,255 | 96,147,784 | 65,702 | - | (108,879,446 | ) | (1,141,867 | ) | (13,800,572 | ) | |||||||||||||||||||||
| - | ||||||||||||||||||||||||||||||||
Conversion of notes payable | 64,132,135 | 6,413 | 2,167,587 | - | - | - | - | 2,174,000 | ||||||||||||||||||||||||
Discounts on notes payable | - | - | 284,112 | - | - | - | - | 284,112 | ||||||||||||||||||||||||
Shares issued to officer as compensation | 1,000,000 | 100 | 38,700 | - | - | - | - | 38,800 | ||||||||||||||||||||||||
Amortization of employee stock options | - | - | 6,439 | - | - | - | - | 6,439 | ||||||||||||||||||||||||
Common stock returned in settlement of notes payable | - | - | - | - | (592,848 | ) | - | - | (592,848 | ) | ||||||||||||||||||||||
Extinguishment of debt | - | - | 6,508,269 | - | - | - | - | 6,508,269 | ||||||||||||||||||||||||
Loss for the nine months ended February 29, 2024 | - | - | - | - | (6,135,257 | ) | 2,368 | (6,132,889 | ) | |||||||||||||||||||||||
Balance, February 29, 2024 | $ | 137,675,276 | $ | 13,768 | $ | 105,152,891 | $ | 65,702 | $ | (592,848 | ) | $ | (115,014,703 | ) | $ | (1,139,499 | ) | $ | (11,514,689 | ) | ||||||||||||
See accompanying notes to these financial statements.
CLS HOLDINGS USA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine | For the Nine | |||||||
Months Ended | Months Ended | |||||||
February 29, 2024 | February 28, 2023 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net loss | $ | (6,132,889 | ) | $ | (10,567,398 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Loss on equity investment | - | 176,587 | ||||||
Share-based compensation | 45,239 | - | ||||||
Amortization of debt discounts and fees | 393,240 | 597,821 | ||||||
Loss on extinguishment of debt | 3,404,910 | 6,659,359 | ||||||
Gain on settlement of note receivable | - | (348,165 | ) | |||||
Gain on settlement of accounts payable | (4,375 | ) | - | |||||
Gain on debt settlement | (168,837 | ) | (2,384 | ) | ||||
Depreciation and amortization expense | 498,131 | 716,114 | ||||||
Bad debt expense | 393 | (4,437 | ) | |||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (523,209 | ) | (95,718 | ) | ||||
Prepaid expenses and other current assets | 66,042 | 143,627 | ||||||
Inventory | 627,208 | (931,861 | ) | |||||
Right of use asset | 287,717 | 263,064 | ||||||
Accounts payable and accrued expenses | 656,121 | 739,622 | ||||||
Accrued interest | 336,878 | 327,169 | ||||||
Deferred tax liability | 1,380,226 | 1,552,028 | ||||||
Operating lease liability | (277,945 | ) | (244,011 | ) | ||||
Net cash provided by (used in) operating activities | 588,850 | (1,018,583 | ) | |||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Payments to purchase property, plant and equipment | (50,659 | ) | (141,465 | ) | ||||
Payment for construction security deposit | (40,000 | ) | - | |||||
Investment in Quinn River | - | (297,149 | ) | |||||
Proceeds from collection of note receivable | - | 348,165 | ||||||
Net cash used in investing activities | (90,659 | ) | (90,449 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Cash received from the issuance of notes payable | - | - | ||||||
Cash received from the issuance of convertible notes payable | 2,030,000 | - | ||||||
Proceeds from loan payable | 2,290,000 | 1,717,115 | ||||||
Repayments of loan payable | (481,943 | ) | (1,869,344 | ) | ||||
Principal payments on notes payable | (812,807 | ) | - | |||||
Repayments on convertible debt | (3,758,795 | ) | (350,000 | ) | ||||
Principal payments on finance leases | (64,190 | ) | (52,786 | ) | ||||
Net cash used in financing activities | (797,735 | ) | (555,015 | ) | ||||
Net decrease in cash and cash equivalents | (299,544 | ) | (1,664,047 | ) | ||||
Cash and cash equivalents at beginning of period | 998,421 | 2,551,859 | ||||||
Cash and cash equivalents at end of period | $ | 698,877 | $ | 887,812 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
Interest paid | $ | 338,529 | $ | 1,188,397 | ||||
Income taxes paid | $ | - | $ | - | ||||
NONCASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
Shares issued for conversion of notes payable | $ | - | $ | 11,532,680 | ||||
Capitalized interest | $ | 967,872 | $ | 3,283 | ||||
Extinguishment of debt | $ | 12,515,830 | $ | - | ||||
Gain on restructure of 15% notes | $ | 1,088,308 | $ | - | ||||
Conversion of notes payable to common stock | $ | 1,745,888 | $ | - | ||||
Loss on conversion of debentures to common stock | $ | 428,112 | $ | - | ||||
Initial ROU asset and lease liability – operating lease | $ | 224,899 | $ | 46,475 | ||||
Transfer from prepaid expenses to fixed assets | $ | 221,712 | $ | - | ||||
See accompanying notes to these financial statements.
CLS HOLDINGS USA, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
February 29, 2024
(Unaudited)
Note 1 –1: Nature of Business and Significant Accounting Policies
Basis of Presentation
These financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States and are expressed in US dollars. The Company has adopted a fiscal year end of May 31st.
Principals of Consolidation
The accompanying consolidated financial statements include the accounts of CLS Holdings USA, Inc.; its direct and indirect wholly owned operating subsidiaries, CLS Nevada, Inc., (“CLS Nevada”), CLS Labs, Inc. (“CLS Labs”), CLS Labs Colorado, Inc. (“CLS Colorado”), CLS Massachusetts, Inc. (“CLS Massachusetts”), and Alternative Solutions, LLC (“Alternative Solutions”); and wholly owned inactive subsidiaries CLS Labs Colorado, Inc. (“CLS Colorado”) and CLS Massachusetts, Inc. (“CLS Massachusetts”). Alternative Solutions is the sole owner of the following three entities (collectively, the “Oasis LLCs”): Serenity Wellness Center, LLC (“Serenity Wellness Center”); Serenity Wellness Products, LLC (“Serenity Wellness Products”); and Serenity Wellness Growers, LLC (“Serenity Wellness Growers”). The accompanying consolidated financial statements also include the accounts of CLS CBD in which the company owns a 95% ownership interest and a variable interest entity, Kealii Okamalu, LLC (“Kealii Okamalu”), in which the Company owns a 50% interest. All material intercompany transactions have been eliminated upon consolidation of these entities.
Nature of Business
CLS Holdings USA, Inc. (the “Company”) was originally incorporated as Adelt Design, Inc. (“Adelt”) on March 31, 2011 to manufacture and market carpet binding art. Production and marketing of carpet binding art never commenced.
We currently operate a retail marijuana dispensary within walking distance to the Las Vegas Strip and a small-scale cultivation facility, as well as a product manufacturing facility and a wholesale distribution operation in North Las Vegas. The vertically integrated business model drives strong margins to the bottom line on a portion of sales at the dispensary.
Our retail dispensary is a single location operation in Nevada and occupies over 5,000 square feet. This location, which is easily accessible by tourists, is currently open 19.5 hours per day for walk-in service. Curbside and in store express pick up is available between the hours of 8:00 AM and 12:00 AM. Oasis dispensary also delivers cannabis to residents between the hours of 8:00 AM and 10:00 PM. The central location provides logistical convenience for delivery to all parts of the outstanding sharesLas Vegas valley.
Our wholesale operations, which occupies approximately 10,000 square feet of commona 22,000 square foot warehouse, began sales to third parties in August 2017 and completed construction and received a certificate of occupancy for its state-of-the-art extraction facility in December of 2019. We have made sales to over 85 external customers as of February 29, 2024. Our existing product line includes vaporizers, tinctures, ethanol produced THC distillate, and live and cured hydrocarbon concentrates. At present, the City Trees cultivation facility only grows breeding stock of Adelt fromto preserve valuable genetics and does not offer 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 exchangecrops for each share of common stock issued and outstanding.sale or processing. As a result, 6,250,000 shares of the Company’s common stock were issued to CLS Labs in exchangeall raw materials for the 10,000,000 shares that it owned by virtue of the above-referenced purchasemanufacturing are sourced from Larry Adelt.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassification
Certain reclassifications, not affecting previously reported net income or cash flows, have been made to the previously issued financial statements to conform to the current period presentation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less to be cash equivalents. The Company had cash and cash equivalents of $259,189$698,877 and $78,310$998,421 as of November 30, 2017February 29, 2024 and May 31, 2017,2023, respectively.
Inventory
Inventories are stated at the lower of cost or market. Cost is determined using a perpetual inventory system whereby costs are determined by acquisition costs of individual items included in inventory. Market is determined based on net realizable value. Appropriate consideration is given to obsolescence, excessive levels, deterioration, and other factors in evaluating net realizable values. Our cannabis products consist of prepackaged purchased goods ready for resale, along with produced tinctures and extracts developed under our production license.
Property, Plant and Equipment
Property and equipment is recorded at the lower of cost or estimated net recoverable amount, and is depreciated using the straight-line method over its estimated useful life. Property acquired in a business combination is recorded at estimated initial fair value. Property, plant, and equipment are depreciated using the straight-line method based on the lesser of the estimated useful lives. Computer equipment is beinglives of the assets or the lease term based upon the following life expectancy:
Years | ||||
Office equipment | 3 to 5 | |||
Furniture & fixtures | 3 to 7 | |||
Machinery & equipment | 3 to 10 | |||
Leasehold improvements | Term of lease | |||
Repairs and maintenance expenditures are charged to operations as incurred. Major improvements and replacements, which extend the useful life of an asset, are capitalized and depreciated over the remaining estimated useful life of the asset. When assets are retired or sold, the cost and related accumulated depreciation are eliminated, and any resulting gain or loss is reflected in operations.
Long-Lived Assets
The Company reviews its property and equipment and any identifiable intangibles including goodwill for impairment on an annual basis utilizing the guidance set forth in the Statement of Financial Accounting Standards Board ASC 350 “Intangibles – Goodwill and Other” and ASC 360 “Property, Plant, and Equipment.” At February 29, 2024, the net carrying value of goodwill on the Company’s balance sheet remained at $557,896.
Employee Retention Tax Credit
Under the provisions of the extension of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Company was eligible for a three-year period.refundable employee retention tax credit (the “ERTC”), subject to certain criteria. As ERTCs are not within the scope of ASC 740, Income Taxes, the Company has chosen to account for the ERTCs by analogizing to the International Standard IAS 20, Accounting/or Government Grants and Disclosure of Government Assistance (“IAS 20”). In accordance with IAS 20, an entity recognizes government grants only when there is reasonable assurance that the entity will comply with the conditions attached to them and the grants will be received. During the three and nine months ended February 29, 2024, the Company received an aggregate of $0 and $924,862, which was accounted for as other income on the Company’s condensed consolidated statement of operations.
Comprehensive Income
ASC 220-10-15 “Reporting Comprehensive Income,” establishes standards for reporting and displaying of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, ASC 220-10-15 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company does not have any items of comprehensive income in any of the periods presented.
Non-Controlling Interests
The Company reports “non-controlling interest in subsidiary” as a component of equity, separate from parent’s equity, on the Consolidated Balance Sheets. In addition, the Company’s Consolidated Statements of Operations includes “net income (loss) attributable to non-controlling interest.” During the three months ended February 29, 2024 and February 28, 2023, the Company reported a non-controlling interest in the amount of ($168) and $130,391, respectively, representing 50% of the income (loss) incurred by its partially owned subsidiary, Kealii Okamalu. During the nine months ended February 29, 2024 and February 28, 2023, the Company reported a non-controlling interest in the amount of ($2,368) and $303,451, respectively, representing 50% of the income (loss) incurred by its partially owned subsidiary, Kealii Okamalu.
Variable Interest Entities
The Company’s consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and variable interest entities (“VIE”), where the Company is the primary beneficiary under the provisions of ASC 810, Consolidation (“ASC 810”). A VIE must be consolidated by its primary beneficiary when, along with its affiliates and agents, the primary beneficiary has both: (i) the power to direct the activities that most significantly impact the VIE’s economic performance; and (ii) the obligation to absorb losses or the right to receive the benefits of the VIE that could potentially be significant to the VIE. The Company reconsiders whether an entity is still a VIE only upon certain triggering events and continually assesses its consolidated VIEs to determine if it continues to be the primary beneficiary. See Note 3.
Concentrations of Credit Risk
The Company maintains its cash in bank deposit accounts and other accounts, the balances of which at times may be uninsured or exceed federally insured limits. From time to time, some of the Company’s funds are also held by escrow agents; these funds may not be federally insured. The Company continually monitors its banking relationships and consequently has not experienced any losses in such accounts.
Advertising and Marketing Costs
All costs associated with advertising and marketing costspromoting products are expensed as incurred. The Company incurred noTotal recognized advertising and marketing costsexpenses were $125,251 and $119,327 for the three and six months ended November 30, 2017February 29, 2024 and 2016.
Research and Development
Research and development expenses are charged to operations as incurred. The Company incurred no research and development costs of $1,286 and $196 for the three and six months ended November 30, 2017February 29, 2024 and 2016,February 28, 2023, respectively.
Fair Value of Financial Instruments
Pursuant to Accounting Standards Codification (“ASC”) No. 825 825–- Financial Instruments, the Company is required to estimate the fair value of all financial instruments included on its balance sheets. The carrying amountamounts of the Company’s cash and cash equivalents, notenotes receivable, convertible notes payable, accounts payable and accrued expenses, none of which is held for trading, approximatesapproximate 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 1–- Quoted prices in active markets for identical assets or liabilities.
Level 2 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 3–- Significant unobservable inputs that cannot be corroborated by market data.
Revenue Recognition
Revenue from the condensed consolidated balance sheetsale of cannabis products is recognized by Oasis at fair value. the point of sale, at which time payment is received, the product is delivered, and the Company’s performance obligation has been met. Management estimates an allowance for sales returns.
The conversion featuresCompany also recognizes revenue from Serenity Wellness Products LLC and Serenity Wellness Growers LLC, d/b/a City Trees (“City Trees”). City Trees recognizes revenue from the sale of the convertible notes are embedded derivativesfollowing cannabis products and are separately valuedservices to licensed dispensaries, cultivators and accounted for ondistributors within the consolidated balance sheet with changes in fair value recognized during the periodState 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 modelNevada:
● | Premium organic medical cannabis sold wholesale to licensed retailers | |
● | Recreational marijuana cannabis products sold wholesale to licensed distributors and retailers | |
● | Extraction products such as oils and waxes derived from in-house cannabis production | |
● | Processing and extraction services for licensed medical cannabis cultivators in Nevada | |
● | High quality cannabis strains in the form of vegetative cuttings for sale to licensed medical cannabis cultivators in Nevada |
Effective June 1, 2018, the Company used foradopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from commercial sales of products and licensing agreements by applying the following steps: (1) identifying the contract with a customer; (2) identifying the performance obligations in the contract; (3) determining the fair valuetransaction price; (4) allocating the transaction price to each performance obligation in the contract; and (5) recognizing revenue when each performance obligation is satisfied.
Disaggregation of its derivatives isRevenue
The following table represents a disaggregation of revenue for the Lattice Model. Valuations derived from this model are subject to ongoing internalthree and external verificationnine months ended February 29, 2024 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). February 28, 2023:
For the Three | For the Three | |||||||
Months Ended | Months Ended | |||||||
February 29, 2024 | February 28, 2023 | |||||||
Cannabis Dispensary | 2,987,224 | 3,529,261 | ||||||
Cannabis Production | 1,939,233 | 1,908,041 | ||||||
| $ | 4,926,457 | $ | 5,437,302 | |||||
For the Nine | For the Nine | |||||||
Months Ended | Months Ended | |||||||
February 29, 2024 | February 28, 2023 | |||||||
Cannabis Dispensary | 9,399,830 | 11,210,622 | ||||||
Cannabis Production | 5,838,368 | 6,345,784 | ||||||
| $ | 15,238,198 | $ | 17,556,406 | |||||
Basic and Diluted Earnings or Loss Per Share
Basic net earnings per share is based on the weighted average number of shares outstanding during the period, while fully-dilutedfully 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 isare 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.anti-dilutive. As a result, the basic and dilutive losses per common share are the same for the three and sixnine months ended November 30, 2017February 29, 2024 and 2016.
Income Taxes
The Company accounts for income taxes under the asset and liability method in accordance with ASC 740. The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The components of the deferred tax assets and liabilities are classified as current and non-current based on their characteristics. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations.
Section 280E of the Internal Revenue Code, as amended, prohibits businesses from deducting certain expenses associated with trafficking controlled substances (within the meaning of Schedule I and II of the Controlled Substances Act). The IRS has invoked Section 280E in tax audits against various cannabis businesses in the U.S. that are permitted under applicable state laws. Although the IRS has issued a clarification allowing the deduction of certain expenses, the bulk of operating costs and general administrative costs are generally not permitted to be deducted. The operations of certain of the Company’s subsidiaries are subject to Section 280E. This results in permanent differences between ordinary and necessary business expenses deemed non-deductible under IRC Section 280E. Therefore, the effective tax rate can be highly variable and may not necessarily correlate with pre-tax income or loss.
Commitments and Contingencies
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management assessesand its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims brought to such legal counsel’s attention as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed.
Recent Accounting Pronouncements
There are various updates recently issued, ASU No. 2017-04, Simplifying the Test for Goodwill Impairment,most of 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.
Note 2 –2: Going Concern
As shown in the accompanying financial statements, the Company has incurred net losses from operations resulting in an accumulated deficit of $12,082,893$115,014,703 as of November 30, 2017. Further losses are anticipated in the development of the Company’s business raising substantial doubt about the Company’s ability to continue as a going concern.February 29, 2024. 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 relatingThe Company has reported positive cash generated from operating activities for the last four quarters, including the three months ended February 29, 2024.
Note 3: Joint Venture
On October 20, 2021, the Company entered into a management services agreement (the “Quinn River Joint Venture Agreement”) through its 50% owned subsidiary, Kealii Okamalu, with CSI Health MCD LLC (“CSI”) and a commission established by the authority of the Tribal Council of the Fort McDermitt Paiute and Shoshone Tribe (“Tribe”). The purpose of the Quinn River Joint Venture Agreement was to establish a business (the “Quinn River Joint Venture”) to grow, cultivate, process, and sell cannabis and related products. The Quinn River Joint Venture Agreement had an initial term of 10 years plus a 10-year renewal option from the date the first cannabis crop produced is harvested and sold. Pursuant to the recoverabilityQuinn River Joint Venture Agreement, Kealii Okamalu leased approximately 5-10 acres of the Tribe’s land located along the Quinn River at a cost of $3,500 per quarter and classificationmanaged the design, finance and construction of a cannabis cultivation facility on such tribal lands (“the Cultivation Facility”). Kealii Okamalu managed the ongoing operations of the Cultivation Facility and related business, including, but not limited to, cultivation of cannabis crops, personnel staffing, product packaging, testing, marketing and sales. Packaged products were branded as “Quinn River Farms.” Kealii Okamalu was required to contribute $6 million towards the construction of the Cultivation Facility and the working capital for the Quinn River Joint Venture. This amount was to be repaid from the portion of the net profits of the Quinn River Joint Venture otherwise payable to CSI and the Tribe at the rate of $750,000 per quarter for eight quarters. Kealii Okamalu was to receive one-third of the net profits of the Quinn River Joint Venture after being repaid its initial contribution.
The Company is the manager of and holds a 50% ownership interest in Kealii Okamalu. Kealii Okamalu is a VIE which the Company consolidates. The Quinn River Joint Venture is not a legal entity but rather a business operated by Kealii Okamalu. The Company uses the equity method of accounting to record one-third of the profit or loss generated by the Quinn River Joint Venture, which accrues to Kealii Okamalu. Since the Company is a 50% owner of Kealii Okamalu, 50% of the profit or loss of Kealii Okamalu is recorded asset amounts,as minority interest in the Company’s statement of operations.
During the year ended May 31, 2022, Kealii Okamalu made cash investments in the aggregate amount of $581,714 in the Quinn River Joint Venture. The Company also purchased $949,939 of fixed assets for use by the Quinn River Joint Venture which are on the balance sheet of Kealii Okamalu.
During the year ended May 31, 2023, Kealii Okamalu made cash investments in the aggregate amount of $304,145 in the Quinn River Joint Venture.
There was no additional investment made in the Quinn River Joint Venture during the nine months ended February 29, 2024.
The Company’s partner in Kealii Okamalu LLC has defaulted on the LLC Operating Agreement and the Quinn River Joint Venture Agreement by failing to make any of its required $3 million capital contribution. As a result of the default by the Company’s partner in Kealii Okamalu LLC, the Tribal Council has formally terminated the Quinn River Joint Venture Agreement. Prior to the termination, the Company removed all of its assets from the tribal land and all of the assets owned by Kealii Okamalu. The Company does not believe it is likely to recover its investment in Kealii Okamalu and has recorded an impairment charge in the amount of $1,590,742 against the following assets during the year ended May 31, 2023:
Deposits and prepaid expenses | $ | 33,000 | ||
Fixed assets | 756,808 | |||
Right of use assets | 205,888 | |||
Equity investment in Quinn River | 595,046 | |||
Total impairment | $ | 1,590,742 |
Following the impairment charge the net book value of the Company’s investment in Kealii Okamalu and the Quinn River Joint Venture at February 29, 2024 is $0.
Note 4: Accounts Receivable
Accounts receivable was $954,020 and $431,204 at February 29, 2024 and May 31, 2023, respectively. The Company had bad debt expense of $0 and $438 during the three months ended February 29, 2024 and February 28, 2023. The Company had bad debt expense of $393 and $(4,437) during the nine months ended February 29, 2024 and February 28, 2023. No allowance for doubtful accounts was necessary during the three months ended February 29, 2024 and February 28, 2023.
Note 5: Inventory
Inventory, consisting of material, overhead, labor, and manufacturing overhead, is stated at the lower of cost (first-in, first-out) or amountsmarket, and classificationconsists of liabilitiesthe following:
February 29, | May 31, | |||||||
2024 | 2023 | |||||||
Raw materials | $ | 354,947 | $ | 399,728 | ||||
Finished goods | 2,030,777 | 2,613,204 | ||||||
Total | $ | 2,385,724 | $ | 3,012,932 | ||||
Raw materials consist of cannabis plants and the materials that might resultare used in our production process prior to being tested and packaged for consumption. Finished goods consist of pre-packaged materials previously purchased from this uncertainty. other licensed cultivators and our manufactured edibles and extracts.
Note 3 –6: Prepaid Expenses
Prepaid expenses and other current assets consisted of the following at November 30, 2017February 29, 2024 and May 31, 2017:2023:
February 29, | May 31, | |||||||
2024 | 2023 | |||||||
Prepaid expenses | 82,911 | 147,953 | ||||||
Employee receivable | - | 1,000 | ||||||
Total | $ | 82,911 | $ | 148,953 | ||||
Prepaid expenses primarily of (i) annual license fees charged by the State of Nevada; (ii) insurance costs; (iii) supplies; (iv) rent; and (v) board fees.
| November 30, | May 31, | |||||||
| 2017 | 2017 | |||||||
| Prepaid legal fees | $ | 1,410 | $ | 1,410 | ||||
| Prepaid expenses | 25,000 | - | ||||||
| Total | $ | 26,410 | $ | 1,410 | ||||
Note 4 – Security Deposit7: Note Receivable
None
Note 5 –8: Property, Plant and Equipment
Property, plant and equipment consisted of the following at November 30, 2017February 29, 2024 and May 31, 2017.2023:
February 29, 2024 | May 31, 2023 | |||||||
Office equipment | $ | 159,401 | $ | 148,243 | ||||
Furniture and fixtures | 148,358 | 148,358 | ||||||
Machinery & Equipment | 2,431,960 | 2,392,458 | ||||||
Leasehold improvements | 2,911,164 | 2,911,164 | ||||||
Less: accumulated depreciation | (3,162,030 | ) | (2,687,146 | ) | ||||
Property, plant, and equipment, net | $ | 2,488,853 | $ | 2,913,077 | ||||
| November 30, | May 31, | |||||||
| 2017 | 2017 | |||||||
| Computer equipment | $ | 2,674 | $ | 2,674 | ||||
| Property and equipment, gross | 2,674 | 2,674 | ||||||
| Less: accumulated depreciation | (2,230 | ) | (1,784 | ) | ||||
| Property and equipment, net | $ | 444 | $ | 890 | ||||
The Company made payments in the amounts of $50,659 and $141,465 for property and equipment during the nine months ended February 29, 2024 and February 28, 2023, respectively.
Depreciation expense totaled $223$157,634 and $223$210,187 for the three months ended November 30, 2017February 29, 2024 and 2016February 28, 2023, respectively. Depreciation expense totaled $446$474,884 and $446$629,920 for the sixnine months ended November 30, 2017February 29, 2024 and 2016February 28, 2023, respectively.
Note 6- Deferred Financing Costs
The Company has operating leases for offices and warehouses. The Company’s leases have remaining lease terms of 1 year to 10.5 years, some of which include options to extend.
The Company’s lease expense for the three months ended November 30, 2017,February 29, 2024 and February 28, 2023 was entirely comprised of operating leases and amounted to $97,658 and $82,858, respectively. The Company’s lease expense for the Company had deferred financing costsnine months ended February 29, 2024 and February 28, 2023 was entirely comprised of $39,500 relatedoperating leases and amounted to a convertible note payable. During$277,945 and $244,021, respectively.
The Company’s right of use (“ROU”) asset amortization for the three months ended November 30, 2017,February 29, 2024 and February 28, 2023 was $89,736 and $86,749, respectively. The Company’s ROU asset amortization for the nine months ended February 29, 2024 and February 28, 2023 was $186,424 and $174,067, respectively.
The Company amortized $3,119has recorded total right of use assets of $4,384,520 and liabilities in the amount of $4,297,720 through February 29, 2024.
Right of use assets – operating leases are summarized below:
February 29, 2024 | ||||
Amount at inception of leases | $ | 4,384,520 | ||
Amount amortized | (2,599,873 | ) | ||
Prior Period Impairment of Quinn River Lease | (205,888 | ) | ||
Balance – February 29, 2024 | $ | 1,578,759 | ||
Operating lease liabilities are summarized below:
Amount at inception of leases | $ | 4,297,720 | ||
Amount amortized | (2,432,479 | ) | ||
Balance – February 29, 2024 | $ | 1,865,241 |
Warehouse and offices | $ | 1,751,609 | ||
Land | 205,888 | |||
Office equipment | 5,402 | |||
Balance – February 29, 2024 | $ | 1,865,241 | ||
Lease liability | $ | 1,865,241 | ||
Less: current portion | (433,465 | ) | ||
Lease liability, non-current | $ | 1,431,776 |
Maturity analysis under these deferred costs.lease agreements is as follows:
Twelve months ended February 28, 2025 | $ | 616,524 | ||
Twelve months ended February 28, 2026 | 589,970 | |||
Twelve months ended February 28, 2027 | 292,381 | |||
Twelve months ended February 29, 2028 | 298,127 | |||
Twelve months ended February 28, 2029 | 276,130 | |||
Thereafter | 332,691 | |||
Total | $ | 2,405,823 | ||
Less: Present value discount | (540,582 | ) | ||
Lease liability | $ | 1,865,241 |
Note 7 –10: Intangible Assets
Intangible assets consisted of the following at November 30, 2017February 29, 2024 and May 31, 2017.
| November 30, | May 31, | |||||||
| 2017 | 2017 | |||||||
| Domain name | $ | 2,158 | $ | 2,158 | ||||
| 2,158 | 2,158 | |||||||
| Less: accumulated amortization | (1,044 | ) | (828 | ) | ||||
| Intangible assets, net | $ | 1,114 | $ | 1,330 | ||||
February 29, 2024 | ||||||||||||||||
Accumulated | ||||||||||||||||
Gross | Amortization | Impairment | Net | |||||||||||||
License & Customer Relations | $ | 110,000 | $ | (31,167 | ) | - | $ | 78,833 | ||||||||
Tradenames - Trademarks | 222,000 | (125,800 | ) | - | 96,200 | |||||||||||
Domain Names | 25,993 | (15,189 | ) | - | 10,804 | |||||||||||
Total | $ | 357,993 | $ | (172,156 | ) | - | $ | 185,837 | ||||||||
May 31, 2023 | ||||||||||||||||
Accumulated | ||||||||||||||||
Gross | Amortization | Impairment | Net | |||||||||||||
Intellectual Property | $ | 319,600 | $ | (157,137 | ) | $ | (162,463 | ) | $ | - | ||||||
License & Customer Relations | 990,000 | (243,375 | ) | (663,667 | ) | 82,958 | ||||||||||
Tradenames - Trademarks | 301,000 | (147,992 | ) | (40,158 | ) | 112,850 | ||||||||||
Non-compete Agreements | 27,000 | (27,000 | ) | - | - | |||||||||||
Domain Names | 25,993 | (12,713 | ) | - | 13,280 | |||||||||||
Total | $ | 1,663,593 | $ | (588,217 | ) | $ | (866,288 | ) | $ | 209,088 | ||||||
Total amortization expense charged to operations for the three months ended November 30, 2017February 29, 2024 and 2016February 28, 2023 was $108$7,750 and $108,$28,715, respectively. Total amortization expense charged to operations for the sixnine months ended November 30, 2017February 29, 2024 and 2016February 28, 2023 was $216$15,501 and $216,$58,149, respectively.
Amount to be amortized during the twelve months ended November 30, | ||||
2024 | $ | 31,044 | ||
2025 | 31,044 | |||
2026 | 31,044 | |||
2027 | 28,472 | |||
2028 | 12,900 | |||
Thereafter | 51,333 | |||
| $ | 185,837 |
Note 11: Goodwill
Goodwill in the amount of $557,896 is carried on the Company’s balance sheet at February 29, 2024 and May 31, 2023 in connection with the acquisition of Alternative Solutions on June 27, 2018.
Goodwill Impairment Test
The domain name is being amortized overCompany assessed its intangible assets as of May 31, 2022 and 2021 for purposes of determining if an impairment existed as set forth in ASC 350 – Intangibles – Goodwill and Other and ASC 360 – Property Plant and Equipment. Pursuant to ASC 360, the Company determined that the fair value of its intangible assets exceeded the carrying value of goodwill at February 29, 2024 and May 31, 2023. As a periodresult, no impairment was recorded. At February 29, 2024 and May 31, 2023, the net amount of 60 months.goodwill on the Company’s balance sheet was $557,896.
Note 12: Other Assets
Other assets included the following as of February 29, 2024 and May 31, 2023:
February 29, | May 31, | |||||||
2024 | 2023 | |||||||
Construction deposit | $ | 40,000 | $ | - | ||||
Security deposits | 157,500 | 157,500 | ||||||
| $ | 197,500 | $ | 157,500 | |||||
During the three months ended February 29, 2024, the Company paid a deposit in the amount of $40,000 for design and architectural work on construction planned for its Las Vegas lounge.
Note 8 –13: Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consisted of the following at November 30, 2017February 29, 2024 and May 31, 2017.2023:
February 29, 2024 | May 31, 2023 | |||||||
Trade accounts payable | $ | 2,615,031 | $ | 1,793,585 | ||||
Accrued payroll and payroll taxes | 376,423 | 311,505 | ||||||
Accrued liabilities | 388,861 | 623,482 | ||||||
Total | $ | 3,380,315 | $ | 2,728,572 | ||||
| November 30, | May 31, | |||||||
| 2017 | 2017 | |||||||
| Trade payables | $ | 577,278 | $ | 497,213 | ||||
| Accrued payroll and related liabilities | 36,577 | 34,987 | ||||||
| Deferred rent liability | 55,699 | 49,565 | ||||||
| Total accounts payable and accrued liabilities | $ | 669,554 | $ | 581,765 | ||||
Note 9 – Related Party Transactions
2022 Financing Agreement CBR
Effective September 30, 2017 and May 31, 2017,2022, the Company owed the amount of $37,500entered into a Business Loan and $37,500, respectively,Security Agreement with CBR Capital LLC to Jeffrey Binder, its President and Chief Executive Officer, for accrued salary. For the three and six months ended November 30, 2017, unpaid accrued salaryborrow $900,000 (the “CBR Loan”). The CBR Loan is repayable in 48 weekly installments in the amount of $12,500$13,312.50 for weeks 1-8 and $75,000, respectively, was transferred$29,287.50 for weeks 9-48. CBR Capital LLC has stated that it is aware of the Canaccord Debentures and the U.S. Convertible Debentures and agreed to a convertible promissory note duesubordinate the CBR security interest to Mr. Binder (see note 9).
During the year ended May 31, 2017,2023, the Company had accrued salary due to Alan Bosnett, a former officer of the Company prior to his October 1, 2017 separation,received cash proceeds in the amount of $37,500$873,000 from the CBR loan agreement. During the year ended May 31, 2023, the Company made payments in the amount of $838,688. Of these payments $506,014 was principal and $332,674 was interest for the year ended May 31, 2023. At the inception of the loan, the Company recorded a discount in the amount of $27,000 related to prepaid fees. During the year ended May 31, 2023, the Company amortized $18,563 of these fees to interest expense, the balance of the discount remaining at May 31, 2023 was $8,438.
During the three months ended February 29, 2024, the Company made payments of principal and interest in the amount of $0 on the CBR Loan. During the nine months ended February 29, 2024, the Company made payments of principal and interest in the amount of $393,986 and $45,327, respectively, on the CBR Loan. Also during the three and nine months ended February 29, 2024, the Company amortized $0 and $8,437, respectively, of prepaid fees to interest expense.
At February 29, 2024 and May 31, 2023, the balance due under the CBR Loan was $0 and $385,550 net of discount, respectively.
2022 Financing Agreement TVT
Effective October 21, 2022, we entered into a Purchase and Sale of Future Receipts Agreement with TVT Business Funding LLC to borrow $200,000 (the “TVT Loan”). The TVT Loan was repayable in 48 weekly installments in the amount of $5,916.67.
During the year ended May 31, 2023, the Company received cash proceeds in the amount of $194,000 from the TVT Loan. During the year ended May 31, 2023, the Company made payments in the amount of $183,417. Of these payments $112,045 was principal and $71,372 was interest for the year ended May 31, 2023. At the inception of the loan, the Company recorded a discount in the amount of $6,000 related to prepaid fees. During the year ended May 31, 2023, the Company amortized $3,875 of these fees to interest expense, the balance of the discount remaining at May 31, 2023 is $2,125.
During the three months ended February 29, 2024, the Company made principal and interest payments in the amount of $0, respectively, on the TVT Loan. During the nine months ended February 29, 2024, the Company made principal and interest payments in the amount of $87,955 and $12,296, respectively, on the TVT Loan. Also during the three and nine months ended February 29, 2024, the Company amortized $0 and $2,126, respectively, of prepaid fees to interest expense.
At February 29, 2024 and May 31, 2023, the balance due under the TVT Loan was $0 and $85,830 net of discount, respectively.
Note 15: Convertible Notes Payable
February 29, 2024 | May 31, 2023 | |||||||
US Convertible Debenture 2 (Navy Capital Green Fund) Convertible debenture in the principal amount of $1,000,000 (the “U.S. Convertible Debenture 2”) dated October 31, 2018, which bears interest, payable quarterly, at a rate of 8% per annum, with interest during the first eighteen months following issuance being payable by increasing the then-outstanding principal amount of the U.S. Convertible Debenture 2. The U.S. Convertible Debenture 2 was to mature on a date that was three years following issuance. The U.S. Convertible Debenture 2 was convertible into Convertible Debenture Units at a conversion price of $3.20 per Convertible Debenture Unit. Each Convertible Debenture Unit consisted of (i) one share of the Company’s common stock, and (ii) one-half of one warrant, with each warrant exercisable for three years to purchase a share of common stock at a price of $4.40.
On July 26, 2019, U.S. Convertible Debenture 2 was amended such that, should the Company issue or sell common stock or equity securities convertible into common stock at a price less than the conversion price of the U.S. convertible Debenture 2, the conversion price of U.S. Convertible Debenture 2 would be reduced to such issuance price, and the exercise price of the warrant issuable in connection with U.S. Convertible Debenture 2 would be exercisable at a price equal to 137.5% of the adjusted conversion price at the time of conversion. The U.S. Convertible Debenture 2 has other features, such as mandatory conversion in the event the common stock trades at a particular price over a specified period of time and required redemption in the event of a “Change in Control” of the Company. The U.S. Convertible Debenture 2 is an unsecured obligation of the Company and ranks pari passu in right of payment of principal and interest with all other unsecured obligations of the Company. The Company recorded a discount in the amount of $813,724 on the U.S. Convertible Debenture 2.
On April 15, 2021, the U.S. Convertible Debenture 2 was amended as follows: (i) the conversion price of the debentures was reduced to $1.20 per unit; and (ii) the maturity date was extended from October 31, 2021 to October 31, 2022. This amendment was accounted for as an extinguishment of debt, and the Company recorded a loss in the amount of $509,700 during the year ended May 31, 2021.
On September 15, 2022, the U.S. Convertible Debenture 2 was amended as follows: (i) the conversion price of debentures with a principal amount of $675,668 was reduced to $0.285 per unit, and these debentures along with accrued interest in the amount of $11,261 were converted to 2,410,279 shares of common stock and warrants to purchase 1,205,140 shares of common stock; (ii) the conversion price of the remaining debentures with a principal amount of $450,446 was reduced to $0.40 per share; (iii) the maturity date of 50% of the remaining debentures with a principal amount of $225,223 was extended to December 31, 2023, and the maturity date of 50% of the remaining debentures with a principal amount of $225,223 was extended to December 31, 2024; and (iv) the conversion price of the warrants issuable upon conversion of the debentures was reduced to $0.40. The value of the warrants will be determined when the issuance becomes probable, which the Company believes is unlikely to occur until the conversion price of the debentures is below the market price of the Company’s common stock. This amendment was accounted for as an extinguishment of debt, and a loss in the amount of $422,331 was recorded on this transaction. The fair values of the warrants and conversion options included in the calculation of the loss on extinguishment of debt were $223,515 and $198,816, respectively.
On December 29, 2023, the U.S. Convertible Debenture 2 was amended as follows: (i) the conversion price of the debentures was reduced to $0.07 per unit; (ii) the conversion price of warrants underlying the units issuable upon conversion was reduced to $0.10 per share; (iii) the maturity date was extended to January 31, 2028; (iv) accrued interest in the amount of $54,054 was added to the principal balance. A loss on extinguishment of debt in the amount of $874,797 was charged to operations in connection with this transaction. During the three and nine months ended February 29, 2024, the Company accrued interest in the amounts of $9,699 and $27,717 on the U.S. Convertible Debenture 2, respectively. During the three months and nine months ended February 29, 2024, the Company made interest payments in the amount of $6,696 on the U.S. Convertible Debenture 2. | 495,196 | 450,446 | ||||||
February 29, 2024 | May 31, 2023 | |||||||
US Convertible Debenture 4 (Darling Capital) Convertible debenture in the principal amount of $532,000 (the “U.S. Convertible Debenture 4”) dated October 25, 2018, which bears interest, payable quarterly, at a rate of 8% per annum, with interest during the first eighteen months following issuance being payable by increasing the then-outstanding principal amount of the U.S. Convertible Debenture 4. The U.S. Convertible Debenture 4 was to mature on a date that was three years following issuance. The U.S. Convertible Debenture 4 was convertible into Convertible Debenture Units at a conversion price of $3.20 per Convertible Debenture Unit. Each Convertible Debenture Unit consisted of (i) one share of the Company’s common stock, and (ii) one-half of one warrant, with each warrant exercisable for three years to purchase a share of common stock at a price of $4.40. The value of the warrants will be recorded when the issuance becomes probable. On July 26, 2019, U.S. Convertible Debenture 4 was amended such that, should the Company issue or sell common stock or equity securities convertible into common stock at a price less than the conversion price of the U.S. Convertible Debenture 4, the conversion price of U.S. Convertible Debenture 4 would be reduced to such issuance price, and the exercise price of the warrant issuable in connection with U.S. Convertible Debenture 4 would be exercisable at a price equal to 137.5% of the adjusted conversion price at the time of conversion. The U.S. Convertible Debenture 4 has other features, such as mandatory conversion in the event the common stock trades at a particular price over a specified period of time and required redemption in the event of a “Change in Control” of the Company. The U.S. Convertible Debenture 4 is an unsecured obligation of the Company and ranks pari passu in right of payment of principal and interest with all other unsecured obligations of the Company. The Company recorded a discount in the amount of $416,653 on the U.S. Convertible Debenture 4. During the years ended May 31, 2023 and 2022, the Company accrued interest in the amounts of $41,900 and $47,928 on the U.S. Convertible Debenture 4, respectively. During the years ended May 31, 2023 and 2022, the Company made interest payments in the amounts of $23,964 and $47,928, respectively. On April 19, 2021, the U.S. Convertible Debenture 4 was amended as follows: (i) the conversion price of the debenture was reduced to $1.20 per unit; and (ii) the maturity date was extended from October 25, 2021 to October 25, 2022. This amendment was accounted for as an extinguishment of debt, and the Company recorded a loss in the amount of $271,164 during the year ended May 31, 2021. On October 25, 2022, the Company received a notice of demand from the lender, placing the U.S. Convertible Debt 4 into default status. On November 1, 2022, the Company entered into a forbearance agreement with the lender (the “Forbearance Agreement”) with the following terms: (i) the Company will pay the lender the amount of $150,000 on November 2, 2022, and an additional $50,000 each month for the following nine months, or a total of $600,000; (ii) the default interest rate of 12% will be applied on the existing principal balances until paid in full; (iii) lender shall forbear from taking any further action based upon the existing default. As a result of this agreement, the Company capitalized $3,283 of accrued interest. During the three and nine months ended February 29, 2024, the Company accrued interest in the amount of $0 and $11,982, respectively, on the U.S. Convertible Debenture 4. The Company recognized a gain in the amount of $2,384 on this transaction during the year ended May 31, 2023. During the three and nine months ended February 29, 2024, the Company made payments in the aggregate amount of $0 and $100,000, respectively, pursuant to the Forbearance Agreement. At February 29, 2024 the amount owing under the Forbearance Agreement was $0 and the obligations under the debenture have been paid in full. | - | 100,000 | ||||||
February 29, 2024 | May 31, 2023 | |||||||
Canaccord Debentures Convertible debentures payable in the aggregate principal amount of $12,012,000 (the “Canaccord Debentures”) dated December 12, 2018, which bear interest, payable quarterly, at a rate of 8% per annum, with interest during the first eighteen months following issuance being payable by increasing the then-outstanding principal amount of the Canaccord Debentures. The Canaccord Debentures were to mature on a date that was three years following issuance. The Canaccord Debentures were convertible into Convertible Debenture Units at a conversion price of $3.20 per Convertible Debenture Unit. Each Convertible Debenture Unit consisted of (i) one share of the Company’s common stock, and (ii) one-half of one warrant, with each warrant exercisable for three years to purchase a share of common stock at a price of $4.40. The Canaccord Debentures have other features, such as mandatory conversion in the event the common stock trades at a particular price over a specified period of time and required redemption in the event of a “Change in Control” of the Company. The Canaccord Debentures are unsecured obligations of the Company and rank pari passu in right of payment of principal and interest with all other unsecured obligations of the Company. During the three months ended November 30, 2019, in two separate transactions, principal in the aggregate amount of $25,857 was converted into an aggregate of 8,081 shares of the Company’s common stock, and warrants to purchase 4,040 shares of common stock. There were no gains or losses recorded on these conversions because they were done in accordance with the terms of the original agreement. No discount was recorded for the fair value of the warrants issued. Because the market price of the Company’s common stock was less than the conversion price on the date of issuance of the Canaccord Debentures, a discount was not recorded on the Canaccord Debentures. During the three and nine months ended February 29, 2024 and February 28, 2023, the Company accrued interest in the amounts of $105,077 and $210,155, respectively, on the Canaccord Debentures. During the three and nine months ended February 29, 2024, the Company made no interest payments on the Canaccord Debentures.
On March 31, 2021, the Canaccord Debentures were amended as follows: (i) the conversion price of the debentures was reduced to $1.20 per unit; (ii) the maturity date was extended from December 12, 2021 to December 12, 2022; (iii) the mandatory conversion threshold was reduced from a daily volume weighted average trading price of greater than $4.80 per share to $2.40 per share for the preceding ten consecutive trading days; and (iv) the exercise price of the warrants issuable upon conversion was reduced from $4.40 to $1.60 and the expiration of the warrants extended until March 31, 2024. This amendment was accounted for as an extinguishment of debt, and the Company recorded a loss in the amount of $3,286,012 during the year ended May 31, 2021. During the year ended May 31, 2022, principal In the aggregate amount of $281,000 was converted into an aggregate of 234,167 shares of the Company’s common stock, and warrants to purchase 117,084 shares of common stock. There were no gains or losses recorded on these conversions because they were done in accordance with the terms of the original agreement.
On September 15, 2022, the Canaccord Debentures were further amended as follows: (i) the conversion price of debentures with a principal amount of $7,965,278 was reduced to $0.285 per unit, and these debentures along with accrued interest in the amount of $132,755 were converted to 28,414,149 shares of common stock and warrants to purchase 14,207,075 shares of common stock; (ii) the conversion price of the remaining debentures with a principal amount of $52,53,873 was reduced to $0.40 per share; (iii) the maturity date of 50% of the remaining debentures with a principal amount of $2,626,936.50 was extended to December 31, 2023, and the maturity date of 50% of the remaining debentures with a principal amount of $2,626,936.50 was extended to December 31, 2024; and (iv) the conversion price of the warrants issuable upon conversion of the debentures was reduced to $0.40. The value of the warrants will be determined when the issuance becomes probable, which the Company believes is unlikely to occur until the conversion price of the debentures is below the market price of the Company’s common stock. This amendment was accounted for as an extinguishment of debt, and a loss in the amount of $4,547,660 was recorded on this transaction. The fair values of the warrants and conversion options included in the calculation of the loss on extinguishment of debt were $2,623,852 and $1,923,808, respectively.
On December 28, 2023, the Canaccord Debentures were amended as follows: (i) the conversion price of the debentures was reduced to $0.07 per unit; (ii) the conversion price of warrants underlying the units issuable upon conversion was reduced to $0.10 per share; (iii) the maturity date was extended to January 31, 2028; (iv) accrued interest in the amount of $186,111 was added to the principal balance and accrued interest in the amount of $465,012 was forgiven (a loss on extinguishment of debt in the amount of $874,797 was charged to operations in connection with this transaction); (v) Put Rights (the “Put Rights”) were granted to the debenture holders granting each debenture holder the right to require the Company to redeem all or any part of the debenture in cash at a redemption price of 60% of face value (a loss on extinguishment of debt in the amount of $8,141,849 was charged to operations in connection with this transaction); (vi) interest accruing through February 28, 2025 will be added to the principal balance rather than paid to debenture holders; (v) debenture holders were granted an additional put right in the event the Company’s cash available for debt service for any fiscal quarter exceeds $750,000, subject to pro ration, to require the Company to redeem all or any part of such debenture holder’s outstanding Canaccord Debentures in cash at a redemption price equal to the aggregate principal amount of the Canaccord Debentures being so redeemed, (vi) a provision that the Company shall redeem on the last day of each calendar month beginning March 31, 2025 a portion of the outstanding Canaccord Debentures less the amount of interest paid on such date was added; and (vii) subject to the receipt of regulatory approvals, a security interest in certain of the Company’s assets (such as licenses, inventory (including work in process), equipment (excluding equipment subject to purchase money financing) and contract rights (excluding investments in entities other than wholly owned subsidiaries)) to the holders of the Canaccord Debentures and to other holders of the Company’s debt, now or in the future, as the Company may elect was granted.
On January 4, 2024, debenture holders exercised Put Rights with regard to the Canaccord Debentures with a principal amount of $3,875,095, the Company made a cash payment to the debenture holders in the amount of $2,325,056 representing 60% of the principal amount of these debentures, and the principal amount of $1,550,039 representing 40% of the principal amount of these debentures was forgiven. The principal balance of the Canaccord Dentures subsequent to the January 4 Put Rights exercise was $1,544,231. Interest at the rate of 8.0% per annum on this amount will be capitalized monthly through February 28, 2025. Principal and interest payments in the amount of $28,522 will be due monthly beginning March 31, 2025 and continuing through December 31, 2027; on January 31, 2028 a balloon payment in the amount of $1,038,777 will be due. During the A gain on extinguishment of debt in the amount of $8,022,612 was recognized in connection with this transaction. The combined December 28 and January 4 transactions resulted in a a net loss on extinguishment of debt in the amount of $119,237 on the Canaccord Debentures during the three months ended February 29, 2024. during the three and nine months ended February 29, 2024, the Company accrued interest in the amounts of $55,684 and $265,839 on the Canaccord Debentures, , respectively. During the three months and nine months ended February 29, 2024, the Company made no interest payments on the Canaccord Debentures. | 1,564,889 | 5,253,873 | ||||||
February 29, 2024 | May 31, 2023 | |||||||
November 2023 Convertible Debentures Four unsecured convertible debentures dated November 30, 2023 in the aggregate principal amount of $960,000 (the “November 2023 Convertible Debentures”). The November 2023 Debentures bear interest at the rate of 15% per annum and are due on November 30, 2024. A minimum of one year of interest will be due on the November 2023 Debentures regardless of when they are paid; this minimum interest in the amount of $144,000 was recorded as an original issue discount. The Company, at its sole discretion, on or before December 6, 2023, may elect to satisfy the principal and interest due under the November 2023 Debentures by the issuance of shares of common stock at a price of $0.0345 per share; this conversion would result in the issuance of 32,000,000 shares of common stock. The conversion feature of the November 2023 Debentures had an intrinsic value in the amount of $62,400; this amount was recorded as a discount.
On December 6, 2023, the November 23 Debentures in the aggregate amount of $960,000 plus minimum interest in the aggregate amount of $144,000 were converted at a price of $0.0345 per share into 32,000,000 shares of common stock. A loss on settlement of debt in the aggregate amount of $206,400 was recorded on these transactions. | $ | - | $ | - | ||||
January 2024 Convertible Debentures Four unsecured convertible debentures dated January 2, 2024 in the aggregate principal amount of $1,070,000 (the “January 2024 Convertible Debentures”). The January 2024 Debentures bear interest at the rate of 16% per annum beginning January 16, 2024 and are due on January 2, 2025. The Company, at its sole discretion, on or before December 6, 2023, may elect to satisfy the principal and interest due under the November 2023 Debentures by the issuance of shares of common stock at a price of $0.0333 per share; this conversion would result in the issuance of 32,132,135 shares of common stock. The conversion feature of the November 2023 Debentures had an intrinsic value in the amount of $221,712; this amount was recorded as a discount.
On January 15, 2024, the January 2024 Convertible Debentures in the aggregate amount of $1,070,000 were converted at a price of $0.0333 per share into 32,132,135 shares of common stock. A loss on settlement of debt in the aggregate amount of $221,712 was recorded on these transactions. | $ | - | $ | - | ||||
Convertible Notes Payable | $ | 2,060,085 | $ | 5,804,319 | ||||
February 29, 2024 | May 31, 2023 | |||||||
Total – Convertible Notes Payable, Current Portion | $ | 58,498 | $ | 2,952,160 | ||||
Total – Convertible Notes Payable, Long-term Portion | $ | 2,001,587 | $ | 2,852,159 | ||||
Note 16: Convertible Notes Payable – Related Party
February 29, 2024 | May 31, 2023 | |||||||
US Convertible Debenture 1 (Navy Capital Green C0-Invest Fund) Convertible debenture in the principal amount of $4,000,000 to a related party (the “U.S. Convertible Debenture 1”) dated October 31, 2018, which bears interest, payable quarterly, at a rate of 8% per annum, with interest during the first eighteen months following issuance being payable by increasing the then-outstanding principal amount of the U.S. Convertible Debenture 1. The U.S. Convertible Debenture 1 was to mature on a date that was three years following issuance. The U.S. Convertible Debenture 1 was convertible into units (the “Convertible Debenture Units”) at a conversion price of $3.20 per Convertible Debenture Unit. Each Convertible Debenture Unit consisted of (i) one share of the Company’s common stock, and (ii) one-half of one warrant, with each warrant exercisable for three years to purchase a share of common stock at a price of $4.40. On July 26, 2019, U.S. Convertible Debenture 1 was amended such that, should the Company issue or sell common stock or equity securities convertible into common stock at a price less than the conversion price of the U.S. Convertible Debenture 1, the conversion price of U.S. Convertible Debenture 1 would be reduced to such issuance price, and the exercise price of the warrant Issuable in connection with U.S. Convertible Debenture 1 would be exercisable at a price equal to 137.5% of the adjusted conversion price at the time of conversion. The U.S. Convertible Debenture 1 has other features, such as mandatory conversion in the event the common stock trades at a particular price over a specified period of time and required redemption in the event of a “Change in Control” of the Company. The U.S. Convertible Debenture 1 is an unsecured obligation of the Company and ranks pari passu in right of payment of principal and interest with all other unsecured obligations of the Company. The Company recorded a discount in the amount of $3,254,896 on the U.S. Convertible Debenture 1.
On April 15, 2021, the U.S. Convertible Debenture 1 was amended as follows: (i) the conversion price of the debenture was reduced to $1.20 per unit; and (ii) the maturity date was extended from October 31, 2021 to October 31, 2022. This amendment was accounted for as an extinguishment of debt, and the Company recorded a loss in the amount of $2,038,803 during the year ended May 31, 2021 in connection with the amendment.
On September 15, 2022, the U.S. Convertible Debenture 1 was further amended as follows: (i) the conversion price of debentures with a principal amount of $2,702,674 was reduced to $0.285 per unit, and these debentures along with accrued interest in the amount of $45,044 were converted to 9,641,118 shares of common stock and warrants to purchase 4,820,560 shares of common stock; (ii) the conversion price of the remaining debentures with a principal amount of $1,801,783 was reduced to $0.40 per share; (iii) the maturity date of 50% of the remaining debentures with a principal amount of $900,891.50 was extended to December 31, 2023, and the maturity date of 50% of the remaining debentures with a principal amount of $900,891.50 was extended to December 31, 2024; and (iv) the conversion price of the warrants issuable upon conversion of the debentures was reduced to $0.40. The value of the warrants will be determined when the issuance becomes probable, which the Company believes is unlikely to occur until the conversion price of the debentures is below the market price of the Company’s common stock. This amendment was accounted for as an extinguishment of debt, and a loss in the amount of $1,689,368 was recorded on this transaction. The fair values of the warrants and conversion options included in the calculation of the loss on extinguishment of debt were $894,090 and $795,278, respectively.
On December 29, 2023, the U.S. Convertible Debenture 1 was amended as follows: (i) the conversion price of the debentures was reduced to $0.07 per unit; (ii) the conversion price of warrants underlying the units issuable upon conversion was reduced to $0.10 per share; (iii) the maturity date was extended to January 31, 2028; (iv) accrued interest in the amount of $215,414 was added to the principal balance. A loss on extinguishment of debt in the amount of $3,499,184 was charged to operations in connection with this transaction. During the three and nine months ended February 29, 2024, the Company accrued interest in the amounts of $37,994 and $110,066 on the U.S. Convertible Debenture 2, respectively. During the three months and nine months ended February 29, 2024, the Company made interest payments in the amount of $26,783 on the U.S. Convertible Debenture 2. | $ | 1,979,979 | $ | 1,801,783 | ||||
February 29, 2024 | May 31, 2023 | |||||||
Total – Convertible Notes Payable - Related Party, Current Portion | $ | 233,993 | $ | 900,891 | ||||
Total – Convertible Notes Payable – Related Party, Long-term Portion | $ | 1,745,986 | $ | 900,892 | ||||
Note 17: Notes Payable
February 29, 2024 | May 31, 2023 | |||||||
Debenture 1 Debenture in the principal amount of $250,000 (the “Debenture 1”) dated December 1, 2021, which bears interest, payable quarterly commencing six months after issuance, at a rate of 15% per annum. Principal on Debenture 1 is due in two equal installments 18 months after issuance and at maturity on July 10, 2024. With the Debenture, the purchaser received warrants to purchase 75,758 shares of common stock at an exercise price of $1.65 per share of common stock. The Company shall make additional quarterly payments under Debenture 1 beginning 90 days after the end of its first fiscal quarter after January 10, 2025, and for the next five years, on an annual basis, equal to the greater of (a) 15% of the original principal amount, or (b) the purchaser’s pro rata portion of 5% of the distributions the Company receives as a result of the Quinn River Joint Venture during the prior fiscal year. The Company recorded a discount in the amount of $17,223 on Debenture 1.
On May 31, 2023, the Debenture 1 was amended as follows: (1) the maturity date was extended to October 31, 2024; (2) the first payment of principal and interest on June 30, 2023, followed by quarterly payment of principal and interest on September 30, 2023, beginning October 31, 2023, the Company is required to pay the note holder principal and interest monthly through the maturity date.
On December 31, 2023, the Debenture 1 was amended as follows: The original issue discount in the amount of $187,000 was reduced to $37,500. A gain on extinguishment of debt in the amount of $110,772 was recognized in connection with this transaction, and a discount in the amount of $11,272 was recorded. During the three and nine months ended February 29, 2024, the Company accrued interest in the amount of $7,500 and $25,833, respectively, on the Debenture 1. During the three and nine months ended February 29, 2024, the Company amortized discounts in the amount of $5,352 and $35,653, respectively. | $ | 204,167 | $ | 250,000 | ||||
Debenture 2 Debenture in the principal amount of $250,000 (the “Debenture 2”) dated December 21, 2021, which bears interest, payable quarterly commencing six months after issuance, at a rate of 15% per annum. Principal on Debenture 2 is due in two equal installments 18 months after issuance and at maturity on July 10, 2024. With the Debenture, the purchaser received warrants to purchase 75,758 shares of common stock at an exercise price of $1.65 per share of common stock. The Company shall make additional quarterly payments under Debenture 2 beginning 90 days after the end of its first fiscal quarter after January 10, 2025, and for the next five years, on an annual basis, equal to the greater of (a) 15% of the original principal amount, or (b) the purchaser’s pro rata portion of 5% of the distributions the Company receives as a result of the Quinn River Joint Venture during the prior fiscal year. The Company recorded a discount in the amount of $10,428 on Debenture 2.
On May 31, 2023, the Debenture 2 was amended as follows: (1) the first payment of principal and interest on June 30, 2023, followed by quarterly payment of principal and interest on September 30, 2023, beginning October 31, 2023, the Company is required to pay the note holder principal and Interest monthly through the maturity date.
On December 31, 2023, the Debenture 2 was amended as follows: The original issue discount in the amount of $187,000 was reduced to $37,500. A gain on extinguishment of debt in the amount of $117,883 was recognized in connection with this transaction, and a discount in the amount of $12,577 was recorded. During the three and nine months ended February 29, 2024, the Company accrued interest in the amount of $2,344 and $12,084, respectively, on the Debenture 2. During the three and nine months ended February 29, 2024, the Company amortized discounts in the amount of $6,721 and $45,029, respectively. | 71,667 | 250,000 | ||||||
February 29, 2024 | May 31, 2023 | |||||||
Debenture 3 Debenture in the principal amount of $500,000 (the “Debenture 3”) dated December 21, 2021, which bears interest, payable quarterly commencing nine months after issuance, at a rate of 15% per annum. Principal on Debenture 3 is due in two equal installments 18 months after issuance and at maturity on July 10, 2024. With the Debenture, the purchaser received warrants to purchase 151,516 shares of common stock at an exercise price of $1.65 per share of common stock. The Company shall make additional quarterly payments under Debenture 3 beginning 90 days after the end of its first fiscal quarter after January 10, 2025, and for the next five years, on an annual basis, equal to the greater of (a) 15% of the original principal amount, or (b) the purchaser’s pro rata portion of 5% of the distributions the Company receives as a result of the Quinn River Joint Venture during the prior fiscal year. The Company recorded a discount in the amount of $19,335 on Debenture 3. During the three and nine months ended February 29, 2024, $1,541 and $3,082, respectively, of this discount was charged to operations. The Company recorded an original issue discount in the amount of $375,000 on Debenture 3. During the three and nine months ended February 29, 2024, $29,886 and $59,772, respectively, of this original issue discount was charged to operations. During the three and nine months ended February 29, 2024, the Company accrued interest in the amounts of $17,917 and $36,667, respectively, on Debenture 3, respectively. During the three and nine months ended February 29, 2024, respectively, the Company made interest payments in the amounts of $30,417 and $49,167. During the three and nine months ended February 29, 2024, the Company made principal payments in the amount of $66,667 on Debenture 3. On May 31, 2023, the Debenture 3 was amended as follows: (1) the maturity date was extended to October 31, 2024; (2) the first payment of principal and interest on June 30, 2023, followed by quarterly payment of principal and interest on September 30, 2023, beginning October 31, 2023, the Company is required to pay the note holder principal and interest monthly through the maturity date. On December 31, 2023, the Debenture 3 was amended as follows: The original issue discount in the amount of $375,000 was reduced to $75,000. A gain on extinguishment of debt in the amount of $219,528 was recognized in connection with this transaction, and a discount in the amount of $24,284 was recorded. During the three and nine months ended February 29, 2024, the Company accrued interest in the amount of $10,417 and $47,084, respectively, on the Debenture 3. During the three and nine months ended February 29, 2024, the Company amortized discounts in the amount of $11,127 and $73,981, respectively. On February 22, 2024, the Company settled the amounts due under Debentures 3, 4, and 5 for a cash payment in the aggregate amount of $1,250,000 and the return of 13,174,402 shares of the Company’s common stock and the cancellation of 454,548 common stock warrants. A gain in the aggregate amount of $596,949 was recognized on this transaction. See note 19. | - | 500,000 | ||||||
Debenture 4 Debenture in the principal amount of $500,000 (the “Debenture 4”) dated January 4, 2022, which bears interest, payable quarterly commencing nine months after issuance, at a rate of 15% per annum. Principal on Debenture 4 is due in two equal installments 18 months after issuance and at maturity on July 10, 2024. With the Debenture, the purchaser received warrants to purchase 151,516 shares of common stock at an exercise price of $1.65 per share of common stock. The Company shall make additional quarterly payments under Debenture 4 beginning 90 days after the end of its first fiscal quarter after January 10, 2025, and for the next five years, on an annual basis, equal to the greater of (a) 15% of the original principal amount, or (b) the purchaser’s pro rata portion of 5% of the distributions the Company receives as a result of the Quinn River Joint Venture during the prior fiscal year. The Company recorded a discount in the amount of $17,154 on Debenture 4. During the three and nine months ended February 29, 2024, $1,413 and $2,826, respectively, of this discount was charged to operations. The Company recorded an original issue discount in the amount of $375,000 on Debenture 4. During the three and nine months ended February 29, 2024, $30,882 and $61,764, respectively, of this original issue discount was charged to operations. During the three and nine months ended February 29, 2024, the Company accrued interest in the amounts of $17,917 and $36,667, respectively, on Debenture 4. During the three months ended February 29, 2024, the Company made interest payments in the amounts of $30,417 and $49,167, respectively. During the three and nine months ended February 29, 2024, the Company made principal payments in the amount of $66,667 on Debenture 4. On May 31, 2023, the Debenture 4 was amended as follows: (1) the maturity date was extended to October 31, 2024; (2) the first payment of principal and interest on June 30, 2023, followed by quarterly payment of principal and interest on September 30, 2023, beginning October 31, 2023, the Company is required to pay the note holder principal and interest monthly through the maturity date. On December 31, 2023, the Debenture 4 was amended as follows: The original issue discount in the amount of $375,000 was reduced to $75,000. A gain on extinguishment of debt in the amount of $216,634 was recognized in connection with this transaction, and a discount in the amount of $24,284 was recorded. During the three and nine months ended February 29, 2024, the Company accrued interest in the amount of $10,417 and $47,084, respectively, on the Debenture 4. During the three and nine months ended February 29, 2024, the Company amortized discounts in the amount of $11,416 and $76,006, respectively. On February 22, 2024, the Company settled the amounts due under Debentures 3, 4, and 5 for a cash payment in the aggregate amount of $1,250,000 and the return of 13,174,402 shares of the Company’s common stock and the cancellation of 454,548 common stock warrants. A gain on settlement of debt in the aggregate amount of $596,949 was recognized on this transaction. See note 19. | - | 500,000 | ||||||
February 29, 2024 | May 31, 2023 | |||||||
Debenture 5 Debenture in the principal amount of $500,000 (the “Debenture 5”) dated January 4, 2022, which bears interest, payable quarterly commencing nine months after issuance, at a rate of 15% per annum. Principal on Debenture 5 is due in two equal installments 18 months after issuance and at maturity on July 10, 2024. With the Debenture, the purchaser received warrants to purchase 151,516 shares of common stock at an exercise price of $1.65 per share of common stock. The Company shall make additional quarterly payments under Debenture 5 beginning 90 days after the end of its first fiscal quarter after January 10, 2025, and for the next five years, on an annual basis, equal to the greater of (a) 15% of the original principal amount, or (b) the purchaser’s pro rata portion of 5% of the distributions the Company receives as a result of the Quinn River Joint Venture during the prior fiscal year. The Company recorded a discount in the amount of $17,154 on Debenture 5. During the three and nine months ended February 29, 2024, $1,413 and $2,826, respectively, of this discount was charged to operations. The Company recorded an original issue discount in the amount of $375,000 on Debenture 5. During the three and nine months ended February 29, 2024, $30,882 and $61,764, respectively, of this original issue discount was charged to operations. During the three and nine months ended February 29, 2024, the Company accrued interest in the amounts of $17,917 and $36,667, respectively, on Debenture 5. During the three and nine months ended February 29, 2024, the Company made interest payments in the amounts of $30,417 and $49,167, respectively. During the three and nine months ended February 29, 2024, the Company made principal payments in the amount of $66,667 on Debenture 5. On May 31, 2023, the Debenture 5 was amended as follows: (1) the maturity date was extended to October 31, 2024; (2) the first payment of principal and interest on June 30, 2023, followed by quarterly payment of principal and interest on September 30, 2023, beginning October 31, 2023, the Company is required to pay the note holder principal and interest monthly through the maturity date.
On December 31, 2023, the Debenture 5 was amended as follows: The original issue discount in the amount of $375,000 was reduced to $75,000. A gain on extinguishment of debt in the amount of $216,634 was recognized in connection with this transaction, and a discount in the amount of $24,284 was recorded. During the three and nine months ended February 29, 2024, the Company accrued interest in the amount of $10,417 and $47,084, respectively, on the Debenture 5. During the three and nine months ended February 29, 2024, the Company amortized discounts in the amount of $11,416 and $76,006, respectively.
On February 22, 2024, the Company settled the amounts due under Debentures 3, 4, and 5 for a cash payment in the aggregate amount of $1,250,000 and the return of 13,174,402 shares of the Company’s common stock and the cancellation of 454,548 common stock warrants. A gain on settlement of debt in the aggregate amount of $596,949 was recognized on this transaction. See note 19. | - | 500,000 | ||||||
Debenture 6 Debenture in the principal amount of $500,000 (the “Debenture 6”) dated January 4, 2022, which bears interest, payable quarterly commencing nine months after issuance, at a rate of 15% per annum. Principal on Debenture 6 is due in two equal installments 18 months after issuance and at maturity on July 10, 2024. With the Debenture, the purchaser received warrants to purchase 151,516 shares of common stock at an exercise price of $1.65 per share of common stock. The Company shall make additional quarterly payments under Debenture 6 beginning 90 days after the end of its first fiscal quarter after January 10, 2025, and for the next five years, on an annual basis, equal to the greater of (a) 15% of the original principal amount, or (b) the purchaser’s pro rata portion of 5% of the distributions the Company receives as a result of the Quinn River Joint Venture during the prior fiscal year. The Company recorded a discount in the amount of $17,154 on Debenture 6. During the three and nine months ended February 29, 2024, $1,413 and $2,826, respectively, of this discount was charged to operations. The Company recorded an original issue discount in the amount of $375,000 on Debenture 6. During the three and nine months ended February 29, 2024, $30,882 and $61,764, respectively, of this original issue discount was charged to operations. During the three and nine months ended February 29, 2024, the Company accrued interest in the amounts of $17,917 and $49,167, respectively, on Debenture 6. During the three and nine months ended February 29, 2024, the Company made interest payments in the amounts of $30,417 and $49,167, respectively. During the three and nine months ended February 29, 2024, the Company made principal payments in the amount of $66,667 on Debenture 6. On May 31, 2023, the Debenture 6 was amended as follows: (1) the maturity date was extended to October 31, 2024; (2) the first payment of principal and interest on June 30, 2023, followed by quarterly payment of principal and interest on September 30, 2023, beginning October 31, 2023, the Company is required to pay the note holder principal and interest monthly through the maturity date.
On December 31, 2023, the Debenture 6 was amended as follows: The original issue discount in the amount of $375,000 was reduced to $75,000. A gain on extinguishment of debt in the amount of $206,856 was recognized in connection with this transaction, and a discount in the amount of $14,270 was recorded. During the three and nine months ended February 29, 2024, the Company accrued interest in the amount of $15,479 and $52,146, respectively, on the Debenture 6. During the three and nine months ended February 29, 2024, the Company amortized discounts in the amount of $11,208 and $76,000, respectively. | 485,063 | 500,000 | ||||||
Debenture 7 Debenture in the principal amount of $475,000 (the “Debenture 7”) dated January 2, 2024, which bears interest at a rate of 12% per annum. Principal and interest payments are due monthly for 36 months in the amount $15,917 beginning February 29, 2024. During the three and nine months ended February 29, 2024, the Company made principal and interest payments on the Debenture 7 in the amount of $6,892 and $9,025, respectively. | 468,108 | - | ||||||
Debenture 8 Debenture in the principal amount of $465,000 (the “Debenture 8”) dated January 2, 2024, which bears interest a rate of 12% per annum. Principal and interest payments are due monthly for 36 months in the amount $15,582 beginning February 29, 2024. During the three and nine months ended February 29, 2024, the Company made principal and interest payments on the Debenture 8 in the amount of $6,747 and $8,835, respectively. | 458,253 | - | ||||||
Debenture 9 Debenture in the principal amount of $450,000 (the “Debenture 9”) dated February 22, 2024, which bears interest a rate of 12% per annum. Principal and interest payments are due monthly for 24 months in the amount $21,239 beginning March 31, 2024. During the three and nine months ended February 29, 2024, the Company made no principal and interest payments on the Debenture 9. | 450,000 | - | ||||||
Debenture 10 Debenture in the principal amount of $300,000 (the “Debenture 10”) dated February 22, 2024, which bears interest a rate of 12% per annum. Principal and interest payments are due monthly for 24 months in the amount $14,159 beginning March 31, 2024. During the three and nine months ended February 29, 2024, the Company made no principal and interest payments on the Debenture 10. | 300,000 | - | ||||||
Debenture 11 Debenture in the principal amount of $350,000 (the “Debenture 11”) dated February 22, 2024, which bears interest a rate of 12% per annum. Principal and interest payments are due monthly for 24 months in the amount $16,519 beginning March 31, 2024. During the three and nine months ended February 29, 2024, the Company made no principal and interest payments on the Debenture 11. | 350,000 | - | ||||||
| Debenture 12 | ||||||||
Debenture in the principal amount of $250,000 (the “Debenture 12”) dated February 22, 2024, which bears interest a rate of 12% per annum. Principal and interest payments are due monthly for 24 months in the amount $11,799 beginning March 31, 2024. During the three and nine months ended February 29, 2024, the Company made no principal and interest payments on the Debenture 12. | 250,000 | - | ||||||
Total | 3,037,257 | 2,500,000 | ||||||
Original Issue Discount | - | 1,875,000 | ||||||
Notes Payable, Gross | 3,037,257 | 4,375,000 | ||||||
Less: Discount | (37,071 | ) | (902,339 | ) | ||||
Notes Payable, Net of Discount | 3,000,186 | 3,472,661 | ||||||
February 29, 2024 | May 31, 2023 | |||||||
Total – Notes Payable, Net of Discounts, Current Portion | $ | 1,190,703 | $ | 1,439,584 | ||||
Total – Notes Payable, Net of Discounts. Long Term Portion | $ | 1,809,483 | $ | 2,033,077 | ||||
During the three months ended February 29, 2024 and February 28, 2023, the Company amortized discounts to interest expense in the amount of $162,718 and $194,774, respectively. During the three and nine months ended February 29, 2024 and February 28, 2023, the Company amortized discounts to interest expense in the amount of $57,240 and $382,676, respectively.
Aggregate maturities of notes payable and convertible notes payable, and convertible notes payable – related parties as of February 29, 2024 are as follows (not including unamortized debt discounts in the amount of $37,071):
For the twelve months ended February 28,
2025 | $ | 1,483,194 | ||
2026 | 1,451,550 | |||
2027 | 965,088 | |||
2028 | 3,177,489 | |||
2029 | - | |||
Thereafter | - | |||
Total | $ | 7,077,321 |
Note 18: Lease Liabilities - Financing Leases
February 29, 2024 | May 31, 2023 | |||||||
Financing lease obligation under a lease agreement for extraction equipment dated March 14, 2022 in the original amount of $359,900 payable in forty-eight monthly installments of $10,173 including interest at the rate of 15.89%. During the three months ended February 29, 2024, the Company made principal and interest payments on this lease obligation in the amounts of $21,413 and $9,106, respectively. During the nine months ended February 29, 2024, the Company made principal and interest payments on this lease obligation in the amounts of $61,790 and $29,766, respectively. | $ | 215,390 | $ | 277,180 | ||||
Financing lease obligation under an agreement for equipment dated June 20, 2022 in the original amount of $12,400 payable in forty-eight monthly installments of $350 including interest at a rate of 15.78%. During the three months ended February 29, 2024, the Company made principal and interest payments on this lease obligation in the amounts of $847 and $203, respectively. During the nine months ended February 29, 2024, the Company made principal and interest payments on this lease obligation in the amounts of $2,400 and $672, respectively. | $ | 7,587 | 9,987 | |||||
Total | $ | 222,977 | $ | 287,167 | ||||
Current portion | $ | 98,210 | $ | 86,887 | ||||
Long-term maturities | 124,767 | 200,280 | ||||||
Total | $ | 222,977 | $ | 287,167 | ||||
Aggregate maturities of lease liabilities – financing leases as of February 29, 2024 are as follows:
For the period ended February 28,
2025 | $ | 98,210 | ||
2026 | 124,767 | |||
2027 | - | |||
2028 | - | |||
2029 | - | |||
Thereafter | - | |||
Total | $ | 222,977 |
Note 19: Stockholders’ Equity
At the Company's annual meeting of stockholders on November 28, 2023, the Company’s shareholders voted to increase the number of shares of authorized common stock from 187,500,000 shares to 350,000,000 shares. At February 29, 2024, the Company’s authorized capital stock consists of 345,000,000 shares of common stock, par value $0.0001 per share, and 5,000,000 shares of preferred stock, par value $0.001 per share.
On September 15, 2022, the Company effected a reverse stock split of its issued and outstanding common stock (“the “Reverse Split”) at a ratio of 1-for-4, whereby four shares of the Company’s common stock issued and outstanding were exchanged for one share. The number of shares of common stock issued and outstanding immediately before the Reverse Split was 290,070,272; the number of shares outstanding immediately after the reverse split was 72,517,570, a decrease of 217,552,702 shares. All share and per-share information in these financial statements have been adjusted to reflect the effects of the Reverse Split. As a result of the split, an additional 576 shares were issued due to rounding.
Common stock transactions for the nine months ended February 29, 2024
On December 6, 2023, 32,000,000 shares of common stock were issued at a price of $0.0345 per share in connection with the conversion of four convertible notes payable in the aggregate principal amount of $960,000 and interest in the amount of $144,000. No gain or loss was recorded on this transaction as the shares were issued according to the terms of the convertible notes.
On January 15, 2024, 32,132,135 shares of common stock were issued at a price of $0.0333 per share in connection with the conversion of four convertible notes payable in the aggregate principal amount of $1,070,000 . No gain or loss was recorded on this transaction as the shares were issued according to the terms of the convertible notes.
On January 30, 2024, the Board of Directors approved the issuance of 1,000,000 shares of common stock at a price of $0.0388 per share to the Company’s CEO pursuant to his employment agreement.
On February 22, 2023, the Company settled the amounts due under Debentures 3, 4, and 5 for a cash payment in the aggregate amount of $1,250,000 and the return of 13,174,402 shares of the Company’s common stock and the cancellation of 454,548 common stock warrants. At February 29, 2024, these shares have not been received for cancellation and are recorded as common stock receivable on the Company’s balance sheet. See note 17.
Common stock transactions for the nine months ended February 28, 2023
Common Stock and Warrants Issued upon Conversion of Notes Payable:
On September 15, 2022, the Company issued 28,414,149 shares and three-year warrants to acquire 14,207,075 shares of common stock at a price of $0.40 per share as a result of the mandatory conversion provided in the amendments to the Canaccord Debentures. The conversion was for the total amount of $8,098,033, of which $7,965,278 was principal and $132,755 was accrued interest. (See note 15 for details). A loss in the amount of $4,547,660 was recorded in connection with the extinguishment of the Canaccord Debentures. No gain or loss was recorded on the issuance of the shares because the conversion was made pursuant to the terms of the Restructured Canaccord Debenture Agreement.
On September 15, 2022, the Company issued 12,051,397 shares and three-year warrants to acquire 6,025,700 shares of common stock at a price of $0.40 per share as a result of the mandatory conversion provided in the amendments to the U.S. Convertible Debenture holders. The conversion was for the total amount of $3,434,647, of which $3,378,342 was principal and $56,305 was accrued interest. (See note 15 for details). A loss in the amount of $2,111,699 was recorded in connection with the extinguishment of the U.S. Convertible Debentures 1 and 2. No gain or loss was recorded on the issuance of the shares because the conversion was made pursuant to the terms of the Restructured U.S. Convertible Debentures 1 and 2 Agreements.
Other Warrant Transactions
From December 1, 2021, through January 4, 2022, the Company issued $2,500,000 in debentures and issued 757,576 warrants in connection with these debentures. Each warrant allows the holder to purchase one share of the Company’s common stock at an exercise price of $1.65 per share for three years after its date of issuance.
On September 15, 2022, the Company amended $18,846,721 in outstanding debentures to reduce the conversion price of the debentures from $1.20 per unit to $0.40 per unit, increasing the warrants issuable upon conversion of such debentures from 3,400,652 to 6,801,298. As amended, each warrants issuable pursuant to the conversion of such debentures is exercisable for one share of the Company’s common stock at a price of $0.40 per share.
The following table summarizes the significant terms of warrants outstanding at February 29, 2024. This table does not include the unit warrants. See Unit Warrants section below.
Range of exercise Prices | Number of warrants Outstanding | Weighted average remaining contractual life (years) | Weighted average exercise price of outstanding Warrants | Number of warrants Exercisable | Weighted average exercise price of exercisable Warrants | |||||||||||||||||
| $ | 0.40-0.4125 | 20,726,901 | 1.55 | $ | 0.40 | 20,726,901 | $ | 0.40 | ||||||||||||||
| 20,726,901 | 1.55 | $ | 0.40 | 20,726,901 | $ | 0.40 | ||||||||||||||||
Transactions involving warrants are summarized as follows. This table does not include the unit warrants. See Unit Warrants section below.
Number of Shares | Weighted Average Exercise Price | |||||||
Warrants outstanding at May 31, 2022 | 1,729,924 | $ | 0.49 | |||||
Granted | 20,232,775 | $ | 0.40 | |||||
Exercised | - | $ | - | |||||
Cancelled / Expired | (781,250 | ) | $ | 0.60 | ||||
Warrants outstanding at May 31, 2023 | 21,181,449 | $ | 0.40 | |||||
Granted | - | $ | - | |||||
Exercised | - | $ | - | |||||
Cancelled / Expired | (454,548 | ) | $ | 0.41 | ||||
Warrants outstanding at February 29, 2024 | 20,726,901 | $ | 0.40 | |||||
Unit Warrants
In February and March 2018, in connection with the Westpark offering, the Company issued five-year warrants to purchase 51,310 of the Company’s units at an exercise price of $5.00 per unit. Each unit consists of four shares of common stock and one warrant to purchase a share of common stock for $3.00. These warrants expired in March of 2023.
Because the unit warrants are exercisable for Common Stock and warrants, they are not included in the warrant tables above.
Stock Options
Stock options for the nine months ended February 29, 2024
On February 2, 2024, the Company issued stock options as follows:
● | Options to purchase 6,000,000 shares of the Company’s common stock at a price of $0.039 per share were issued to the Company’s CEO. These options have a term of 10 years and vest monthly over 36 months; |
● | Options to purchase 750,000 shares of the Company’s common stock at a price of $0.039 per share were issued to the Company’s Vice President of Finance. These options have a term of 10 years and vest monthly over 36 months; |
● | Options to purchase 750,000 shares of the Company’s common stock at a price of $0.039 per share were issued to the Company’s CAO. These options have a term of 10 years and vest monthly over 36 months; |
● | Options to purchase 500,000 shares of the Company’s common stock at a price of $0.039 per share were issued to the Company’s COO Officer. . These options have a term of 10 years and vest monthly over 24 months; |
● | Options to purchase 250,000 shares of the Company’s common stock at a price of $0.039 per share were issued to the Company’s Chief Scientific Officer. These options have a term of 10 years and vest monthly over 24 months; |
The options were priced at the closing price of the Company’s common stock on the date of the grant.
The following table summarizes the significant terms of options outstanding at February 29, 2024.
Range of exercise Prices | Number of options Outstanding | Weighted average remaining contractual life (years) | Weighted average exercise price of outstanding Options | Number of Options Exercisable | Weighted average exercise price of exercisable Option | |||||||||||||||||
| $ | 0.039 | 8,250,000 | 9.93 | $ | 0.039 | 343,750 | $ | 0.039 | ||||||||||||||
Transactions involving options are summarized as follows.
Number of Shares | Weighted Average Exercise Price | |||||||
Options outstanding at May 31, 2023 | - | $ | - | |||||
Granted | 8,250,000 | $ | 0.039 | |||||
Exercised | - | $ | - | |||||
Cancelled / Expired | - | $ | - | |||||
Options outstanding at February 29, 2024 | 8,250,000 | $ | 0.039 | |||||
Stock options for the nine months ended February 29, 2023
None.
The Company valued options using the Black-Scholes valuation model utilizing the following variables:
February 29, | ||||
2024 | ||||
Volatility | 269.44 | % | ||
Dividends | $ | - | ||
Risk-free interest rates | 3.8 | % | ||
Expected term (years) | 5.00 | |||
During the three and month months ended February 29, 2024, the Company charged $6,439 to stock based compensation expense, in connection with the vesting of stock options. There were no comparables charges during the three and nine months ended February 28, 2023.
The aggregate intrinsic value of options outstanding and exercisable at February 29, 2024 and February 28, 2023 was $3,678 and $0, respectively. Aggregate intrinsic value represents the difference between the fair value of the Company’s stock on the last day of the fiscal period, which was $0.0495 as of February 29, 2024, and the exercise price multiplied by the number of options outstanding and exercisable.
Note 20: Related Party Transactions
As of November 30, 2017February 29, 2024 and May 31, 2017,2023, the Company had accrued salary due to Michael Abrams, a former officer of the Company prior to his September 1, 2015 termination, in the amount of $16,250.
During the nine months ended February 29, 2024, the Company had related party payablesmade payments of $10,000 to each of its three directors for their participation on the Board, for a total of $30,000.
During nine months ended February 29, 2024, the Company’s Board of Directors authorized a bonus for its Chief Executive Officer in the amount of $17,930 due to officers and directors related to expenses$50,000; this amount was 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 $268 and $539 during the three and six months ended November 30, 2017 and 2016, respectively. TheseFebruary 29, 2024.
During the nine months ended February 29, 2024, the Company accrued interest accruals were chargedin the amount of $110,066 on a convertible note payable to additional paid-in capital.
Note 10 – Notes Payable
The following table summarizes the Company’s income tax accrued for the three and six and months ended February 29, 2024 and February 28, 2023:
The Company accounts for income taxes under FASB ASC 740-10, which provides for an asset and liability approach of accounting for income taxes. Under this approach, deferred tax assets and liabilities are recognized based on anticipated future tax consequences, using currently enacted tax laws, attributed to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts calculated for income tax purposes.
The components of the income tax provision include:
Three Months Ended February 29, | ||||||||
2024 | 2023 | |||||||
Revenue | $ | 4,926,457 | $ | 5,437,302 | ||||
Directly attributable costs | (2,799,498 | ) | (2,798,959 | ) | ||||
Deferred | 2,126,959 | 2,458,343 | ||||||
Tax rate | 21 | % | 21 | % | ||||
Tax expense | $ | 446,662 | $ | 516,252 | ||||
Nine months Ended February 29, | ||||||||
2024 | 2023 | |||||||
Revenue | $ | 15,238,198 | $ | 17,556,406 | ||||
Directly attributable costs | (8,665,694 | ) | (10,165,796 | ) | ||||
Deferred | 6,572,504 | 7,390,610 | ||||||
Tax rate | 21 | % | 21 | % | ||||
Tax expense | $ | 1,380,226 | $ | 1,552,028 | ||||
Note: Change in uncertain tax position with all tax expense recorded in current year due to change in estimate. No prior year net operating loss was considered.
Due to the accrual of taxes related to Section 280E of the Internal Revenue Code, as amended, the Company entered intohas 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”). Pursuantuncertain tax accrual that is currently being expensed as a change in estimate. The Company has net operating losses that it believes are available to the Omnibus Loan Amendment,it to offset this expense; however, there can be no assurance under current interpretations of tax laws for cannabis companies that the Company agreedwill be allowed to use these net operating losses to offset Section 280E tax expenses.
Note 22: Commitments and Contingencies
Legal Matters
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of the date of filing of this report, there were no pending or threatened lawsuits.
Integrity Global Security
On October 20, 2022, Integrity Global Security Inc. (“IGS”) filed a Complaint in the Eighth Judicial District Court, Case No. A-22-860152-C, against Serenity alleging Breach of Contract and Breach of Covenant of Good Faith and Fair Dealing. In its Complaint, IGS alleged that Serenity owes IGS the amount of $48,890 for unpaid invoices related to security services performed at Oasis Cannabis Dispensary and City Trees’ locations in Clark County, Nevada. The Company has accrued the amount of $27,314 in connection with this liability of February 29, 2024.
On January 2, 2024, the Insiders to amend certain termsCompany reached agreements with IGS whereby (i) the Company will pay the amount of loans$55,000 in settlement of all claims against the Insiders madeCompany, and (ii) IGS will pay the Company $10,000 in settlement of all claims against IGS. The net cost to the Company for working capital purposes,will be $45,000. The date of record of these settlement agreements will be the dates upon 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 ofagreements are signed. At that time, 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, intocourt will issue an aggregate of 10,816,960 shares oforder officially dismissing 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.
| November 30, | May 31, | |||||||
| 2017 | 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”). | $ | 84,841 | $ | 77,550 | ||||
November 30, 2017 | 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 1; 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”). | 15,000 | 621,658 | ||||||
| Total – Demand Convertible Notes Payable, Related Parties | $ | 100,841 | $ | 699,208 | ||||
| Current portion | $ | 100,841 | $ | 699,208 | ||||
| Long term portion | $ | - | $ | - | ||||
| November 30, | May 31, | |||||||
| 2017 | 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. During the three and six months ended November 30, 2017, interest in the amount of $1,798 and $3,610 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 1”). The Newcan Convertible Note 1 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. During the three and six months ended November 30, 2017, interest in the amount of $2,992 and $6,016 was accrued on Newcan Convertible Note 1, respectively. | 120,000 | 120,000 | ||||||
| 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. | 115,050 | - | ||||||
Lease Arrangements
The Company leases several facilities for office, warehouse, and retail space. Currently lease commitments are as follows:
● | A lease that commenced in February 2019 for 1,400 square feet of office space located at 1718 Industrial Road, Las Vegas, NV 89102, for a term of eighteen months, and for rent of $1,785 per month. In June 2020, this lease was extended to August 31, 2022, with the monthly rent increasing to $1,867 until September 2021, after which time it will be subject to annual increases of 3%. The lease was extended again on April 1, 2022, effective September 1, 2022 until August 31, 2024. The monthly rent increased on September 1, 2022 to $2,084. | |||||||||
● | A lease that commenced January 2018 for 1,000 square feet of storefront space plus 5,900 square feet of warehouse space located at 1800 Industrial Road, Suites 102, 160, and 180, Las Vegas, NV 89102, for a term of five years and for initial base rent of $7,500 per month, with annual increases of 3%. In February 2020, this lease was extended to February 28, 2030 and the monthly rent was increased by $600. At February 29, 2024, the monthly rent on this lease was $10,385. | |||||||||
● | A lease that commenced in February 2019 for 2,504 square feet of office space located at 1800 Industrial Road, Suite 100, Las Vegas, NV 89102 for a term of eighteen months and | |||||||||
November 30, 2017 | 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; $751 of this discount was amortized during the three months ended November 30, 2017. During the three months ended November 30, 2017, interest in the amount of $427 was accrued on the Newcan Convertible Note 6 and $148 of accrued interest was transferred from the Newcan Funding Notes. | 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 Notes 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; $570 of this discount was amortized during the three months ended November 30, 2017. During the three months ended November 30, 2017, interest in the amount of $563 was accrued on the Binder Convertible Note 7 and $122 of accrued interest was transferred from the Binder Funding Notes. | 39,521 | - | ||||||
| Total – Convertible Notes Payable, Related Parties | $ | 1,140,996 | $ | 192,000 | ||||
| Less: Discount | (346,471 | ) | - | |||||
| Convertible Notes Payable, Related Parties, Net of Discounts | $ | 794,525 | $ | 192,000 | ||||
| Convertible Notes Payable, Related Parties, Net of Discounts, Current Portion | $ | 48,000 | $ | - | ||||
| Convertible Notes Payable, Related Parties, Net of Discounts, Long-term Portion | 746,525 | 192,000 | ||||||
November 30, 2017 | 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 six months ended November 30, 2017, the Company accrued interest in the amount of $822 and $4,603, respectively, on the April 2015 Note. | $ | - | $ | 100,000 | ||||
● | A lease that commenced in January 2016 for 22,000 square feet of warehouse space located at 203 E. Mayflower Avenue, North Las Vegas, NV 89030 for a term of five years and initial rent of $11,000 per month, which amount increased | |||||||||
● | A lease that commenced in October 2023 for 2,547 square feet of office space located at 516 S. 4th Street, Las Vegas, NV 89101 for a term of five years and initial rent of $5,083 per month through September 30, 2024. The monthly rent will increase to | 2028. | ||||||||
November 30, 2017 | 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. 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 months ended November 30, 2017, $30,083 of this discount was charged to operations. During the three months ended November 30, 2017, the Company accrued interest in the amount of $746 on this note. | 363,000 | - | ||||||
| Total - Convertible Notes Payable | $ | 363,000 | $ | 310,000 | ||||
| Less: Discount | (332,917 | ) | (57,644 | ) | ||||
| Convertible Notes Payable, Net of Discounts | $ | 30,083 | $ | 252,356 | ||||
| Total - Convertible Notes Payable, Net of Discounts, Current Portion | $ | 30,083 | $ | 252,356 | ||||
| Total - Convertible Notes Payable, Net of Discounts, Long-term Portion | $ | - | $ | - | ||||
| 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 | 350,000 | 2.96 | $ | 0.75 | 350,000 | $ | 0.75 | ||||||||||||||
| 350,000 | 2.96 | $ | 0.75 | 350,000 | $ | 0.75 | ||||||||||||||||
Number of Shares | Weighted Average ExercisePrice | |||||||
| Warrants outstanding at May 31, 2017 | - | $ | - | |||||
| Granted | 350,000 | $ | 0.75 | |||||
| Exercised | - | $ | - | |||||
| Cancelled / Expired | - | $ | - | |||||
| Warrants outstanding at November 30, 2017 | 350,000 | $ | 0.75 | |||||
| November 30, 2017 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities | ||||||||||||||||
| Derivative liabilities | $ | - | $ | - | $ | 353,093 | $ | 353,093 | ||||||||
| May 31, 2017 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities | ||||||||||||||||
| Derivative liabilities | $ | - | $ | - | $ | 95,276 | $ | 95,276 | ||||||||
| Derivative | ||||
| Liability | ||||
| Liabilities Measured at Fair Value | ||||
| Balance as of May 31, 2017 | $ | 95,276 | ||
| Issuances | 673,891 | |||
| Conversions/Redemptions | (603,559 | ) | ||
| Extinguishment of debt | 13,395 | |||
| Revaluation loss | 174,090 | |||
| Balance as of November 30, 2017 | $ | 353,093 | ||
In connection with the Company’s planned Colorado Arrangement,operations, on April 17, 2015, pursuant to an Industrial Lease Agreement (the “Lease”), CLS Labs Colorado leased 14,392 square feet of warehouse and office space (the “Leased Real Property”) in a building in Denver, Colorado where certain intended activities, including growing, extraction, conversion, assembly and packaging of cannabis and other plant materials, are permitted by and in compliance with state, city and local laws, rules, ordinances and regulations. The Lease hashad an initial term of seventy-two (72) months and providesprovided CLS Labs Colorado with two options to extend the term of the lease by up to an aggregate of ten (10) additional years. In August 2017, as a result of the Company’s decision to suspend its proposed operations in Colorado, CLS Labs Colorado asked its landlord to be relieved from its obligations under the Lease, but the parties have not yet reached an agreement on how to proceed.
In August 2017, the Company’s Colorado subsidiary received a demand letter from its Colorado landlord requesting the forfeiture of the $50,000 security deposit, $10,000 in expenses, $15,699 in remaining rent due under the lease agreement and $30,000 to buy out the remaining amounts due under the lease. The $50,000 security deposit was forfeited to the Landlord and the Landlord has made no additional demands for payment or attempts at collection since August of 2017. These expenses, which are a liability of the Company’s Colorado subsidiary, have been accrued on the Balance Sheetbalance sheet as of November 30, 2017.February 29, 2024.
Note 23: Subsequent Events
The Company has evaluated events through the date of the financial statements and has determined that there were no additional material subsequent events.
Item 2. Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations.
History
We were incorporated on March 31, 2011 as Adelt Design, Inc. to manufacture and market carpet binding art. Production and marketing of carpet binding art never commenced. On November 20, 2014, we adopted amended and restated articles of incorporation, thereby changing our name to CLS Holdings USA, Inc. 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.
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
We have been issued 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.
Current Business and conversion method andOutlook
We generate revenues throughthrough: (i) the licensing of our patent pending proprietary methodsretail dispensary (Oasis), and processes to others, (ii) theour City Trees cultivation and processing of cannabis for others, and (iii) the purchase of cannabis and the processing and salewholesale of cannabis-related products.products for Oasis and third-parties. We plancontinue to accomplish thisexplore opportunities for growth 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 ultimately 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 ofWe have created our own brand of concentrates for consumer use, which we would sell wholesale to cannabis dispensaries. We believe that we canare attempting to create a “gold standard” national brand by standardizing the testing, compliance and labeling of our products in an industry currently comprised of small, local businesses with erratic and unreliable product quality, testing practices and labeling. We also plan
Finally, we intend to offer consulting servicesgrow through Cannabis Life Sciences Consulting, LLC, which will generate revenue by providing consulting services to cannabis-related businesses, including growers, dispensariesselect acquisitions in secondary and laboratories, and driving business to our processing facilities.
Results of Operations for the Three Months Ended November 30, 2017February 29, 2024 and 2016February 28, 2023
The table below sets forth our select expenses as a percentage of revenue for the applicable periods:
Three Months Ended | Three Months Ended | |||||||
February 29, 2024 | February 28, 2023 | |||||||
Revenue | 100 | % | 100 | % | ||||
Cost of Goods Sold | 57 | % | 57 | % | ||||
Gross Margin | 43 | % | 43 | % | ||||
Selling, General, and Administrative Expenses | 52 | % | 40 | % | ||||
Loss on Extinguishment of Debt | 66 | % | - | % | ||||
Interest expense | 5 | % | 12 | % | ||||
Provision for Income Tax | 9 | % | 9 | % | ||||
The Companytable below sets forth certain statistical and financial highlights for the applicable periods:
Three Months Ended | Three Months Ended | |||||||
February 29, 2024 | February 28, 2023 | |||||||
Number of Customers Served (Dispensary) | 64,368 | 77,859 | ||||||
Revenue | $ | 4,926,457 | $ | 5,437,302 | ||||
Gross Profit | $ | 2,126,959 | $ | 2,309,244 | ||||
Selling, General, and Administrative Expenses | $ | 2,565,239 | $ | 2,151,465 | ||||
Revenues
We had no revenues during the three months periods ended November 30, 2017 and November 30, 2016.
Cost of Goods Sold
Our cost of goods sold for the three months ended November 30, 2017February 29, 2024 was $806,965, an increase$2,799,498, a decrease of $50,673,$72,059, or 7%3%, compared to $756,292cost of goods sold of $2,871,557 for the three months ended November 30, 2016. Interest expense increasedFebruary 28, 2023. The decrease in cost of goods sold for the three months ended February 29, 2024 was primarily due to $207,229a decrease in sales. Cost of interestgoods sold was 56.8% of sales during the three months ended February 29, 2024 resulting in a gross margin of 43.2%. Cost of goods sold was 52.8% of sales during the three months ended February 28, 2023 resulting in a gross margin of 47.2%. Cost of goods sold during the third quarter of the 2024 fiscal year primarily consisted of product cost of $2,210,390, labor, overhead, and fees of $475,961, and supplies and materials of $113,147. Cost of goods sold during the third quarter of the 2023 fiscal year primarily consisted of product cost of $2,102,515, labor, overhead, and fees of $637,236, and supplies and materials of $131,806.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, or SG&A, increased by $157,273, or approximately 7%, to $2,565,239 during the three months ended February 29, 2024, compared to $2,407,966 for the three months ended February 28, 2023. The increase in SG&A expenses for the three months ended February 29, 2024 was primarily due to professional fees incurred in connection with the Company’s refinancings.
SG&A expense during the three months ended February 29, 2024 was primarily attributable to an aggregate of $1,917,540 in costs associated with operating the commitment sharesOasis LLCs, a decrease of $18,039 compared to $1,935,579 during the three months ended February 28, 2023. The major components of the decrease were as follows: payroll and warrants issued withrelated costs of $1,181,169 compared to $1,412,706; lease, facilities and office costs of $490,314 compared to $576,493; and insurance costs of $68,821 compared to $82,299. These reductions were the FirstFire Note. This increaseresult of our cost cutting efforts. The decrease in SG&A expense for the third quarter was partially offset by an increase in taxes, licenses, and the absorption of costs into cost of goods sold and inventory in the amount of $366,685.
Finally, SG&A increased by $173,106 during the three months ended February 29, 2024 as a $156,400result of an increase in the expenses associated with the ongoing implementation of other aspects of our business plan and our general corporate overhead to $645,493 from $472,387 during the three months ended February 28, 2023. The major components of this increase compared to the third quarter of fiscal 2023 were increases in legal and professional fees of $119,699, non-cash compensation of $45,239, and payroll and related costs of $20,022,
Interest Expense, Net
Our interest expense was $247,961 for the three months ended February 29, 2024, a decrease of $400,996, or 62%, compared to $648,957 for the nine months ended February 28, 2023. The decrease consisted primarily of a decrease in the amount of $178,365 in connection with the payment of principal due on our short-term financing arrangements, and a decrease of $72,962 due primarily to the settlement of convertible debentures in the amount of $3,875,095 on December 29, 2023. Interest expense also decreased by $146,470 due to a decrease in the amortization of discounts on our notes payable. During the three months ended November 30, 2016, $445,803 of the amortization of discount on convertible debt was related to debt that was converted to equity at May 31, 2017; since this debt was no longer outstanding, there was no amortization of discount related to this debt during the three months ended November 30, 2017.
Loss on note exchangeExtinguishment of Debt
During the three months ended November 30, 2017,February 29, 2024, we recognizedrestructured and / or redeemed certain of our convertible debentures, as follows: (A) The terms of certain convertible debenture were restructured, including (i) the conversion price of the debentures was reduced to $0.07 per unit; (ii) the conversion price of warrants underlying the units issuable upon conversion was reduced to $0.10 per share; (iii) the maturity date was extended to January 31, 2028. This restructuring included the redemption of convertible debentures in the principal amount of $3,875,095 at a loss on the exchangediscount of debt40% for a cash payment in the amount of $404,532. This loss related to the exchange of the April 2015 Note for our common stock. 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 increased the outstanding principal balance by 10%, resulting$2,325,036. These transactions resulted in a net loss on the modification of the 10% Notes of $33,334, which we included in results of operation for the three months ended November 30, 2016.
Gain on Settlement of Debt
During the three months ended February 29, 2024, we redeemed certain other debentures and convertible debentures as follows: (A) We redeemed three debentures with an aggregate principal amount of $1,325,000 along with 13,174,402 shares of our common stock and warrants to purchase 454,548 shares of common stock for a cash payment in the amount of $1,250,000; we recognized a gain on extinguishment of debt in the amount of $596,949 in connection with this transaction. (B) We also converted eight debentures with an aggregate principal amount of $2,030,000 into a total of 64,132,135 shares of common stock. A loss on settlement of debt in the aggregate amount of $428,112 was recorded on these transactions. There were no comparable transactions in the previous period.
Gain on Equity Investment
During the three months ended February 2, 2023, we had a loss income on equity investment in the amount of $22,476 in connection with our interest in the Quinn River Joint Venture; there was no comparable transaction in the current period.
Provision for Income Taxes
We recorded a provision for income taxes in the amount of $446,662 during the three months ended November 30, 2016.February 29, 2024 compared to $516,252 during the three months ended February 28, 2023. Although we have net operating losses that we believe are available to us to offset this entire tax liability, which arises under Section 280E of the Code because we are a cannabis company, as a conservative measure, we have accrued this liability.
Net lossLoss
For the reasons above, we had aour net loss for the three months ended November 30, 2017 of $2,525,598, which is an increase of $1,400,145, or approximately 124%,February 29, 2024 was $4,368,976 compared to a net loss of $1,125,453 during$1,029,606 for the three months ended November 30, 2016.February 28, 2023, a decrease of $3,339,070, or 324%.
Non-Controlling Interest
During the three months ended February 29, 2024 and February 28, 2023, the income (loss) associated with the non-controlling interest in Kealii Okamalu was ($168) and $130,391, respectively. This amount is comprised of the third-party portion of the operating loss of the Quinn River Joint Venture and our loss on equity investment.
Net Loss Attributable to CLS Holdings USA, Inc.
Our net loss attributable to CLS Holdings USA, Inc. for the three months ended February 29, 2024 was $4,369,144 compared to a net loss of $899,515 for the three months ended February 28, 2023, a decrease of $3,469,629 or 386%.
Non-GAAP Measures
EBITDA and Adjusted EBITDA are non-GAAP financial performance measures and should not be considered as alternatives to net income(loss) or any other measure derived in accordance with GAAP. These non-GAAP measure have limitations as analytical tools and should not be considered in isolation or as substitutes for analysis of our financial results as reported in accordance with GAAP. Because not all companies use identical calculations, these presentations may not be comparable to other similarly titled measures of other companies. As required by the rules of the SEC, we provide below a reconciliation of these non-GAAP financial measures contained herein to the most directly comparable measure under GAAP. Management believes that EBITDA provides relevant and useful information, which is widely used by analysts, investors and competitors in our industry as well as by our management. Management also believes that adjusting EBITDA for the effects of non-recurring transactions may provide insight into the nature of the core business. By providing these non-GAAP profitability measure, management intends to provide investors with a meaningful, consistent comparison of our profitability measures for the periods presented.
Three Months Ended February 29, 2024 | Three Months Ended February 28, 2023 | |||||||
Net Loss attributable to CLS Holdings, Inc. | $ | (4,369,144 | ) | $ | (899,515 | ) | ||
Add: | ||||||||
Interest expense, net | 247,961 | 648,957 | ||||||
Provision for taxes | 446,662 | 516,691 | ||||||
Depreciation and amortization | 165,383 | 238,921 | ||||||
EBITDA (1) | $ | (3,509,138 | ) | $ | (504,615 | ) | ||
Less non-recurring gains and losses: | ||||||||
Loss on extinguishment of debt | $ | 3,236,073 | $ | - | ||||
Gain on equity investment | - | 22,476 | ||||||
Adjusted EBITDA (2) | $ | (273,065 | ) | $ | 527,091 | |||
(1) | Net loss plus interest, taxes, depreciation, and amortization. | |
(2) | EBITDA adjusted for non-recurring gains, losses, and impairments. |
Results of Operations for the Six MonthsNine months Ended November 30, 2017February 29, 2024 and 2016February 28, 2023
The table below sets forth our select expenses as a percentage of revenue for the applicable periods:
Nine months Ended | Nine months Ended | |||||||
February 29, 2024 | February 28, 2023 | |||||||
Revenue | 100 | % | 100 | % | ||||
Cost of Goods Sold | 57 | % | 52 | % | ||||
Gross Margin | 43 | % | 48 | % | ||||
Selling, General, and Administrative Expenses | 52 | % | 51 | % | ||||
Employee Retention Tax Credit | 6 | )% | - | % | ||||
Gain on Settlement of Notes Receivable | - | % | (2 | )% | ||||
Loss on Extinguishment of Debt | 21 | % | 38 | % | ||||
Interest expense | 7 | % | 11 | % | ||||
Provision for Income Tax | 9 | % | 9 | % | ||||
The table below sets forth certain statistical and financial highlights for the applicable periods:
Nine months Ended | Nine months Ended | |||||||
February 29, 2024 | February 28, 2023 | |||||||
Number of Customers Served (Dispensary) | 204,520 | 244,547 | ||||||
Revenue | $ | 15,238,198 | $ | 17,556,406 | ||||
Gross Profit | $ | 6,572,504 | $ | 8,391,492 | ||||
Selling, General, and Administrative Expenses | $ | 7,902,057 | $ | 8,896,933 | ||||
Revenues
We had no revenuesrevenue of $15,238,198 during the sixnine months periods ended November 30, 2017 and November 30, 2016.
Cost of Goods Sold
Our cost of goods sold for the sixnine months ended November 30, 2017. We expect professional fees to increase in future periods as our business grows.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, or SG&A, decreased by $994,876, or approximately 11%, to $7,902,057 during the nine months ended February 29, 2024, compared to $8,896,933 for the nine months ended February 28, 2023. The decrease in SG&A expenses for the nine months ended February 29, 2024 was primarily due to the Company’s efforts to reduce payroll, legal and office related costs, and sales and marketing expenses.
SG&A expense during the nine months ended February 29, 2024 was primarily attributable to an aggregate of $6,328,537 in costs associated with operating the Oasis LLCs, a decrease of $876,937 compared to $7,205,474 during the nine months ended February 28, 2023. The major components of the decrease were as follows: payroll and related costs of $4,237,052 compared to $3,523,653; lease, facilities, and office costs of $1,565,653 compared to $1,948,396; sales and marketing costs of $355,011 compared to $506,304; and depreciation and amortization of $337,830 compared to $491,354. The reductions in costs were primarily the discount on convertible debt, whichresult of our cost cutting efforts. The decrease in SG&A expense for the third quarter was $572,856partially offset by an increase in taxes, licenses, and the amount of overhead absorbed by cost of goods sold and inventory of $465,208.
Finally, SG&A decreased by $117,939 during the nine months ended February 29, 2024 as a result of a decrease in the expenses associated with the ongoing implementation of other aspects of our business plan and our general corporate overhead to $1,573,521 from $1,691,460 during the nine months ended February 28, 2023. The major components of this decrease compared to the third quarter of fiscal 2023 was a decrease in professional fees to $886,123 during the current period compared to $889,392 forfrom $1,084,082 during the comparable period of the prior year. DuringThis decrease was partially offset by an increase in payroll and related costs to $393,222 during the sixnine months ended November 30, 2016, $445,803February 29, 2024 compared to $262,432 during the comparable period of the amortization on discount on convertible debtprior year.
Interest Expense, Net
Our interest expense was related to debt that was converted to equity at May 31, 2017; since this debt was no longer outstanding, there was no amortization of discount related to this debt during$1,116,274 for the sixnine months ended November 30, 2017.
Employee Retention Tax Credit
During the sixnine months ended November 30, 2016.February 29, 2024, the Company received the amount of $924,862 Under the provisions of the extension of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). This amount was recorded as other income. There was no comparable transaction in the prior period.
Loss on Extinguishment of Debt
During the three months ended February 29, 2024, we restructured and / or redeemed certain of our convertible debentures, as follows: (A) The terms of certain convertible debenture were restructured, including (i) the conversion price of the debentures was reduced to $0.07 per unit; (ii) the conversion price of warrants underlying the units issuable upon conversion was reduced to $0.10 per share; (iii) the maturity date was extended to January 31, 2028. This restructuring included the redemption of convertible debentures in the principal amount of $3,875,095 at a discount of 40% for a cash payment in the amount of $2,325,036. These transactions resulted in a net loss on extinguishment of debt in the amount of $4,493,218 due to the increase in the calculated value of the conversion features and warrants of the remaining debentures at the reduced exercise prices. We also restructured the principal amounts and due dates of six additional debentures with an aggregate principal amount of $3,897,916 resulting in a gain on extinguishment of debt in the amount of $1,088,308. There were no comparable transactions in the previous period.
During the nine months ended February 28, 2023, certain of our convertible debentures were amended to (i) permit mandatory conversion of $11,343,619 in principal plus $189,061 in accrued interest into units at a reduced rate of $0.285 per unit; (ii) decrease the conversion price of the remaining debentures to $0.40 per unit; (iii) reduce the mandatory conversion VWAP provision from $2.40 to $0.80; and (iv) change the maturity date so that half of the remaining balance matures on December 31, 2023 and the remaining on December 31, 2024. We recognized a loss on the amendment of the debt in the amount of $6,659,359.
There was no comparable transaction in the current period.
Loss on Equity Investment
During the nine months ended February 28, 2023, we had a loss on equity investment in the amount of $154,111 in connection with our interest in the Quinn River Joint Venture; there was no comparable transaction in the current period.
Gain on Settlement of Debt
During the three months ended February 29, 2024, we redeemed certain other debentures and convertible debentures as follows: (A) We redeemed three debentures with an aggregate principal amount of $1,325,000 along with 13,174,402 shares of our common stock and warrants to purchase 454,548 shares of common stock for a cash payment in the amount of $1,250,000; we recognized a gain on extinguishment of debt in the amount of $596,949 in connection with this transaction. (B) We also converted eight debentures with an aggregate principal amount of $2,030,000 into a total of 64,132,135 shares of common stock. A loss on settlement of debt in the aggregate amount of $428,112 was recorded on these transactions. There were no comparable transactions in the previous period.
During the sixnine months ended February 28, 2023, our U.S. Convertible Debenture 4 in the amount $599,101 in principal and accrued interest in the amount of $3,283, went into default. We entered into a forbearance agreement with the lender, whereby we would pay the amount of $600,000 in installments beginning in November 30, 2017,of 2022 through August of 2023. All payments under the Forbearance Agreement were made by the Company. As a result of this agreement, we recognized a gain on the settlement of accounts payabledebt in the amount of $3,480 because we repaid an account using our common stock.$2,384. There was no comparable transaction duringin the sixcurrent period.
Gain on Settlement of Accounts Payable
During the nine months ended November 30, 2016.February 29, 2024, we settled an outstanding vendor account in the amount of $8,375 for a cash payment of $4,000 representing a gain in the amount of $4,375. There was no comparable transaction in the prior period.
Gain on Settlement of Note Receivable
During the nine months ended February 28, 2023, we recorded a gain on the settlement of the IGH Settlement Note in the amount of $348,165; there was no comparable transaction in the current period. This gain on the settlement arose after IGH notified us on February 27, 2021, that it did not plan to make further payments in accordance with the terms of the IGH Note on the theory that the Break-Up Fee excused such additional payments. We vehemently disagreed and litigation ensued. On June 14, 2021, the parties to the IGH lawsuit entered into a confidential settlement agreement to resolve the action and executed the $3,000,000 IGH Settlement Note. Pursuant to the IGH Settlement Note, IGH paid us $1,000,000 on or before July 21, 2021. The remaining $2,000,000 and accrued interest was paid in 12 equal monthly installments, and the final installment was paid in July 2022.
Provision for Income Taxes
We recorded a loss on the modification of debtprovision for income taxes in the amount of $29,145. This loss related$1,380,226 during the nine months ended February 29, 2024 compared to $1,552,028 during the amendmentnine months ended February 28, 2023. Although we have net operating losses that we believe are available to us to offset this entire tax liability, which arises under Section 280E of the 8% Note. On November 28, 2016,Code, because we entered into an amendment with Old Main regarding the 10% Notes. In exchange for amending the terms of the 10% Notes,are a cannabis company, as a conservative measure, we increased 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 six months ended November 30, 2016.have accrued this liability.
Net lossLoss
For the reasons above, we had aour net loss for the sixnine months ended November 30, 2017 of $3,091,283 which is an increase of $1,350,755, or approximately 78%,February 29, 2024 was $6,132,889 compared to a net loss of $1,740,528 during$10,5667,398 for the sixnine months ended November 30, 2016.February 28, 2023, a decrease of $4,434,509, or 42%.
Non-Controlling Interest
During the nine months ended February 29, 2024 and February 28, 2023, the income (loss) associated with the non-controlling interest in Kealii Okamalu was ($2,368) and $303,451, respectively. This amount is comprised of the third-party portion of the operating loss of the Quinn River Joint Venture and our loss on equity investment.
Net Loss Attributable to CLS Holdings USA, Inc.
Our net loss attributable to CLS Holdings USA, Inc. for the nine months ended February 29, 2024 was $6,135,257 compared to a net loss of $10,263,947 for the nine months ended February 28, 2023, a decrease of $4,128,690 or 40%.
Non-GAAP Measures
EBITDA and Adjusted EBITDA are non-GAAP financial performance measures and should not be considered as alternatives to net income(loss) or any other measure derived in accordance with GAAP. These non-GAAP measure have limitations as analytical tools and should not be considered in isolation or as substitutes for analysis of our financial results as reported in accordance with GAAP. Because not all companies use identical calculations, these presentations may not be comparable to other similarly titled measures of other companies. As required by the rules of the SEC, we provide below a reconciliation of these non-GAAP financial measures contained herein to the most directly comparable measure under GAAP. Management believes that EBITDA provides relevant and useful information, which is widely used by analysts, investors and competitors in our industry as well as by our management. Management also believes that adjusting EBITDA for the effects of non-recurring transactions may provide insight into the nature of the core business. By providing these non-GAAP profitability measure, management intends to provide investors with a meaningful, consistent comparison of our profitability measures for the periods presented.
Nine months Ended February 29, 2024 | Nine months Ended February 28, 2023 | |||||||
Net Loss attributable to CLS Holdings, Inc. | $ | (6,168,257 | ) | $ | (9,364,432 | ) | ||
Add: | ||||||||
Interest expense, net | 1,116,274 | 1,375,575 | ||||||
Provision for taxes | 1,380,226 | 1,035,776 | ||||||
Depreciation and amortization | 498,131 | 477,193 | ||||||
EBITDA (1) | $ | (3,410,626 | ) | $ | (6,475,888 | ) | ||
Less non-recurring gains and losses: | ||||||||
Gain on settlement of accounts payable | $ | (4,375 | ) | $ | - | |||
Gain on settlement of debt | - | (2,384 | ) | |||||
Gain on settlement of notes receivable | - | (348,165 | ) | |||||
Employee retention tax credit | (924,862 | ) | - | |||||
Loss on extinguishment of debt | 3,236,073 | 6,659,359 | ||||||
Loss on equity investment | - | 176,587 | ||||||
Adjusted EBITDA (2) | $ | (833,790 | ) | $ | 514,124 | |||
(1) | Net loss plus interest, taxes, depreciation, and amortization. | |
(2) | EBITDA adjusted for non-recurring gains, losses, and impairments. |
Liquidity and Capital Resources
The following table summarizes our total current assets, liabilities and working capital at November 30, 2017 compared to May 31, 2017.
November 30, 2017 | May 31, 2017 | |||||||
| Current Assets | $ | 321,980 | $ | 79,720 | ||||
| Current Liabilities | $ | 1,469,800 | $ | 1,826,478 | ||||
| Working Capital (Deficit) | $ | (1,147,820 | ) | $ | (1,746,758 | ) | ||
February 29 | May 31, | |||||||
2024 | 2023 | |||||||
Current Assets | $ | 4,121,532 | $ | 4,591,510 | ||||
Current Liabilities | $ | 13,531,467 | $ | 16,340,529 | ||||
Working Capital (Deficit) | $ | (9,409,935 | ) | $ | (11,749,019 | ) | ||
At February 29, 2024, we had a working capital deficit of $1,147,820 and $1,746,758, respectively. This$9,409,935, an improvement in our working capital position of $2,339,084 compared to the working capital deficit occurredof $11,749,019 we had at May 31, 2023. Our working capital increased primarily because we have not yet commenced earning revenues. We plan to commence earning revenues upon the closing on our pending Acquisition Agreement with Alternative Solutions, which we believe will close in approximately April 2018, assuming certain conditions are satisfied, as described below. During the six months ended November 30, 2017, we obtained loans from our officers, directors and entities affiliated with Frank Koretsky, onea result of our directors,program of debt restructuring. At February 29, 2024, the portion of notes payable classified as current liabilities was $1,483,194, compared to cover operating expenses. We also obtained a loan from FirstFire$5,292,635 at May 31, 2023, an improvement of $3,809,441. In addition, accrued interest was reduced to pay the initial deposit due under the Acquisition Agreement. This$3,600 at February 29, 2024, compared to $634,594 at May 31, 2023, and short term loans payable was $0 compared to $471,380 at May 31, 2023. Our working capital deficit will likelywas also negatively impacted by an increase until we begin earning revenues but should not be viewed as an indicator ofin our future performance once we commence earning revenues. We have operated at a loss since inception.
In September 2022, we successfully refinanced all but one of our directors during the six months ended November 30, 2017, becauseU.S. Convertible Debentures and all of the suspensionCanaccord Debentures so that 60% of them were converted into equity and the balance of them mature in equal portions in December 2023 and December 2024. In December 2023, we restructured and / or redeemed certain of our planned Colorado operations.convertible debentures, as follows: (A) The terms of certain convertible debenture were restructured, including (i) the conversion price of the debentures was reduced to $0.07 per unit; (ii) the conversion price of warrants underlying the units issuable upon conversion was reduced to $0.10 per share; (iii) the maturity date was extended to January 31, 2028. This decrease was partially offset by our new loan from FirstFire, which we obtained to payrestructuring included the initial deposit due under the Acquisition Agreement.
We have recently taken significant actions to improve our liquidity and reduce our debt:
On November 30, 2023, we completed a private placement of $960,000 original principal amount of Unsecured Debentures (the “November 2023 Debentures”). The November 2023 Debentures bear interest at rates between $.2515%, and 1.07are convertible to the Company’s Common Stock, par value $0.0001 per share, at the option of the Company on or before December 6, 2023, at a conversion price of $0.0345 per share. Effective on May 31, 2017,A minimum of one year of interest is required to be converted as well.
On December 6, 2023 we entered intoelected to convert the Omnibus Loan Amendment Agreement, wherebydebt owed under 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.November 2023 Debentures. As a result of these conversions, Mr. Koretsky, CLS CO 2016 and Newcan convertedthe conversion an aggregateadditional 32,000,000 shares were issued to four separate parties bringing the outstanding number of $1,485,000, $150,000, and $460,000 in principal, and $130,069, 49,247 and $7,747 in accrued interest, into an aggregate of 6,460,276, 636,988 and 1,870,988issued shares of common stock at $.25 per share. Pursuantthe Company to the Omnibus Loan Amendment Agreement,104,543,141.
On December 28, 2023, we executed a Supplemental Indenture (the “December 28, 2023 Indenture Supplement”) to, among other things, (i) decrease the conversion rate on allprice of the loans made by Mr. Koretsky, CO CLS 2016, and Newcan was reduced, if applicable,remaining Canaccord Debentures to $.25$0.07 per unit; (ii) decrease the conversion price of warrants underlying the units issuable upon conversion to $0.10 per share and Mr. Koretsky and his affiliates gave up(iii) change the right to receive warrants upon conversion. Thus, each of Mr. Koretsky, CLS CO 2016 and Newcan received 4,560,849, 488,159 and 1,433,841 shares of common stock in excess of what they would have received had they converted their loans into common stock prior to the effectivematurity date of the Omnibus Loan Amendment Agreement.
A total of $3,875,095 in principal amount of Newcan Funding Notes (advanceddebentures have exercised their Put Options. We obtained the November 30, 2023 loan in September 2017)order to facilitate the payment of these Put Options. We have also obtained an additional $2,030,000 in loans, of which $1,070,000 was converted into equity at $0.0333 per share and $960,000 was converted to equity at $0.0345 per share.
Although our revenues are expected to grow as we expand our operations, we only achieved net income for Newcan Convertible Note 6. 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 time during our first quarter of eight principal paymentsfiscal 2022 and we have experienced net losses since such time. Due to our cost control efforts, we have generated positive cash flow from operating activities in the amounts of $221,381, $783,250, $788,724, and $802,729 for the three months ended November 30, 2023, August 31, 2023, May 31, 2023 and February 28, 2023, respectively; although cash flow from operating activities fell to a negative $(415,781) for the three months ended February 29, 2024, cash flow from operating activities for the nine months ended February 29, 2024 was $588,850. As a result of this improved operational performance and our debt retirement and restructuring. we believe we will become due; subsequent principal paymentshave funds sufficient to sustain our operations at their current level, or if we require additional cash, we expect to obtain the necessary funds through short-term financing agreements; however, our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in the cannabis business. To address these risks, we must, among other things, seek growth opportunities through investments and acquisitions in our industry, successfully execute our business strategy and successfully navigate the business environment in which we currently operate as well as any changes that may arise in the cannabis regulatory environment. We cannot assure that we will become duebe successful in addressing such risks, and the failure to do so could have a material adverse effect on our business prospects, financial condition and results of operations.
Cash flows provided by operating activities were $582,575 during the first daynine months ended February 29, 2024, an improvement of each July, October, January$1,601,583, or approximately 157%, compared to ($1,018,583) during the nine months ended February 28, 2023. In deriving cash flows used in operating activities from the net losses for the nine months ended February 29, 2024 and April until paid in full. This note and accrued interest thereunder may be converted, in wholeFebruary 28, 2023, certain non-cash items were deducted from or in part, into one share of common stockadded back to the net loss for each $0.25 converted.
Finally, our cash provided by operating activities was affected by changes in the components of working capital. The amounts of the components of working capital fluctuate for a variety of reasons, including management’s expectation of required inventory levels; the amount of accrued interest, both receivable and payable; the amount of prepaid expenses; the amount of accrued interestcompensation and other accrued liabilities; our accounts payable and accounts receivable balances; and the capitalization of right of use assets and liabilities associated with operating leases. The overall net change in the components of working capital resulted in an increase in cash from operating activities in the amount of $2,246$2,546,763 during the nine months ended February 29, 2024, compared to an increase in cash from operating activities of $1,753,920 during nine months ended February 28, 2023. The more significant changes for the nine months ended February 29, 2024 which were transferred fromadded back to the Binder Funding Notes to fund Binder Convertible Note 5,net loss in deriving cash generated by in operating activities were the changes in accounts payable and principalaccrued liabilities of $656,121, accrual for taxes in the amount of $47,767, accrued salary due to Mr. Binder$1,373,951, and inventory in the amount of $25,000, and accrued interest$627,208. These increases were partially offset by a reduction in the amount of $1,384$523,209 related to accounts receivable. The more significant changes for the nine months ended February 28, 2023 which were transferredadded back to the net loss in deriving cash generated by operating activities were the deferred tax liability of $1,552,028 and accounts payable and accrued expenses of $739,622, offset by reductions related to inventory in the amount of $931,861 and accounts receivable in the amount of $95,718.
Cash flows used by investing activities were $90,659 for the nine months ended February 29, 2024, an increase in cash used of $210 compared to cash used in investing activities of $90,449 during the nine months ended February 28, 2023.
Cash flows used in financing activities were $797,735 for the nine months ended February 29, 2024, a decrease in the amount of $242,720 compared to cash used in financing activities of $555,015 in the prior period. We received proceeds in the amount of $4,320,000 from the Binder Funding Notesissuance of notes and convertible notes payable during the period, compared 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 beproceeds from loans payable in eight equal quarterly installments, together with accrued interest, beginning on January 2, 2019. At Mr. Binder’s election, at any timethe amount of $1,717,115 in the prior to payment or prepayment ofperiod. During 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.
Third Party Debt and Related Party Debt
The table below summarizes 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 Convertile 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, 2019. The note may be prepaid by us with no penalty at any time upon thirty days written notice.
Name of Note |
| Original Principal Amount |
| Outstanding |
| Payment Details | |
U.S. Convertible Debentures 1 – Related Party |
| $ | 1,979,979 |
| Outstanding |
| Due over 49 months beginning January 31, 2024. |
|
|
|
|
|
|
|
|
U.S. Convertible Debentures 2 |
| $ | 495,196 |
| Outstanding |
| Due over 49 months beginning January 31, 2024 |
|
|
|
|
|
|
|
|
Canaccord Debentures |
| $ | 1,564,889 |
| Outstanding |
| Due over 35 months beginning March 31, 2025. |
|
|
|
|
|
|
|
|
Debenture 1* |
| $ | 204,167 |
| Outstanding |
| Due in 12 equal payments through February 28, 2025. |
|
|
|
|
|
|
|
|
Debenture 2* | $ | 71,667 | Outstanding | Due in 4 equal payments through June 30, 2024. | |||
Debentures 3,4,5 |
| $ | 0 |
| Paid |
| |
Debenture 6 | $ | 485,062 | Outstanding | Due over 35 months beginning March 31, 2025 with a balloon payment of $309,510 on January 31, 2028 | |||
2022 Financing Agreement |
| $ | 0 |
| Paid |
| |
|
|
|
|
|
|
|
|
November 2023 and January 2024 Convertible Notes |
| $ | 0 |
| Converted to common stock |
| |
Debentures 7,9 | $ | 940,000 | Outstanding | Due in 36 equal payments beginning February 29, 2024 | |||
Debentures 10-12 | $ | 1,350,000 | Outstanding | Due in 24 equal payments beginning March 31, 2024 | |||
* 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, toand 2 Debentures provide for whereadditional payments in the aggregate amount of not alreadyless than $7,500 per month beginning in at the case, a 10% interest rate per annum, a $0.25 conversion price per share of common stock, and the deletionend of the requirementpayment term, for five months.
We have generated positive cash flow from operating activities in the amounts of $221,381, $783,250, $788,724, and $802,729 for the three months ended November 30, 2023, August 31, 2023, May 31, 2023 and February 28, 2023, respectively; although cash flow from operating activities fell to a negative $(415,781) for the three months ended February 29, 2024, cash flow from operating activities for the nine months ended February 29, 2024 was $588,850. We believe that we issue warrants to purchase our common stock upon conversion of such Insider Loans.
Going concernConcern
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. WeWith the exception of the first quarter of fiscal 2022, we have incurred continuous losses from operations since inception, and have an accumulated deficit of $11,953,503 and$115,014,703 as of February 29, 2024, compared to $108,879,446 as of May 31, 2023. We had a working capital deficit of $1,147,820 at November 30, 2017. In addition, we do not currently have$9,409,935 as of February 29, 2024, compared to a working capital deficit of $11,749,019 as of May 31, 2023. The report of our independent auditors for the cash resources to meet our operating commitments during the next twelve months. year ended May 31, 2023 contained a going concern qualification.
Our ability to continue as a going concern must be considered in light of the problems, expenses, and complications frequently encountered by developmental stageearly-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 our plans to acquire operating businesses, open processing facilities and finance our 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 regarding the deductibility of expenses for purposes of Section 280E of the Internal Revenue Code: Management evaluates the expenses of its manufacturing and retail operations and makes certain judgments regarding the deductibility of various expenses under Section 280E of the Internal Revenue Code based on its interpretation of this regulation and its subjective assumptions about the categorization of these expenses. | |
● | Estimates and assumptions used in the valuation of derivative liabilities: Management utilizes a lattice model to estimate the fair value of derivative liabilities. The model includes subjective assumptions that can materially affect the fair value estimates. | |
● | Estimates and assumptions used in the valuation of intangible assets. In order to value our intangible assets, management prepares multi-year projections of revenue, costs of goods sold, gross margin, operating expenses, taxes and after tax margins relating to the operations associated with the intangible assets being valued. These projections are based on the estimates of management at the time they are prepared and include subjective assumptions regarding industry growth and other matters. |
Recently Issued Accounting Standards
Accounting standards promulgated by the Financial Accounting Standards Board (“FASB”(the “FASB”) are subject to change. Changes in such standards may have an impact on our future financial statements. The following are a summary of recent accounting developments.
In 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 ASUIn 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 ASUIn July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815). The amendments in Part I of this update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception.
These amendments do not have an accounting effect. For public business entities, the amendments in Part I of this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.
There are various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on our consolidated financial position, results of operations or cash flows.
Item 3. Quantitative and Qualitative Disclosure about Market Risk.
This item is not applicable as we are currently considered a smaller reporting company.
Item 4. Controls and Procedures.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit pursuant to the requirements of the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, among other things, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Securities Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures
Andrew Glashow, our Chief Executive Officer, and David Lamadrid, our ChiefPrincipal Financial and Accounting Officer, havehas 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 their evaluation, Mr. Binder and Mr. Lamadrid concluded that our disclosure controls and procedures are not effective in timely alerting themThe Company believes it now has an adequate number of trained personnel 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, as appropriate to allow timely decisions regarding required disclosure, for the following reasons:
● | We do not have an independent body to oversee our internal controls over financial reporting due to our limited resources. |
We plan to rectify these weaknesses by 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.
None.
Item 1A. Risk Factors.
The Effects of Climate Change Could Adversely Affect the Quantity and Quality of Our Crops and the Cost and Availability of Energy to Our Dispensary Operations.
The effect of climate change is not applicable as we are currently consideredcausing an increase in the cost of electricity to operate our dispensary operation and if temperatures remain high, could result in rationing of electricity, which could necessitate a smaller reporting company.reduction in operating hours at our dispensary.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Uponupon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.
Item 6. Exhibits.
31.1 | |
32.1 | |
101.INS | Inline XBRL Instance Document |
101.SCH | Inline XBRL Taxonomy Extension Schema |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase |
104 | Cover Page Interactive Data File (formatted as Inline XBRL) |
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: | By: | /s/ | |
Andrew Glashow President and Chief Executive Officer | |||
(Principal Executive, | |||