HISTORY AND OUTLOOK
We were incorporated on March 31, 2011 as Adelt Design, Inc. to manufacture and
market carpet binding art. Production and marketing of carpet binding art never
commenced. On November 20, 2014, we adopted amended and restated articles of
incorporation, thereby changing our name to CLS Holdings USA, Inc. Effective
December 10, 2014, we effected a reverse stock split of our issued and
outstanding common stock at a ratio of 1-for-0.625 (the "Reverse Split"),
wherein 0.625 shares of our common stock were issued in exchange for each share
of common stock issued and outstanding.
On April 29, 2015, the Company, CLS Labs and the Merger Sub consummated the
Merger, whereby the Merger Sub merged with and into CLS Labs, with CLS Labs
remaining as the surviving entity. As a result of the Merger, we acquired the
business of CLS Labs and abandoned our previous business. As such, only the
financial statements of CLS Labs are included herein.
CLS Labs was originally incorporated in the state of Nevada on May 1, 2014 under
the name RJF Labs, Inc. before changing its name to CLS Labs, Inc. on October
24, 2014. It was formed to commercialize a proprietary method of extracting
cannabinoids from cannabis plants and converting the resulting cannabinoid
extracts into concentrates such as oils, waxes, edibles and shatter.
On April 17, 2015, CLS Labs took its first step toward commercializing its
proprietary methods and processes by entering into agreements through its wholly
owned subsidiary, CLS Labs Colorado, with certain Colorado entities. During
2017, we suspended our plans to proceed with the Colorado Arrangement due to
regulatory delays and have not yet determined if or when we will pursue them
again.
We have been issued a U.S. patent with respect to our proprietary method of
extracting cannabinoids from cannabis (hemp) plants and converting the resulting
cannabinoid extracts into concentrates such as oils, waxes, edibles and shatter.
These concentrates may be ingested in a number of ways, including through
vaporization via electronic cigarettes, and used for a variety of pharmaceutical
and other purposes. Internal testing of this extraction method and conversion
process has revealed that it produces a cleaner, higher quality product and a
significantly higher yield than the cannabinoid extraction processes currently
existing in the marketplace. We have not yet commercialized our proprietary
process and the extraction and production process utilized in the patent is
currently prohibited in Nevada. The Company is currently pursuing options to
generate revenue from the patent, including the possible sale of the patent.
We intend to generate revenues through: (i) the processing of cannabis for
others, and (ii) the purchase of cannabis (or cultivation through our joint
venture) and the processing and sale of cannabis-related products. We plan to
accomplish this through the acquisition of companies, the creation of joint
ventures, through licensing agreements, and through fee-for-service arrangements
with growers and dispensaries of cannabis products. We believe that we have
established a position as one of the premier cannabinoid extraction and
processing companies in the industry. We have already created our own brand of
concentrates for consumer use, which we sell wholesale to cannabis dispensaries.
We believe that we have created a "gold standard" national brand by
standardizing the testing, compliance and labeling of our products in an
industry currently comprised of small, local businesses with erratic and
unreliable product quality, testing practices and labeling. We also plan to
offer consulting services through Cannabis Life Sciences Consulting, LLC, which
will generate revenue by providing consulting services to cannabis-related
businesses, including growers, dispensaries and laboratories, and driving
business to our processing facilities. Finally, we intend to grow through select
acquisitions in secondary and tertiary markets, targeting newly regulated states
that we believe offer a competitive advantage. Our goal at this time is to
become a successful regional cannabis company.
On December 4, 2017, we entered into the Acquisition Agreement with Alternative
Solutions to acquire the outstanding equity interests in the Oasis LLCs.
Pursuant to the Acquisition Agreement, as amended, we paid a non-refundable
deposit of $250,000 upon signing, which was followed by an additional payment of
$1,800,000 on February 5, 2018, for an initial 10% of Alternative Solutions and
each of the subsidiaries. At the closing of our purchase of the remaining 90% of
the ownership interests in Alternative Solutions and the Oasis LLCs, which
occurred on June 27, 2018, we paid the following consideration: $5,995,543 in
cash, a $4.0 million promissory note due in December 2019, and $6,000,000 in
shares of our common stock. The cash payment of $5,995,543 was less than the
$6,200,000 payment originally contemplated because we assumed an additional
$204,457 of liabilities. The Oasis Note, which was repaid in full in December
2019, was secured by all of the membership interests in Alternative Solutions
and the Oasis LLCs and by the assets of the Oasis LLCs. At that time, we applied
for regulatory approval to own an interest in the Oasis LLCs, which approval was
received on June 21, 2018. Just prior to closing, the parties agreed that we
would instead acquire all of the membership interests in Alternative Solutions,
the parent of the Oasis LLCs, from its members, and the membership interests in
the Oasis LLCs owned by members other than Alternative Solutions. We received
final regulatory approval to own our interest in the Oasis LLCs through
Alternative Solutions under the final structure of the transaction on April 26,
2022.
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On October 31, 2018, the Company, CLS Massachusetts, Inc., a Massachusetts
corporation and a wholly-owned subsidiary of the Company ("CLS Massachusetts"),
and In Good Health, Inc., a Massachusetts corporation ("IGH"), entered into an
Option Agreement (the "IGH Option Agreement"). Under the terms of the IGH Option
Agreement, CLS Massachusetts had an exclusive option to acquire all of the
outstanding capital stock of IGH (the "IGH Option") during the period beginning
on the earlier of the date that is one year after the effective date of the
conversion and December 1, 2019 and ending on the date that was 60 days after
such date. (See Note 3 for more detail).
On October 31, 2018, as consideration for the IGH Option, we made a loan to IGH,
in the principal amount of $5,000,000, subject to the terms and conditions set
forth in that certain loan agreement, dated as of October 31, 2018 between IGH
as the borrower and the Company as the lender. The loan was evidenced by a
secured promissory note of IGH, which bore interest at the rate of 6% per annum
and was to mature on October 31, 2021.
On February 4, 2020, CLS Massachusetts exercised the IGH Option and IGH
subsequently asserted that CLS Massachusetts' exercise was invalid. By letter
dated February 26, 2020, we informed IGH that as a result of its breaches of the
IGH Option, which remained uncured, an event of default had occurred under the
IGH Note. We advised IGH that we were electing to cause the IGH Note to bear
interest at the default rate of 15% per annum effective February 26, 2020 and to
accelerate all amounts due under the IGH Note. On February 27, 2020, IGH
informed CLS Massachusetts that it did not plan to make further payments under
the IGH Note on the theory that the break-up fee excused additional payments.
On June 14, 2021, the parties to the IGH lawsuit entered into a confidential
settlement agreement to resolve the action and a secured promissory note dated
and executed by IGH in favor of us and effective June 11, 2021 (the "IGH
Settlement Note"). Pursuant to the IGH Settlement Note, IGH paid us $3,000,000,
$1,000,000 of which was paid on or before July 12, 2021. The remaining
$2,000,000 and accrued interest was paid in 12 equal monthly installments, which
began on August 12, 2021. During the year ended May 31, 2022, we received
$2,740,820 under the IGH Settlement Note, which included $2,666,670 in principal
and $74,150 in accrued interest. During the six months ended November 30, 2022,
we received $348,165 was due under the IGH Settlement Note, which included
$333,333 in principal and $14,382 in accrued interest. As of November 30, 2022,
the IGH Settlement Note has been paid in full. We record amounts paid under the
IGH Settlement Note as gains when payments are received
On October 20, 2021, we entered into a management services agreement (the "Quinn
River Joint Venture Agreement") through our 50% owned subsidiary, Kealii
Okamalu, LLC ("Kealii Okamalu"), with CSI Health MCD LLC ("CSI") and a
commission established by the authority of the Tribal Council of the Fort
McDermitt Paiute and Shoshone Tribe (the "Tribe"). The purpose of the Quinn
River Joint Venture Agreement is to establish a business (the "Quinn River Joint
Venture") to grow, cultivate, process and sell cannabis and related products.
(See Note 3 for more detail) The Quinn River Joint Venture Agreement has a term
of 10 years plus a 10 year renewal term from the date the first cannabis crop
produced is harvested and sold. The first cannabis crop was harvested in
September of 2022. Pursuant to the Quinn River Joint Venture Agreement, Kealii
Okamalu leased approximately 20-30 acres of the Tribe's land located along the
Quinn River at a cost of $3,500 per quarter and managed the design, finance and
construction of a cannabis cultivation facility on such tribal lands (the
"Cultivation Facility"). Kealii Okamalu now also manages the ongoing operations
of the Cultivation Facility and related business, including, but not limited to,
the cultivation of cannabis crops, personnel staffing, product packaging,
testing, marketing and sales. Packaged products are branded as "Quinn River
Farms." We have provided up to 10,000 square feet of warehouse space at our Las
Vegas facility for the Quinn River Joint Venture product, and have preferred
vendor status including the right to purchase cannabis flower and the business's
cannabis trim at favorable prices. Kealii Okamalu will contribute up to $6
million (the "Invested Amount") towards the construction of the Cultivation
Facility and the working capital for the Quinn River Joint Venture. This
Invested Amount will be repaid from a portion of the net income of the Quinn
River Joint Venture otherwise payable to CSI and the Tribe at the rate of
$750,000 per quarter for eight quarters. Once the Invested Amount is paid in
full, Kealii Okamalu will receive one-third of the net profits of the Quinn
River Joint Venture.
COVID-19 Update
On March 12, 2020, Governor Steven Sisolak declared a State of Emergency related
to the COVID-19 global pandemic. This State of Emergency was initiated due to
the multiple confirmed and presumptive cases of COVID-19 in the State of Nevada.
On March 17, 2020, pursuant to the Declaration of Emergency, Governor Sisolak
released the Nevada Health Response COVID-19 Risk Mitigation Initiative
("Initiative"). This Initiative provided guidance related to the March 12
Declaration of Emergency, requiring Nevadans to stay home and all nonessential
businesses to temporarily close to the public for thirty (30) days. In the
Initiative, it was declared that licensed cannabis stores and medical
dispensaries could remain open only if employees and consumers strictly adhered
to the social distancing protocols.
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In light of the Initiative, Governor Sisolak issued Declaration of Emergency
Directive 003 on March 20, 2020 which mandated retail cannabis dispensaries to
operate as delivery only. On April 29, 2020, Governor Sisolak issued Declaration
of Emergency Directive 016 which amended the cannabis section of Directive 003
and permitted licensed cannabis dispensaries to engage in retail sales on a
curbside pickup or home delivery basis pursuant to guidance from the Cannabis
Compliance Board. Through Directive 016, licensed cannabis dispensaries were
able to begin curbside pickup on May 1, 2020 so long as the facility adhered to
protocols developed by the Cannabis Compliance Board ("CCB").
In accordance with Directive 016, the CCB released guidelines related to
curbside pickup requiring all facilities wishing to offer curbside pickup to
first submit and receive approval from the CCB. Serenity Wellness Center LLC
developed the required procedures and submitted and received State approval on
April 30, 2020 to conduct curbside pickup sales effective May 1, 2020. Further,
the City of Las Vegas required cannabis facilities to obtain a temporary 30-day
curbside pickup permit. Serenity Wellness Center LLC was issued its first
temporary curbside pickup permit from the City of Las Vegas on May 1, 2020.
Serenity Wellness Center LLC has subsequently received a temporary curbside
permit every thirty (30) days thereafter. The City of Las Vegas has since
extended the permit to 6 months before it needs to be renewed. Serenity Wellness
Center LLC dba Oasis Cannabis was issued its most recent curbside sales permit
on January 1, 2023 which is set to expire on June 30, 2023. Upon expiration
every 6 months, the City of Las Vegas reviews the licensee and determines if a
new temporary permit shall be issued.
On May 7, 2020, Governor Sisolak issued Declaration of Emergency Directive 018.
Directive 018 worked to reopen the State of Nevada as a part of Phase One of the
Nevada United: Roadmap to Recovery Plan introduced by Governor Sisolak on April
30, 2020. Directive 018 provided that, in addition to curbside pickup or home
delivery, licensed cannabis dispensaries could engage in retail sales on an
in-store basis effective May 9, 2020, pursuant to guidance from the CCB. The CCB
required facilities wishing to engage in limited in-store retail sales to submit
Standard Operating Procedures and receive approval of the same. Serenity
Wellness Center LLC developed the required procedures and submitted and received
State approval on May 8, 2020 to conduct limited in-store retail sales effective
May 9, 2020. The City of Las Vegas did not require a separate permit for limited
in-store sales.
On July 31, 2020, Governor Sisolak issued Declaration of Emergency Directive 029
reaffirming The Nevada United: Roadmap to Recovery Plan. Directive 029 stated
that all directives promulgated pursuant to the March 12, 2020 Declaration of
Emergency or subsections thereof set to expire on July 31, 2020, would remain in
effect for the duration of the current state of emergency unless terminated
prior to that date by a subsequent directive or by operation of law associated
with lifting the Declaration of Emergency. Further, Directive 029, having become
effective at 11:59 PM on Friday, July 31, 2020 shall remain in effect until
terminated by a subsequent directive promulgated pursuant to the March 12, 2020
Declaration of Emergency, or dissolution or lifting of the Declaration of
Emergency itself, to facilitate the State's response to the COVID-19 pandemic.
COVID-19 cases increased at a significant rate in November and December 2021
with the arrival of the Omicron variant, but then sharply dropped off as we
started 2022. As a result, our curbside and delivery programs have now returned
to approximately 20% of total dispensary revenue. In addition, COVID-19
restrictions and mask mandates have ceased. The number of customers and
transactions at our dispensary have increased from 64,886 for the three months
ending November 30, 2021 to 83,744 for the three months ending November 30,
2022. This increase in customer traffic of 18,858 visits represents a 29%
increase over the same period last year. The average amount of each purchase per
visit has decreased from $55.03 for the three months ending November 30, 2021 to
$44.93 for the three months ending November 30, 2022, largely due to an increase
in competitive pricing at other dispensaries which have forced us to reduce our
prices and offer deeper discounts.
Our supply chain remains challenging at times with respect to our purchases on
non-cannabis items; the purchase of cannabis-related items has returned to
normal and prices for wholesale cannabis trim have fallen below pre-pandemic
levels. In recent months the labor market has been very tight for us. Although
we have been able to employ sufficient staff to maintain operations at a normal
level, wage increases have averaged about 15% annually in order for us to do so.
The gradual return to more normal operations from the COVID-19 pandemic is
continuing to evolve and the ways that our business may respond to meet the
needs of our customers cannot, at this time, be fully known.
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Results of Operations for the Three Months Ended November 30, 2022 and November
30, 2021
The table below sets forth our select expenses as a percentage of revenue for
the applicable periods:
Three Months Three Months
Ended Ended
November 30, 2022 November 30, 2021
Revenue 100 % 100 %
Cost of Goods Sold 51 % 50 %
Gross Margin 49 % 50 %
Selling, General, and Administrative Expenses 58 % 56 %
Gain on Settlement of Notes Receivable 0 % 10 %
Loss on Extinguishment of Debt 110 % -
Provision for Income Tax 9 % 3 %
The table below sets forth certain statistical and financial highlights for the
applicable periods:
Three Months Three Months
Ended Ended
November 30, 2022 November 30, 2021
Number of Customers Served (Dispensary) 83,744 64,886
Revenue $ 6,074,177 $ 5,414,002
Gross Profit $ 3,002,444 $ 2,729,812
Gain on Note Receivable $ - $ 522,246
Loss on Extinguishment of Debt $ (6,659,359 ) -
Net (Loss) Income $ (8,215,954 ) $ (345,472 )
EBITDA (1) $ (6,850,100 ) $ 382,268
(1) EBITDA is a non-GAAP financial performance measures and should not be
considered as alternatives to net income(loss) or any other measure derived in
accordance with GAAP. This non-GAAP measure has limitations as an analytical
tool and should not be considered in isolation or as substitutes for analysis
of our financial results as reported in accordance with GAAP. Because not all
companies use identical calculations, these presentations may not be
comparable to other similarly titled measures of other companies. As required
by the rules of the SEC, we provide below a reconciliation of this non-GAAP
financial measure contained herein to the most directly comparable measure
under GAAP. Management believes that EBITDA provides relevant and useful
information, which is widely used by analysts, investors and competitors in
our industry as well as by our management. By providing this non-GAAP
profitability measure, management intends to provide investors with a
meaningful, consistent comparison of our profitability measures for the
periods presented.
Reconciliation of net loss for the three months ended November 30, 2022 and 2021
to EBITDA:
Three Months Three Months
Ended Ended
November 30, 2022 November 30, 2021
Net Loss attributable to CLS Holdings, Inc. $ (8,215,954 ) $ (345,472 )
Add:
Interest expense, net $ 608,905 $ 407,880
Provision for income taxes $ 516,691 $ 140,717
Depreciation and amortization $ 240,258 $ 179,143
EBITDA $ (6,850,100 ) $ 382,268
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Revenues
We had revenue of $6,074,177 during the three months ended November 30, 2022, an
increase of $660,175, or 12%, compared to revenue of $5,414,002 during the three
months ended November 30, 2021. Our cannabis dispensary accounted for
$3,792,804, or 62%, of our revenue for the three months ended November 30, 2022,
an increase of $201,405, or 6%, compared to $3,591,399 during the three months
ended November 30, 2021. Dispensary revenue increased during the second quarter
of fiscal year 2023 because our average sales per day increased from $39,466
during the second quarter of fiscal year 2022 to $41,679 during the second
quarter of fiscal year 2023. Our cannabis production accounted for $2,281,373,
or 38%, of our revenue for the three months ended November 30, 2022, an increase
of $458,770 or 25%, compared to $1,822,603 for the three months ended November
30, 2021. The increase in production revenues for the second quarter of fiscal
year 2023 was primarily due to an increase in our THC distillate sales of almost
$1,000,000, as well as sales to 10 new dispensaries and significant increases in
existing customer order size and frequency. These improvements occurred as a
result of our addition of a new sales director, an improvement in our product
mix, the introduction of new products, and the procurement of higher quality
materials. The increase was also due to greater revenue from third parties for
whom we manufactured and processed products.
Cost of Goods Sold
Our cost of goods sold for the three months ended November 30, 2022 was
$3,071,733, an increase of $387,543, or 14%, compared to cost of goods sold of
$2,684,190 for the three months ended November 30, 2021. The increase in cost of
goods sold for the three months ended November 30, 2022 was due primarily to an
increase in revenue and more aggressive competitive discounts. Cost of goods
sold was 51% of sales during the three months ended November 30, 2022 resulting
in a gross margin of 49%. Cost of goods sold was 50% for the three months ended
November 30, 2021 resulting in a gross margin of 50%. Costs of goods sold as a
percentage of revenue increased due to aggressive pricing in response to a very
competitive market. Gross margin was slightly under our target of 50% for the
second quarter of fiscal year 2023. Cost of goods sold during the second quarter
of the 2023 fiscal year primarily consisted of $2,697,590 of product cost,
$200,942 of state and local fees and taxes, and $132,426 of supplies and
materials.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, or SG&A, increased by $453,126, or
approximately 15%, to $3,505,559 during the three months ended November 30,
2022, compared to $3,052,433 for the three months ended November 30, 2021. The
increase in SG&A expenses for the three months ended November 30, 2022 was
primarily due to increases in costs associated with operating the Oasis LLCs.
SG&A expense during the three months ended November 30, 2022 was primarily
attributable to an aggregate of $2,801,960 in costs associated with operating
the Oasis LLCs, an increase of $320,320 compared to $2,481,640 during the second
quarter of fiscal 2022. The major components of the $320,320 increase in SG&A
associated with the operation of the Oasis LLCs during the three months ended
November 30, 2022 compared to the three months ended November 30, 2021 were as
follows: payroll and related costs of $1,412,510 compared to $1,140,962; lease,
facilities and office costs of $671,449 compared to $635,038; professional fees
of $241,594 compared to $58,143; depreciation and amortization of $165,961
compared to $103,927;and taxes and licenses of $108,248 compared to $26,175.
Payroll costs increased during the second quarter of fiscal 2023 primarily due
to increases in salaries of our employees related to the national labor shortage
and due to an increase in the number of employees in our manufacturing division
as we planned for the rollout of our pre-roll division. Payroll costs also
increased due to costs incurred in connection with our response to COVID-19.
Lease, facilities and office costs increased due to our efforts to prepare our
facilities for the new pre-roll division by purchasing equipment and
implementing compliance procedures applicable to this new division. Lease,
facilities and office costs also increased due to costs incurred in connection
with our response to COVID-19. Professional fees increased primarily due to
legal fees related to regulatory compliance issues. Travel increased due to
tribal visits in New Mexico and Northern Nevada. These increases were partially
offset by a decrease in sales and marketing costs of $165,679 due to a concerted
effort to reduce professional outsourced marketing programs.
Finally, SG&A increased by $132,806 during the three months ended November 30,
2022 as a result of an increase in the expenses associated with the ongoing
implementation of other aspects of our business plan and our general corporate
overhead to $703,599 from $570,793 during the three months ended November 30,
2021. The major components of this inecrease compared to the second quarter of
fiscal 2022 was an increase in professional fees to $538,761 compared to
$264,444 in the previous period due to increased legal fees. The Company is
actively disputing the amount of fees charged by our prior legal counsel.
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Loss on Extinguishment of Debt
During the three months ended November 30, 2022, certain of our convertible
debentures were amended to (i) permit mandatory conversion of $11,343,619 in
principal plus $189,061 in accrued interest into units at a reduced rate of
$0.285 per unit; (ii) decrease the conversion price of the remaining debentures
to $0.40 per unit; (iii) reduce the mandatory conversion VWAP provision from
$2.40 to $0.80; and (iv) change the maturity date so that half of the remaining
balance matures on December 31, 2023 and the remaining on December 31, 2024. We
recognized a loss on the amendment of the debt in the amount of $6,659,359 in
connection with these amendments during the second quarter of fiscal 2023. There
was no comparable transaction in the prior year.
Gain on Settlement of Debt
During the three months ended November 30, 2022, our U.S. Convertible Debenture
4 in the amount $599,101 in principal and accrued interest in the amount of
$3,283, went into default. We entered into a forbearance agreement with the
lender, whereby we would pay the amount of $600,000 in installments beginning in
November of 2022 through August of 2023. As a result of this agreement, we
recognized a gain on the settlement of debt in the amount of $2,384. There is no
comparable transaction in the prior period.
Gain on Settlement of Note Receivable
During the three months ended November 30, 2022, we recorded a gain on the
settlement of the IGH Settlement Note in the amount of $0 compared to $522,246
for the first half of fiscal 2022. 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.
Loss on Equity Investment
During the three months ended November 30, 2022, we had income on equity
investment in the amount of $80,319; there was no comparable transaction in the
prior period. The Company, through its 50% owned subsidiary Kealii Okamalu, owns
a one-third interest in the Quinn River Joint Venture. The second quarter of
fiscal 2023 loss represents our share of the results of the Quinn River Joint
Venture. The Quinn River Joint Venture completed its first harvest during the
three months ended November 30, 2022, and the Company purchased inventory in the
amount of $952,124 from the Quinn River Joint Venture.
Interest Expense, Net
Our interest expense was $608,905 for the three months ended November 30, 2022,
an increase of $201,025, or 49%, compared to $407,880 for the three months ended
November 30, 2021. The increase in interest expense was primarily due to the
original issue discount associated with the 2021 Debentures in the amount of
$185,081 which was amortized to interest expense during the three months ended
November 30, 2022. There was no comparable charge during the second quarter of
the prior fiscal year. In addition, the increase in net interest expense for the
second quarter of fiscal 2023 was due to an increase in interest expense of
$20,450 in connection with the 2021 Debentures in the principal amount of
$2,500,000 (net of original issue discount of $1,875,000), which we issued in
the November 2021 Debenture Offering. The increase in net interest expense for
the second quarter of fiscal 2023 was partially offset by a decrease in the
amortization of discounts on debentures in the amount of $4,506.
Provision for Income Taxes
We recorded a provision for income taxes in the amount of $516,691 during the
three months ended November 30, 2022 compared to $140,717 during the three
months ended November 30, 2021. Although we have net operating losses that we
believe are available to us to offset this entire tax liability, which arises
under Section 280E of the Code because we are a cannabis company, as a
conservative measure, we have accrued this liability.
Net Loss
Our net loss for the three months ended November 30, 2022 was $8,205,367compared
to a net loss of $348,972 for the three months ended November 30, 2022, an
increase of $7,856,395, or 2,251%. The net loss amount was primarily due to a
one-time entry of $6,815,402 for the Loss on Extinguishment of Debt resulting
from the debt restructuring and the conversion of $11,523,680 of debt to equity.
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Non-Controlling Interest
During the three months ended November 30, 2022 and 2021, the loss (income)
associated with the non-controlling interest in Kealii Okamalu was ($10,587) and
$3,500, respectively. This amount is comprised of the third-party portion of the
operating loss of the Quinn River Joint Venture and our loss on equity
investment.
Net Loss Attributable to CLS Holdings USA, Inc.
Our net loss attributable to CLS Holdings USA, Inc. for the three months ended
November 30, 2022 was $8,215,954 compared to a net loss of $345,472 for the
three months ended November 30, 2021, a decrease of $7,870,482 or 2,278%.
Results of Operations for the Six Months Ended November 30, 2022 and November
30, 2021
The table below sets forth our select expenses as a percentage of revenue for
the applicable periods:
Six Months Ended Six Months Ended
November 30, 2022 November 30, 2021
Revenue 100 % 100 %
Cost of Goods Sold 50 % 48 %
Gross Margin 50 % 52 %
Selling, General, and Administrative Expenses 55 % 54 %
Gain on Settlement of Notes Receivable 3 % 16 %
Loss on Extinguishment of Debt 55 % -
Provision for Income Tax 9 % 4 %
The table below sets forth certain statistical and financial highlights for the
applicable periods:
Six Months Ended Six Months Ended
November 30, 2022 November 30, 2021
Number of Customers Served (Dispensary) 166,688 129,978
Revenue $ 12,119,104 $ 10,914,712
Gross Profit $ 6,044,641 $ 5,626,055
Gain on Note Receivable $ (348,165 ) $ (1,696,328 )
Net (Loss) Income $ (9,364,432 ) $ 82,127
Loss on Extinguishment of Debt $ 6,659,359 $ -
EBITDA (1) $ (6,475,888 ) $ 1,734,111
(1) EBITDA is a non-GAAP financial performance measures and should not be
considered as an alternative to net income(loss) or any other measure derived
in accordance with GAAP. This non-GAAP measure has limitations as an
analytical tool and should not be considered in isolation or as substitutes
for analysis of our financial results as reported in accordance with GAAP.
Because not all companies use identical calculations, these presentations may
not be comparable to other similarly titled measures of other companies. As
required by the rules of the SEC, we provide below a reconciliation of this
non-GAAP financial measure contained herein to the most directly comparable
measure under GAAP. Management believes that EBITDA provides relevant and
useful information, which is widely used by analysts, investors and
competitors in our industry as well as by our management. By providing this
non-GAAP profitability measure, management intends to provide investors with a
meaningful, consistent comparison of our profitability measures for the
periods presented.
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Reconciliation of net loss for the six months ended November 30, 2022 and 2021
to EBITDA:
Six Months Ended Six Months Ended
November 30, 2022 November 30, 2021
Net Loss attributable to CLS Holdings, Inc. $ (9,364,432 ) $ 82,127
Add:
Interest expense, net $ 1,375,575 $ 826,472
Provision for income taxes $ 1,035,776 $ 469,057
Depreciation and amortization $ 477,193 $ 356,455
EBITDA $ (6,475,888 ) $ 1,734,111
Revenues
We had revenue of $12,119,104 during the six months ended November 30, 2022, an
increase of $1,204,392, or 11%, compared to revenue of $10,914,712 during the
six months ended November 30, 2021. Our cannabis dispensary accounted for
$7,681,361, or 63%, of our revenue for the six months ended November 30, 2022,
an increase of $344,387, or 5%, compared to $7,336,974 during the six months
ended November 30, 2021. Dispensary revenue increased during the first half of
fiscal year 2023 because our average sales per day increased from $40,093 during
the first half of fiscal year 2022 to $41,975 during the first half of fiscal
year 2023. Our cannabis production accounted for $4,437,743, or 37%, of our
revenue for the six months ended November 30, 2022, an increase of $860,005 or
24%, compared to $3,577,738 for the six months ended November 30, 2021. The
increase in production revenues for the first half of fiscal year 2023 was
primarily due to an increase in our THC distillate sales of almost $1,000,000,
as well as sales to 10 new dispensaries and significant increases in existing
customer order size and frequency. These improvements occurred as a result of
our addition of a new sales director, an improvement in our product mix, the
introduction of new products, and the procurement of higher quality materials.
The increase was also due to greater revenue from third parties for whom we
manufactured and processed their products.
Cost of Goods Sold
Our cost of goods sold for the six months ended November 30, 2022 was
$6,074,463, an increase of $785,806, or 15%, compared to cost of goods sold of
$5,288,657 for the six months ended November 30, 2021. The increase in cost of
goods sold for the six months ended November 30, 2022 was due primarily to an
increase in revenue and more aggressive competitive discounts. Cost of goods
sold was 50% of sales during the six months ended November 30, 2022 resulting in
a gross margin of 50%. Cost of goods sold was 48% for the six months ended
November 30, 2021 resulting in a gross margin of 52%. Costs of goods sold as a
percentage of revenue increased due to aggressive pricing in response to a very
competitive market. Gross margin met our target of 50% for the first half of
fiscal year 2023. Cost of goods sold during the first half of the 2023 fiscal
year primarily consisted of $5,333,84 of product cost, $399,203 of state and
local fees and taxes, and $283,933 of supplies and materials.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, or SG&A, increased by $759,634, or
approximately 13%, to $6,707,861 during the six months ended November 30, 2022,
compared to $5,948,227 for the six months ended November 30, 2021. The increase
in SG&A expenses for the six months ended November 30, 2022 was primarily due to
increases in costs associated with operating the Oasis LLCs.
SG&A expense during the six months ended November 30, 2022 was primarily
attributable to an aggregate of $5,488,789 in costs associated with operating
the Oasis LLCs, an increase of $647,953 compared to $4,840,836 during the first
half of fiscal 2022. The major components of the $647,953 increase in SG&A
associated with the operation of the Oasis LLCs during the six months ended
November 30, 2022 compared to the six months ended November 30, 2021 were as
follows: payroll and related costs of $2,826,346 compared to $2,142,613; lease,
facilities and office costs of $1,371,903 compared to $1,157,255; professional
fees of $391,826 compared to $146,513; depreciation and amortization of $327,517
compared to $205,285; and travel of $176,970 compared to $145,178. Payroll costs
increased during the first half of fiscal 2023 primarily due to increases in
salaries of our employees related to the national labor shortage and due to an
increase in the number of employees in our manufacturing division as we planned
for the rollout of our pre-roll division. Lease, facilities and office costs
increased due to our efforts to prepare our facilities for the new pre-roll
division by purchasing equipment and implementing compliance procedures
applicable to this new division. Professional fees increased primarily due to
legal fees related to the restructuring of debt and the implementation of a
reverse stock split. Travel increased due to tribal visits in New Mexico and
Northern Nevada. These increases were partially offset by a decrease in sales
and marketing costs of $397,448 due to a concerted effort to reduce professional
outsourced marketing programs.
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Finally, SG&A increased by $111,681 during the six months ended November 30,
2022 as a result of an increase in the expenses associated with the ongoing
implementation of other aspects of our business plan and our general corporate
overhead to $1,219,073 from $1,107,392 during the six months ended November 30,
2021. The major component of this increase compared to the first half of fiscal
2022 was due to increased legal fees. The Company is actively disputing the
amount of fees charged by our prior legal counsel.
Loss on Equity Investment
During the six months ended November 30, 2022, we had a loss on equity
investment in the amount of $154,111; there was no comparable transaction in the
prior period. The Company, through its 50% owned subsidiary Kealii Okamalu, owns
a one-third interest in the Quinn River Joint Venture. The Quinn River Joint
Venture completed its first harvest during the three months ended November 30,
2022, and the Company purchased inventory in the amount of $952,124 from the
Quinn River Joint Venture.
Gain on Settlement of Note Receivable
During the six months ended November 30, 2022, we recorded a gain on the
settlement of the IGH Settlement Note in the amount of $348,165 compared to
$1,696,328 for the first half of fiscal 2022. 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.
Loss on Extinguishment of Debt
During the six months ended November 30, 2022, certain of our convertible
debentures were amended to: (i) permit mandatory conversion of $11,343,619 in
principal plus $189,061 in accrued interest into units at a reduced rate of
$0.285 per unit; (ii) decrease the conversion price of the remaining debentures
to $0.40 per unit; (iii) reduce the mandatory conversion VWAP provision from
$2.40 to $0.80; (iv) change the maturity date so that half of the remaining
balance matures on December 31, 2023 and the remaining on December 31, 2024. We
recognized a loss on the amendment of the debt in the amount of $6,659,359 in
connection with these amendments during the first half of fiscal 2023. There was
no comparable transaction in the prior year.
Gain on Settlement of Debt
During the six months ended November 30, 2022, our U.S. Convertible Debenture 4
in the amount $599,101 in principal and accrued interest in the amount of
$3,283, went into default. We entered into a forbearance agreement with the
lender, whereby we would pay the amount of $600,000 in installments beginning
with a $150,000 payment on November 2, 2022 and $50,000 payments each month
thereafter through August of 2023. As a result of this agreement, we recognized
a gain on the settlement of debt in the amount of $2,384. There is no comparable
transaction in the prior period.
Interest Expense, Net
Our interest expense was $1,375,575 for the six months ended November 30, 2022,
an increase of $549,103, or 66%, compared to $826,472 for the six months ended
November 30, 2021. The increase in interest expense was primarily due to the
original issue discount associated with the 2021 Debentures in the amount of
$370,162 which was amortized to interest expense during the six months ended
November 30, 2022. There was no comparable charge during the first half of the
prior fiscal year. In addition, the increase in net interest expense for the
first half of fiscal 2023 was due to an increase in interest expense of $195,051
in connection with the 2021 Debentures in the principal amount of $2,500,000
(net of original issue discount of $1,875,000), which we issued in the November
2021 Debenture Offering. The increase in net interest expense for the first half
of fiscal 2023 was partially offset by a decrease in the amortization of
discounts on debentures in the amount of $16,110.
Provision for Income Taxes
We recorded a provision for income taxes in the amount of $1,035,776 during the
six months ended November 30, 2022 compared to $469,057 during the six months
ended November 30, 2021. 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.
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Net Loss
Our net loss for the six months ended November 30, 2022 was $9,537,492 compared
to a net income of $78,627 for the six months ended November 30, 2022, a
decrease of $9,049,400, or 1,652%. The net loss amount was primarily due to a
one-time entry of $6,659,359 for the Loss on Extinguishment of Debt resulting
from the debt restructuring and the conversion of $11,523,680 of debt to equity.
Non-Controlling Interest
During the six months ended November 30, 2022 and 2021, income (loss) associated
with the non-controlling interest in Kealii Okamalu was $173,060 and $3,500,
respectively. This amount is composed 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 six months ended
November 30, 2022 was $9,364,432 compared to a net income of $82,127 for the six
months ended November 30, 2021, a decrease of $9,446,559, or 11,502%.
Liquidity and Capital Resources
The following table summarizes our total current assets, liabilities and working
capital at November 30, 2022 and May 31, 2022:
November 30, May 31,
2022 2022
Current Assets $ 6,976,780 $ 6,883,557
Current Liabilities $ 11,454,374 $ 28,112,190
Working Capital (Deficit) $ (4,477,594 ) $ (21,228,633 )At November 30, 2022, we had a working capital deficit of $4,477,594, a decrease
of $16,751,039 from the working capital deficit of $21,228,633 we had at May 31,
2022. Our working capital increased primarily due to the restructuring of
debenture agreements whereby (i) the current principal and interest in the
aggregate amount of $11,532,679 was converted to common stock, and (ii) the
principal in the aggregate amount of $7,506,102 was converted to long term
liabilities. Working capital also increased due to an increase in inventory in
the amount of $1,458,054. Our working capital increase was partially offset by
an increase in our accrued potential tax liability in the amount of $1,035,776
as a result of the calculation of our tax liability under 280E, which can change
based on the deductibility of applicable expenses and is not necessarily tied to
operating income.
We recently completed the first harvest of the Quinn River Joint Venture and
have been selling the products derived from that initial harvest since October
of 2022. Our partner in Kealii Okamalu has not yet contributed its capital
contribution and we have advanced additional amounts to cover this cash need. We
believe that once we sell the initial crop from the Quinn River Joint Venture,
which is expected to occur by the end of the third quarter of fiscal 2023, our
liquidity will improve significantly; however, we cannot yet estimate when, or
if, our partner will make the required capital contributions. If our partner
fails to make the required capital contributions we will take control and
ownership of our partners interest in Kealii Okamalu (among other remedies) in
lieu of the contributions that should have been made by the partner. Until these
issues are resolved, we may utilize short-term financing through the 2022
Financing Agreement and our Short-Term Financing Agreement. Although we have
been able to secure such financing so far, there can be no assurance that we
will be able to continue to secure such financing if we continue to need it.
In September 2022, we successfully refinanced all but one of the U.S.
Convertible Debentures and all of the Canaccord 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.
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Although our revenues are expected to grow as we expand our operations, we only
achieved net income for the first time during our first quarter of fiscal 2022
and we have experienced net losses since such time. Nonetheless, as a result of
the debt restructuring and the competition of the first harvest of the Quinn
River Joint Venture, we believe we will have funds sufficient to sustain our
operations at their current level, or if we require additional cash, we expect
to obtain the necessary funds as described above; 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 COVID-19 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 be 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 used in operating activities were $1,821,312 during the six months
ended November 30, 2022, an increase of $293,982, or approximately 19%, compared
to $1,527,330 during the six months ended November 30, 2021. In deriving cash
flows used in operating activities from the net losses for the first half of
fiscal 2023 and the first half of fiscal 2022, certain non-cash items were
(deducted from) or added back to the net loss for each such period. These
amounts were $7,334,224 and $(1,304,248) for the six months ended November 30,
2022 and 2021, respectively. For the first half of fiscal year 2023, the most
significant item deducted from the net loss was $348,165 related to the gain on
settlement of the IGH Settlement Note; compared to $1,696,328 during the first
half of fiscal 2022. For the first half of fiscal year 2023, the most
significant item added to the net loss was $6,659,359 related to the loss on
extinguishment of debt. There is no comparable transaction during the first half
of fiscal 2022.
Finally, our cash used in 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 compensation 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 $133,925 during the six months ended November 30, 2022, compared to a
decrease in cash from operating activities of $301,709 during the first half of
fiscal 2022. The more significant changes for the first half of fiscal 2023 were
as follows: inventory increased during first half of fiscal 2023 by $1,458,054,
compared to an increase of $1,013,127 during the first half of the prior fiscal
year because of increased inventory levels necessary to support increased sales;
tax liability increased by $1,035,776 during the first half of fiscal 2023,
compared to $469,057 during the first half of the prior year as we accrued
potential taxes in connection with Section 280E of the tax code; accounts
receivable increased by $387,057 during the first half of fiscal 2023 compared
to an increase of $115,060 during the first half of prior fiscal year due to an
increase in revenue; and operating lease liability decreased by $161,153 during
the first quarter of fiscal 2023 compared to $139,983 during the first quarter
of prior fiscal year as certain leases were renegotiated resulting in lower
monthly amortization.
Cash flows used by investing activities were $33,268 for the six months ended
November 30, 2022, a decrease of $1,491,581, or 102%, compared to cash flow
provided by investing activities of $1,458,313 during the six months ended
November 30, 2021. This decrease was primarily due to payments for our
investment in the Quinn River Joint Venture of $242,957, and payments to acquire
property, plant and equipment of $138,476, all of which occurred in the first
half of fiscal 2023. The decrease was partially offset by our receipt of
principal payments on the IGH Settlement Note in the amount of $348,165 during
the six months ended November 30, 2022, compared to our receipt of $1,696,328
during the six months ended November 30, 2021.
Cash flows provided by financing activities were $111,313 for the six months
ended November 30, 2022, an increase of $173,489, or 279%, compared to cash flow
used in financing activities of $62,176 during the six months ended November 30,
2021. This increase was primarily due to proceeds from loans payable in the
amount of $1,717,115. This increase was partially offset by principal payments
we made on loans payable in the amount $1,371,309, principal payments on
convertible notes payable in the amount of $200,000, and principal payments on
our equipment financing lease obligations of $34,493.
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Third Party Debt
The table below summarizes the status of our third party debt, excluding our
short term receivables-based debt facilities and reflects whether such debt
remains outstanding, has been repaid, or has been converted into or exchanged
for our common stock:
Name of Original Outstanding Payment
Note Principal Amount or Repaid Details
Oasis Note $ 4,000,000 Repaid Repaid
2018 U.S.
Convertible
Debentures $ 365,991 Outstanding Repaid
Half due
on
December
Amended and 31, 2023
Restated and half
2018 U.S. due on
Convertible December
Debentures $ 2,252,229 Outstanding 31, 2024
Half due
December
31, 2023
and half
2018 due
Convertible December
Debentures $ 5,253,872 Outstanding 31, 2024
2021 Due July
Debentures* $ 2,500,000 Outstanding 10, 2024.
2022 Due
Financing September
Agreement $ 894,348 Outstanding 2023
* The terms of the 2021 Debenture provide for additional payments in the
aggregate amount of not less than $375,000 per year for five years after the
maturity of the 2021 Debentures.
2018 U.S. Convertible Debenture Offering
Between October 22, 2018 and November 2, 2018, we entered into six subscription
agreements, pursuant to which we agreed to sell, $5,857,000 in original
principal amount of convertible debentures in minimum denominations of $1,000
each for an aggregate purchase price of $5,857,000.
Under the original terms, the debentures bear interest, payable quarterly, at a
rate of 8% per annum, with capitalization of accrued interest on a quarterly
basis for the first 18 months, by increasing the then-outstanding principal
amount of the debentures. The debentures originally matured on a date that was
three years following their issuance. The debentures were convertible into units
at a conversion price of $3.20 per unit. Each unit consists of (i) one share of
our common stock, par value $0.001 and (ii) one-half of one warrant, with each
warrant exercisable for three years to purchase a share of common stock at an
initial price of $1.10. The warrants also provided that we could force their
exercise at any time after the bid price of our common stock exceeds $2.20 for a
period of 20 consecutive business days. The debentures include a provision for
the capitalization of accrued interest on a quarterly basis for the first 18
months. After capitalizing accrued interest in the aggregate amount of $738,663,
the aggregate principal amount of the debentures increased to $6,595,663.
The debentures have other features, such as mandatory conversion in the event
our 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 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. The warrants have anti-dilution provisions that provide for an
adjustment to the exercise price in the event of a future sale of our common
stock at a lower price, subject to certain exceptions as set forth in the
warrant.
On July 26, 2019, we entered into amendments to the debentures with four of the
purchasers, pursuant to which we agreed to reduce the conversion price of the
original debentures if, in general, we issue or sell common stock, or warrants
or options exercisable for common stock, or any other securities convertible
into common stock, in a capital raising transaction, at a consideration per
share, or exercise or conversion price per share, as applicable, less than the
conversion price of the original debentures in effect immediately prior to such
issuance. In such case, the conversion price of the original debentures will be
reduced to such issuance price. The amendments also provided that, if a dilutive
issuance occurs, the warrant to be issued upon conversion will be exercisable at
a price equal to 137.5% of the adjusted conversion price at the time of
conversion of the debenture. If a dilutive issuance occurs, the form of warrant
attached to the subscription agreement would be amended to change the Initial
Exercise Price, as defined therein, to be the revised warrant exercise price.
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On March 31, 2021, we amended the Canaccord Debentures. This Debenture Amendment
(as hereafter defined) was a dilutive issuance. As a result, the conversion
price of the convertible debentures was automatically reduced from $3.20 per
unit to $1.20 per unit and the form of warrant attached to the subscription
agreement will be amended to reduce the exercise price from $4.40 per share of
common stock to 137.5% of the debenture conversion price (presently $1.65 per
share of common stock).
On April 15, 2021 and April 19, 2021, we amended three of the purchasers'
debentures and subscription agreements in order to (i) reduce the conversion
price of the debentures from $3.20 per unit to $1.20 per unit, and (ii) extend
the maturity date of the debentures by one year to four (4) years from the
execution date of the debentures. The subscription agreements, as amended, also
provide that we will file a registration statement to register for resale all of
the shares of common stock issuable to these three purchasers upon conversion of
the debentures and the exercise of the warrants issuable upon conversion of such
debentures. Each warrant issuable pursuant to the debentures is exercisable for
one share of common stock at a price equal to 137.5% of the conversion price
(presently $1.65 per share) for a period of three years from the earlier of the
date of issuance of the warrant or the effectiveness of a registration statement
registering the warrant shares.
On October 25, 2021, we repaid three of the debentures at maturity, which
comprised $365,991 of principal and $2,065 of interest.
Effective September 15, 2022, we entered into agreements with the holders of two
of the debentures to make the following changes to these debentures and the
related subscription agreements: (i) to permit the mandatory conversion, in our
discretion, of an aggregate of $3,378,342 in principal amount plus $56,307 in
accrued interest into units at the reduced conversion price of $0.285 per unit;
(ii) to decrease the conversion price of the remaining amount due under these
debentures (following the mandatory conversion) to $0.40 per unit; (iii) to
reduce the mandatory conversion VWAP provision in the debentures from $2.40 to
$0.80; (iv) to provide for a reduced conversion price to holders of these
debentures who elect to covert more than the mandatory conversion amount on or
prior to September 15, 2022; (v) to change the maturity date so that half of the
remaining amounts due mature on December 31, 2023 and the remaining amounts due
mature on December 31, 2024; (vi) to provide for the payment of interest
accruing between July 1, 2022 and December 31, 2024 so that one-third of the
total scheduled interest is paid on December 31, 2023 and the balance of the
accrued interest is paid on December 31, 2024; and (vii) subject to the receipt
of regulatory approvals, to grant a security interest in certain of our 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
these debentures and to other holders of our debt, now or in the future, as we
may elect. Following execution of the amendments to these two debentures and the
related subscription documents, the Company elected to effect the mandatory
conversion provided for in the amended documents.
2018 Convertible Debenture Offering
On December 12, 2018, we entered into an agency agreement with two Canadian
agents regarding a private offering of up to $40 million of convertible
debentures of the Company at an issue price of $1,000 per debenture (the
"Canaccord Debentures"). The agents sold the convertible debentures on a
commercially reasonable efforts private placement basis. Each debenture was
convertible into units of the Company at the option of the holder at a
conversion price of $3.20 per unit at any time prior to the close of business on
the last business day immediately preceding the maturity date of the debentures,
being the date that is three (3) years from the closing date of the offering
(the "2018 Convertible Debenture Offering"). Each unit will be comprised of one
share of common stock and a warrant to purchase one-half of a share of common
stock. Each warrant was initially exercisable for one share of common stock at a
price of $4.40 per warrant for a period of 36 months from the closing date.
We closed the 2018 Convertible Debenture Offering on December 12, 2018, issuing
$12,012,000 million in 8% senior unsecured convertible debentures at the initial
closing. At the closing, we paid the agents: (A)(i) a cash fee of $354,000 for
advisory services provided to us in connection with the offering; (ii) a cash
commission of $720,720, equivalent to 6.0% of the aggregate gross proceeds
received at the closing of the offering; (B)(i) an aggregate of 46,094 units for
advisory services; and (ii) a corporate finance fee equal to 93,844 units, which
is the number of units equal to 2.5% of the aggregate gross proceeds received at
the closing of the offering divided by the conversion price; and (C)(i) an
aggregate of 110,625 advisory warrants; and (ii) 225,225 broker warrants, which
was equal to 6.0% of the gross proceeds received at the closing of the offering
divided by the conversion price. During the year ended May 31, 2020, principal
in the amount of $25,856 was converted into 8,080 shares of common stock. The
debentures include a provision for the capitalization of accrued interest on a
quarterly basis for the first 18 months. Accrued interest in the amount of
$1,514,006 was capitalized, and the principal amount of the debentures is
$13,500,150.
The debentures are unsecured obligations of the Company, rank pari passu in
right of payment of principal and interest and were issued pursuant to the terms
of a debenture indenture, dated December 12, 2018, between the Company and
Odyssey Trust Company as the debenture trustee. The debentures bear interest at
a rate of 8% per annum from the closing date, payable on the last business day
of each calendar quarter.
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Beginning on the date that is four (4) months plus one (1) day following the
closing date, we could force the conversion of all of the principal amount of
the then outstanding debentures at the conversion price on not less than 30
days' notice should the daily volume weighted average trading price, or VWAP, of
our common stock be greater than $1.20 per share for the preceding 10
consecutive trading days.
Upon a change of control of the Company, holders of the debentures have the
right to require us to repurchase their debentures at a price equal to 105% of
the principal amount of the debentures then outstanding plus accrued and unpaid
interest thereon. The debentures also contain standard anti-dilution provisions.
On March 31, 2021, the holders of the Canaccord Debentures approved the
amendment of the indenture related to the Canaccord Debentures (the "Debenture
Amendment") to: (i) extend the maturity date of the Canaccord Debentures from
December 12, 2021 to December 12, 2022; (ii) reduce the conversion price from
$3.20 per unit (as such term is defined in the indenture) to $1.20 per unit;
(iii) reduce the mandatory conversion VWAP threshold from $1.20 to $0.60 per
share; and (iv) amend the definitions of "Warrant" and "Warrant Indenture" (as
such terms are defined in the indenture), to reduce the exercise price of each
warrant to $1.60 per share of our common stock. Simultaneously, we amended the
warrant indenture to make conforming amendments and extend the expiration date
of the warrants to March 31, 2024.
Effective September 15, 2022, we entered into agreements with the holders of the
Canaccord Debentures to restructure the debentures as follows: (i) $7,931,490 in
principal amount of the Canaccord Debentures plus $132,192 in accrued interest
on the Canaccord Debentures were converted into units at the reduced conversion
price of US$0.285 per unit; (ii) to decrease the conversion price of the
remaining Canaccord Debentures (following the mandatory conversion) to $0.40 per
unit; (iii) to reduce the mandatory conversion VWAP provision in the Canaccord
Debentures from $2.40 to $0.80; (iv) to provide for a reduced conversion price
to holders of Canaccord Debentures who elect to covert more than the mandatory
conversion amount of Canaccord Debentures on or prior to the date of the meeting
of debenture holders; (v) to change the maturity date of the Canaccord
Debentures so that half of the remaining Canaccord Debentures mature on December
31, 2023 and the remaining Canaccord Debentures mature on December 31, 2024;
(vi) to provide for the payment of interest accruing between July 1, 2022 and
December 31, 2024 so that one-third of the total scheduled interest is paid on
December 31, 2023 and the balance of the accrued interest is paid on December
31, 2024; and (vii) to grant a security interest in certain of our 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 debt of ours now or in the
future, as we may elect, provided that we are able to secure all regulatory
approvals required to make such a grant. Following the meeting, we elected to
effect the mandatory conversion provided for in the amendments to the Canaccord
Debentures and received an additional voluntary conversion of $33,787 in
principal and $563 in accrued interest of the Canaccord Debentures.
If, at the time of exercise of any warrant in accordance with the warrant
indenture, there is no effective registration statement under the Securities Act
covering the resale by the holder of a portion of the shares of common stock to
be issued upon exercise of the warrant, or the prospectus contained therein is
not available for the resale of the shares of common stock by the holder under
the Securities Act by reason of a blackout or suspension of use thereof, then
the warrants may be exercised, in part for that portion of the shares of common
stock not registered for resale by the holder under an effective registration
statement or in whole in the case of the prospectus not being available for the
resale of such shares of common stock, at such time by means of a "cashless
exercise" in which the holder shall be entitled to receive a number of shares of
common stock equal to the quotient obtained by dividing [(A-B) (X)] by (A),
where: A = the last volume weighted average price, or VWAP, for the trading day
immediately preceding the time of delivery of the exercise form giving rise to
the applicable "cashless exercise"; B = the exercise price of the warrant; and X
= the number of shares of common stock that would be issuable upon exercise of
the warrant in accordance with the terms of such warrant if such exercise were
by means of a cash exercise rather than a cashless exercise.
Pursuant to the agency agreement, we granted the agents an option to increase
the offering by an additional $6 million in principal amount of debentures,
which option was not exercised by the agents prior to the closing date of the
offering.
Pursuant to the agency agreement and the subscription agreements signed by
investors in the offering, we granted certain registration rights to the holders
of the debentures pursuant to which we agreed to prepare and file a registration
statement with the SEC to register the resale by the original purchasers of the
debentures of the shares of common stock issuable upon conversion of the
debentures or exercise of the warrants.
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November 2021 Debenture Offering
During November 2021, we commenced an offering of a maximum of $5,500,000 of
2021 Debentures and warrants to purchase shares of our common stock at an
exercise price of $1.65 per share in an aggregate amount equal to one-half of
the aggregate purchase price for the 2021 Debentures The proceeds of the
November 2021 Debenture Offering were used to fund our investment in the Quinn
River Joint Venture.
On March 9, 2022, we conducted the final closing of the November 2021 Debenture
Offering. Between December 1, 2021 and January 4, 2022, we completed multiple
closings of the November 2021 Debenture Offering in which we sold an aggregate
of $2,500,000 of 2021 Debentures and issued an aggregate of 757,576 Debenture
Warrants to the investors. The 2021 Debentures bear interest at the rate of 15%
per annum calculated on the basis of a 360 day year and mature on July 10, 2024.
Commencing 36 months after issuance of the 2021 Debentures and for a period of 5
years thereafter, all note holders shall receive, on an annual basis, cash
payments equal to the greater of (i) 15% of the principal amount of the notes
they purchased, or (ii) such purchaser's pro rata portion of 5% of the
distributions we receive for the prior fiscal year pursuant to the terms of the
Quinn River Joint Venture Agreement. The Debenture Warrants have a term of 3
years and are exercisable, in whole or in part, at any time, or from time to
time, after the date of issuance for $1.65 per share of our common stock.
Accounts Receivable Financing Agreement
We maintain an accounts receivable financing agreement (the "Short Term
Financing Agreement") with LeafLink Financial whereby we can sell certain of our
accounts receivable for a discount of 3%. In April 2022, the discount rate
decreased to 2.5% Loans under the facility cannot exceed an aggregate of
$1,500,000 and are payable within 30 days.
2022 Financing Agreement
Effective September 30, 2022, we entered into a Business Loan and Security
Agreement with CBR Capital LLC to borrow $900,000. The loan is repayable in 48
weekly installments in the amount of $13,312.50 for weeks 1-8 and $29,287.50 for
weeks 9-48. CBR Capital LLC has stated that it is aware of the Canaccord
Debentures and the U.S. Convertible Debentures and will agree to subordinate the
CBR security interest to these debenture holders. Certain terms of the loan
remain subject to regulatory approval. During the three months ended November
30, 2022, the Company received cash proceeds in the amount of $873,000 from the
loan agreement and made payments in the amount of $93,188.
2022 Agreement for the Purchase and Sale of Future Receipts
Effective October 21, 2022, we entered into an Agreement for the Purchase and
Sale of Future Receipts with TVT Business Funding LLC to borrow $200,000. The
loan is prepayable in future receipts until the amount of $284,000 has been
repaid. During the three months ended November 30, 2022, the Company received
cash proceeds in the amount of $194,000 from the loan agreement and made
payments in the amount of $29,583.
Sales of Equity
The Canaccord Special Warrant Offering
On June 20, 2018, we executed an agency agreement with Canaccord Genuity Corp.
and closed on a private offering of our Special Warrants for aggregate gross
proceeds of CD$13,037,859 (USD$9,785,978). In connection therewith, we also
entered into a Special Warrant Indenture and a Warrant Indenture with Odyssey
Trust Company, as special warrant agent and warrant agent.
Pursuant to the offering, we issued 7,243,014 special warrants at a price of
CD$1.80 (USD$1.36) per Special Warrant. Each Special Warrant was automatically
exercised, for no additional consideration, into Units on November 30, 2018.
Each Unit consisted of one Unit Share and one warrant to purchase one share of
common stock. Each warrant was to be exercisable at a price of CD$2.60 for three
years after our common stock was listed on a recognized Canadian stock exchange,
subject to adjustment in certain events. The warrants expired on January 7,
2022. Because we did not receive a receipt from the applicable Canadian
securities authorities for the qualifying prospectus by August 20, 2018, each
Special Warrant entitled the holder to receive 1.1 Units (instead of one (1)
Unit); provided, however, that any fractional entitlement to penalty units was
rounded down to the nearest whole penalty unit.
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In connection with the Special Warrant Offering, we paid a cash commission and
other fees equal to CD$1,413,267 (USD$1,060,773), a corporate finance fee equal
to 362,163 Special Warrants with a fair value of USD$1,413,300, and 579,461
Broker Warrants. Each Broker Warrant entitles the holder thereof to acquire one
unit at a price of CD$1.80 per unit for a period of 36 months from the date that
our common stock is listed on a recognized Canadian stock exchange, subject to
adjustment in certain events. Our common stock commenced trading on the Canadian
Stock Exchange on January 7, 2019. During the year ended May 31, 2020, we also
issued investors 760,542 Special Warrants with a fair value of $7,142,550 as a
penalty for failure to timely effect a Canadian prospectus with regard to the
securities underlying the Special Warrants.
The Navy Capital Investors
Effective July 31, 2018, we entered into a subscription agreement with Navy
Capital Green International, Ltd., a British Virgin Islands limited company
("Navy Capital"), pursuant to which we agreed to sell to Navy Capital, for a
purchase price of $3,000,000, 1,875,000 units ($1.60 per unit), representing (i)
1,875,000 shares of our common stock, and (ii) three-year warrants to purchase
an aggregate of 1,875,000 shares of our common stock (the "Navy Warrant Shares")
at an exercise price of $2.40 per share of common stock (the "Navy Capital
Offering"). We valued the warrants using the Black-Scholes valuation model, and
allocated gross proceeds in the amount of $1,913,992 to the common stock and
$1,086,008 to the warrants. The closing occurred on August 6, 2018. In the
subscription agreement, we also agreed to file, on or before November 1, 2018, a
registration statement with the SEC registering the shares of common stock and
Navy Warrant Shares issued to Navy Capital. If we failed to file the
registration statement on or before that date, we were required to issue to Navy
Capital an additional number of units equal to ten percent (10%) of the units
originally subscribed for by Navy Capital (which would include additional
warrants at the original exercise price). On August 29, 2019, we filed a
registration statement with the SEC which included the shares of common stock
and Navy Warrant Shares issued to Navy Capital. The warrant was exercisable from
time to time, in whole or in part for three years. The warrant had anti-dilution
provisions that provided for an adjustment to the exercise price in the event of
a future issuance or sale of common stock at a lower price, subject to certain
exceptions as set forth in the warrant. The warrant also provided that it is
callable at any time after the bid price of our common stock exceeds 120% of the
exercise price of the warrant for a period of 20 consecutive business days. This
warrant expired on July 31, 2021.
Between August 8, 2018 and August 10, 2018, we entered into five subscription
agreements, pursuant to which we sold, for an aggregate purchase price of
$2,750,000, 1,718,750 units ($1.60 per unit), representing (i) 1,718,750 shares
of our common stock, and (ii) three-year warrants to purchase an aggregate of
1,718,750 shares of our common stock at an exercise price of $2.40 per share of
common stock. We valued the warrants using the Black-Scholes valuation model,
and allocated gross proceeds in the amount of $1,670,650 to the common stock and
$1,079,350 to the warrants. These warrants expired on August 7, 2021. The
balance of the terms set forth in the subscription agreements are the same as
the terms in the Navy Capital subscription agreement summarized above.
Oasis Cannabis Transaction
On December 4, 2017, we entered into the Acquisition Agreement, with Alternative
Solutions for us to acquire all of the outstanding equity interests in
Alternative Solutions and the Oasis LLCs. Pursuant to the Acquisition Agreement,
we paid a non-refundable deposit of $250,000 upon signing, which was followed by
an additional payment of $1,800,000 approximately 45 days thereafter and were to
receive, upon receipt of applicable regulatory approvals, an initial 10% of each
of the Oasis LLCs. Regulatory approvals were received and the 10% membership
interests were transferred to us.
On June 27, 2018, we closed on the purchase of the remaining 90% of the
membership interests in Alternative Solutions and the Oasis LLCs from the owners
thereof (excluding Alternative Solutions). The closing consideration was as
follows: $5,995,543 in cash, a $4.0 million promissory note due in December
2019, known as the Oasis Note, and $6,000,000 in shares of our common stock. The
cash payment of $5,995,543 was less than the $6,200,000 payment originally
contemplated because the Company assumed an additional $204,457 of liabilities.
The number of shares to be issued was computed as follows: $6,000,000 divided by
the lower of $1.00 or the conversion price to receive one share of our common
stock in our first equity offering of a certain minimum size that commenced in
2018, multiplied by 80%. This price was determined to be $0.272 per share. The
Oasis Note was secured by a first priority security interest over our membership
interests in Alternative Solutions and the Oasis LLCs, and by the assets of each
of the Oasis LLCs and Alternative Solutions. We also delivered a confession of
judgment to a representative of the former owners of Alternative Solutions and
the Oasis LLCs (other than Alternative Solutions) that would generally become
effective upon an event of default under the Oasis Note or failure to pay
certain other amounts when due. We repaid the Oasis Note in full in December
2019.
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At the time of closing of the Acquisition Agreement, Alternative Solutions owed
certain amounts to a consultant known as 4Front Advisors, which amount was in
dispute. In August 2019, we made a payment to this company to settle this
dispute and the Oasis Note was reduced accordingly.
The former owners of Alternative Solutions and the Oasis LLCs (other than
Alternative Solutions) became entitled to a $1,000,000 payment from us because
the Oasis LLC maintained an average revenue of $20,000 per day during the 2019
calendar year. We made a payment in the amount of $850,000 to the sellers on May
27, 2020. We deposited the balance due to sellers of $150,000 with an escrow
agent to hold pending the outcome of a tax audit. During the year ended May 31,
2020, the State of Nevada notified the Oasis LLCs that it would be conducting a
tax audit for periods both before and after the closing of the sale to CLS. In
February 2021, we finalized the tax audit, used approximately $43,000 of the
escrowed amount to reimburse ourselves for the portion of the tax liability
properly payable by the sellers, and returned approximately $107,000 of the
escrowed amount to the sellers.
We received final regulatory approval to own the membership interests in the
Oasis LLCs on December 12, 2018. We received final regulatory approval to own
our interest in the Oasis LLCs through Alternative Solutions under the revised
structure of the transaction on April 26, 2022.
Consulting Agreements
We periodically use the services of outside investor relations consultants.
During the year ended May 31, 2016, pursuant to a consulting agreement, we
agreed to issue 2,500 shares of common stock per month, valued at $11,600 per
month, to a consultant in exchange for investor relations consulting services.
The consulting agreement was terminated during the first month of its term. The
parties are in discussions regarding whether any shares of our common stock have
been earned and it is uncertain whether any shares will be issued. As of
November 30, 2022, we included 5,000 shares of common stock, valued at $23,200
in stock payable on the accompanying balance sheets. The shares were valued
based on the closing market price on the grant date.
On December 29, 2015, pursuant to a consulting agreement, we agreed to issue
6,250 shares of common stock per month, valued at $21,250, to a consultant in
exchange for investor relations consulting services. The consulting agreement
was terminated during the first month of its term. The parties are in
discussions regarding whether any shares of our common stock have been earned
and it is uncertain whether any shares will be issued. As of November 30, 2022,
we had 12,500 shares of common stock, valued at $42,500 included in stock
payable on the accompanying balance sheet. The shares were valued based on the
closing market price on the grant date.
Going Concern
Our financial statements were prepared using accounting principles generally
accepted in the United States of America applicable to a going concern, which
contemplate the realization of assets and liquidation of liabilities in the
normal course of business. With the exception of the first quarter of fiscal
2022, we have incurred losses from operations since inception, and have an
accumulated deficit of $104,444,249 as of November 30, 2022, compared to
$95,079,817 as of May 31, 2022. We had a working capital deficit of $4,477,594
as of November 30, 2022, compared to a working capital deficit of $21,228,633 as
of May 31, 2022. The report of our independent auditors for the year ended May
31, 2022 contained a going concern qualification.
Our ability to continue as a going concern must be considered in light of the
problems, expenses, and complications frequently encountered by early-stage
companies.
Our ability to continue as a going concern is dependent on our ability to
generate sufficient cash from operations to meet our cash needs and finance our
ongoing operations. There can be no assurance that cash generated by our future
operations will be adequate to meet our needs.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably
likely to have, a current or future effect on our financial condition, changes
in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors.
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Critical Accounting Estimates
Management uses various estimates and assumptions in preparing our financial
statements in accordance with generally accepted accounting principles. These
estimates and assumptions affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Accounting estimates that are the most important to the
presentation of our results of operations and financial condition, and which
require the greatest use of judgment by management, are designated as our
critical accounting estimates. We have the following critical accounting
estimates:
? Estimates and
assumptions
regarding the
deductibility
of expenses
for purposes
of Section
280E of the
Internal
Revenue Code:
Management
evaluates the
expenses of
its
manufacturing
and retail
operations and
makes certain
judgments
regarding the
deductibility
of various
expenses under
Section 280E
of the
Internal
Revenue Code
based on its
interpretation
of this
regulation and
its subjective
assumptions
about the
categorization
of these
expenses.
? Estimates and
assumptions
used in the
valuation of
derivative
liabilities:
Management
utilizes a
lattice model
to estimate
the fair value
of derivative
liabilities.
The model
includes
subjective
assumptions
that can
materially
affect the
fair value
estimates.
? Estimates and
assumptions
used in the
valuation of
intangible
assets. In
order to value
our intangible
assets,
management
prepares
multi-year
projections of
revenue, costs
of goods sold,
gross margin,
operating
expenses,
taxes and
after tax
margins
relating to
the operations
associated
with the
intangible
assets being
valued. These
projections
are based on
the estimates
of management
at the time
they are
prepared and
include
subjective
assumptions
regarding
industry
growth and
other matters.
Recently Issued Accounting Standards
Accounting standards promulgated by the Financial Accounting Standards Board
(the "FASB") are subject to change. Changes in such standards may have an impact
on our future financial statements. The following are a summary of recent
accounting developments.
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for
Goodwill Impairment, which simplifies the subsequent measurement of goodwill by
eliminating Step 2 from the goodwill impairment test. In computing the implied
fair value of goodwill under Step 2, current U.S. GAAP requires the performance
of procedures to determine the fair value at the impairment testing date of
assets and liabilities (including unrecognized assets and liabilities) following
the procedure that would be required in determining the fair value of assets
acquired and liabilities assumed in a business combination. Instead, the
amendments under this ASU require the goodwill impairment test to be performed
by comparing the fair value of a reporting unit with its carrying amount. An
impairment charge should be recognized for the amount by which the carrying
amount exceeds the reporting unit's fair value; however, the loss recognized
should not exceed the total amount of goodwill allocated to that reporting unit.
The ASU became effective for us on January 1, 2020. The amendments in this ASU
were applied on a prospective basis. During the year ended May 31, 2020, the
Company recorded an impairment of goodwill in the amount of $25,185,003 pursuant
to ASU No. 2017-04.
In May 2017, the FASB issued ASU No. 2017-09, Stock Compensation - Scope of
Modification Accounting, which provides guidance on which changes to the terms
or conditions of a share-based payment award require an entity to apply
modification accounting. The ASU requires that an entity account for the effects
of a modification unless the fair value (or calculated value or intrinsic value,
if used), vesting conditions and classification (as equity or liability) of the
modified award are all the same as for the original award immediately before the
modification. The ASU became effective for us on January 1, 2018, and is applied
to an award modified on or after the adoption date. Adoption of ASU 2017-09 did
not have a material effect on the Company's financial statements.
In 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.
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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.
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