UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended: May 31, 20172022
☐ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to ________
Commission File No.: 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.) |
11767 South Dixie Highway, Suite 115, Miami, Florida 33156
(Address of principal executive offices)
(888) 438-9132
(Registrant’s telephone number)
Securities registered underpursuant to Section 12(b) of the Exchange Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
N/A | N/A | N/A |
Securities registered underpursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.0001
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o ☐ Yes ☒ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. ☐ Yes ☒ No
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 website, 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
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 aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $3,009,002.$12,503,655.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 32,876,944128,208,082 shares of common stock, par value $0.0001, as of August 17, 2017.19, 2022.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III of this Annual report on Form 10-K will be incorporated by reference from the Registrant's definitive proxy statement or included in an amendment on Form 10-K/A that will be filed not later than 120 days after the end of the fiscal year ended May 31, 2022.
Table of Contents
Page | |||
PART I | |||
Item 1. | 6 | ||
Item 1A. | 30 | ||
| Item | |||
Item | 51 | ||
Item 3. | 52 | ||
Item 4. | 52 | ||
PART II | |||
Item 5. | 53 | ||
Item 6. | 54 | ||
Item 7. | 54 | ||
Item 7A. | 70 | ||
Item 8. | 71 | ||
Item 9. | 72 | ||
Item 9A. | 72 | ||
Item 9B. | 72 | ||
| Item | |||
PART III | |||
Item 10. | 73 | ||
Item 11. | 73 | ||
Item 12. | 73 | ||
Item 13. | 73 | ||
Item 14. | 73 | ||
PART IV | |||
Item 15. | 74 | ||
| Item 16. | Form 10-K Summary | 77 | |
78 | |||
Cautionary Note Regarding Forward-Looking Statements
This annual report contains forward-looking statements as that term is defined in“forward-looking statements” within the Privatemeaning of Section 27A of the Securities Litigation Reform Act of 1995. These1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements relate to anticipated future events,other than statements of historical fact contained in this annual report, including statements regarding our future results of operations orand financial position, strategy and plans, and our expectations for future financial performance. Theseoperations, are forward-looking statements. The forward-looking information is contained principally in the sections entitled “Our Business,” “Management’s Discussion and Analysis” and “Risk Factors”.
We have based these forward-looking statements include, but are not limited to, statements relating to the adequacylargely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of our capital to finance our planned operations, market acceptance of our servicesstrategy, short-term and product offerings, our ability to attractlong-term business operations and retain key personnel,objectives and our ability to protect our intellectual property. financial needs.
In some cases, youthe forward-looking information can identify forward-looking statementsbe identified by terminologywords or phrases such as “may,” “might,” “will,” “should,” “intends,” “expects,” “plans,” “goals,” “projects,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,”“may”, “might”, “will”, “expect”, “anticipate”, “estimate”, “intend”, “plan”, “indicate”, “seek”, “believe”, “predict” or “continue”“likely”, or the negative of these terms, or other comparable terminology.similar expressions intended to identify forward-looking information. We have based this forward-looking information on our current expectations and projections about future events and financial trends that it believes might affect its financial condition, results of operations, business strategy and financial needs.
These statements relate to, among other things, the impact of the COVID-19 virus on our business, the results of our initiatives to retain our employees and strengthen our relationships with our customers and community during the pandemic, the effect of our initiatives to retain and expand market share and achieve growth following the pandemic, results of operations during the pandemic, and the effectiveness of our business practices during the pandemic. The continued spread of COVID-19 could have, and in some cases already has had, an adverse impact on our business, operations and financial results, including through disruptions in our processing activities, sales channels, and retail dispensary operations as well as a deterioration of general economic conditions including a possible national or global recession. Due to the uncertainties associated with the continued spread of COVID-19 and the timing of vaccinations, it is not possible to estimate its impact on our business, operations or financial results; however, the impact could be material.
This forward-looking information also includes, among other things, information and statements relating to:
● | our expectations regarding our revenue, expenses and operations | |
● | our anticipated cash needs, our needs for additional financing, and our need to re-finance our debt | |
● | our intention to grow our business and our operations, including our new joint ventures, grow operation expansion, and the expansion of our production operation for third parties | |
● | the expected growth in the number of consumers using our products | |
● | the expected growth of the cannabis industry in Nevada and in the U.S. | |
● | our ability to finance our planned operations and future acquisitions | |
● | safety and dosing of cannabis | |
● | expectations with respect to future production costs and capacity | |
● | expectations with respect to the renewal and/or extension of our licenses | |
● | expectations with respect to our plan to apply for additional retail store licenses | |
● | market reception of our current product offerings and other new delivery mechanisms produced by us for use by consumers | |
● | our competitive position and the regulatory environment in which we operate | |
● | any commentary or legislative changes related to the legalization of medical or recreational cannabis and the timing related to such commentary or legalization | |
● | any changes to U.S. federal policies regarding the enforcement of the Controlled Substances Act | |
● | our ability to monetize our patented production process |
Although we believe that the assumptions underlying this information are only predictions, are uncertainreasonable, they may prove to be incorrect, and involve substantial known and unknownwe cannot assure that actual results will be consistent with this forward-looking information. Given these risks, uncertainties and other factors which may cause our (or our industry’s) actual results, levels of activity or performance to be materially different from any future results, levels of activity or performance expressed or implied by these forward-looking statements. The “Risk Factors” section of this annual report sets forth detailed risks, uncertainties and cautionary statements regarding our business and these forward-looking statements.
● | shutdowns or operational disruptions related to COVID-19 | |
● | whether the U.S. will experience a recession in the next year | |
● | ongoing compliance with regulatory requirements relating to our business | |
● | changes in laws, regulations and guidelines relating to our business | |
● | difficulties in obtaining bank accounts and transferring money |
● | risk of prosecution of the cannabis business at the federal level in the U.S. due to the ambiguity of laws in relation to medical cannabis and the cannabis business | |
● | adverse interpretation of federal tax laws relating to cannabis | |
● | accuracy of current research regarding the medical benefits, viability, safety, efficacy and dosing of cannabis | |
● | our history of losses | |
● | failure or delay of our operations, including the addition of retail stores, grow operation expansion, and the expansion of processing operations | |
● | our ability to utilize or monetize our patented production process | |
● | reliance on management and loss of members of management or other key personnel or an inability to attract new management team members | |
● | inability to raise financing to fund on-going operations, capital expenditures or acquisitions, and to re-finance our debt | |
● | inability to realize growth targets | |
● | requirements of additional financing | |
● | competition in our industry | |
● | inability to acquire and retain new clients | |
● | inability to develop new technologies and products and the obsolescence of existing technologies and products | |
● | vulnerability to rising energy costs | |
● | vulnerability to increasing costs and obligations related to investment in infrastructure, growth and regulatory compliance | |
● | dependence on third party transportation services to deliver our products | |
● | unfavorable publicity or consumer perception | |
● | product liability claims and product recalls | |
● | reliance on key inputs and their related costs | |
● | dependence on suppliers and skilled labor | |
● | difficulty associated with forecasting demand for products | |
● | operating risk and insurance coverage | |
● | inability to manage growth | |
● | conflicts of interest among our officers and directors | |
● | environmental regulations and risks | |
● | managing damage to our reputation and third party reputational risks | |
● | inability to adequately protect our intellectual property due to cannabis being illegal under U.S. federal law | |
● | potential reclassification/re-categorization of cannabis as a controlled substance in the U.S. | |
● | changes to safety, health and environmental regulations | |
● | exposure to information systems security threats and breaches | |
● | management of additional regulatory burdens | |
● | volatility in the market price for our common stock | |
● | potential imposition of additional sales practice requirements by the SEC | |
● | no dividends for the foreseeable future | |
● | future sales of common stock by existing stockholders causing the market price for our common stock to fall | |
● | the issuance of common stock in the future causing dilution |
If any of these risks or uncertainties materialize, or if assumptions underlying the forward-looking information prove to be incorrect, actual results might vary materially from those anticipated in the forward-looking information.
You should not rely upon forward-looking statements as predictions of future events. In addition, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. The forward-looking statements whichcontained in this annual report are made as of the date hereof, and we assume no obligation to update or supplement any forward-looking statements.
Please read “Risk Factors” herein and in other filings we make with the SEC for a more complete discussion of the risks and uncertainties mentioned above and for a discussion of other risks and uncertainties. All forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements as well as others made in this annual report, and hereafter in our other SEC filings and public communications. You should evaluate all forward-looking statements made by us in the context of these risks and uncertainties. Note that forward-looking statements 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.of this annual report. Except as required by applicable law, including the securities laws of the United States, we do not intendundertake any obligation to publicly correct or 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.statement.
AVAILABLE INFORMATION
We file certain reports under the Securities Exchange Act of 1934 (the “Exchange Act”). Such filings includinginclude annual and quarterly reports, can be inspected and copied at the public reference facilities maintained by the Securities and Exchange Commission (“SEC”) at 100 F Street, N.E., Washington, D.C. 20549. Stockholders may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. Stockholders can request copies of these documents upon payment of a duplicating fee by writing to the SEC.reports. The reports we file with the SEC are also available on the SEC’s website (http://www.sec.gov).
PART I
Item 1. Business
Background
We were originally incorporated as Adelt Design, Inc. on March 31, 2011 to manufacture and market carpet binding art. Production and marketing of carpet binding art never commenced. After CLS Labs, Inc. (“CLS Labs”Labs”) acquired 55.6% of the outstanding shares of common stock of the Company, Jeffrey Binder, the Chairman, President and Chief Executive Officer of CLS Labs, was appointed Chairman, President and Chief Executive Officer of the Company. Subsequently, the Companywe adopted amended and restated articles of incorporation, thereby changing its name to CLS Holdings USA, Inc.
The Merger
On April 29, 2015, the Companywe entered into a merger agreement with CLS Labs and a newly-formed, wholly owned subsidiary of the Company (the “Merger Sub”“Merger Sub”) and effected the Merger (the “Merger”“Merger”). Upon the consummation of the Merger, the separate existence of the Merger Sub ceased and CLS Labs, the surviving corporation in the Merger, became a wholly owned subsidiary of the Company, with the Company acquiring the stock of CLS Labs, abandoning its previous business, and adopting the existing business plan and operations of CLS Labs. CLS Labs is a company that plans to generate revenues through licensing, fee-for-service and joint venture arrangements related to its patent pendingpatented proprietary method of extracting cannabinoids from cannabis plants and converting the resulting cannabinoid extracts into saleable concentrates.
Historical Operations
Since 2014, one of the founders of CLS Labs has been developing a proprietary method of extracting cannabinoids from cannabis plants and converting the resulting cannabinoid extracts into concentrates such as oils, waxes, edibles and shatter. These concentrates may be ingested in a number of ways, including through vaporization via e-cigarettes, and used for a variety of pharmaceutical and other purposes. Internal testing of the cannabinoids extracted through our patent-pending proprietary process versus the cannabinoids resulting from the processes commonly used in the industry, the results of which were reviewed and confirmed by an independent laboratory, has revealed that our process produces a cleaner, higher quality product and a significantly higher yield than the cannabinoid extraction processes currently existing in the marketplace.
As CLS Labs was unable to obtain a license in Colorado to operate a cannabis processing facility due to residency requirements, on April 17, 2015, CLS Labs took its first step toward commercializing its then patent pending proprietary methods and processes by entering into theagreements with certain Colorado Arrangement, as described below. Recently,entities. During 2017, we suspended our plans to proceed with the Colorado Arrangementagreements due to regulatory delays and have not yet determined when we will pursue it again. Instead,
On April 24, 2018, we were issued a U.S. patent with respect to our proprietary method of extracting cannabinoids from cannabis plants and converting the resulting cannabinoid extracts into concentrates such as oils, waxes, edibles and shatter. 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 commercialized our proprietary process. We plan to pursue other revenue producing opportunities, includinggenerate revenues through licensing, fee-for-service and joint venture arrangements related to our non-binding letterproprietary method of intent with Pure Harvest, as described below, in other states throughextracting cannabinoids from cannabis plants and converting the acquisition of cannabis and other complementary companies. CLS Labs had not otherwise commercialized its patent pending proprietary process prior to the Merger and has not earned any revenues.resulting cannabinoid extracts into saleable concentrates.
We intend to monetize this extraction method and generate revenues through (i) the licensing of our patent pending proprietary methods and processes to others, as in the Colorado Arrangement, (ii) the processing of cannabis for others, and (iii) the purchase of cannabis (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 can establish a position as one of the premier cannabinoid extraction and processing companies in the industry. Assuming we do so, we then intend to explore the creation of our own brand of concentrates for consumer use, which we would sell wholesale to cannabis dispensaries. We believe that we can create a “gold standard” national brand by standardizing the testing, compliance and labeling of our products in an industry currently comprised of small, local businesses with erratic and unreliable product quality, testing practices and labeling. We also planFinally, we intend to grow through select acquisitions in secondary and tertiary markets, targeting newly regulated states that we believe offer consulting services through Cannabis Life Sciences Consulting, LLC (“CLS Consulting”), which will generate revenue by providing consulting services to cannabis-related businesses, including growers, dispensaries and laboratories, and driving business to our processing facilities.
Acquisition of Alternative Solutions
On June 27, 2018, the Company completed the purchase of all of the membership interests in Alternative Solutions and the Oasis LLCs from the members of such entities (other than Alternative Solutions). The closing occurred pursuant to a Membership Interest Purchase Agreement (the “Acquisition Agreement”) entered into between the Company and Alternative Solutions on December 4, 2017, as amended. Pursuant to the Acquisition Agreement, the Company initially contemplated acquiring all of the membership interests in the Oasis LLCs from Alternative Solutions. Just prior to closing, the parties agreed that the Company would instead acquire all of the membership interests in Alternative Solutions, the parent of the Oasis LLCs, from its members, and the membership interests in the Oasis LLCs owned by members other than Alternative Solutions. The revised structure of the transaction is referenced in the Oasis Note (as defined below), which modified the Acquisition Agreement.
Pursuant to the Acquisition Agreement, the Company paid a non-refundable deposit of $250,000 upon signing, which was followed by an additional payment of $1,800,000 paid in February 2018, for an initial 10% of each of the Oasis LLCs. At that time, the Company applied for regulatory approval to own an interest in the Oasis LLCs, which approval was received on June 21, 2018. On June 27, 2018, the Company made the payments to indirectly acquire the remaining 90% of the Oasis LLCs, which were equal to cash in the amount of $6,200,000 (less offsets for assumed liabilities), a $4.0 million promissory note due in December 2019 (the “Oasis Note”), and 22,058,823 shares of common stock. We used the proceeds of the Canaccord Special Warrant Offering to fund the cash portion of the closing consideration. On December 12, 2018, we were approved for the transfer of the remaining 90% interest. We received final regulatory approval to own our patent pending proprietary process for extracting, cleaning and converting cannabinoids from cannabis plants. He has also created various delivery systems and materialsinterest in the Oasis LLCs through Alternative Solutions under the revised structure of the transaction on April 26, 2022.
The number of purchase price shares was equal to ready80% of the converted cannabis product for different uses by different potential distributors. Mr. Keller contributed this intellectual property to CLS Labs in exchange foroffering price of our common stock in CLS Labs,our last equity offering, which price was subsequently exchanged for stock$0.34 per share. The Oasis Note is secured by a first priority security interest over the membership interests in Alternative Solutions and the CompanyOasis LLCs, as well as by the assets of the Oasis LLCs. The Oasis Note bears interest at the rate of 6% per annum and both principal and accrued interest were paid in full in December 2019. We also delivered a confession of judgment to a third party neutral representative of the Merger. A patent application has been filedparties that will become effective, in general, if we default under the Oasis Note.
At the time of closing of the Acquisition Agreement, Alternative Solutions owed certain amounts to a consultant known as 4Front Advisors, LLC (“4Front Advisors”). In August 2019, we made a payment to this company to settle this dispute and the Oasis Note was reduced accordingly.
The sellers of the membership interests in Alternative Solutions were also entitled to a $1,000,000 payment from us on May 30, 2020 if the Oasis LLCs had maintained an average revenue of $20,000 per day during the 2019 calendar year. This amount was fully accrued at May 31, 2019. In May 2020, we paid $850,000 of this amount to the sellers and deposited the balance of $150,000 in escrow pending the payment of a state sales and excise tax amount with respect to the process. As there can be no assurances thatpre-closing period. On February 8, 2021, $41,805 was released from escrow to us and $106,195 was released to Serenity Wellness Enterprises, LLC. We then paid the application will be granted,total tax due to the process is currently maintained as a trade secret byDepartment of Taxation.
None of the Company. We believe that this patent pending proprietary process will allow us to extract and convert cannabinoids containedsellers of the membership interests in cannabis in a manner that produces a greater yield than methods currently used inAlternative Solutions or the industry. We believe this ability andOasis LLCs was affiliated with the ability to convert these refined cannabinoids into products that can be used in multiple delivery systems will provide us with a strategic advantage in the cannabis industry.
Corporate Structure
We have four direct and three indirect, active, wholly-owned subsidiaries, CLS Labs, CLS Nevada, Inc., CLS Massachusetts, Inc. and Alternative Solutions are owned directly, and Alternative Solutions owns 100% of the issued and outstanding membership interests of: (i) Serenity Wellness Center, LLC dba Oasis Cannabis Dispensary (“Oasis”); (ii) Serenity Wellness Products, LLC dba City Trees (“City Trees Production”); and (iii) Serenity Wellness Growers, LLC dba City Trees (“City Trees Cultivation”, together with City Trees Production, “City Trees” and together with Oasis and City Trees Production, the “Oasis LLCs”). We also own a 50% interest in Kealii Okamalu, LLC. The following diagram illustrates the inter-corporate relationships of the Company, and all of the parents, except as noted, own 100% of the issued and outstanding shares of their subsidiaries:
Notes:
(1) | We own 100% of Alternative Solutions, CLS Nevada, Inc., CLS Labs, Inc., and CLS Massachusetts, Inc. | |
(2) | Alternative Solutions owns 100% of Oasis, City Trees Production and City Trees Cultivation. | |
(3) | We own 50% of Kealii Okamalu, LLC. | |
(4) | All entities in the corporate chart were incorporated and are existing under the laws of the state of Nevada, except for CLS Massachusetts, Inc., which is a Massachusetts corporation. |
Nevada Operations
We own 100% of Alternative Solutions, LLC, a Nevada-based holding company (“Alternative Solutions”), which is currently unable to obtain a license in ColoradoNevada-based holding company that owns three separate entities with licenses to operate a cannabis processing facility due to residency requirements, on April 17, 2015, it entered into an arrangement through CLS Labs Colorado with Picture Rock Holdings, LLC (“PRH”), which will be licensed bybusinesses within the State of ColoradoNevada: Serenity Wellness Center, LLC dba Oasis Cannabis (“Oasis”); Serenity Wellness Growers, LLC dba City Trees Fresh Cannabis Cultivation Wholesale; and Serenity Wellness Products, LLC dba City Trees Fresh Cannabis Production Wholesale. Oasis currently operates a retail marijuana dispensary within walking distance to the Las Vegas Strip. Its other subsidiaries, which do business as City Trees Cultivation and City Trees Production, currently operate a small-scale cultivation facility, as well as a marijuana infused product manufacturer and retailer, to, among other things, (i) license its patent pending proprietary technology, methods and processes to PRH in exchange for a fee; (ii) build a processingmanufacturing facility and lease such facility, including equipment,a wholesale distribution operation in North Las Vegas. Management expects that the vertically integrated business model will drive strong margins to PRH;the bottom line on a large portion of existing sales at the dispensary as the newly expanded Warehouse Facility becomes fully operational.(See section entitled “Expansion of Cultivation Facilities” below).
Oasis’ retail dispensary is a single location operation in Nevada and (iii) loan certain fundsoccupies over 5,000 square feet of an over 20,000 square foot building This location, which is easily accessible by tourists, is currently open 19.5 hours per day for walk-in / in-store pickup and 19.5 hours per day for curbside orders. It also delivers cannabis to PRHresidents between the hours of 8:00 AM and 10:00 PM. The central location provides logistical convenience for delivery to be used by PRH in connection with its financingall parts of the building out, equipping,Las Vegas valley.
City Trees’ wholesale operations, which occupies approximately 10,000 square feet of a 22,000 square foot warehouse (the “Warehouse Facility”), began sales to third parties in August 2017 and developmentcompleted construction and received certificate of occupancy for its state-of-the-art extraction facility in December of 2019. It had made sales to over 45 external customers as of February 28, 2022. Its existing product line includes vaporizers, tinctures, ethanol produced THC distillate, and live and cured hydrocarbon concentrates. At present, the growCity Trees cultivation facility that will be operated byonly grows breeding stock to preserve valuable genetics and does not offer its crops for sale or processing. As a licensed third-party marijuana grower (the “Grower”)result, all raw materials for manufacturing are sourced from third parties. See “Our Business”.
The New Mexico Licensing AgreementArrangement
On April 17, 2015, CLS Labs Colorado29, 2021, Serenity Wellness Products LLC entered into a Licensing Agreement with PRH whereby,a company in exchange forNew Mexico to manufacture and distribute tinctures in New Mexico under our City Trees brand name. In addition, we agreed to manufacture and distribute cannabis infused baked goods, which are products we do not currently offer, under the “Herbal Edibles” brand at our dispensary in Nevada. The Agreement expired in May 2022 and we did not renew it.
Quinn River Joint Venture
On October 20, 2021, we entered into a license fee payable overmanagement services agreement (the “Quinn River Joint Venture Agreement”) through our 50% owned subsidiary, Kealii Okamalu, with CSI Health MCD LLC (“CSI”) and a commission established by the ten (10) year termauthority of the agreement, CLS Labs Colorado granted to PRH an exclusive license for the State of Colorado of certain proprietary inventions and formulas relating to the extraction from, separation and processing (the “Process”) of marijuana to produce certain marijuana-infused products, including edibles, e-liquids, waxes and shatter (the “Products”), and to practice and use the Process in conjunction with the manufacture, production, sale, and distributionTribal Council of the Products.Fort McDermitt Paiute and Shoshone Tribe (“Tribe”). The Licensingpurpose of the Quinn River Joint Venture Agreement was subsequently amended effective June 30, 2015, October 31, 2015, April 11, 2016is to establish a business (the “Quinn River Joint Venture”) to grow, cultivate, process, and May 31, 2016. Pursuant to the Licensing Agreement, as amended, its term will commence once CLS Labs Colorado has completed building a fully equipped lab at the Leased Real Property and payments by PRH to CLS Labs Colorado will commence in the month following the month in which PRH commences generating revenue through the grow facility.
Market Growth
Legal cannabis sales in the U.S. have grown substantially in recent years. This growth trend is expected to an aggregatecontinue as more states legalize medical and recreational cannabis and as more consumers choose to make legal cannabis purchases instead of ten (10)buying through traditional sources. Consumers who are learning about new research supporting the health and the perceived medical benefits of cannabis will be a secondary source of strong growth in the market for the next several years.
Cannabis sales in Nevada have exceeded all expectations since recreational sales began on July 1, 2017. Management believes that the Nevada market will continue to grow for the next few years albeit more modestly if the market is impacted by a national recession. This expectation is supported by sales trends in other legal markets like Colorado and Washington.
Internal Growth Strategy
Oasis expects to continue to grow its dispensary market share both organically and by adding additional years. In August 2017, aslocations within the Nevada market. Oasis will seek to expand its footprint throughout the state in select locations with access to tourists or in residential areas with above average median income. The locations of the potential acquisitions will only matter to the extent that they are in preferable local jurisdictions. For licensing purposes, the physical location of a cannabis establishment in Nevada may be moved if it remains in the same local municipality or jurisdiction. Oasis currently purchases about $150,000 per month in products from City Trees, at cost. As a result of our decision to suspend our proposed operationsthese purchases, Oasis has reduced its cost of goods sold on all its SKUs by approximately half, increasing its gross margin.
City Trees’ wholesale growth strategy focuses on more fully utilizing its new and expanded state-of-the-art Warehouse Facility, which was completed 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. December 2019, by adding new customers and increasing product line diversity, uniqueness, and penetration at each customer’s retail location. City Trees has about 45 customers with regular recurring orders at dispensaries located throughout Nevada.
Dispensary Operations
Oasis opened as a medical cannabis dispensary in 2015 and began retail sales to adults over the age of 21 on July 1, 2017. Customers and patients can browse the selection of inventory on display and ask questions to qualified staff with minimal wait times. The dispensary was renovated in November of 2019. The renovations included updating the executionsales floor by adding an additional 8 registers, as well as an inventory storage behind the sales staff which allows for a smoother and overall better customer experience within Oasis.
Inventory Management
The revenues of Oasis have increased since the onset of the Lease, CLS Labs Colorado entered into a Sublease Agreement with PRH (the "Sublease"), thereby sublettingCOVID-19 pandemic. The operations of the entire Leased Real Property to PRH. The Sublease was subsequently amended effective October 31, 2015, April 11, 2016 and May 31, 2016. PursuantOasis dispensary, however, have changed markedly since the onset of COVID-19. Prior to the Sublease, as amended, rent payments will commencepandemic, almost all of the Oasis sales were made in its dispensary. In recent months, approximately 20% of its sales were made via delivery or curbside sales and approximately 80% of sales were made in the month following the date upon which PRH commences generating revenues through the grow facility, which commencementdispensary.
All inventory is anticipated to occurtracked in the first quarterstate-mandated METRC seed to sale tracking system. Additionally, we have implemented Leaf Logix for our point of 2017. The balancesale and internal inventory management system. Each item is stored in a designated physical location that is also reflected in the inventory control system. All products are prepackaged before arriving at the retail store and a barcode is added to each package to ensure the proper products are fulfilled in each order. Leaf Logix synchronizes its sales and inventory data with METRC, but we also regularly reconcile the two systems for additional assurance of compliance with state mandated inventory tracking accuracy. Regular, independent inventory counts ensure that any physical variances from the tracking system are detected and addressed immediately. All product that is unusable is destroyed and logged with photo-evidence according to state regulations.
Product Selection
Product selections are currently managed by a team comprised of the termsDirector of CLS Nevada, General Manager, and Inventory Team Leader/Purchaser. As Oasis adds new locations, it will form a centralized purchasing team supervised by the Director that will ensure there is consistent product selection across all locations. The Inventory Team Leader/Purchaser, or the Director will be responsible for negotiating bulk purchase discounts and maintaining target gross margins. Inventory Team Leader/Purchaser or Director will also be responsible for quality assurance and product mix. Each new vendor is researched, and their operations are visited whenever possible. Product samples are distributed to various employees and feedback is reviewed before making final product decisions. Oasis carries between 30 and 40 different cultivars or “strains” of cannabis flowers in addition to a wide variety of cannabis products such as vaporizers, concentrated oil, edibles, capsules, tinctures, and beverages.
Payment System and Banking
Payments made at Oasis can be completed via cash or a debit cashless ATM system. Cash risk is minimized by making regular deposits in our bank account at a credit union, located in Colorado. Cash deposits are picked up by armed personnel and taken to the LA Federal Reserve Bank where the deposit is made on our behalf.
Home Delivery
Home delivery is currently about 10% of the Subleasetotal sales mix of Oasis. Customers can call or place orders online for both pickup and delivery. The current delivery fees are as follows: $50.00 minimum through $74.99 (subtotal) is a $10.00 delivery fee; $75.00 through $99.99 (subtotal) is a $7.00 delivery fee; and all sales over $100.00 (subtotal) get free delivery. Home deliveries average well over $100 per order, which is about 75% higher than in-store orders. Oasis is centrally located within the same asLas Vegas valley which makes it roughly equally distant from all areas of town. This allows the Lease and PRH is requiredstore to pay CLS Labs Colorado monthly rent equalhave a much wider geographic reach than it otherwise would. Many locals work on the Las Vegas Strip close to the total rent due understore and will shop there when going to and from a shift. Offering delivery also allows them to conveniently make a purchase from Oasis without having to drive past a cannabis store that might be located closer to their homes. Many consumers prefer the Lease for the corresponding month. As a resultconvenience of our decisionhome delivery and this allows Oasis to suspend our plans to enter the Colorado market, PRH has vacated the subleased premises but the sublease remains effective.
Pricing Strategy
Oasis targets at least a 50% gross margin when determining pricing for any given product. Market dynamics such as supply, demand, and PRH entered into an Equipment Lease Agreement (the “Equipment Lease”) whereby, in exchange for a lease payment, CLS Labs Colorado agreed to commence building a fully equipped lab atcompetitive pressure can cause variances from the Leased Real Property, including purchasing all equipment necessary to extract, convert and provide quality controltarget. The Inventory Team Leader/Purchaser of all cannabis products of PRH. The termOasis, as part of the Equipment Lease commences upon deliverypurchasing team, conducts a pricing survey for all new products to determine which of the equipmentcompetition in close proximity carries the product and terminates upon the earlier of ten (10) years from its effective date orhow much such earlier date upon which the Leasecompetition is terminated. PRH has the option to renew the Equipment Leasecharging for a period of five (5) years, or such lesser period as remains under the Lease at the time of the renewal.similar products.
Marketing Strategy
Oasis uses a variety of methods to reach consumers including billboards, paid digital and Services
Cultivation, Production & Wholesale Sales Operations
City Trees’ wholesale laboratory operations are now fully operational, with all oil being manufactured in-house and formulated into a variety of finished products for sale and distribution to operateretail cannabis stores and medical dispensaries throughout Nevada. The laboratory throughput and design was implemented in such a way that extra capacity could be absorbed by third party toll processing, and as such, City Trees’ is processing approximately 300 pounds of raw material per month for third party vendors between both ethanol and hydrocarbon extraction methods. The entire division processes approximately 1,200 pounds of biomass extracted with ethanol and 500 pounds of biomass extracted with hydrocarbons, monthly. The ability to produce has significantly improved the cost of goods sold for Oasis. (See section entitled “Expansion of Cultivation Facilities” below.)
City Trees’ grow operation cultivates plants for breeding and preserves quality stock and does not harvest its plants for either production or for sale to third parties. Some of these cultivars are High Times Cannabis Cup Winners which provide intrinsic value for not only breeding but for possible licensing deals with exclusive rights and/or access. In January 2021, City Trees launched a new division, Trichome Harvest Company, specializing in toll processing for regional and national cannabis brands licensed in the state of Nevada with a variety of transaction types and negotiable terms.
Expansion of Cultivation Facilities
City Trees Cultivation is in the preliminary stages of expanding its grow operation and implementing additional manufacturing operations using both Alternative Solutions’ existing processing facilitymethods, our patented processing methods and our new joint venture. City Trees Cultivation intends to build out a grow operation to manufacture products for Oasis. Based on current wholesale prices for cannabis, however, which are relatively low due to residency or other requirements that we cannot meet,ample supply, these plans are on hold, we will continue to enter into arrangements similarmonitor wholesale cannabis press and determine if and when to proceed.
Product Line
City Trees offers the Colorado Arrangement, whereby we will agreefollowing product lines to build out a processing facility and then leaseits wholesale customers:
● | The vaporizer, live and cured concentrate product line consists of proprietary blends of cannabis oil and terpenes filled into custom branded City Trees vaporizers that utilize ceramic heating technology to deliver clean, even heat without using a wick like most traditional vaporizers. We recently launched six new flavors, including Mango Haze, GMO, Cherry Cola, LV Confidential, Gasolina and cucumber melon. |
● | The City Trees line of tinctures includes a 1 to 1 to 1 CBD to THC to CBG ratio, 20 to 1 and 1 to 1 CBD to THC ratios, as well as THC only versions. The tinctures are available in four different carriers and flavors, MCT oil, agave nectar, chocolate agave nectar and orange cream. |
Pricing Strategy
The raw materials cost inputs have dropped over the facility and equipment therein to the customer for what will generally be a tenlast year term. As partbecause of this arrangement, the customer will be required to enter into an agreement of equal length to license our proprietary technology, methods and processes solely for useincrease in the processing facility.
Single Stream Inventory
In Nevada, as long as a wholesale facility holds both a medical and a recreational license, it may sell products to dispensaries that may be sold to both recreational and medical customers. As long as the dispensary also holds both licenses, the inventory may be sold to either type of customer as long as it came from a wholesale company with both license types. This reduces logistical challenges that would otherwise arise from having two separate streams of inventory to service the medical and adult-use segments.
Licenses
A Cannabis Retail Store License or Medical Cannabis Dispensary Registration Certificate allows for the sale of cannabis products to the applicable end consumer. A company must hold both licenses to be able to sell products to both types of consumers. A cannabis retail store and a medical cannabis dispensary may also deliver to residents in Nevada without any additional licensing. Both local and state licenses are required.
A Retail (adult-use or recreational) Cannabis Cultivation or Medical Cannabis Cultivation Registration Certificate allows the holder to grow as much cannabis as it can in its approved cultivation space. There is no limitation to the number of plants that may be grown at any time. The Cannabis Compliance Board can limit the amount of cultivation space through a public meeting if it determines such a limitation is needed.
A Retail (adult-use or recreational) Cannabis Product Manufacturing license or Medical Cannabis Production Registration Certificate allows for the extraction, conversion, and manufacturing of raw cannabis material into finished consumer packaged goods. The Cannabis Compliance Board (“CCB”) must approve all formulas, processes, equipment, products, and packaging prior to any manufacturing or sales.
A Retail (adult-use or recreational) Cannabis Distributor License allows licensees to deliver wholesale products from a cultivator or manufacturer to a retail store. This is only a requirement for products that could be sold to recreational customers. Many vertically integrated operators are forced to use third party distributors to deliver products from their wholesale facilities to their own stores and to other customers. City Trees holds one of a limited number of distributor licenses that exist to serve the more than 60 medical dispensaries or retail stores and approximately 200 wholesalers in the state. Oasis is licensed to operate in the City of Las Vegas as a Dual-Licensed Medical Marijuana Dispensary and Marijuana Retail Store Business, and in the State of Nevada as a Medical Cannabis Dispensary Establishment and a Cannabis Retail Store. City Trees Production is licensed to operate in the State of Nevada as a Medical Cannabis Production Establishment, a Retail Cannabis Product Manufacturing facility and a Retail Cannabis Distributor. City Trees is also licensed to operate in the State of Nevada as a Medical Cannabis Cultivation Facility and a Retail Cannabis Cultivator. Please see “Our Business – Regulation and Licensure – Oasis LLC Licenses” for a complete list of state and local licenses held by acquiringthe Oasis LLCs and “Our Business – Regulation and Licensure – Nevada Licenses and Regulations” for additional information regarding Nevada licensures.
Specialized Skill & Knowledge
Commercial cannabis cultivation requires access to employees with specialized skills and knowledge in order to maximize harvest quality and yield in addition to having the capacity for developing new varieties. Botanical extraction of concentrated oils, product formulation and product manufacturing each require their own specific sets of specialized skill and knowledge to ensure maximization of yields and quality from extraction and to create consistent, high quality products. Additionally, the operation of a quality retail cannabis store requires extensive product knowledge to provide the optimal experience for customers. Each of these operations requires extensive knowledge and understanding of the Nevada regulatory landscape to ensure compliance with all local and state laws and regulations.
The Director of Laboratory Operations has gained important skills and knowledge through experience with all areas needed to run a successful cultivation and extraction operation. These include indoor warehouse, outdoor, greenhouse, greenhouse light deprivation, meristem tissue culture, hydroponic irrigation/fertigation, DWC, coco, soil, rockwool, no-till, organic and synthetic feedings, and non-solvent, hydrocarbon, ethanol, and CO2 extraction respectively. With these skills and knowledge, we expect the Company to continue to develop unique, new strains that are only available to City Trees and will build on the current knowledge of the organization through testing new techniques and technologies in a small research and development room within the cultivation facility. The previous experience of the management team of CLS Nevada, along with independent consultation, is the basis for Oasis’ proprietary standard operating procedures that we believe will ensure consistent quality and yield performance.
The extraction/product formulation team is headed by a Doctor of Pharmacy and includes employees with hands-on experience in cannabis extraction and product manufacturing. This provides access to both the technical and hands-on applications of knowledge that benefits product formulation in addition to extraction efficiency and productivity.
The leadership at CLS Nevada is knowledgeable in all the products available in the United States market because the leadership at Oasis has operated in Nevada since the beginning of medical cannabis sales.
We conduct ongoing training to ensure compliance with all laws and regulations. The leadership of each business unit attends regular compliance training conducted by local and state officials which provides content and updates for internal training.
In addition to our internal resources, there is a broad market of skilled employees with cannabis knowledge and experience in Nevada to facilitate growth of the labor force.
Competitive Conditions
We currently operate in the Nevada cannabis market, which has limited licensing opportunities for retail locations in accordance with state regulations. These conditions create significant barriers to entry for new competition.
There is currently no legal limitation on the number of cultivation and product manufacturing licenses that may be issued and there is no limitation on how much can be grown or produced with those licenses. However, the CCB is tasked with determining what it believes is an adequate supply of cultivation and production licenses and at present there is no open application period.
The limitation on the number of licenses available for retail creates a significant barrier to entry for potential competition in the retail cannabis market. Acquisition is the only method available for most companies to enter the state’s retail cannabis market absent changes in legislation. There is also a 10% legal limitation on the number of retail licenses that may be owned by any one entity within a given county. The size and number of locations in a potential acquisition are limited as a result. These conditions mitigate the risk of losing market share to new companies entering the Nevada retail market.
The wholesale market, however, is more fluid. At present, both supply and demand for raw cannabis are increasing, but the increase in supply precipitated by the commencement of recreational sales is outpacing the increase in demand. As a result, Nevada wholesale prices have decreased over the last year. We have undertaken and, in some cases, completed various expansion projects to meet the additional demand but we are carefully watching changes in the supply market. Most of the additional supply has been provided by existing cannabis industry companiesparticipants within the market as very few new cultivation licenses have been issued since 2018. The ability to expand facilities without limitation will allow the market to reach an equilibrium wholesale price point without the need to license additional operators. Although there is no legal limitation on cultivation and production licenses, we do not currently anticipate that new licenses will be issued because there is no open application period at this time for new cultivation or production licenses.
Regardless of whether supply remains high, we believe we can benefit from the use ofmarket conditions. A low cost for raw cannabis will likely benefit our proprietary technology as well as other companies in the cannabis industry that are compatible with our proposed operations, including but not limited to completion of the proposed Pure Harvest transaction.
Components
Raw materials for medical use. Additionally, the recreational useprocessing and manufacturing are available from a variety of marijuana by adults is currently legal in eight states and the District of Columbia and a number of states have decriminalized the use of marijuana in some fashion. Assources. Oasis maintains relationships with various states continue to legalize marijuanasuppliers for medical and/or recreational use, the number of potential grower and dispensary clients is expected to increase accordingly.
The following table describes the value added by our premier methods, which should generate higher profit margins by producing a higher yield of cannabinoid oil per pound of cannabis versus the methods that are currently being employed. As our competitive advantage is directly related to our patent pending proprietary extraction method and conversion process, and as the value of our services should be immediately recognizable, we intend to target licensed, operating growers and dispensaries with an immediate and substantial need for cannabis processing. Upon attaining significant market share among growers and dispensaries, we may also target pharmaceutical clientele and other potential customers.
Raw Material Item | Description | # of Suppliers | Pricing | Internal Sourcing |
Raw Cannabis Trim | Raw cannabis leaf that is trimmed from raw flowers that will be sold directly to consumers. Trim makes up the majority of what is extracted into oil. | 8+ | Wholesale prices are currently in the range of $200 - $450 per pound. Target pricing is $220 per pound in order to match the cost of sourcing finished bulk oil. | Gradually increasing amount will be sourced internally upon completion of Phase 1 and Phase 2. |
Raw Cannabis Flower | Raw cannabis flower is typically trimmed, packaged and sold to consumers or it is rolled into pre-rolled joints, packaged and sold to consumers. City Trees is currently purchasing cured and fresh frozen flower for extraction of its hydrocarbon concentrates. | 5+ | Wholesale prices for extraction material currently range from $300 - $600 per pound. | Gradually increasing amount will be sourced internally for City Trees upon completion of Phase 1 and Phase 2. |
Bulk Distillate Cannabis Oil | Cannabis oil refined through distillation processes that maximize potency and remove impurities. | 1 | Wholesale prices currently range from $7 - $9 per gram. | City Trees produces 100% of its own bulk distillate cannabis oil for all its products and also wholesales bulk liters through its toll processing division. |
Custom All-in-One Disposable Vaporizer Pens | Cannabis oil vaporizer “pens” with ceramic heating that contain a single use battery charge customized with City Trees logos and imagery. | 2 | $3.66 each | N/A |
Vaporizer Pen Cartridges and Custom Batteries | Cannabis oil vaporizer cartridges with ceramic heating that attach to a rechargeable battery customized with City Trees logos and imagery. | 2 | Cartridges: $1.95 each Custom Batteries: $5.75 each | N/A |
Botanical Terpenes | Natural compounds found in essential oils of plants with strong fragrance and flavor. Some terpenes have been shown to be biologically active with specific effects | 2 | Isolated Terpenes: $130-$770 per kilogram | Some terpenes will be sourced internally through a fractional distillation process. |
CBD Isolate | Cannabidiol (CBD) in powder form that is 99.9% pure CBD | 2 | Wholesale prices range from $600 ‑ $900 per kilogram | N/A |
Intellectual Property
Domains
We have protected Internet domain names with the raw cannabis or sell the processed product to an unrelated distributor or dispensary. In some cases, we might also process the product and package it for a certain type of use, suchfollowing registered domains as an edible, and sell the processed product to a licensed bakery.
● | https://www.clsholdingsinc.com/ |
● | https://oasiscannabis.com/ |
● | http://www.citytrees.com/ |
Patent and Other Intellectual PropertyTrademarks
We have applied for United States federal trademarks for the names Cannabis Life Sciences and CLS Labs. Due to federal laws against the use of cannabis, we are uncertain whether any trademark that includes a reference to cannabis will issue. We have also acquired the Cannabis Life Science, Cannabis Life Sciences and CLS Labs domain names.
Internal testing of the Extraction Process has revealed that such process produces a cleaner, higher quality product and a higher yield than the cannabinoid extraction processes currently existing in the marketplace. We have not commercialized the Extraction Process. We plan to generate revenues through licensing, fee-for-service and joint venture arrangements related to the Extraction Process from cannabis plants and converting the resulting cannabinoid extracts into saleable concentrates.
We intend to monetize the Extraction Process and generate revenues through (i) the licensing of its patented processes to others, (ii) the processing of cannabis for others, and (iii) the purchase of cannabis (or cultivation through our patent pending proprietary process. Asjoint 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 our trade market, there can be no assurances thatgrowers and dispensaries of cannabis products. We then intend to explore the patent application will be granted,creation of its own brand of concentrates for among other reasons, the factconsumer use, which it would sell wholesale to cannabis dispensaries. We believe that it references cannabis.
Employees
As of August 11, 2022, the Oasis LLCs had 111 employees in total, 108 of which are infringing onfull-time employees and 3 of which are part-time employees. The employees are distributed among the rights of others, we cannot assure you that our intellectual property does not infringe the intellectual property rights of others, or will not in the future. If we become liable to third parties for infringing upon their intellectual property rights, we could be required to pay substantial damage awards and be forced to develop non-infringing methods and processes.following departments:
Nevada Market Administration | Numberof Employees | |
Administrative | 4 | |
Accounting | 5 | |
Oasis Cannabis Retail | ||
Product Sales and Customer Service | 34 | |
Inventory Control | 6 | |
Dispatch / Delivery | 6 | |
Safety / Security | 7 | |
Management / Leadership | 1 | |
Communications / Marketing | 1 | |
City Trees Wholesale | ||
Wholesale Sales and Distribution | 7 | |
Leadership | 10 | |
Cultivation / Product Manufacturing | 14 | |
Fulfillment | 8 | |
Inventory Control | 3 | |
Safety / Security | 4 | |
Communications / Marketing | 1 | |
Total Employees | 111 |
We believe in equal opportunity employment and we recruit, hire and promote individuals that are best qualified for each position without regard to race, color, creed, sex, national origin or handicap. We pride ourselves on using a selection process that recruits people who are trainable, co-operative and share the core values of the Company. Our employees are highly-talented individuals who have educational achievements ranging from masters and undergraduate degrees in a wide range of disciplines, as well as staff who have been trained on the job to uphold the highest standards set as a Company.
We recruit based on a rigorous interview process to ensure the right candidates are selected for the Company and the individual team. In addition to adherence to our core values, it requires that each employee acts with integrity and constant striving to uphold the highest professional standards.
In addition, the safety of our employees is a priority and we are committed to the prevention of illness and injury through the provision and maintenance of a healthy workplace. We take all reasonable step to ensure staff are appropriately informed and trained to ensure the safety of themselves as well as others around them.
In addition to the Oasis employees, the Company employs three executive and management personnel and engages one consultant in a management capacity.
As a result of the COVID-19 pandemic, we initially furloughed 23 of our employees, including 19 dispensary employees and 4 employees of City Trees. As our dispensary and our City Trees’ revenues have steadily improved and now exceed pre-COVID-19 levels, we have rehired all the furloughed employees who wished to return and have replaced all of the jobs lost at the onset of the pandemic.
Growth Strategy
Our growth strategy includes the following plans:
● | Securing capital for the construction of processing centers. |
● | Obtaining the necessary state and local licensure for each proposed facility. |
● | Securing initial licensing, processing or sales arrangements, as applicable, with growers and dispensaries, and for our joint venture. Such arrangements may result from marketing efforts, relationships within the industry. |
● | Constructing processing facilities. |
● | Expanding per-facility capacity and increasing revenues. |
● | Developing a national brand of cannabis concentrates, which will be sold wholesale to dispensaries, through standardization of the testing, compliance and labeling process. |
We also 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.
Regulation and Licensure
Despite 2938 states, and the District of Columbia, and four U.S. territories having legalized or decriminalized marijuanacannabis use for recreational or medical purposes, the prescription, use and possession of marijuanacannabis remains illegal under federal law. As such, although we will only operate processing facilities in states that permit the possession, sale and use of cannabis, certain activities of our business, including the possession of cannabis for processing and the sale of cannabis concentrates, will be in violation of federal law.
Enforcement of United States Federal Laws
In the United States, cannabis is highly regulated at the state level. To our knowledge, over half of the United States of America, plus the District of Columbia, and four territories have legalized cannabis in some form, including recreational use of cannabis in many states. Additional states have legalized CBD, low THC oils for a limited class of patients. Notwithstanding the permissive regulatory environment of cannabis at the state level, cannabis continues to be categorized as a Schedule I controlled substance under the Controlled Substances Act (codified in 21 U.S.C.A. Section 812). Under United States federal law, a Schedule I drug is considered to have a high potential for abuse, no accepted medical use in the United States, and a lack of accepted safety for the use of the substance under medical supervision. Federal law tightly regulates or outright prohibits commercial production and sale of all Schedule I controlled substances, and as such, cannabis-related activities, including without limitation, the importation, cultivation, manufacture, distribution, sale and possession of cannabis that remain illegal under U.S. federal law. It is also illegal to aid or abet such activities or to conspire or attempt to engage in such activities. Strict compliance with state and local laws with respect to cannabis may neither absolve the Company of liability under U.S. federal law, nor provide a defense to any federal proceeding brought against the Company. An investor’s contribution to and involvement in such activities may result in federal civil and/or criminal prosecution, including, but not limited to, forfeiture of his, her or its entire investment, fines and/or imprisonments.
As a result of the conflicting views between states and the federal government regarding cannabis, investments in, and the operations of, cannabis businesses in the U.S. are subject to inconsistent laws and regulations. The so-called “Cole Memorandum” or “Cole Memo” issued by former Deputy Attorney General James Cole on August 29, 2013 and other Obama-era cannabis policy guidance, discussed below, provided the framework for managing the tension between federal and state cannabis laws. Subsequently, as discussed below, Attorney General Jeff Sessions rescinded the Cole Memo and related policy guidance. Although no longer in effect, these policies, and the enforcement priorities established within, appear to continue to be followed during the Trump administration and remain critical factors that inform the past and future trend of state-based legalization.
On January 4, 2018, former Attorney General Jeff Sessions rescinded the Cole Memo, the Cole Banking Memorandum, and all other related Obama-era DOJ cannabis enforcement guidance. While the rescission did not change federal law, as the Cole Memo and other DOJ guidance documents were not themselves laws, the rescission removed the DOJ’s formal policy that state-regulated cannabis businesses in compliance with the Cole Memo guidelines should not be a prosecutorial priority. Notably, Attorney General Sessions’ rescission of the Cole Memo has not affected the status of the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) memorandum issued by the Department of Treasury, which remains in effect. This memorandum outlines Bank Secrecy Act-compliant pathways for financial institutions to service state-sanctioned cannabis businesses, which echoed the enforcement priorities outlined in the Cole Memo. In addition to his rescission of the Cole Memo, Attorney General Sessions issued a one-page memorandum known as the “Sessions Memorandum”. The Sessions Memorandum explains the DOJ’s rationale for rescinding all past DOJ cannabis enforcement guidance, claiming that Obama-era enforcement policies are “unnecessary” due to existing general enforcement guidance adopted in the 1980s, in chapter 9.27.230 of the USAM. The USAM enforcement priorities, like those of the Cole Memo, are based on the use of the federal government’s limited resources and include “law enforcement priorities set by the Attorney General,” the “seriousness” of the alleged crimes, the “deterrent effect of criminal prosecution,” and “the cumulative impact of particular crimes on the community.” Although the Sessions Memorandum emphasizes that cannabis is a federally illegal Schedule I controlled substance, it does not otherwise instruct U.S. Attorneys to consider the prosecution of cannabis-related offenses a DOJ priority, and in practice, most U.S. Attorneys have not changed their prosecutorial approach to date. However, due to the lack of specific direction in the Sessions Memorandum as to the priority federal prosecutors should ascribe to such cannabis activities, there can be no assurance that the federal government will not seek to prosecute cases involving cannabis businesses that are otherwise compliant with state law.
William Barr served as United States Attorney General from February 14, 2019 to December 23, 2020. The DOJ under Mr. Barr did not take a formal position on federal enforcement of laws relating to cannabis. On March 11, 2021, United States President Biden’s nominee, Merrick Garland was sworn in as the U.S. Attorney General. During his campaign, President Biden stated a policy goal to decriminalize possession of cannabis at the federal level, but he has not publicly supported the full legalization of cannabis. It is unclear what impact, if any, the new administration will have on U.S. federal government enforcement policy on cannabis. Nonetheless, there is no guarantee that the position of the Department of Justice will not change.
Such potential proceedings could involve significant restrictions being imposed upon the Company or third parties, and also divert the attention of key executives. Such proceedings could have a material adverse effect on our business, revenues, operating results and financial condition as well as our reputation, even if such proceedings were concluded successfully in favor of the Company. See “Risk Factors”.
For the reasons set forth above, our existing operations in the United States, and any future operations or investments the Company may engage in, may become the subject of heightened scrutiny by regulators, stock exchanges and other authorities in Canada. As a result, the Company may be subject to significant direct and indirect interaction with public officials. There can be no assurance that this heightened scrutiny will not in turn lead to the imposition of certain restrictions on our ability to operate in the United States or any other jurisdiction. See “Risk Factors”.
Government policy changes or public opinion may also result in a significant influence over the regulation of the cannabis industry in the United States or elsewhere. A negative shift in the public’s perception of medical cannabis in the United States or any other applicable jurisdiction could affect future legislation or regulation. Among other things, such a shift could cause state jurisdictions to abandon initiatives or proposals to legalize medical cannabis, thereby limiting the number of new state jurisdictions into which the Company could expand. Any inability to fully implement our expansion strategy may have a material adverse effect on our business, financial condition and results of operations. See “Risk Factors”.
Further, violations of any federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings conducted by either the federal government or private citizens, or criminal charges, including, but not limited to, disgorgement of profits, cessation of business activities or divestiture. This could have a material adverse effect on the Company, including its reputation and ability to conduct business, its holding (directly or indirectly) of medical cannabis licenses in the United States, the listing of its securities on various stock exchanges, its financial position, operating results, profitability or liquidity or the market price of its publicly traded shares. In addition, it is difficult for the Company to estimate the time or resources that would be needed for the investigation of any such matters or its final resolution because, in part, the time and resources that may be needed are dependent on the nature and extent of any information requested by the applicable authorities involved, and such time or resources could be substantial. See “Risk Factors”.
United States Enforcement Proceedings
An appropriations rider contained in the fiscal year 2015, 2016, 2017, 2018, 2019, 2020 and 2021 Consolidated Appropriations Acts (formerly known as the “Rohrabacher-Farr Amendment”; now known as the “Rohrabacher-Blumenauer Amendment” and currently proposed for the next appropriations rider as the “Joyce Amendment”, referred to herein as the “Amendment”) provides budgetary constraints on the federal government’s ability to interfere with the implementation of state-based medical cannabis laws. The Ninth Circuit Court of Appeals and other courts have interpreted the language to mean that the DOJ cannot expend funds to prosecute state-law-abiding medical cannabis operators complying strictly with state medical cannabis laws. The Amendment prohibits the federal government from using congressionally appropriated funds to prevent states from implementing their own medical cannabis laws. Previously the Amendment was extended until December 8, 2018, as part of the passage of an emergency aid package. The Amendment has now been renewed and is effective through September 30, 2022. Through his signing statement, former President Trump reiterated that the Department of Justice may not use any funds to prevent implementation of medical cannabis laws by various States and territories, and “I will treat this provision consistent with the President’s constitutional responsibility to faithfully execute the laws of the United States.” Continued reauthorization of the Amendment is predicated on future political developments and cannot be guaranteed. If the Amendment expires, federal prosecutors could prosecute even state-compliant medical cannabis operators for conduct within the five-year statute of limitations. The Amendment does not protect state legal adult-use cannabis businesses and the DOJ may spend funds to prosecute persons that are operating in accordance with state adult use cannabis laws. However, the United States Congress also passed the Blumenauer-McClintock-Norton-Lee Amendment which would provide legal protection for all state legal cannabis activities. It is unclear whether the amendment language will be included in the Senate appropriations language. Various other pieces of legislation have been introduced by members of Congress that would legalize cannabis at a federal level, although it is uncertain if any of the proposed bills will gain any traction. Most recently the United States House of Representatives passed the Marijuana Opportunity Reinvestment and Expungement Act (“MORE”), but it is expected to be stalled in the United States Senate.
Ability to Access Public and Private Capital
We have historically, and continue to have, access to equity and debt financing from the public and prospectus exempt (private placement) markets in Canada and, to a lesser extent, in the United States. Our executive team and board of directors also have extensive relationships with sources of private capital (such as funds and high net worth individuals), that could be investigated at a higher cost of capital. If such equity and/or debt financing was no longer available in the public markets due to changes in applicable law, then the Company expects that it would have access to raise equity and/or debt financing privately.
Although we are not able to obtain bank financing in the U.S. or financing from other U.S. federally regulated entities, we currently have access to equity financing through the private markets in Canada and in the United States. Since the use of cannabis is illegal under U.S. federal law, and in light of concerns in the banking industry regarding money laundering and other federal financial crime related to cannabis, U.S. banks have been reluctant to accept deposit funds from businesses involved with the cannabis industry. Consequently, businesses involved in the cannabis industry often have difficulty finding a bank willing to accept their business. Likewise, cannabis businesses have limited, if any, access to credit card processing services. As a result, cannabis businesses in the U.S. are largely cash-based. This complicates the implementation of financial controls and increases security issues.
Commercial banks, private equity firms and venture capital firms have approached the cannabis industry cautiously to date. However, there are increasing numbers of high net worth individuals and family offices that have made meaningful investments in companies and projects similar to our projects. Although there has been an increase in the amount of private financing available over the last several years, there is neither a broad nor deep pool of institutional capital that is available to cannabis license holders and license applicants. There can be no assurance that additional financing, if raised privately, will be available to us when needed or on terms which are acceptable. Our inability to raise financing to fund capital expenditures or acquisitions could limit our growth and may have a material adverse effect upon future profitability. See “Risk Factors”.
State-Level Overview
The following sections present an overview of market and regulatory conditions for the cannabis industry in the state of Nevada, in which we have an operating presence in, and is presented as of April 2022, unless otherwise indicated. Although our activities are compliant with applicable United States state and local law, strict compliance with state and local laws with respect to cannabis may neither absolve the Company of liability under United States federal law, nor may it provide a defense to any federal proceeding which may be brought against the Company.
Nevada Cannabis Licenses and the COVID-19 Pandemic
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.
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 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. Upon expiration every 30 days, 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. On February 10, 2022, Governor Sisolak terminated and rescinded virtually all prior directives relating to the COVID-19 pandemic.
Nevada Summary
Medical Cannabis Program
Nevada has a medical cannabis program and passed an adult-use legalization through the ballot box in November 2016. In 2000, Nevada voters passed an amendment to the Nevada state constitution allowing physicians to recommend cannabis for an inclusive set of qualifying conditions including chronic pain and created a limited non-commercial medical cannabis patient/caregiver system. Senate Bill 374, which passed the legislature and was passed by operation of law in 2013, expanded this program and established a for-profit regulated medical cannabis industry.
The Nevada Division of Public and Behavioral Health licensed medical cannabis establishments up until July 1, 2017 when the state’s medical cannabis program merged with adult-use cannabis enforcement under the Nevada Department Of Taxation. In 2019 Nevada Governor Sisolak established the Cannabis Compliance Board which took over the regulation of cannabis on July 1, 2020. In 2014, Nevada accepted medical cannabis business applications and a few months later the Division approved 182 cultivation licenses, 118 licenses for the production of edibles and infused products, 17 independent testing laboratories, and 55 medical cannabis dispensary licenses. The number of dispensary licenses was then increased to 66 by legislative action in 2015. In 2017 these medical cannabis establishments were able to apply for and obtain retail cannabis licenses of the same type (cultivation, production, laboratory or dispensary). From September 7, 2018 to September 20, 2018 Nevada began accepting retail cannabis store business applications and shortly thereafter in December 2018, the State of Nevada awarded sixty-one (61) retail cannabis store licenses. The application process was merit-based, competitive, and is currently closed. Residency is not required to own or invest in a Nevada medical cannabis business or recreational cannabis business. In addition, vertical integration is neither required nor prohibited. Nevada’s medical law includes patient reciprocity, which permits medical patients from other states to purchase cannabis from Nevada dispensaries. Nevada also allows for dispensaries to deliver medical cannabis to patients.
Each medical cannabis establishment must maintain a medical cannabis establishment registration certificate with the CCB. Among other requirements, there are minimum liquidity requirements and restrictions on the geographic location of a medical cannabis establishments as well as restrictions relating to the age and criminal background of employees, owners, officers and board members of the establishment. All employees must be over 21 and all owners, officers and board members must not have any previous felony convictions or had a previously granted medical cannabis registration revoked. Additionally, each volunteer, employee, owner (subject to certain exceptions for owners holding less than 5% of the interests in an entity that holds a cannabis establishment certificate), officer and board member of a medical cannabis establishment must be registered with the CCB as a medical cannabis agent and hold a valid medical cannabis establishment agent card. The establishment must have adequate security measures and use an electronic verification system and inventory control system. If the medical cannabis establishment will sell or deliver edible cannabis products or cannabis-infused products, proposed operating procedures for handling such products which must be preapproved by the CCB.
In response to the rescission of the Cole Memorandum, former Nevada Attorney General Adam Laxalt issued a public statement, pledging to defend the law after it was approved by voters. Former Nevada Governor Brian Sandoval also stated, “Since Nevada voters approved the legalization of recreational cannabis in 2016, I have called for a well-regulated, restricted and respected industry. My administration has worked to ensure these priorities are met while implementing the will of the voters and remaining within the guidelines of both the Cole and Wilkinson federal memos,” and that he would like for Nevada to follow in the footsteps of Colorado, where the U.S. attorneys do not plan to change the approach to prosecuting crimes involving recreational cannabis.
To our knowledge, there have not been any additional statements or guidance made by federal authorities or prosecutors regarding the risk of enforcement action in Nevada.
In determining whether to issue a medical cannabis establishment registration certificate pursuant to NRS 453A.322, the Nevada Division of Public and Behavioral Health or the Nevada Department of Taxation, in addition the application requirements set out, considered the following criteria of merit:
(a) | the total financial resources of the applicant, both liquid and illiquid; | |
(b) | the previous experience of the persons who are proposed to be owners, officers or board members of the proposed medical cannabis establishment at operating other businesses or non- profit organizations; | |
(c) | the educational achievements of the persons who are proposed to be owners, officers or board members of the proposed medical cannabis establishment; | |
(d) | any demonstrated knowledge or expertise on the part of the persons who are proposed to be owners, officers or board members of the proposed medical cannabis establishment with respect to the compassionate use of cannabis to treat medical conditions; | |
(e) | whether the proposed location of the proposed medical cannabis establishment would be convenient to serve the needs of persons who are authorized to engage in the medical use of cannabis; | |
(f) | the likely impact of the proposed medical cannabis establishment on the community in which it is proposed to be located; | |
(g) | the adequacy of the size of the proposed medical cannabis establishment to serve the needs of persons who are authorized to engage in the medical use of cannabis; | |
(h) | whether the applicant has an integrated plan for the care, quality and safekeeping of medical cannabis from seed to sale; | |
(i) | the amount of taxes paid to, or other beneficial financial contributions made to, the State of Nevada or its political subdivisions by the applicant or the persons who are proposed to be owners, officers or board members of the proposed medical cannabis establishment; and | |
(j) | any other criteria of merit that the Division determines to be relevant. |
A medical cannabis registration certificate expires one year after the date of issuance and may be renewed upon resubmission of the application information to the CCB and a payment of the renewal fee.
Governor Sisolak has signed multiple Assembly Bills and Senate Bills having to do with or affecting both retail and medical aspects in the cannabis industry. Specifically, Senate Bill 430 effects the medical cannabis industry, amending NRS 453A.050, to further expand the definition of chronic or debilitating medical condition as it is defined in relation to the medical use of cannabis. The new definition includes: an anxiety disorder, autism spectrum disorder, autoimmune disease, dependence upon opioids, anorexia, medical condition related to acquired immune deficiency syndrome (AIDS) or the human immunodeficiency virus (HIV) and a neuropathic condition. The applicable sections of Nevada Revised Statutes continues to protect a person who holds a valid registry identification card or letter of approval from state prosecution for possession, delivery and production of cannabis.
Adult-Use Retail Cannabis Program
The sale of cannabis for adult-use in Nevada was approved by ballot initiative on November 8, 2016. Nevada Revised Statute 453D required the NV DOT to begin receiving applications for the licensing of cannabis establishments on or before January 1, 2018. Title 56 of Nevada Revised Statutes and Nevada Cannabis Compliance Regulations (NCCR)exempts a person who is 21 years of age or older from state or local prosecution for possession, use, consumption, purchase, transportation or cultivation of certain amounts of cannabis.
In February 2017, the Nevada Department of Taxation announced plans to issue “early start” recreational cannabis establishment licenses in the summer of 2017. Beginning on July 1, 2017, these licenses allowed cannabis establishments holding both a retail cannabis store and dispensary license to sell their existing medical cannabis inventory as either medical or adult-use cannabis. Starting July 1, 2017, medical and adult-use cannabis have incurred a 15% excise tax on the first wholesale sale (calculated on the fair market value) and adult-use cannabis have incurred an additional 10% special retail cannabis sales tax in addition to any general state and local sales and use taxes. Effective July 1, 2019, revenue collected from the 10% excise tax on retail cannabis stores is deposited into the State Distributive School Account in the State General Fund.
On July 1, 2020, portions of Assembly Bill 533 went into effect. Among the provisions of AB 533 that went into effect are any person who owns more than five percent (5%) ownership interest in a cannabis establishment has to obtain a cannabis establishment agent registration card for a cannabis executive and person who owns less than five percent (5%) must either obtain a waiver for the agent registration card requirement or obtain an agent registration card.
On January 16, 2018, the Marijuana Enforcement Division of the NV DOT issued final rules governing its adult-use cannabis program, pursuant to which up to sixty-six (66) permanent adult-use cannabis dispensary licenses were to be issued. That application period occurred in September 2018 and there is ongoing litigation relating to that licensing process that is currently pending appeal through Nevada’s state courts.
Under Nevada’s adult-use cannabis law, the CCB licenses and regulates cannabis cultivation facilities, product manufacturing facilities, distributors, retail stores and testing facilities. After merging medical and adult-use cannabis regulation and enforcement into the Marijuana Enforcement Division of the Department of Taxation in 2017, Governor Sisolak has now created the single regulatory agency known as the “Cannabis Compliance Board” that took over the regulation of the program on July 1, 2020. For the first 18 months of retail cannabis starting in 2017, applications to the Department for adult-use establishment licenses were only accepted from existing medical cannabis establishment certificate holders and existing liquor distributors for the adult-use distribution license, but in September 2018 applications for retail cannabis stores were accepted and conditional licenses were issued in December 2018. In enforcing the new regulations, the CCB has filed formal complaints against several licensees for various violations of the NCCRs. The CCB has sought significant monetary penalties, and suspension or revocation of certain cannabis licenses.
There are five types of retail cannabis establishment licenses under Nevada’s retail cannabis program:
1. | Cultivation Facility - licensed to cultivate (grow), process, and package cannabis; to have cannabis tested by a testing facility; and to sell cannabis to retail cannabis stores, to cannabis product manufacturing facilities, and to other cultivation facilities, but not to consumers. |
2. | Distributor - licensed to transport cannabis from a cannabis establishment to another cannabis establishment. For example, from a cultivation facility to a retail store. |
3. | Product Manufacturing Facility - licensed to purchase cannabis; manufacture, process, and package cannabis and cannabis products; and sell cannabis and cannabis products to other product manufacturing facilities and to retail cannabis stores, but not to consumers. Cannabis products include things like edibles, ointments, and tinctures. |
4. | Testing Facility - licensed to test cannabis and cannabis products, including for potency and contaminants. |
5. | Retail Store - licensed to purchase cannabis from cultivation facilities, cannabis and cannabis products from product manufacturing facilities, and cannabis from other retail stores; can sell cannabis and cannabis products to consumers. |
The NV DOT conducted public consultation and received public comments on the Revised Proposed Adult-Use Marijuana Regulation (LCB File No. R092-17) dated December 13, 2017 (the “Nevada Adult-Use Regulation”). On February 27, 2018, the NV DOT adopted the Nevada Adult-Use Regulations and the NV DOT began accepting applications for adult-use cannabis registration certificates shortly thereafter. In December of 2018, the Department of Taxation awarded 61 conditional retail cannabis store licenses throughout the State of Nevada. There is ongoing litigation regarding the issuance of these licenses.
In determining who shall receive a license for a retail cannabis store in response to the request for applications made pursuant to NAC 453D.260, the Department ranked the applications in order from first to last based on compliance with NAC 453D and chapter 453D of NRS and on the following content:
a. | Whether the owners, officers or board members have experience operating another kind of business that has given them experience which is applicable to the operation of a cannabis establishment; |
b. | The diversity of the owners, officers or board members of the proposed cannabis establishment; |
c. | The educational achievements of the owners, officers or board members of the proposed cannabis establishment; |
d. | The financial plan and resources of the applicant, both liquid and illiquid; |
e. | Whether the applicant has an adequate integrated plan for the care, quality and safekeeping of cannabis from seed to sale; |
f. | The amount of taxes paid and other beneficial financial contributions, including, without limitation, civic or philanthropic involvement with this State or its political subdivisions, by the applicant or the owners, officers or board members of the proposed cannabis establishment; |
g. | Whether the owners, officers or board members of the proposed cannabis establishment have direct experience with the operation of a medical cannabis establishment or cannabis establishment in this State and demonstrated a record of operating such an establishment in compliance with the laws and regulations of this State for an adequate period of time to demonstrate success; |
h. | The experience of key personnel that the applicant intends to employ in operating the type of cannabis establishment for which the applicant seeks a license; and |
i. | Any other criteria that the Department determines to be relevant. |
In response to the ever-changing cannabis industry, Governor Sisolak has signed Assembly Bills: 132, 466, and 533 along with Senate Bills: 346, and 545, amongst others, all relating to the cannabis industry in the State of Nevada.
Assembly Bill 132, which went into effect on January 1, 2020, provides that it is unlawful for an employer to refuse/fail to hire a prospective employee who submitted to a drug test and the results showed a presence of cannabis. AB 132 does not apply to persons applying to be a firefighter or medical tech, whom operates a motor vehicle or a person whose employment affects the safety of others.
Assembly Bill 466 requires the creation of a pilot program to facilitate certain financial transactions relating to cannabis. AB 466 began on October 1, 2019 and is set to expire, by limitation, on June 23, 2023. The goals of AB 466 are to give cannabis establishments a financial institution that will allow them to continue to strive towards reducing the risk to the safety and welfare of the public that is seen when large sums of cash are present, provide cannabis establishments with a safe way to pay taxes, prevent revenue from going to criminal enterprises and prevent the distribution of cannabis to minors. AB 466 has built in reporting provisions which state that the State Treasurer shall submit to the Director of the Legislative Counsel Bureau a report about the pilot program before December 1, 2020 and every six (6) months thereafter. The Nevada legislature meets every two years and convened on February 1, 2021. Although it is impossible to predict with certainty, we anticipate that due to the heavy lobbying efforts by the cannabis industry that there will be several cannabis related issues addressed during the 2021 legislative session. Some issues that may be addressed at the session that could impact our business activities involve transfers of ownership in publicly traded companies and the issuance of securities by publicly traded companies.
Assembly Bill 533 was approved by Governor Sisolak on June 12, 2018. Included in AB 533 is Section 52 which calls for the creation of the Cannabis Advisory Commission (CAM) and the Cannabis Compliance Board (CCB). Any reference to NV DOT and the need for NV DOT approval discussed herein, now means that CCB approval is required. The CAM shall be comprised of Officers and Members appointed by the Governor. The purpose of the CAM is to study issues and make recommendations to the CCB in regard to cannabis regulations. Additionally, the CAM will recommend to the CCB any guidelines, rules or regulations or changes to existing ones. Furthermore, the CAM will study the distribution of licenses, emerging technologies for collecting data and recommend to the board any statutory changes that the Commission determines to be appropriate. The CCB was created as a part of Section 54 of Assembly Bill 533. AB 533 calls for the authority to license and regulate persons and establishments involved in the cannabis industry in this State to be transferred to the Cannabis Compliance Board. The CCB consists of five (5) members appointed by Governor Sisolak. The Nevada legislature modeled the CCB after the successful Nevada Gaming Control Board. The CCB licenses, registers and regulates cannabis establishments and those who are engaged in the production and/or sale of cannabis and cannabis products. Additionally, section 65 of AB 533 outlines the procedures by which the CCB can adopt regulations and provides the procedure by which the Legislative Commission can review those regulations. Among other things, the CCB regulates ownership of cannabis companies and requires approvals of and regulatory filings by certain owners of cannabis companies, which requirements remain subject to change and interpretation. There is a major private equity fund that has invested in us, and we recently learned that the CCB is requiring an officer of that fund to make a submission to it and be vetted by it. This submission is now in process. Section 57 of AB 533 outlines that the CCB can perform certain audits of the accounts, programs, funds, activities, and functions of the licensees or they are authorized to require the Department of Taxation to do so. Section 68 provides the procedures for disciplinary actions if a cannabis establishment violates any provision or has an unsatisfactory audit.
Section 178 of Assembly Bill 533 went into effect on July 1, 2020 further expands on the concept that a person who is 21 years of age or older is exempt from state prosecution for:
A. | The possession, delivery or production of cannabis; |
B. | The possession or delivery of paraphernalia; |
C. | Aiding and abetting another in the possession, delivery or production of cannabis; |
D. | Aiding and abetting another in the possession or delivery of paraphernalia; |
E. | Any combination of the acts described in paragraphs (a) to (d), inclusive; and |
F. | Any other criminal offense in which the possession, delivery or production of cannabis or the possession or delivery of paraphernalia is an element. |
The legislative intent behind Section 178 is to provide protections for persons and establishments engaged in certain actions relating to the adult use of cannabis. Section 178 extends the provision of no state prosecution to persons being in the presence or vicinity of the adult use of cannabis in accordance with the provisions of this title.
In addition to the Assembly Bills passed, Governor Sisolak also passed various Senate Bills related to the cannabis industry. As mentioned below in Training, Senate Bill (SB) 346 allows for an independent contractor to enter into a contract to provide training of medical cannabis establishment and cannabis establishment agents.
Senate Bill 430 amends NRS 453A.050 to further expand the definition of chronic or debilitating medical condition as it is defined in relation to the medical use of cannabis. The new definition includes: an anxiety disorder, autism spectrum disorder, autoimmune disease, dependence upon opioids, anorexia, medical condition related to acquired immune deficiency syndrome (AIDS) or the human immunodeficiency virus (HIV) and a neuropathic condition. As mentioned previously, NRS 453A.050 continues to protect a person lawfully consuming medical cannabis from state prosecution for the possession, delivery or production of cannabis.
Nevada Licenses and Regulations
In the state of Nevada, only cannabis that is grown or produced in the state by a licensed establishment may be sold in the state.
A retail cannabis store license permits the holder to purchase cannabis from Nevada licensed cultivation facilities, cannabis products from Nevada licensed product manufacturing facilities and cannabis from other Nevada licensed retail stores and allows the sale of cannabis and cannabis products to consumers. No cannabis or cannabis infused products may be brought into Nevada from outside of Nevada. Unlicensed cannabis activities are subject to harsh criminal penalties under Nevada state law.
A medical cannabis dispensary registration certificate permits the holder to purchase medical cannabis from Nevada licensed medical cultivation facilities, medical cannabis products from Nevada licensed medical product manufacturing facilities and medical cannabis from other Nevada licensed cannabis dispensaries and allows the sale of medical cannabis and medical cannabis products to consumers. No medical cannabis or medical cannabis infused products may be brought into Nevada from outside of Nevada. Unlicensed medical cannabis activities are subject to harsh criminal penalties under Nevada state law.
A medical cultivation license permits its holder to acquire, possess, cultivate, deliver, transfer, have tested, transport, supply or sell cannabis and related supplies to medical cannabis dispensaries, facilities for the production of edible medical cannabis products and/or medical cannabis-infused products, or other medical cannabis cultivation facilities.
A retail cultivation license permits its holders to acquire, possess, cultivate, deliver, transfer, have tested, transport, supply or sell cannabis and related supplies to retail cannabis stores, retail cannabis production facilities for the production of edible, cannabis products and/or cannabis infused products or other retail cannabis cultivation facilities.
The medical product manufacturing license permits its holder to acquire, possess, manufacture, deliver, transfer, transport, supply, or sell edible cannabis products or cannabis infused products to other medical cannabis production facilities or medical cannabis dispensaries.
The retail product manufacturing license permits its holder to acquire, possess, manufacture, deliver, transfer, transport, supply, or sell edible cannabis products or cannabis infused products to other retail cannabis production facilities or retail cannabis stores.
Reporting Requirements
The state of Nevada uses a computerized track and trace system used to track commercial cannabis activity and seed-to-sale. Individual licensees, whether directly or through third-party integration systems, are required to push data to the state to meet all reporting requirements. See section entitled “Compliance with Applicable State Law in the United States” below.)
Storage and Security
To ensure the safety and security of cannabis business premises and to maintain adequate controls against the diversion, theft, and loss of cannabis or cannabis products, Nevada state law requires the following:
(a) | be an enclosed, locked facility; | |
(b) | have a single secure entrance; | |
(c) | train employees in security measures and controls, emergency response protocol, confidentiality requirements, safe handling of equipment, procedures for handling products, as well as the differences in strains, methods of consumption, methods of cultivation, methods of fertilization and methods for health monitoring; | |
(d) | install security equipment to deter and prevent unauthorized entrances, which includes: |
a. | devices that detect unauthorized intrusion which may include a signal system; and |
b. | exterior lighting to facilitate surveillance; |
(e) | electronic monitoring must be in place, which includes: |
a. | at least one call-up monitor that is 19 inches or more; | |
b. | a video printer capable of immediately producing a clear still photo from any video camera image; | |
c. | video cameras with recording resolution of at least 1920 x 1080, or the equivalent, at a rate of at least 15 frames per second, which records 24 hours a day and is capable of being accessed remotely by a law enforcement agency in real time upon request. | |
d. | video cameras with a recording resolution of at least 720 x 480 which provides coverage of all entrances to and exits from limited access areas and all entrances to and exits from the building and which can identify any activity occurring in or adjacent to the building; | |
e. | a video camera at each point-of-sale location which allows for the identification of any person who holds a valid registry identification card, including, without limitation, a designated primary caregiver, purchasing medical cannabis; | |
f. | a video camera in each grow room which can identify any activity occurring within the grow room in low light conditions; | |
g. | a method for storing video recordings from the video cameras for at least thirty (30) calendar days; | |
h. | a failure notification system that provides an audible and visual notification of any failure in the electronic monitoring system; | |
i. | sufficient battery backup for video cameras and recording equipment to support at least five (5) minutes of recording in the event of a power outage; and | |
j. | security alarm to alert local law enforcement of unauthorized breach of security; and |
(f) | implement security procedures that: |
a. | restrict access of the establishment to only those persons/employees authorized to be there; | |
b. | deter and prevent theft; | |
c. | provide identification (badge) for those persons/employees authorized to be in the establishment; | |
d. | prevent loitering; | |
e. | require and explain electronic monitoring; and | |
f. | require and explain the use of automatic or electronic notification to alert local law enforcement of an unauthorized breach of security. |
Training
In accordance with SB 346, an independent contractor is authorized to enter into a contract to provide training of medical cannabis establishment agents and cannabis establishment agents. The independent contractor is required to submit a plan to the CCB describing the manner their training will be conducted.
Transportation
In Nevada, cannabis may only be transported from a licensed cultivation or production facility by a licensed cannabis distributor. Prior to transporting the cannabis or cannabis products, the distributor must complete a trip plan which includes: the agent name and registration number providing and receiving the cannabis; the date and start time of the trip; a description, including the amount, of the cannabis or cannabis products being transported; and the anticipated route of transportation.
During the transportation of cannabis or cannabis products, the licensed cannabis distributor agent must: (a) carry a copy of the trip plan with him or her for the duration of the trip; (b) have his or her cannabis establishment agent card in his or her immediate possession; (c) use a vehicle without any identification relating to cannabis and which is equipped with a secure lockbox or locking cargo area which must be used for the sanitary and secure transportation of cannabis, or cannabis products; (d) have a means of communicating with the cannabis establishment for which he or she is providing the transportation; and (e) ensure that all cannabis or cannabis products are not visible. After transporting cannabis or cannabis products, a licensed cannabis distributor agent must enter the end time of the trip and any changes to the trip plan that was completed.
Each licensed cannabis distributor agent transporting cannabis or cannabis products must report any: (a) vehicle accident that occurs during the transportation to a person designated by the cannabis distributor to receive such reports within two (2) hours after the accident occurs; and (b) loss or theft of cannabis or cannabis products that occurs during the transportation to a person designated by the cannabis distributor to receive such reports immediately after the cannabis establishment agent becomes aware of the loss or theft. A cannabis distributor that receives a report of loss or theft pursuant to this paragraph must immediately report the loss or theft to the appropriate law enforcement agency and to the CCB. The distributor must report any unauthorized stop that lasts longer than two (2) hours to the CCB.
A cannabis distributor shall maintain the required documents and provide a copy of the documents required to the CCB for review upon request. Each cannabis distributor shall maintain a log of all received reports.
Employees of licensed cannabis distributors, including drivers transporting cannabis and cannabis products, must be 21 years of age or older and must obtain a valid cannabis establishment agent registration card issued by the CCB. If a cannabis distributor is co-located with another type of business, all employees of co-located businesses must have cannabis establishment agent registration cards unless the co-located business does not include common entrances, exits, break room, restrooms, locker rooms, loading docks, and other areas as are expedient for business and appropriate for the site as determined and approved by CCB inspectors. While engaged in the transportation of cannabis and cannabis products, any person that occupies a transport vehicle when it is loaded with cannabis or cannabis products must have their physical cannabis establishment agent registration card in their possession.
All drivers must carry in the vehicle valid driver’s insurance at the limits required by the State of Nevada and the CCB. All drivers must be bonded in an amount sufficient to cover any claim that could be brought, or disclose to all parties that their drivers are not bonded. Cannabis establishment agent registration cardholders and the licensed cannabis distributor they work for are responsible for the cannabis and cannabis product once they take control of the product and leave the premises of the cannabis establishment.
There is no load limit on the amount or weight of cannabis and cannabis products that are being transported by a licensed cannabis distributor. Cannabis distributors are required to adhere to CCB regulations and those required through their insurance coverage. The motor vehicle which a cannabis distributor uses to transport cannabis shall be equipped with an audible car alarm. When transporting by vehicle, cannabis and cannabis product must be in a lockbox or locked cargo area. A trunk of a vehicle is not considered secure storage unless there is no access from within the vehicle and it is not the same key access as the vehicle. Live plants can be transported in a fully enclosed, windowless locked trailer or secured area inside the body/compartment of a locked van or truck so that they are not visible to the outside. If the value of the cannabis and cannabis products being transported by vehicle is in excess of $25,000 (the insured fair market value per the shipping manifest), the transporting vehicle will have no less than two (2) of the cannabis distributor’s cannabis establishment agent registration cardholders involved in the transportation. All cannabis and cannabis product must be tagged for purposes of inventory tracking with a unique identifying label as required by the CCB and remain tagged during transport. This unique identifying label should be similar to the stamp for cigarette distribution. All cannabis and cannabis products when transported by vehicle must be transported in sealed packages and containers and remain unopened during transport. All cannabis and cannabis product transported by vehicle should be inventoried and accounted for in the inventory tracking system. Loading and unloading of cannabis and cannabis products from the transporting vehicle must be within view of existing video surveillance systems prior to leaving the origination location. Security requirements are required for the transportation of cannabis and cannabis products.
Oasis LLC Licenses
Oasis is licensed to operate in the City of Las Vegas as a Dual Use Marijuana Business and in the State of Nevada as a Medical Cannabis Dispensary Establishment and a Retail Cannabis Store. City Trees Production is licensed to operate in the state of Nevada as a Medical Cannabis Production Establishment, a Retail Cannabis Product Manufacturing facility and a Retail Cannabis Distributor. City Trees Production is licensed to operate in the state of Nevada as a Medical Cannabis Cultivation Facility and a Retail Cannabis Cultivator. The table below lists the licenses issued to the Oasis LLCs in respect of the Oasis LLCs’ operations in Nevada (including municipal licenses). Under applicable laws, the licenses permit the Oasis LLCs to cultivate, manufacture, process, package, sell, and purchase cannabis pursuant to the terms of the licenses, which are issued by the NV DOT and CCB under the provisions of Nevada Revised Statutes (“NRS”) sections 678A, 678B, 678C and 678D and the associated sections of the Nevada Administrative Code, CCB regulations and local regulations pertaining to cannabis businesses. All licenses are independently issued for each approved activity for use at the Oasis LLCs’ facilities in Nevada.
All cannabis establishments must register with the CCB. If applications contain all required information and after vetting by officers, establishments may be issued a cannabis license or medical cannabis establishment registration certificate only during an open application period. In a local governmental jurisdiction that issues business licenses, the issuance by the CCB of a cannabis license or medical cannabis establishment registration certificate is considered provisional or conditional until the local government has issued a business license for operation and the establishment is in compliance with all applicable local governmental ordinances. Final licenses and registration certificates are valid for a period of one year and are subject to annual renewals after required fees are paid and the business remains in good standing. Renewal requests are typically communicated through email or mailings from the CCB and include a renewal form or application. The renewal periods serve as an update for the CCB on the licensee’s status. Maintaining the licenses in good standing is critical to the success of a cannabis business in Nevada. Failure to adhere to the regulations can result in significant fines and penalties, including the suspension or revocation of the license.
The licenses are independently issued for each approved activity for use at Oasis LLC facilities. The table below lists the licenses issued to the Oasis LLCs in respect of their operations in Nevada.
Licenses in the State of Nevada
Holding Entity | Permit/License | Location City | Expiration/Renewal Date | Description |
Serenity Wellness Center LLC d/b/a Oasis Cannabis | D90 – Medical Marijuana Dispensary License #: M66-00051 | Las Vegas | 01/01/2023 | City of Las Vegas Marijuana Business License for a Medical Dispensary |
Serenity Wellness Center LLC d/b/a Oasis Cannabis | R90 – Retail Marijuana Store (Rec Sales) License # M66-00052 | Las Vegas | 01/01/2023 | City of Las Vegas Marijuana Business License for a Retail Marijuana Store |
Serenity Wellness Center LLC d/b/a Oasis Medical Cannabis | Medical Marijuana Registration Certificate: # 02916424476864783141 MME Code: D046 | 06/30/2023 | State of NV Final Registration Certificate – Medical Marijuana Dispensary Establishment | |
Serenity Wellness Center LLC d/b/a Oasis Medical Cannabis | Retail Marijuana Store License #: 55910347793434478299 ME Code: RD046 | 06/30/2023 | State of NV – Retail Marijuana Store License |
Holding Entity | Permit/License | Location City | Expiration/Renewal Date | Description |
Oasis Cannabis | G50 – General Retail Sales Drug Paraphernalia License #: G66-07378 | Las Vegas | 02/01/2023 | City of Las Vegas general retail sales license |
Oasis Cannabis | Curbside Cannabis Sales License # PMT20-01468 | Las Vegas | 12/31/2022 | City of Las Vegas Time-Limited Cannabis Curbside Sales Permit |
Community Oasis LLC | A51 – Automated Teller Operator License #: G63-09197 | Las Vegas | 12/01/2022 | City of Las Vegas license to operate an automated teller |
Community Oasis LLC | 150 – Instruction Services Workshop/Yoga/Art Sales License #: G6400802 | Las Vegas | 09/01/2022 | City of Las Vegas Instruction Services Workshop/Yoga/Art Sales License |
Serenity Wellness Products LLC d/b/a City Trees | MM Production – GS License #: BL105437 | North Las Vegas | 10/31/2022 *Renews every 90 days | City of North Las Vegas Marijuana Production License |
Serenity Wellness Products LLC d/b/a City Trees | RM Rec Production – GS License #: BL111296 | North Las Vegas | 10/31/2022 *Renews every 90 days | City of North Las Vegas Marijuana Production License |
Serenity Wellness Products LLC d/b/a City Trees | Marijuana Distributor License #: 2020313713 | Henderson | 09/30/2022 | City of Henderson Marijuana Distributor License |
Serenity Wellness Products LLC d/b/a City Trees | Medical Marijuana Registration Certificate: # 40297970315350477547 MME Code: P024 | 06/30/2023 | State of NV Final Registration Certificate – Medical Marijuana Production Establishment | |
Serenity Wellness Products LLC d/b/a City Trees | Retail Marijuana Product Manufacturing License #: 79484750509886968559 ME Code: RP024 | 06/30/2023 | State of NV Retail Marijuana Product Manufacturing License | |
Serenity Wellness Products LLC d/b/a City Trees | Retail Marijuana Distributor License #: 61611537222691531848 ME Code: T073 | 06/30/2023 | State of NV Retail Marijuana Distributor License | |
Serenity Wellness Products LLC d/b/a City Trees | Z90 – Medical Marijuana Production Facility OLV Marijuana Production License #: M65-00015 | 01/01/2023 | City of Las Vegas license required to sell to dispensaries within its jurisdiction | |
Serenity Wellness Growers LLC d/b/a City Trees | MM Cultivation – GS License #: BL105436 | North Las Vegas | 10/31/2022 | City of North Las Vegas Marijuana Cultivation License |
Serenity Wellness Growers LLC d/b/a City Trees | RM Rec Cultivation – GS License #: BL111295 | North Las Vegas | 10/31/2022 | City of North Las Vegas Marijuana Cultivation License |
Serenity Wellness Growers LLC d/b/a City Trees | Medical Marijuana Registration Certificate: 36161311931874315998 MME Code: C039 | 06/30/2023 | State of NV Medical Marijuana Cultivation Facility Registration Certificate | |
Serenity Wellness Growers LLC d/b/a City Trees | Retail Marijuana Cultivator License #: 77486514896179438118 ME Code: RC039 | 06/30/2023 | State of NV Retail Marijuana Cultivator License | |
Serenity Wellness Growers LLC d/b/a City Trees | X90 – Medical Marijuana Cultivation Facility OLV License #: M65-00014 | Las Vegas | 01/01/2023 | City of Las Vegas license required to sell cannabis within its jurisdiction |
Serenity Wellness Products LLC d/b/a City Trees | F90 Cannabis Distributor OLV License #: M68-00005 | Las Vegas | 01/01/2023 | City of Las Vegas License required to distribute cannabis within its jurisdiction |
Serenity Wellness Products LLC d/b/a City Trees | Marijuana Distributor License # BL113029 | Las Vegas | 01/31/2023 | City of North Las Vegas Marijuana Distributor License |
Nevada Reporting Requirements
The state of Nevada uses METRC as the state’s computerized T&T system for seed-to-sale. Individual licensees whether directly or through third-party integration systems are required to push data to the state to meet all reporting requirements. The Oasis LLCs have designated an in-house computerized seed to sale software that integrate with METRC via API (GreenBits), which captures the required data points for cultivation, manufacturing and retail as required in Nevada Revised Statutes and by the NCCRs.
Compliance with Applicable State Law in the United States
We, via the Oasis LLCs, are classified as having a “direct” involvement in the U.S. cannabis industry and are in compliance with applicable licensing requirements and the regulatory framework enacted by the state of Nevada. Neither the Company nor the Oasis LLCs are subject to any citations or notices of violation with applicable licensing requirements and the regulatory framework enacted by each applicable U.S. state which may have an impact on its licenses, business activities or operations.
We have in place a detailed compliance program overseen and maintained by external state and local regulatory/compliance counsel. Our internal compliance team (consisting of managers for each respective business unit) implements the compliance program.
Our internal compliance team oversees training for all employees, including on the following topics:
● | compliance with state and local laws | |
● | safe cannabis use | |
● | dispensing procedures | |
● | security and safety policies and procedures | |
● | inventory control | |
● | quality control | |
● | transportation procedures |
Our compliance program emphasizes security and inventory control to ensure strict monitoring of cannabis and inventory from delivery by a licensed distributor to sale or disposal. Only authorized, properly trained employees are allowed to access the Company’s computerized seed-to-sale system.
Our internal compliance team, together with external state and local regulatory/compliance counsel, monitors all compliance notifications from the regulators and inspectors in each market, timely resolving any issues identified. We keep records of all compliance notifications received from the state regulators or inspectors and how and when the issue was resolved.
Further, we have created comprehensive standard operating procedures that include detailed descriptions and instructions for receiving shipments of inventory, inventory tracking, recordkeeping and record retention practices related to inventory, as well as procedures for performing inventory reconciliation and ensuring the accuracy of inventory tracking and recordkeeping. We maintain accurate records of our inventory at all licensed facilities. Adherence to our standard operating procedures is mandatory and ensures that our operations are compliant with the rules set forth by the applicable state and local laws, regulations, ordinances, licenses and other requirements. We ensure adherence to standard operating procedures by regularly conducting internal inspections and ensure that any issues identified are resolved quickly and thoroughly.
In January 2018, former United States Attorney General, Jeff Sessions rescinded the Cole Memorandum and thereby created a vacuum of guidance for enforcement agencies and the Department of Justice.1 As an industry best practice, despite the recent rescission of the Cole Memorandum, the Company continues to do the following to ensure compliance with the guidance provided by the Cole Memorandum:
● | Ensure the operations of its subsidiaries are compliant with all licensing requirements that are set forth with regards to cannabis operation by the applicable state, county, municipality, town, township, borough, and other political/administrative divisions. To this end, the Company retains appropriately experienced legal counsel to conduct the necessary due diligence to ensure compliance of such operations with all applicable regulations; | |
● | the Company only works through licensed operators, which must pass a range of requirements, adhere to strict business practice standards and be subjected to strict regulatory oversight whereby sufficient checks and balances ensure that no revenue is distributed to criminal enterprises, gangs and cartels; and | |
● | we conduct reviews of products and product packaging to ensure that the products comply with applicable regulations and contain necessary disclaimers about the contents of the products to prevent adverse public health consequences from cannabis use and prevent impaired driving. |
1U.S. Dept. of Justice. (2013). Memorandum for all United States Attorneys re: Guidance Regarding Marijuana Enforcement. Washington, DC: US Government Printing Office. Retrieved from https://www.justice.gov/iso/opa/resources/3052013829132756857467.pdf.
We, together with external state and local regulatory/compliance counsel, will continue to monitor compliance on an ongoing basis in accordance with our compliance program and standard operating procedures. While our operations are in material compliance with all applicable state laws, regulations and licensing requirements, such activities remain illegal under United States federal law. For the reasons described above and the risks further described in the “Risk Factors” section below, there are significant risks associated with the business of the Company. Readers are strongly encouraged to carefully read all of the risk factors contained in the “Risk Factors” section below.
Although state-licensed businesses engaged in such activities are currently proceeding largely free from federal prosecution and recently-enacted federal spending legislation prohibits the Department of Justice from using federal funds to prevent states from implementing their own marijuanacannabis laws, changes in congress or in the executive administration, including presidential elections, could result in changes to current federal enforcement policies regarding cannabis-related activities which are legal under certain state laws. Therefore, by operating the business, we will face the possibility of civil and criminal sanctions.
Additionally, certain states in which we seek to operate may prohibit non-resident companies from conducting business directly in the state. In such states, we will seek to enter into a collaborative arrangement with a local entity holding the necessary licensure, whereby we will agree to lease our facilities, equipment and employees to the licensed entity in exchange for a fee. Such an arrangement may be difficult to secure and/or expensive to maintain, as we will be reliant on the licensee to maintain its license in order to continue operations. Further, various state and local licensure application and approval processes may require significant time and expense, and, upon becoming authorized to do business in a state, it may be difficult or expensive for us to comply with the oft-changing laws, regulations and licensure requirements of each state and municipality where we are doing business.
We will need to obtain applicable state licenses in each state in which we will operate processing facilities. License requirements and procedures vary from state to state. The initial state in which we plan to operate is Colorado. Subsequently, we will likely seek to operate in Nevada and Washington.Nevada.
Item 1A. Risk Factors.
Our business faces certain risks. The risks described below may not be the only risks we face. Additional risks that we do not yet know of or that we currently think are immaterial may also impair our business. If any of the events or circumstances described as risks below or elsewhere in this report actually occurs, our business, results of operations or financial condition could be materially and adversely affected. In connection with any investment decision, you should carefully consider the following factors, which could materially affect our business, financial condition or results of operations. You should read these Risk Factors in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and our Consolidated Financial Statements and related notes in Item 8.
Risks Related to the MarijuanaCannabis Industry
Cannabis continues to be a Controlled Substance under the use, saleUnited States Federal Controlled Substances Act and our business may result in federal civil or possession of marijuana iscriminal prosecution.
We are directly engaged in the medical and adult-use cannabis industry in the U.S. where local state law permits such activities however all such activities remain illegal under federal law in the Company and its officers and employees could be subjectU.S. Investors are cautioned that in the U.S., cannabis is highly regulated at the state level. To our knowledge, there are to criminal and civil sanctions.
An appropriations rider contained in the fiscal year 2015, 2016, 2017, 2018, 2019, 2020 and 2021 Consolidated Appropriations Acts (formerly known as the “Rohrabacher-Farr Amendment”; now known as the “Rohrabacher-Blumenauer Amendment” and currently proposed for the next appropriations rider as the “Joyce Amendment”, referred to herein as the “Amendment”) provides budgetary constraints on the federal government’s ability to interfere with the implementation of state-based medical cannabis laws. The Ninth Circuit Court of Appeals and other courts have interpreted the language to mean that the U.S. Department of Justice (the “DOJ”) cannot expend funds to prosecute state-law-abiding medical cannabis operators complying strictly with state medical cannabis laws. The Amendment prohibits the federal government from using federalcongressionally appropriated funds to prevent states from implementing their own marijuanamedical cannabis laws. The Rohrabacher Amendment was renewed for fiscal year 2021 and again through various spending bills and is effective until September 2022. Continued reauthorization of the Amendment is predicated on future political developments and cannot be guaranteed. If the Amendment expires, federal prosecutors could prosecute even state-compliant medical cannabis operators for conduct within the five-year statute of limitations. The Amendment does not protect state legal adult-use cannabis businesses and the DOJ may spend funds to prosecute persons that are operating in accordance with state adult use cannabis laws.
Violations of any federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings conducted by either the federal government or private citizens, or criminal charges and penalties, including, but not limited to, disgorgement of profits, cessation of business activities, divestiture, or prison time. This could have a material adverse effect on us, including our reputation and ability to conduct business, our holding (directly or indirectly) of medical and adult-use cannabis licenses in the U.S., the listing of our securities on the Canadian Securities Exchange (the “CSE”), our financial position, operating results, profitability or liquidity or the market price of our publicly traded shares. In addition, it is difficult for us to estimate the time or resources that would be needed for the investigation or defense of any such matters or our final resolution because, in part, the time and resources that may be needed are dependent on the nature and extent of any information requested by the applicable authorities involved, and such time or resources could be substantial.
The approach to the enforcement of cannabis laws may be subject to change, which creates uncertainty for our business.
As a result of the conflicting views between states and the federal government regarding cannabis, investments in, and the operations of, cannabis businesses in the U.S. are subject to inconsistent laws and regulations. The so-called “Cole Memorandum” issued by former Deputy Attorney General James Cole on August 29, 2013 and other Obama-era cannabis policy guidance, discussed below, provided the framework for managing the tension between federal and state cannabis laws. Subsequently, as discussed below, former Attorney General Jeff Sessions rescinded the Cole Memo and related policy guidance. Although no longer in effect, these policies, and the enforcement priorities established within, appear to continue to be followed during the Trump administration and remain critical factors that inform the past and future trend of state-based legalization.
The Cole Memo directed U.S. Attorneys not to prioritize the enforcement of federal cannabis laws against individuals and businesses that comply with state medical or adult-use cannabis regulatory programs, provided certain enumerated enforcement priorities (such as diversion or sale of cannabis to minors) were not implicated. In addition to general prosecutorial guidance issued by the DOJ, FinCEN issued a the FinCEN Memorandum on February 14, 2014 outlining Bank Secrecy Act-compliant pathways for financial institutions to service state-sanctioned cannabis businesses, which echoed the enforcement priorities outlined in the Cole Memorandum. On the same day the FinCEN Memorandum was published, the DOJ issued complimentary policy guidance directing prosecutors to apply the enforcement priorities of the Cole Memo when determining whether to prosecute individuals or institutions with crimes related to financial transactions involving the proceeds of cannabis-related activities.
On January 4, 2018, the then Attorney General Jeff Sessions rescinded the Cole Memo, the Cole Banking Memorandum, and all other related Obama-era DOJ cannabis enforcement guidance. While the rescission did not change federal law, as the Cole Memo and other DOJ guidance documents were not themselves laws, the United States Supreme Courtrescission removed the DOJ’s formal policy that state-regulated cannabis businesses in compliance with the Cole Memo guidelines should not be a prosecutorial priority. Notably, former Attorney General Sessions’ rescission of the Cole Memo and the Cole Banking Memorandum has rulednot affected the status of the FinCEN Memorandum issued by the Department of Treasury, which remains in effect. In addition to his rescission of the Cole Memo, former Attorney General Sessions issued a one-page memorandum known as the “Sessions Memorandum.” The Sessions Memorandum explains the DOJ’s rationale for rescinding all past DOJ cannabis enforcement guidance, claiming that federal laws criminalizingObama-era enforcement policies are “unnecessary” due to existing general enforcement guidance adopted in the 1980s, in chapter 9.27.230 of the U.S. Attorney’s Manual (the “USAM”). The USAM enforcement priorities, like those of the Cole Memo, are based on the use of marijuana pre-empt state laws. Thus, even if we limit our business to marijuana-friendly states,the federal government’s limited resources and include “law enforcement priorities set by possessing, distributing or even aiding others in distributing marijuana or marijuana-based products such as cannabinoid oils, the Company, its officers, directors and employees may faceAttorney General,” the prospect“seriousness” of the alleged crimes, the “deterrent effect of criminal and/or civil sanctions for engagingprosecution,” and “the cumulative impact of particular crimes on the community.” Although the Sessions Memorandum emphasizes that cannabis is a federally illegal Schedule I controlled substance, it does not otherwise instruct U.S. Attorneys to consider the prosecution of cannabis-related offenses a DOJ priority, and in activitiespractice, most U.S. Attorneys have not changed their prosecutorial approach to date. However, due to the lack of specific direction in violation ofthe Sessions Memorandum as to the priority federal lawprosecutors should ascribe to such cannabis activities and the Company couldlack of additional guidance since the resignation of former Attorney General Sessions, there can be no assurance that the federal government will not seek to prosecute cases involving cannabis businesses that are otherwise compliant with state law.
William Barr served as United States Attorney General from February 14, 2019 to December 23, 2020. The DOJ under Mr. Barr did not take a formal position on federal enforcement of laws relating to cannabis. On March 11, 2021, United States President Biden’s nominee, Merrick Garland was sworn in as the U.S. Attorney General. During his campaign, President Biden stated a policy goal to decriminalize possession of cannabis at riskthe federal level, but he has not publicly supported the full legalization of civil and/or criminal forfeiture actions against its assets and operations for such violations. As our business plan depends uponcannabis. It is unclear what impact, if any, the possession, sale, and use of marijuana and certain cannabinoid extracts, such sanctions or forfeiture actions would be debilitating toBiden administration will have on U.S. federal government enforcement policy on cannabis. Nonetheless, there is no guarantee that the businessposition of the Company and wouldDepartment of Justice will not change.
Such potential proceedings could involve significant restrictions being imposed upon us or third parties, while diverting the attention of key executives. Such proceedings could have a material adverse effect on our operations.
Uncertainty surrounding existing protection from U.S. federal prosecution may adversely affect our operations and federal spending legislation prohibitingfinancial performance.
Pursuant to the DepartmentAmendment, until such time as it is not renewed or expires of Justiceits own accord, the DOJ is prohibited from using federalexpending any funds to prevent states from implementing their own marijuanamedical cannabis laws. If the Amendment or an equivalent thereof is not successfully included in the next or any subsequent federal omnibus spending bill, the protection which has been afforded thereby to U.S. medical cannabis businesses in the past would lapse, and such businesses would be subject to a higher risk of prosecution under federal law. Although unlikely, there is a possibility that all amendments may be banned from federal omnibus spending bills, and if this occurs and the substantive provisions of the Amendment are not included in the base federal omnibus spending bill or other law, these protections would lapse. To the extent the Amendment is included in a continuing resolution, the protections of the Amendment would lapse if Congress does not reauthorize the resolution or pass another funding measure that includes the Amendment.
We may be in violation of anti-money laundering laws and regulations which could impact our ability to obtain banking services, result in the forfeiture or seizure of our assets and could require us to suspend or cease operations.
We are subject to a variety of laws and regulations domestically and in the U.S. that involve money laundering, financial recordkeeping and proceeds of crime, including the Bank Secrecy Act, as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada), as amended and the rules and regulations thereunder, the Criminal Code (Canada) and any related or similar rules, regulations or guidelines, issued, administered or enforced by governmental authorities in the U.S. and Canada. Since the cultivation, manufacture, distribution and sale of cannabis remains illegal under the Controlled Substances Act, banks and other financial institutions providing services to cannabis-related businesses risk violation of federal anti-money laundering statutes (18 U.S.C. §§ 1956 and 1957), the unlicensed money-remitter statute (18 U.S.C. § 1960) and the Bank Secrecy Act, among other applicable federal statutes. Banks or other financial institutions that provide cannabis businesses with financial services such as a checking account or credit card in violation of the Bank Secrecy Act could be criminally prosecuted for willful violations of money laundering statutes, in addition to being subject to other criminal, civil, and regulatory enforcement actions. Banks often refuse to provide banking services to businesses involved in the cannabis industry due to the present state of the laws and regulations governing financial institutions in the U.S. The statements issuedlack of banking and financial services presents unique and significant challenges to businesses in the cannabis industry. The potential lack of a secure place in which to deposit and store cash, the inability to pay creditors through the issuance of checks and the inability to secure traditional forms of operational financing, such as lines of credit, are some of the many challenges presented by the Departmentunavailability of Justicetraditional banking and financial services. These statutes can impose criminal liability for engaging in certain financial and monetary transactions with the proceeds of a “specified unlawful activity” such as distributing controlled substances which are however, only guidelines providedillegal under federal law, including cannabis, and for failing to identify or report financial transactions that involve the proceeds of cannabis-related violations of the Controlled Substances Act. We may also be exposed to the foregoing risks.
As previously introduced, in February 2014, FinCEN issued the FinCEN Memo providing instructions to banks seeking to provide services to cannabis-related businesses. The FinCEN Memo states that in some circumstances, it is permissible for banks to provide services to cannabis-related businesses without risking prosecution for violation of the Bank Secrecy Act. It refers to supplementary guidance that former Deputy Attorney General James M. Cole issued to federal lawprosecutors relating to the prosecution of money laundering offenses predicated on cannabis-related violations of the Controlled Substances Act. Although the FinCEN Memo remains in effect today, it is unclear at this time whether the current administration will follow the guidelines of the FinCEN Memo. Overall, the DOJ continues to have the right and power to prosecute crimes committed by banks and financial institutions, such as money laundering and violations of the Bank Secrecy Act, that occur in any state, including in states that have legalized the applicable conduct and the DOJ’s current enforcement agenciespriorities could change for any number of reasons. A change in settingthe DOJ’s enforcement priorities could result in the DOJ prosecuting banks and financial institutions for the investigationcrimes that previously were not prosecuted. If we do not have access to a U.S. banking system, its business and prosecution ofoperations could be adversely affected.
Other potential violations of federal laws criminalizing marijuana andlaw resulting from cannabis-related activities include the effectsRacketeer Influenced Corrupt Organizations Act (“RICO”). RICO is a federal statute providing criminal penalties in addition to a civil cause of action for acts performed as part of an ongoing criminal organization. Under RICO, it is unlawful for any person who has received income derived from a pattern of racketeering activity (which includes most felonious violations of the federal spending legislation are not yet apparent.
In the event that any of our operations, or any proceeds thereof, any dividends or distributions therefrom, or any profits or revenues accruing from such operations in the United States were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime under one or more of the statutes noted above or any other applicable legislation. This could restrict or otherwise jeopardize our ability to declare or pay dividends, effect other distributions or subsequently repatriate such funds back to Canada, and subject us to civil and/or criminal penalties. Furthermore, while there are no current intentions to declare or pay dividends on our common stock in the foreseeable future, in the event that a determination was made that our proceeds from operations (or any future operations or investments in the United States) could reasonably be shown to constitute proceeds of crime, we may decide or be required to suspend declaring or paying dividends without advance notice and for an indefinite period of time. We could likewise be required to suspend or cease operations entirely.
We may become subject to federal and state forfeiture laws which could negatively impact our business operations.
Violations of any federal laws and regulations could result in changessignificant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings conducted by either the federal government or private citizens, or criminal charges, including, but not limited to, seizure of assets, disgorgement of profits, cessation of business activities or divestiture. As an entity that conducts business in the cannabis industry, we are potentially subject to federal and state forfeiture laws (criminal and civil) that permit the government to seize the proceeds of criminal activity. Civil forfeiture laws could provide an alternative for the federal government or any state (or local police force) that wants to discourage residents from conducting transactions with cannabis related businesses but believes criminal liability is too difficult to prove beyond a reasonable doubt. Also, an individual can be required to forfeit property considered to be the proceeds of a crime even if the withdrawalindividual is not convicted of the crime, and the standard of proof in a civil forfeiture matter is lower than the standard in a criminal matter. Depending on the applicable law, whether federal or reversalstate, rather than having to establish liability beyond a reasonable doubt, the federal government or the state, as applicable, may be required to prove that the money or property at issue is proceeds of currenta crime only by either clear and convincing evidence or a mere preponderance of the evidence.
Investors located in states where cannabis remains illegal may be at risk of prosecution under federal law enforcement policy concerningand/or state conspiracy, aiding and abetting, and money laundering statutes, and be at further risk of losing their investments or proceeds under forfeiture statutes. Many states remain fully able to take action to prevent the investigationproceeds of cannabis businesses from entering their state. Because state legalization is relatively new, it remains to be seen whether these states would take such action and prosecutionwhether a court would approve it. Investors and prospective investors of activities involving marijuana including those whichthe Company should be aware of these potentially relevant federal and state laws in considering whether to invest in the Company.
We are legalsubject to certain tax risks and treatments that could negatively impact our results of 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 certainapplicable state laws. Likewise,Although the IRS issued a clarification allowing the deduction of certain expenses, the scope of such items is interpreted very narrowly and the bulk of operating costs and general administrative costs are not permitted to be deducted. While there are currently several pending cases before various administrative and federal courts challenging these restrictions, there is no guaranteesguarantee that legislation enactedthese courts will issue an interpretation of Section 280E favorable to cannabis businesses.
Our business in subsequent yearsthe cannabis industry is subject to heightened scrutiny by regulatory authorities.
For the reasons set forth above, our existing operations in the United States, and any future operations or investments, may become the subject of heightened scrutiny by regulators, stock exchanges and other authorities in Canada. As a result, we may be subject to significant direct and indirect interaction with public officials. There can be no assurance that this heightened scrutiny will containnot in turn lead to the imposition of certain restrictions on our ability to operate or invest in the United States or any other jurisdiction, in addition to those described herein.
Prior to the CDS MOU (as defined below), it had been reported by certain publications in Canada that The Canadian Depository for Securities Limited is considering a policy shift that would see its subsidiary, CDS Clearing and Depository Services Inc. (“CDS”), refuse to settle trades for cannabis issuers that have investments in the United States. CDS is Canada’s central securities depository, clearing and settlement hub settling trades in the Canadian equity, fixed income and money markets. CDS or its parent company has not issued any public statement in regard to these reports. If CDS were to proceed in the manner suggested by these publications, and apply such a policy to us, it would have a material adverse effect on the ability of holders of common stock to make trades in Canada. In particular, our common stock would become highly illiquid in Canada as investors would have no ability to effect a trade of our common stock in Canada through the facilities of a stock exchange.
In the United States, many clearing houses for major broker-dealer firms, including Pershing LLC, the largest clearing, custody and settlement firm in the United States, have refused to handle securities or settle transactions of companies engaged in cannabis related business. Many other clearing firms have taken a similar marijuana-friendly provisions. approach. This means that certain broker-dealers cannot accept for deposit or settle transactions in the securities of companies, which may inhibit the ability of investors to trade in our securities in the United States and could negatively affect the liquidity of our securities.
In fact,addition, on November 24, 2017, the current administration has already announced its intentionTMX Group provided an update regarding issuers with cannabis-related activities in the United States and confirmed that TMX Group will rely on the Canadian Securities Administrators’ recommendation to reverse these positionsdefer to individual exchange’s rules for companies that have cannabis-related activities in the United States and policies.to determine the eligibility of individual issuers to list based on those exchanges’ listing requirements. On February 8, 2018, CDS signed a memorandum (the “CDS MOU”) with Aequitas NEO Exchange Inc., CNSX Markets Inc., TSX Inc., and TSX Venture Exchange Inc. (collectively, the “Exchanges”). The CDS MOU outlines CDS’ and the Exchanges’ understanding of Canada’s regulatory framework applicable to the rules and procedures and regulatory oversight of the Exchanges and CDS. The CDS MOU confirms, with respect to the clearing of listed securities, that CDS relies on the Exchanges to review the conduct of listed issuers. As a result, there currently is no CDS ban on the clearing of securities of issuers with cannabis-related activities in the U.S.
Any restrictions imposed by the CSE or other applicable exchange on the business of the Company and/or the potential delisting of our common stock from the CSE or other applicable exchange would have a material adverse effect on the Company and on the ability of holders of common stock to make trades in Canada.
The heightened regulatory scrutiny could have a negative impact on our ability to raise capital.
Our business activities rely on newly established and/or developing laws and regulations in multiple jurisdictions, including in Nevada. These laws and regulations are rapidly evolving and subject to change with minimal notice. Regulatory changes may adversely affect our profitability or cause it to cease operations entirely. The cannabis industry may come under the scrutiny or further scrutiny by the U.S. Food and Drug Administration, SEC, the DOJ, the Financial Industry Regulatory Authority or other federal, Nevada or other applicable state or non-governmental regulatory authorities or self-regulatory organizations that supervise or regulate the production, distribution, sale or use of cannabis for medical or non-medical purposes in the U.S. It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any proposals will become law. The regulatory uncertainty surrounding our industry may adversely affect our business planand operations, including without limitation, the costs to remain compliant with applicable laws and the impairment of its ability to raise additional capital, create a public trading market in the U.S. for securities of the Company or to find a suitable acquirer, which could reduce, delay or eliminate any return on investment in the Company.
Our business is subject to risk from changing regulatory and political environments surrounding the cannabis industry.
The success of our business strategy depends on the legality of the cannabis industry. The political environment surrounding the cannabis industry in general can be volatile and the regulatory framework remains in flux. To our knowledge, there are to date 38 states, the District of Columbia, and four U.S. territories that have legalized cannabis in some form, including Nevada, and additional states have pending legislation regarding the same; however, the risk remains that a shift in the regulatory or political realm could occur and have a drastic impact on the industry as a whole, adversely impacting our business, results of operations, financial condition or prospects.
Delays in enactment of new state or federal regulations could restrict our ability to reach strategic growth targets and lower return on investor capital. Our strategic growth strategy is reliant upon certain federal and state regulations being enacted to facilitate the possession,legalization of medical and adult-use cannabis. If such regulations are not enacted, or enacted but subsequently repealed or amended, or enacted with prolonged phase-in periods, our growth target, and thus, the effect on the return of investor capital, could be detrimental. We are unable to predict with certainty when and how the outcome of these complex regulatory and legislative proceedings will affect its business and growth.
Further, there is no guaranty that state laws legalizing and regulating the sale and use of marijuana and certain cannabinoid extracts, a changecannabis will not be repealed or reversaloverturned, or that local governmental authorities will not limit the applicability of state laws within their respective jurisdictions. If the federal law enforcement policy and/orgovernment begins to enforce federal spending legislation concerning marijuana would be debilitatinglaws relating to our business as it could result in a temporary suspension or the permanent cessation of our operations.
We are aware that multiple states are considering special taxes or fees on businesses in the cannabis industry. It is a potential yet unknown risk at this time that other states are in the process of reviewing such additional fees and taxation. This could have a material adverse effect upon our business, results of operations, financial condition or prospects.
The commercial, medical marijuana is permitted,and adult-use cannabis industries are in their infancy and we mayanticipate that such regulations will be unablesubject to obtain a license and may have to rely on collaborative arrangements with licensed entities.
Our internal compliance team oversees training for all employees, including on the following topics:
• | compliance with state and local laws | |
• | safe cannabis use | |
• | dispensing procedures | |
• | security and safety policies and procedures | |
• | inventory control | |
• | quality control | |
• | transportation procedures |
Our compliance program emphasizes security and inventory control to operate may prohibit non-resident companiesensure strict monitoring of cannabis and inventory from conducting business directlydelivery by a licensed distributor to sale or disposal. Only authorized, properly trained employees are allowed to access our computerized seed-to-sale system.
Additionally, we have created comprehensive standard operating procedures that include detailed descriptions and instructions for monitoring inventory at all stages of development and distribution. We will continue to monitor compliance on an ongoing basis in accordance with its compliance program, standard operating procedures, and any changes to regulation in the cannabis industry.
Overall, the medical and adult-use cannabis industry is subject to significant regulatory change at both the state and federal level. The inability of the Company to respond to the changing regulatory landscape may cause it to not be successful in capturing significant market share and could otherwise harm its business, results of operations, financial condition or prospects.
The potential re-classification of cannabis in the United States could create additional regulatory burdens on our operations and negatively affect our results of operations.
If cannabis and/or CBD is re-categorized as a Schedule II or lower controlled substance, the ability to conduct research on the medical benefits of cannabis would most likely be improved; however, rescheduling cannabis may requirematerially alter enforcement policies across many federal agencies, primarily the U.S. Food and Drug Administration (the “FDA”). FDA is responsible for ensuring public health and safety through regulation of food, drugs, supplements, and cosmetics, among other products, through its enforcement authority pursuant to the Federal Food Drug and Cosmetic Act (the “FFDCA”). FDA’s responsibilities include regulating the ingredients as well as the marketing and labeling of drugs sold in interstate commerce. Because cannabis is federally illegal to produce and sell, and because it has no federally recognized medical uses, the FDA has historically deferred enforcement related to cannabis to the U.S. Drug Enforcement Agency (the “DEA”); however, the FDA has enforced the FFDCA with regard to hemp-derived products, especially CBD, sold outside of state-regulated cannabis businesses. If cannabis were to be rescheduled to a federally controlled, yet legal, substance, FDA would likely play a more active regulatory role. Further, in the event that the pharmaceutical industry directly competes with state-regulated cannabis businesses for market share, as could potentially occur with rescheduling, the pharmaceutical industry may urge the DEA, FDA, and others to enforce the Canadian Securities Administrators and FFDCA against businesses that comply with state but not federal law. The potential for multi-agency enforcement post-rescheduling could threaten or have a materially adverse effect on the operations of existing state-legal cannabis businesses, including the Company.
Our participation in the cannabis industry may lead to costly litigation, which could adversely affect our financial condition and business operations.
Our participation in the cannabis industry may lead to litigation, formal or informal complaints, enforcement actions, and inquiries by various federal, state, or local governmental authorities against us or our investments. Litigation, complaints, and enforcement actions involving either us or our investments could consume considerable amounts of financial and other corporate resources, which could have an adverse effect on our future cash flows, earnings, results of operations and financial condition.
There is uncertainty regarding the availability of U.S. federal patent and trademark protection.
As long as cannabis remains illegal under U.S. federal law, the benefit of certain licensure,federal laws and protections which may be available to most businesses, such as federal trademark and patent protection regarding the intellectual property of a Medical Marijuana Infused Product Manufacturer License (MMIP),business, may not be available to us. As a result, our intellectual property may never be adequately or sufficiently protected against the use or misappropriation by third-parties. In addition, since the regulatory framework of the cannabis industry is in a constant state of flux, we can provide no assurance that it will ever obtain any protection of its intellectual property, whether on a federal, state or local level.
Current constraints on marketing our products could adversely affect our sales and results of operations.
The development of our business and operating results may be hindered by applicable restrictions on sales and marketing activities imposed by government regulatory bodies. The regulatory environment in the United States limits companies’ abilities to compete for usmarket share in a manner similar to conductother industries. If we are unable to effectively market our business. In such states,products and compete for market share, or if the costs of compliance with government legislation and regulation cannot be absorbed through increased selling prices for our products, our sales and results of operations could be adversely affected.
We could experience difficulty enforcing our contracts.
Due to the nature of our business and the fact that our contracts involve cannabis and other activities that are not legal under U.S. federal law and in some jurisdictions, we may be requiredface difficulties in enforcing our contracts in federal and certain state courts. The inability to enter into a collaborative arrangement with a local entity holding the necessary MMIP license, whereby we would agree to leaseenforce any of our facilities and employees to the licensed entity. Securing such an arrangement may be difficult to enter into and/or expensive to maintain. Additionally, our operations would be entirely dependent on the licensed entity’s ability to maintain the required licenses, and a loss of licensure by the licensed entity wouldcontracts could have a material adverse effect on our operations.business, operating results, financial condition or prospects.
Our payments system may depend on third-party providers and is subject to evolving laws and regulations.
We have engaged third-party service providers in the past, and may do so again in the future, to perform underlying debit card processing. If these service providers do not perform adequately our ability to process payments could be adversely affected and our business would be harmed.
The laws and regulations related to payments are complex and are potentially impacted by tensions between federal and state treatment of the cannabis industry. These laws and regulations also vary across different jurisdictions in which we operate. As a result, we are permittedrequired to operate directly, licensing requirements may be difficult and/or expensive to satisfy and maintain.
Risks Related to the Business
Our business in a state, it may be difficultmaterially adversely affected by the recent COVID-19 outbreak.
The recent outbreak of the coronavirus, or expensiveCOVID-19, which has been declared by the World Health Organization to be a “pandemic,” has spread across the globe and is impacting worldwide economic activity. A public health epidemic, including COVID-19, or the fear of a potential pandemic, poses the risk that we or our employees, contractors, suppliers, and other partners may be prevented from conducting business activities for an indefinite period of time, and our customers may be prevented from purchasing our products, due to shutdowns, “stay at home” mandates or other preventative measures that may be requested or mandated by governmental authorities. On March 20, 2020, Nevada Governor Sisolak ordered all cannabis dispensaries to close their retail operations and we became limited to delivery-only retail sales. Although we are now permitted to make curbside and in-store sales, we were initially adversely affected by these limitations. Our wholesale business has also been adversely affected due to the impact of the pandemic on the businesses or our wholesale customers. While it is not possible at this time to estimate the impact that COVID-19 (or any other actual or potential pandemic) could have on our business, or the duration of the pandemic, the continued spread of COVID-19 (or any other actual or potential pandemic) and the measures taken by the U.S. federal and state governments, could disrupt the manufacture or sale of our products and adversely impact our business, financial condition or results of operations. It could also affect the health and availability of our workforce at our facilities, as well as those of our suppliers, wholesale and retail customers. Because cannabis remains federally illegal, we are not eligible to participate in any federal government relief programs (such as Small Business Administration loans that were recently announced) resulting from COVID-19 or any other actual or potential pandemic.
The spread of the COVID-19 outbreak has caused severe disruptions in the U.S. and global economy and financial markets and could potentially create widespread business continuity issues of unknown magnitude and duration.
The outbreak of COVID-19 has severely impacted global economic activity and caused significant volatility and negative pressure in financial markets. The global impact of the outbreak has been rapidly evolving and many countries, including the United States, have reacted by instituting quarantines and restricting travel. Many experts predict that the outbreak will trigger a period of global economic slowdown or a global recession. COVID-19 or another pandemic could have material and adverse effects on our ability to successfully operate due to, among other factors:
● a general decline in business activity of cannabis dispensaries;
● the destabilization of markets that could negatively impact our customer and user growth and limit access to capital and credit markets which could affect our access to capital necessary to fund business operations or address maturing liabilities on a timely basis; and
● a deterioration in our ability to ensure business continuity during a disruption.
The rapid development of this situation makes it nearly impossible to predict the ultimate adverse impact of COVID-19 on our business and operations. Nevertheless, COVID-19 presents material uncertainty which could adversely affect our results of operations, financial condition and cash flows. We continue to assess the potential impact of COVID-19, which remains uncertain at this time.
We will require additional financing to re-finance our debt and support our on-going operations.
We will require equity and/or debt financing to re-finance our debt and support on-going operations, to undertake capital expenditures or to undertake acquisitions, joint ventures or other business combination transactions. A number of factors could cause us to incur higher borrowing costs and experience greater difficulty accessing public and private markets for debt. These factors include disruptions or declines in the global capital markets and/or a decline in our financial performance, outlook, or credit ratings. There can be no assurance that additional financing will be available to us when needed or on terms which are acceptable. Our inability to raise financing to fund our debt, on-going operations, capital expenditures or acquisitions may adversely affect our ability to fund our operations, meet contractual commitments, make future investments or desirable acquisitions, or respond to competitive challenges and could have a material adverse effect upon our business, and our ability to continue our operations.
If additional funds are raised through further issuances of equity or convertible debt securities, existing stockholders could suffer significant dilution, and any new equity securities issued could have rights, preferences and privileges superior to those of holders of common stock. Any debt financing secured in the future could involve restrictive covenants relating to capital raising activities and other financial and operational matters, which may make it more difficult for us to complyobtain additional capital and to pursue business opportunities, including potential acquisitions.
We may have difficulty continuing as a going-concern.
The financial statements have been prepared on a going-concern basis under which an entity is considered to be able to realize its assets and satisfy its liabilities in the ordinary course of business. Our future operations are dependent upon the identification and successful completion of equity or debt financing and the achievement of profitable operations at an indeterminate time in the future. There can be no assurances that we will be successful in completing an equity or debt financing or in achieving profitability. The financial statements do not give effect to any adjustments relating to the carrying values and classification of assets and liabilities that would be necessary should we be unable to continue as a going-concern.
We had negative cash flow for the financial year ended May 31, 2022.
We had negative operating cash flow for the financial year ended May 31, 2022. To the extent that we have negative operating cash flow in future periods, we may need to allocate a portion of our cash reserves to fund such negative cash flow. We may also be required to raise additional funds through the issuance of equity or debt securities. There can be no assurance that we will be able to generate a positive cash flow from our operations, that additional capital or other types of financing will be available when needed or that these financings will be on terms favorable to the Company.
We may experience difficulties in generating profits.
We may experience difficulties in our development process, such as capacity constraints, quality control problems or other disruptions, which would make it more difficult to generate profits. A failure by the Company to achieve a low-cost structure through economies of scale or improvements in manufacturing processes and design could have a material adverse effect on our business, prospects, results of operations and financial condition.
We will likely incur significant costs and obligations in relation to our on-going and anticipated business operations.
We expect to incur significant on-going costs and obligations related to our investment in infrastructure and growth and for regulatory compliance, which could have a material adverse impact on our results of operations, financial condition and cash flows. In addition, future changes in regulations, more vigorous enforcement thereof or other unanticipated events could require extensive changes to our operations, increased compliance costs or give rise to material liabilities, which could have a material adverse effect on the business, results of operations and financial condition of the Company.
Our business is reliant on Oasis and City Trees.
Our current activities and resources are focused on Oasis and City Trees. The licenses held by the Oasis LLCs are specific to Oasis and City Trees. Adverse changes or developments affecting any of Oasis or City Trees, including but not limited to, a breach of security, could have a material and adverse effect on our business, financial condition and prospects. Any breach of the security measures and other facility requirements could also have an impact on the Oasis LLCs’ ability to continue operating under their respective licenses or the prospect of renewing their respective licenses. Oasis and City Trees continue to operate with routine maintenance however buildings do have components that require replacement. We will bear many, if not all, of the costs of maintenance and upkeep of Oasis and City Trees. Our operations and financial performance may be adversely affected if any of Oasis and City Trees are unable to keep up with maintenance requirements.
Furthermore, given our reliance on Oasis and City Trees, any negative publicity could have a material adverse effect on our business and operations, as could other regional occurrences such as local strikes, terrorist attacks, increases in energy prices, or natural or man-made disasters, or the enactment of more stringent state and local laws and regulations.
We are reliant on key employees in the management of our business and loss of their services could materially adversely affect our business.
Our success is dependent upon the ability, expertise, judgment, discretion and good faith of our senior management. While employment agreements or management agreements are customarily used as a primary method of retaining the services of key employees, these agreements cannot assure the continued services of such employees. Any loss of the services of such individuals could have a material adverse effect on our business, operating results, financial condition or prospects.
Our business is heavily regulated which could have a material adverse effect on our results of operations and financial condition.
The business and activities of the Company are heavily regulated in all jurisdictions where it carries on business. Our operations are subject to various laws, regulations and licensureguidelines by governmental authorities, relating to the manufacture, marketing, management, transportation, storage, sale, pricing and disposal of medical cannabis and cannabis oil, and also including laws and regulations relating to health and safety, insurance coverage, the conduct of operations and the protection of the environment. Laws and regulations, applied generally, grant government agencies and self-regulatory bodies broad administrative discretion over the activities of the Company, including the power to limit or restrict business activities as well as impose additional disclosure requirements on our products and services. Achievement of each state. Complianceour business objectives is contingent, in part, upon compliance with regulatory requirements enacted by governmental authorities and obtaining all regulatory approvals, where necessary, for the sale of our products. Similarly, the Company cannot predict the time required to secure all appropriate regulatory approvals for its products, or the extent of testing and documentation that may also includebe required by governmental authorities. Any delays in obtaining, or failure to obtain regulatory approvals would significantly delay the development of markets and products and could have a subjective factormaterial adverse effect on the business, results of operations and financial condition of the Company.
We will incur ongoing costs and obligations related to regulatory compliance. Failure to comply with regulations may lead to possible sanctions including the revocation or imposition of additional conditions on licenses to operate our business, the suspension or expulsion from a particular market or jurisdiction or of our key personnel, and the imposition of fines and censures. In addition, changes in regulations, more vigorous enforcement thereof or other unanticipated events could require extensive changes to our operations, increased compliance costs or give rise to material liabilities, which could have a material adverse effect on the business, results of operations and financial condition of the Company.
Our business is subject to general regulatory risks, which could negatively impact our operations.
Our business is subject to a variety of laws, regulations and guidelines relating to the manufacture, management, transportation, storage and disposal of cannabis, including laws and regulations relating to health and safety, the conduct of operations and the protection of the environment. Achievement of our business objectives are contingent, in part, upon compliance with applicable regulatory requirements and obtaining all requisite regulatory approvals. Changes to such laws, regulations and guidelines due to matters beyond the control of the Company may cause adverse effects to the Company.
We are required to obtain or renew further government permits and licenses for our current and contemplated operations. Obtaining, amending or renewing the necessary governmental permits and licenses can be a time-consuming process potentially involving numerous regulatory agencies, involving public hearings and costly undertakings on our part. The duration and success of our efforts to obtain, amend and renew permits and licenses are contingent upon many variables not within our control, including the interpretation of applicable requirements implemented by the relevant permitting or licensing authority. We may not be able to obtain, amend or renew permits or licenses that are necessary to our operations. Any unexpected delays or costs associated with the permitting and licensing process could allow a state to revoke our MMIP license even though we believed we were complyingimpede the ongoing or proposed operations of the Company. To the extent permits or licenses are not obtained, amended or renewed, or are subsequently suspended or revoked, the Company may be curtailed or prohibited from proceeding with all applicable requirements. The loss of such an MMIP license for any reason would likelyits ongoing operations or planned development and commercialization activities. Such curtailment or prohibition may result in a material adverse effect on our operations.business, financial condition, results of operations or prospects.
While our compliance controls have been developed to mitigate the sale and userisk of recreationalany material violations of any license we hold, there is no assurance that our licenses will be renewed by each applicable regulatory authority in the future in a timely manner. Any unexpected delays or medical marijuana is permitted, local ordinances and regulations may adversely affectcosts associated with the licensing renewal process for any of the licenses held by the Company and our strategic collaborators, such as growers and dispensaries.
We may become involved in a number of government or agency proceedings, investigations and audits. The outcome of any regulatory or agency proceedings, investigations, audits, and other contingencies could harm our reputation, require the Company to achieve significanttake, or refrain from taking, actions that could harm its operations or require the Company to pay substantial amounts of money, harming its financial success is dependent on additional states and local governments legalizing marijuana.
Changes in laws, regulations and other products utilizing cannabinoid extracts is unproven. Lack of acceptance by end users and/or the failure of distributors or customers to accept the price point of our productsguidelines could have a material adverse effect on us and could prevent us from ever becoming profitable. Further, the cost of educating the market regarding marijuana e-cigarettes and other products utilizing cannabinoid extracts could prove to be unfeasible.
Our operations are subject to allvarious laws, regulations, guidelines and licensing requirements relating to the production, manufacture, sale, distribution, management, transportation, storage and disposal of medical cannabis, as well as being subject to laws and regulations relating to health and safety, the conduct of operations and the protection of the environment. While to the knowledge of management we are currently in compliance with all such laws, any changes to such laws, regulations, guidelines and policies due to matters beyond the control of the Company could have a material adverse effect on the business, results of operations and financial condition of the Company.
Volatility of industry conditions could have a material adverse effect on our operations.
Industry conditions are influenced by numerous factors over which we have no control, including the level of medical cannabis prices, expectations about future medical cannabis prices and production, the cost of producing and delivering medical cannabis; any rates of declining current production, political, regulatory and economic conditions; alternative fuel requirements; and the ability of medical cannabis companies to raise equity capital or debt financing.
The level of activity in the medical cannabis industry is volatile. No assurance can be given that expected trends in medical cannabis production and sales activities will continue or that demand for medical cannabis will reflect the level of activity in the industry. Any prolonged substantial reduction in medical cannabis prices would likely affect medical cannabis production levels and therefore affect the demand for medical cannabis. A material decline in medical cannabis prices or industry activity could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our industry is subject to intense competition.
There is potential that we will face intense competition from other companies, some of which can be expected to have longer operating histories and more financial resources and experience than the us. Increased competition by larger and better-financed competitors could materially and adversely affect the business, financial condition, results of operations or prospects of the Company. If we are unable to compete effectively, it could decrease our customer traffic, sales and profit margins, which could adversely affect our business, financial condition, and results of operations.
Because of the early stage of the industry in which we operate, we expect to face additional competition from new entrants. To become and remain competitive, we will require research and development, marketing, sales and support. We may not have sufficient resources to maintain research and development, marketing, sales and support efforts on a competitive basis which could materially and adversely affect the business, financial condition, results of operations or prospects of the Company.
The introduction of a recreational model for cannabis production and distribution may impact the medical cannabis market. The impact of this potential development may be negative for us, and could result in increased levels of competition in its existing medical market and/or the entry of new competitors in the overall cannabis market in which we operate.
If the number of users of medical cannabis increases, the demand for products will increase and we expect that competition will become more intense, as current and future competitors begin to offer an increasing number of diversified products. To remain competitive, we will require a continued high level of investment in research and development, marketing, sales and client support. We may not have sufficient resources to maintain research and development, marketing, sales and client support efforts on a competitive basis which could materially and adversely affect the business, financial condition and results of operations of the Company.
As well, the legal landscape for medical and recreational cannabis is changing internationally. More countries have passed laws that allow for the production and distribution of medical cannabis in some form or another. We have some international partnerships in place, which may be effected if more countries legalize medical cannabis. Increased international competition might lower the demand for our products on a global scale.
New well-capitalized entrants in our industry may develop large-scale operations which will make it difficult for our business to compete and remain profitable.
Currently, the cannabis industry generally is comprised largely of individuals and small to medium-sized entities, however, the risk remains that large conglomerates and companies who also recognize the potential for financial success through investment in this industry could strategically purchase or assume control of larger dispensaries and cultivation facilities. In doing so, these larger competitors could establish price setting and cost controls which would effectively “price out” many of the individuals and small to medium-sized entities who currently make up the bulk of the participants in the varied businesses operating within and in support of the medical cannabis industry. While the trend in most state laws and regulations seemingly deters this type of takeover, this industry remains quite nascent, so what the landscape will be in the future remains largely unknown, which in itself is a risk.
Our proposed business plan is subject to all business risks inherentassociated with start-upnew business enterprises.enterprises, including the absence of any significant operating history upon which to evaluate an investment. The likelihood of the Company’sour success must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered in connection with the start-up and initial growthformation of a new business, the development of new strategy and the competitive and growing marketenvironment in which we will operate. It is possible that we will incur losses in the future. There is no guarantee that we will be profitable.
Future acquisitions and dispositions could increase our risks and uncertainties.
Material acquisitions, dispositions and other strategic transactions, including joint ventures, involve a number of risks, including: (i) potential disruption of our ongoing business; (ii) distraction of management; (iii) financial leverage; (iv) unrealized or delayed benefits and cost savings; (v) increased complexity of our operations; and (vi) loss or reduction of control over certain of our assets.
The presence of one or more material liabilities of an acquired company that are unknown to us at the time of acquisition could have a material adverse effect on the business, results of operations, prospects and financial condition of the Company. A strategic transaction may result in a significant change in the nature of our business, operations and strategy. In addition, the Company operates. The Company must be regarded asmay encounter unforeseen obstacles or costs in implementing a high-risk newstrategic transaction or integrating any acquired business into our operations.
Acquisitions, strategic collaborations and unprovenjoint ventures may never materialize or may fail.
We intend to explore a variety of acquisitions, strategic collaborations and joint ventures with existing cannabis growers, dispensaries and related businesses in various states. We are likely to face significant competition in seeking appropriate acquisitions, strategic collaborators or joint venture with all the unforeseen costs, expenses, problems,partners, and difficulties to which suchthese acquisitions, strategic collaborations and joint ventures are subject and no assurance can be givencomplicated and time consuming to negotiate and document. We may not be able to negotiate acquisitions, strategic collaborations and joint ventures on acceptable terms, or at all, and we are unable to predict when, if ever, we will enter into any such acquisitions, strategic collaborations or joint ventures due to the numerous risks and uncertainties associated with them.
Failure to successfully integrate acquired businesses, their products and other assets, or if integrated, failure to further our business strategy, may result in our inability to realize any benefit from such acquisition.
We have grown by acquiring Alternative Solutions. The consummation and integration of any acquired business, product or other assets into the Company may be complex and time consuming and, if not successfully integrated, the Company may not achieve the anticipated benefits, cost-savings or growth opportunities. Furthermore, even if successfully integrated, the acquisition target may fail to further the Company’s business strategy as anticipated, expose us to increased competition or other challenges with respect to the our products or geographic markets, and expose us to additional liabilities associated with an acquired business, technology or other asset or arrangement.
When we acquire cannabis businesses, we may obtain the rights to applications for licenses as well as licenses; however, the procurement of such applications for licenses and licenses generally will be subject to governmental and regulatory approval. There are no guarantees that the Company will ever have enough revenues so assuccessfully consummate such acquisitions, and even we consummate such acquisitions, the procurement of applications for licenses may never result in the grant of a license by any state or local governmental or regulatory agency and the transfer of any rights to be profitable.
We are a holding company.
We are a holding company and essentially all of our assets are the capital stock of our material subsidiaries and investments in joint ventures. As a result, investors in the Company are subject to the risks attributable to its subsidiaries and joint ventures. Consequently, our cash flows and ability to complete current or desirable future enhancement opportunities are dependent on the earnings of our subsidiaries and investments and the distribution of those earnings to us. The ability of these entities to pay dividends and other distributions will depend on their operating results and will be subject to applicable laws and regulations which require that solvency and capital standards be maintained by such companies and contractual restrictions contained in the instruments governing their debt. In the event of a bankruptcy, liquidation or reorganization of any of the Company’s material subsidiaries, holders of indebtedness and trade creditors may be entitled to payment of their claims from the assets of those subsidiaries before the Company.
We have never earned a profit. limited operating history.
The Company and its subsidiaries have varying and limited operating histories, which can make it difficult for investors to evaluate our operations and prospects and may increase the risks associated with investment into the Company.
We have not generated profits in the periods covered by our financial statements included herein, and, as a result, have only a very limited operating history upon which our business and future prospects may be evaluated.
Although we expect to incur losses duringgenerate substantial revenues from our subsidiaries and joint ventures, the subsidiaries and joint ventures are not yet generating a net profit and accordingly, we are therefore expected to remain subject to many of the risks common to early-stage enterprises for the foreseeable future, including challenges related to laws, regulations, licensing, integrating and retaining qualified employees; making effective use of limited resources; achieving market acceptance of existing and future solutions; competing against companies with greater financial and technical resources; acquiring and retaining customers; and developing new solutions. There is no assurance that we will be successful in achieving a return on stockholders’ investment and the likelihood of success must be considered in light of the early stage of operations.
Potential reputational risks to third parties could result in difficulties in maintaining our operations.
The parties with which the Company does business may never become profitable. perceive that they are exposed to reputational risk as a result of our medical cannabis business activities. While we have other banking relationships and believe that the services can be procured from other institutions, the Company may in the future have difficulty establishing or maintaining bank accounts or other business relationships. Failure to establish or maintain business relationships could have a material adverse effect on the Company.
Changes in public opinion and perception could negatively affect our business operations.
Government policy changes or public opinion may also result in a significant influence over the regulation of the cannabis industry in the United States or elsewhere. Public opinion and support for medical and adult-use cannabis has traditionally been inconsistent and varies from jurisdiction to jurisdiction. While public opinion and support appears to be rising for legalizing medical and adult-use cannabis, it remains a controversial issue subject to differing opinions surrounding the level of legalization (for example, medical cannabis as opposed to legalization in general). A negative shift in the public’s perception of cannabis in the United States or any other applicable jurisdiction could affect future legislation or regulation. Among other things, such a shift could cause state jurisdictions to abandon initiatives or proposals to legalize medical and/or adult-use cannabis, thereby limiting the number of new state jurisdictions into which the Company could expand. Any inability to fully implement our expansion strategy may have a material adverse effect on its business, results of operations or prospects.
We needmay be subject to obtain additional financing until we are able to earn a profit.unfavorable publicity or consumer perception which could negatively affect our results of operations.
We believe the medical cannabis industry is highly dependent upon consumer perception regarding the safety, efficacy and quality of the cannabis produced. Consumer perception can be significantly influenced by scientific research or findings, regulatory investigations, litigation, media attention and other publicity regarding the consumption of cannabis products. There can be no assurance that we can implement our business plan,future scientific research or findings, regulatory investigations, litigation, media attention or other publicity will be favorable to the cannabis market or any particular product, or consistent with earlier publicity. Future research reports, findings, regulatory investigations, litigation, media attention or other publicity that we will become profitable,are perceived as less favorable than, or that our securitiesquestion, earlier research reports, findings or other publicity could have a material adverse effect on the demand for medical cannabis and on the business, results of operations, financial condition, cash flows or prospects of the Company. Further, adverse publicity reports or other media attention regarding the safety, efficacy and quality of cannabis in general, or associating the consumption of medical cannabis with illness or other negative effects or events, could have such a material adverse effect. There is no assurance that such adverse publicity reports or other media attention will have any value. Continued losses could make it difficult to fund our operations or successfully execute our business plan.not arise.
Research and development costs may negatively impact our results of operations.
Before we can obtain regulatory approval for the commercial sale of any of our products, we will be required to complete extensive trial testing to demonstrate safety and efficacy. Depending on the exact nature of trial testing, such trials can be expensive and are difficult to design and implement. The testing process is also time consuming and can often be subject to unexpected delays.
The timing and completion of trial testing may be subject to significant delays relating to various causes, including: inability to manufacture or obtain sufficient quantities of units and or test subjects for use in trial testing; delays arising from collaborative partnerships; delays in obtaining regulatory approvals to commence a study, or government intervention to suspend or terminate a study; delays, suspensions or termination of trial testing due to the applicable institutional review board or independent ethics board responsible for overseeing the study to protect research subjects; delays in identifying and reaching agreement on acceptable terms with prospective trial testing sites and subjects; variability in the number and types of subjects available for each study and resulting difficulties in identifying and enrolling subjects who meet trial eligibility criteria; scheduling conflicts; difficulty in maintaining contact with subjects after testing, resulting in incomplete data; unforeseen safety issues or side effects; lack of efficacy during trial testing; reliance on research organizations to conduct trial testing, which may not conduct such trials with good laboratory practices; or other regulatory delays.
We may encounter start-up delays.experience difficulty in developing products.
If we cannot successfully develop, manufacture and distribute its products, or if we experience difficulties in the development process, such as capacity constraints, quality control problems or other disruptions, the Company may not be able to develop market-ready commercial products at acceptable costs, which would adversely affect our ability to effectively enter the market. A failure by the Company to achieve a low-cost structure through economies of scale or improvements in cultivation and manufacturing processes would have a material adverse effect on our commercialization plans and our business, prospects, results of operations and financial condition.
We cannot projectare dependent on the timingsuccess of our initial sales. new and existing products and services.
We have already encountered delayscommitted, and expect to continue to commit, significant resources and capital to develop and market existing product and service enhancements and new products and services, including those using our patented processes. These products and services are relatively untested, and the Company cannot guarantee that they will operate as expected or that it will achieve market acceptance for these products and services, or other new products and services that we may offer in commencingthe future. Moreover, these and other new products and services may be subject to significant competition with offerings by new and existing competitors in the business of manufacturing and distributing vaporizers and accessories. In addition, new products, services and enhancements may pose a variety of technical challenges and require us to attract additional qualified employees. The failure to successfully develop and market these new products, services or enhancements or to hire qualified employees could seriously harm our Colorado operations,business, financial condition and as a result, have put such proposed operationsresults of operations.
We are dependent on hold whilethe continued market acceptance by consumers of our products.
We are substantially dependent on continued market acceptance of our products by consumers. Although we seekbelieve that the use of products similar to commence operations elsewhere. Delaysthe products designed and manufactured by the Company is gaining international acceptance, we cannot predict the future growth rate and size of this market.
We may incur significant expenses in licensure, raising capital, acquiring businesses, establishingpromoting and implementing our management team, securing relationships with partners and strategic collaborators such as growers and dispensaries, building out facilities, developing products, finalizing sales and marketing structures and/or implementing other portions of CLS Labs’ business plan may delay start-up in other states,maintaining brands, which could negatively affect an investmentimpact our profitability.
We believe that establishing and maintaining the brand identities of products is a critical aspect of attracting and expanding a large customer base. Promotion and enhancement of brands will depend largely on success in the Company.
The results of future clinical research may negatively impact our business.
Research in Canada, the U.S. and internationally regarding the medical benefits, viability, safety, efficacy, dosing and social acceptance of cannabis or isolated cannabinoids (such as CBD and THC) remains in early stages. There have been relatively few clinical trials on the benefits of cannabis or isolated cannabinoids (such as CBD and THC). Although the Company believes that the articles, reports and studies support its beliefs regarding the medical benefits, viability, safety, efficacy, dosing and social acceptance of cannabis, future research and clinical trials may prove such statements to be incorrect, or could raise concerns regarding, and perceptions relating to, cannabis. Given these risks, uncertainties and assumptions, prospective purchasers of our common stock should not yet identified a complete management, sales or marketing team. As a result, aside from the directorsplace undue reliance on such articles and officers referencedreports. Future research studies and clinical trials may draw opposing conclusions to those stated in this annual report stockholdersor reach negative conclusions regarding the medical benefits, viability, safety, efficacy, dosing, social acceptance or other facts and perceptions related to cannabis, which could have a material adverse effect on the demand for our products with the potential to lead to a material adverse effect on our business, financial condition, results of operations or prospects.
We are reliant on key inputs and changes in their costs could negatively impact our profitability.
The manufacturing business is dependent on a number of key inputs and their related costs including raw materials and supplies related to product development and manufacturing operations. Any significant interruption or negative change in the availability or economics of the supply chain for key inputs could materially impact the business, financial condition, results of operations or prospects of the Company. Some of these inputs may only be available from a single supplier or a limited group of suppliers. If a sole source supplier was to go out of business, the Company might be unable to find a replacement for such source in a timely manner or at all. If a sole source supplier were to be acquired by a competitor, that competitor may elect not to sell to the Company in the future. Any inability to secure required supplies and services or to do so on appropriate terms could have a materially adverse impact on the business, financial condition, results of operations or prospects of the Company.
Our business is subject to certain environmental risks.
Our operations are subject to environmental regulation in the various jurisdictions in which we operate. These regulations mandate, among other things, the maintenance of air and water quality standards and land reclamation. They also set forth limitations on the generation, transportation, storage and disposal of solid and hazardous waste. Environmental legislation is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors (or the equivalent thereof) and employees. There is no assurance that future changes in environmental regulation, if any, will not haveadversely affect our operations.
Government approvals and permits are currently, and may in the benefitfuture, be required in connection with our operations. To the extent such approvals are required and not obtained, the Company may be curtailed or prohibited from its proposed production of knowingmedical cannabis or from proceeding with the identitiesdevelopment of its operations as currently proposed.
Failure to comply with applicable laws, regulations and backgroundspermitting requirements may result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of such team members in making their investment decisions. In addition, we have estimated the compensation we will haveadditional equipment, or remedial actions. We may be required to pay to recruit a qualified management,compensate those suffering loss or damage by reason of our operations and salesmay have civil or criminal fines or penalties imposed for violations of applicable laws or regulations.
Amendments to current laws, regulations and marketing team and have not engaged a compensation consultantpermits governing the production of medical cannabis, or other professional to estimate such costs, but have relied solely on the judgment of its directors. If the budgeted compensation expense is not adequate to retain a qualified management, operations, and sales and marketing team, we may need to scale back other aspects of its proposed operations or we may need to raise additional capital to commence operations. In addition, if it takes longer than anticipated to recruit a qualified team, the commencement of operations could be delayed. All of these potential issuesmore stringent implementation thereof, could have a material adverse impact on the Company.Company and cause increases in expenses, capital expenditures or production costs or reduction in levels of production or require abandonment or delays in development.
Our business is subject to certain agricultural risks.
Our future business involves the growing of cannabis, an agricultural product. Such business will be subject to the risks inherent in the agricultural business, such as insects, plant diseases and similar agricultural risks. Although we expect that any such growing will be completed indoors under climate controlled conditions, there can be no assurance that natural elements will not have a material adverse effect on any such future production.
Our business is vulnerable to rising energy costs.
Adult-use and medical cannabis growing operations consume considerable energy, making us potentially vulnerable to rising energy costs. Rising or volatile energy costs may adversely impact the business, results of operations, financial condition or prospects of the Company.
We planare dependent on equipment and skilled labor.
Our ability to commencecompete and grow is dependent on our having access, at a reasonable cost and in a timely manner, to skilled labor, equipment, parts and components. No assurances can be given that we will be successful in maintaining our required supply of skilled labor, equipment, parts and components. It is also possible that the final costs of the major equipment contemplated by our capital expenditure plans may be significantly greater than anticipated by our management, and may be greater than funds available to us, in which circumstance the Company may curtail, or extend the timeframes for completing, its capital expenditure plans. This could have an adverse effect on the business, financial condition, results of operations by acquiring existing businesses, but weor prospects of the Company.
The market for our products is difficult to forecast and our forecasts may not be successful identifying appropriate targets, and even if weaccurate which could negatively impact our results of operations.
We must rely largely on our own market research to forecast sales as detailed forecasts are successful in doing so, we may not be able to acquire and operate such targets profitably.
We are subject to penny stock regulationscertain risks regarding the management of our growth.
We may be subject to growth-related risks including capacity constraints and restrictionspressure on our internal systems and youcontrols. The ability of the Company to manage growth effectively will require it to continue to implement and improve its operational and financial systems and to expand, train and manage its employee base. The inability of the Company to deal with this growth may have difficulty selling sharesa material adverse effect on our business, financial condition, results of operations or prospects.
We may experience difficulties in maintaining adequate internal controls.
Effective internal controls are necessary for the Company to provide reliable financial reports and to help prevent fraud. Failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our results of operations or cause it to fail to meet its reporting obligations. If the Company or its auditors discover a material weakness, the disclosure of that fact, even if quickly remedied, could reduce the market’s confidence in our Consolidated Financial Statements and materially adversely affect the trading price of our common stock.
Certain of our officers and directors may have conflicts of interest.
Certain of the directors and officers of the Company are, or may become directors and officers of other companies, and conflicts of interest may arise between their duties as officers and directors of the Company and as officers and directors of such other companies.
We may become subject to costly litigation regarding our operations.
We may become party to litigation from time to time in the ordinary course of business which could adversely affect our business. Should any litigation in which the Company becomes involved be determined against the Company, such a decision could adversely affect our ability to continue operating and the market price for our common stock. Even if we are involved in litigation and win, litigation can redirect significant company resources.
We are subject to product liability regarding our products, which could result in costly litigation and settlements.
As a distributor of products designed to be ingested by humans, we face an inherent risk of exposure to product liability claims, regulatory action and litigation if our products are alleged to have caused significant loss or injury. In addition, the sale of our products involves the risk of injury to consumers due to tampering by unauthorized third parties or product contamination. Previously unknown adverse reactions resulting from human consumption of our products alone or in combination with other medications or substances could occur. We may be subject to various product liability claims, including, among others, that our products caused injury or illness, include inadequate instructions for use or include inadequate warnings concerning possible side effects or interactions with other substances.
A product liability claim or regulatory action against the Company could result in increased costs, could adversely affect our reputation with our clients and consumers generally, and could have a material adverse effect on our results of operations and financial condition of the Company. Although we have secured product liability insurance, and strictly enforce a quality standard within the operations, there can be no assurances that we will be able to maintain our product liability insurance on acceptable terms or with adequate coverage against potential liabilities. This scenario could prevent or inhibit the commercialization of our potential products. To date, there have been no product related issues.
Our products may become subject to product recalls, which could negatively impact our results of operations.
Manufacturers and distributors of products are sometimes subject to the recall or return of their products for a variety of reasons, including product defects, such as contamination, unintended harmful side effects or interactions with other substances, packaging safety and inadequate or inaccurate labeling disclosure. If any of our products are recalled due to an alleged product defect or for any other reason, the Company could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall. We may lose a significant amount of sales and may not be able to replace those sales at an acceptable margin or at all. In addition, a product recall may require significant management attention. Although we have detailed procedures in place for testing finished products, there can be no assurance that any quality, potency or contamination problems will be detected in time to avoid unforeseen product recalls, regulatory action or lawsuits. Additionally, if one of our significant brands were subject to recall, the image of that brand and the Company as its owner could be harmed. A recall for any of the foregoing reasons could lead to decreased demand for the Company’s products and could have a material adverse effect on the results of operations and financial condition of the Company. Additionally, product recalls may lead to increased scrutiny of our operations by the U.S. FDA, Health Canada or other regulatory agencies, requiring further management attention and potential legal fees and other expenses.
We are subject to certain intellectual property risks.
Our viability will depend, in part, on our ability to develop and maintain the proprietary aspects of our technology to distinguish our products from our competitors’ products. We have certain proprietary intellectual property, including but not limited to brands, trademarks, trade names, patents and proprietary processes. We will rely on this intellectual property, know-how and other proprietary information, and may require employees, consultants and suppliers to sign confidentiality agreements. However, any confidentiality agreement may be breached, and the Company may not have adequate remedies for such breaches. Third parties may independently develop substantially equivalent proprietary information without infringing upon any proprietary technology. Third parties may otherwise gain access to our proprietary information and adopt it in a competitive manner. Any loss of intellectual property protection may have a material adverse effect on our business, results of operations or prospects.
As long as cannabis remains illegal under U.S. federal law as a Schedule I controlled substance pursuant to the Controlled Substances Act, the benefit of certain federal laws and protections which may be available to most businesses, such as federal trademark and patent protection regarding the intellectual property of a business, may not be available us. As a result, our intellectual property may never be adequately or sufficiently protected against the use or misappropriation by third parties. In addition, since the regulatory framework of the cannabis industry is in a constant state of flux, the Company can provide no assurance that it will ever obtain any protection of its intellectual property, whether on a federal, state, provincial and/ or local level.
We may also find it necessary to bring infringement or other actions against third parties to seek to protect its intellectual property rights. Litigation of this nature, even if successful, is often expensive and time-consuming to prosecute and there can be no assurance that we will have the financial or other resources to enforce our rights or prevent other parties from developing similar technology or designing around our intellectual property. Although we believe that our technology does not and will not infringe upon the patents or violate the proprietary rights of others, it is possible such infringement or violation has occurred or may occur, which could have a material adverse effect on our business.
We are not aware of any infringement by us of any person’s or entity’s intellectual property rights. In the event that products the Company sells are deemed to infringe upon the patents or proprietary rights of others, the Company could be required to modify its products or obtain a license for the manufacture and/or sale of such products or cease selling such products. In such event, there can be no assurance that the Company would be able to do so in a timely manner, upon acceptable terms and conditions, or at all, and the failure to do any of the foregoing could have a material adverse effect upon our business.
There can be no assurance that the Company will have the financial or other resources necessary to enforce or defend a patent infringement or proprietary rights violation action. If our products or proposed products are deemed to infringe or likely to infringe upon the patents or proprietary rights of others, the Company could be subject to injunctive relief and, under certain circumstances, become liable for damages, which could also have a material adverse effect on our business and financial condition.
Fraudulent or illegal activity by employees, contractors and consultants could negatively impact our operations.
We are exposed to the risk that our employees, independent contractors and consultants may engage in fraudulent or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to us that violates: (i) government regulations; (ii) manufacturing standards; (iii) federal and provincial healthcare fraud and abuse laws and regulations; or (iv) laws that require the true, complete and accurate reporting of financial information or data. It may not always be possible for the Company to identify and deter misconduct by its employees and other third parties, and the precautions taken by the Company to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting the Company from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against the Company, and it is not successful in defending itself or asserting its rights, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our operations, any of which could have a material adverse effect on our business, financial condition, results of operations or prospects.
We are subject to certain risks regarding our information technology systems and cyber-attacks.
Our operations depend, in part, on how well we and our suppliers protect networks, equipment, IT systems and software against damage from a number of threats, including, but not limited to, cable cuts, damage to physical plants, natural disasters, intentional damage and destruction, fire, power loss, hacking, computer viruses, vandalism and theft. Our operations also depend on the timely maintenance, upgrade and replacement of networks, equipment, IT systems and software, as well as pre-emptive expenses to mitigate the risks of failures. Any of these and other events could result in information system failures, delays and/or increase in capital expenses. The failure of information systems or a component of information systems could, depending on the nature of any such failure, adversely impact our reputation and results of operations.
We have not experienced any material losses to date relating to cyber-attacks or other information security breaches, but there can be no assurance that the Company will not incur such losses in the future. Our risk and exposure to these matters cannot be fully mitigated because of, among other things, the evolving nature of these threats. As a result, cyber security and the continued development and enhancement of controls, processes and practices designed to protect systems, computers, software, data and networks from attack, damage or unauthorized access is a priority. As cyber threats continue to evolve, the Company may be required to expend additional resources to continue to modify or enhance protective measures or to investigate and remediate any security vulnerabilities.
If we experience security breaches, it could negatively impact our operations and result in litigation or civil penalties and fees.
Given the nature of our product and its lack of legal availability outside of channels approved by the government of the United States, as well as the concentration of inventory in its facilities, despite meeting or exceeding all legislative security requirements, there remains a risk of shrinkage as well as theft. A security breach at one of our facilities could expose the Company to additional liability and to potentially costly litigation, increase expenses relating to the resolution and future prevention of these breaches and may deter potential patients from choosing our products.
In addition, we collect and store personal information about our customers and are responsible for protecting that information from privacy breaches. A privacy breach may occur through procedural or process failure, information technology malfunction, or deliberate unauthorized intrusions. Theft of data for competitive purposes, particularly patient lists and preferences, is an ongoing risk whether perpetrated via employee collusion or negligence or through deliberate cyber-attack. Any such theft or privacy breach would have a material adverse effect on our business, financial condition and results of operations.
The lack of reliable data on the medical cannabis industry may negatively impact our results of operations.
As a result of recent and ongoing regulatory and policy changes in the medical cannabis industry, the market data available is limited and unreliable. Federal, and state laws prevent widespread participation and hinder market research. Therefore, market research and projections by the Company of estimated total retail sales, demographics, demand, and similar consumer research, are based on assumptions from limited and unreliable market data, and generally represent the personal opinions of our management team as of the date of this document.
We do not have long-term agreements or guaranteed price or delivery arrangements with most of our suppliers. The loss of a significant supplier would require us to rely more heavily on our other existing suppliers or to develop relationships with new suppliers. Such a loss may have an adverse effect on our product offerings and our business.
Consistent with industry practice, we do not have guaranteed price or delivery arrangements with most of our suppliers. We generally make our purchases through purchase orders, although we have some internal processing capabilities through City Trees. As a result, we have experienced and may in the future experience inventory shortages or price increases on certain products. Furthermore, our industry occasionally experiences significant product supply shortages, and we sometimes experience customer order backlogs due to the inability of certain suppliers to make available to us certain products as needed. We cannot assure you that suppliers will maintain an adequate inventory of products to fulfill our orders on a timely basis, or at all, or that we will be able to obtain particular products on favorable terms, or at all. Additionally, we cannot assure you that product lines currently offered by suppliers will continue to be available to us. A decline in the supply or continued availability of the products of our suppliers, or a significant increase in the price of those products, could reduce our sales and negatively affect our operating results.
In addition, some of our suppliers have the ability to terminate their relationships with us at any time, or to decide to sell, or increase their sales of, their products through other channels. Although we believe there are numerous suppliers with the capacity to supply the products we distribute, the loss of one or more of our major suppliers could have an adverse effect on our product offerings and our business. Such a loss would require us to rely more heavily on our other existing suppliers, develop relationships with new suppliers or undertake our own manufacturing, which may cause us to pay higher prices for products. Any termination, interruption or adverse modification of our relationship with a key supplier or a significant number of other suppliers would likely adversely affect our operating income, cash flow and future prospects.
We are subject to certain operating risks for which our insurance coverage may not be adequate.
Our operations are subject to hazards inherent in the medical cannabis industry, such as equipment defects, malfunction and failures, natural disasters which result in fires, accidents and explosions that can cause personal injury, loss of life, suspension of operations, damage to facilities, business interruption and damage to or destruction of property, equipment and the environment, labor disputes, and changes in the regulatory environment. These risks could expose the Company to substantial liability for personal injury, wrongful death, property damage, pollution, and other environmental damages. The frequency and severity of such incidents will affect operating costs, insurability and relationships with customers, employees and regulators.
We continuously monitor our operations for quality control and safety. However, there are no assurances that our safety procedures will always prevent such damages. Although we maintain insurance coverage that we believe to be adequate and customary in the industry, there can be no assurance that such insurance will be adequate to cover its liabilities. In addition, there can be no assurance that we will be able to maintain adequate insurance in the future at rates we consider reasonable and commercially justifiable. The occurrence of a significant uninsured claim, a claim in excess of the insurance coverage limits maintained by the Company, or a claim at a time when it is not able to obtain liability insurance, could have a material adverse effect on us, our ability to conduct normal business operations and on our business, financial condition, results of operations and cash flows in the future.
We may have uninsured or uninsurable risk.
We may be subject to liability for risks against which we cannot insure or against which we may elect not to insure due to the high cost of insurance premiums or other factors. The payment of any such liabilities would reduce the funds available for our normal business activities. Payment of liabilities for which the Company does not carry insurance may have a material adverse effect on our financial position and operations.
We may issue debt.
From time to time, the Company may enter into transactions to acquire assets or the shares of other organizations or enter into joint ventures. These transactions may be financed in whole or in part with debt, which may increase our debt levels above industry standards for companies of similar size. Depending on future exploration and development plans, the Company may require additional equity and/or debt financing that may not be available or, if available, may not be available on favorable terms to us. Neither our articles nor our by-laws limit the amount of indebtedness that the Company may incur. As a result, the level of our indebtedness from time to time, could impair its ability to obtain additional financing on a timely basis to take advantage of business opportunities that may arise.
Certain remedies stockholders may seek against our officers and directors may be limited and such officers and directors may be entitled to indemnification by us.
Our governing documents and indemnification agreements we have entered into with members of our board of directors and officers provide that the liability of our board of directors and officers is eliminated to the fullest extent allowed under the laws of the State of Nevada. Thus, the Company and our stockholders may be prevented from recovering damages for alleged errors or omissions made by the members of our board of directors and our officers. Our governing documents and these agreements also provide that we will, to the fullest extent permitted by law, indemnify members of the board of directors and our officers for certain liabilities incurred by them by virtue of their acts on our behalf.
We are dependent on attracting new customers.
Our success depends on our ability to attract and retain customers. There are many factors which could impact our ability to attract and retain clients, including but not limited to our ability to continually produce desirable and effective products, the successful implementation of our client-acquisition plan and continued growth in the aggregate number of patients selecting medical cannabis as a treatment option. Our failure to acquire and retain patients as customers would have a material adverse effect on our business, operating results and financial condition.
We are subject to interest rate risks.
Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. Our debt and borrowings are all at fixed interest rates, therefore the interest rate risk is limited to potential changes on cash held with financial institutions. As interest on these balances is negligible, the Company considers interest rate risk to be immaterial.
We are subject to certain credit risks.
We are exposed to credit risk through our cash and cash equivalents. Credit risk arises from deposits with banks and attorneys and outstanding receivables. We do not hold any collateral as security but mitigate this risk by dealing only with what management believes to be financially sound counterparties, however there can be no assurance that we will not suffer loss.
Risks related to the Ownership of our Common Stock
Because our common stock is deemed a low-priced “Penny” stock, an investment in our common stock should be considered high risk and subject to the provisions of Section 15(g) andmarketability restrictions.
Since our common stock is a penny stock, as defined in Rule 15g-9 of3a51-1 under the Exchange Act, commonly referredit will be more difficult for investors to as the “penny stock rule.” Section 15(g) sets forth certain requirements for transactions in penny stock, and Rule 15g-9(d) incorporates the definition of “penny stock” that is found in Rule 3a51-1 of the Exchange Act.liquidate their investment. The SEC generally defines a penny stock“penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. WeThe shares of common stock are subject tocovered by the SEC’s penny stock rules.
Financial Industry Regulatory Authority sales practice requirements may also limit a large number of shares ofstockholder’s ability to buy and sell our common stock, which could significantly dilute existing stockholders and negatively impactdepress the market price of our common stock.
In addition to the conditions thereof, Old Main“penny stock” rules described above, the U.S. Financial Industry Regulatory Authority (“FINRA”) has adopted rules that require a broker-dealer to have reasonable grounds for believing that an investment is committedsuitable for a customer before recommending an investment to purchase, on an unconditional basis, sharesa customer. Prior to recommending speculative, low priced securities to non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives, and other information. Pursuant to the interpretation of these rules, FINRA believes that there is a high probability that speculative, low priced securities will not be suitable for at least some customers. Thus, the FINRA requirements make it more difficult for broker-dealers to recommend our common stock atto customers which may limit an aggregate price of upinvestor’s ability to $4,000,000 over the course of its 24-month term.
We are subject to the conversion date, which is referred to as the "fixed conversion price." This could result in the issuance of a substantial number of shares. For example, if Old Main had converted the 8% Note on August 15, 2017, it would have received approximately 595,749 shares of our common stock, which currently would represent approximately 1.8% of our outstanding common stock following issuance. Old Main will receive additional shares of common stock if we elect to sell shares to it under the equity purchase agreement. The number of shares we will sell under the equity purchase agreement will be determined, in general, based on 80% of the actual market price. As a result, if we sell shares of common stock under the equity purchase agreement or Old Main converts the 8% Note into common stock, we will be issuing common stock at below market prices, which could cause theprice volatility risks.
The market price of our common stock may be subject to decline, and if such issuances are significantwide fluctuations in number,response to many factors, including variations in the amountoperating results of the declineCompany, divergence in financial results from analysts’ expectations, changes in earnings estimates by stock market analysts, changes in the business prospects for the Company, general economic conditions, legislative changes, and other events and factors outside of our control. In addition, stock markets have from time to time experienced extreme price and volume fluctuations, which, as well as general economic and political conditions, could adversely affect the market price could be significant. The terms of the 8% Note also state that, absent certain exceptions, if we issue additionalfor our common stock.
Our common stock options or warrants at less thanis subject to liquidity risks.
In the "fixed conversion price," then the "fixed conversion price" with respect to the 8% Note will be reduced to such issuance price, which would result in our issuance of more shares upon conversion of such note by Old Main. In general, we are unlikely to sell shares of common stock under the equity purchase agreement or issue additional shares ofUnited States, our common stock attrades on the OTCQB. The OTCQB is an inter-dealer, over-the-counter market that provides significantly less liquidity than other national or regional exchanges. Securities traded on the OTCQB are usually thinly traded, highly volatile, have fewer market makers and are not followed by analysts. The SEC’s order handling rules, which apply to NASDAQ-listed securities, do not apply to securities quoted on the OTCQB. Quotes for stocks listed on the OTCQB are not listed in newspapers. Therefore, prices belowfor securities traded solely on the "fixed conversion price" at a time when the additional dilutionOTCQB may be difficult to stockholders wouldobtain and holders of our securities may be substantial unless we are unable to obtain capital to meet our financial obligations from other sources on better termsresell their securities at such time. However, if we were to sell such shares of common stock or issue shares of common stocknear their original acquisition price, or at a time when the market price ofany price.
We cannot predict at what prices our common stock is substantially less than the "fixed conversion price" associated with the 8% Note, the dilutionwill trade and there can be no assurance that could result from such issuances could have a material adverse impact on existing stockholders and could cause the price ofan active trading market will develop or be sustained. Commencing in January 2019, our common stock to fall rapidly basedbegan trading on the amount of such dilution.
The shares of our common stock we may issue in the future and the options we may issue in the future may have an adverse effect on the market price of our common stock and cause dilution to investors.
We may issue shares of common stock and warrants to purchase common stock pursuant to private offerings and we may issue options to purchase common stock to our executive officers pursuant to their employment agreements. The sale, or even the possibility of sale, of shares pursuant to a separate offering or to executive officers could have an adverse effect on the market price of our common stock or on our ability to obtain future financing.
Our amended and restated articles of incorporation and bylaws could discourage acquisition proposals, delay a change in control or prevent other transactions.
Provisions of our amended and restated articles of incorporation and bylaws, as well as provisions of Nevada Corporation Law, may discourage, delay or prevent a change in control of the Company or other transactions that you as a shareholderstockholder may consider favorable and may be in your best interest. The amended and restated articles of incorporation and bylaws contain provisions that: authorize the issuance of shares of “blank check” preferred stock that could be issued by our board of directors to increase the number of outstanding shares and discourage a takeover attempt; limit who may call special meetings of shareholders;stockholders; and require advance notice for business to be conducted at shareholderstockholder meetings, among other anti-takeover provisions.
Our directors have the authority to issue common and preferred shares without shareholderstockholder approval, and preferred shares can be issued with such rights, preferences, and limitations as may be determined by our board of directors. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of any holders of preferred stock that may be issued in the future. Although we authorized a series A preferred stock in 2017, we presently have no commitments or contracts to issue any shares of preferred stock. Authorized and unissued preferred stock could delay, discourage, hinder or preclude an unsolicited acquisition of our company, could make it less likely that shareholdersstockholders receive a premium for their shares as a result of any such attempt, and could adversely affect the market prices of and the voting and other rights, of the holders of outstanding shares of our common stock.
We havedo not retained independent professionalsexpect to pay any cash dividends for investors.the foreseeable future.
The continued operation and expansion of our business may require substantial funding. Accordingly, we do not retainedanticipate that we will pay any independent professionalscash dividends on shares of our common stock for the foreseeable future. Any determination to comment on or otherwise protectpay dividends in the interestsfuture will be at the discretion of potential investors. Althoughour board of directors and will depend upon results of operations, financial condition, contractual restrictions, including any indebtedness we have retainedmay incur, restrictions imposed by applicable law and other factors our own counsel, neither such counsel nor any other independent professionals have made any examinationboard of any factual matters herein, and potential investors should not rely on our counsel regarding any matters herein described.directors deems relevant.
We may sell additional equity securities in the future and your ownership interest in the Company may be diluted as a result of such sales.
We intend to sell additional equity securities in order to fully implement our business plan. Such sales will be made at prices determined by our board of directors based on the market value of the Company and could be made at prices less than the price of the shares of our common stock purchased by investors, in which case, such investors could experience dilution of their investment.
Our stock price may be volatile and you may not be able to sell your shares for more than what you paid.
Our stock price may be subject to significant volatility, and you may not be able to sell shares of common stock at or above the price you paid for them. The trading price of our common stock has been subject to fluctuations in the past and the market price of theour common stock could continue to fluctuate in the future in response to various factors, including, but not limited to: quarterly variations in operating results; our ability to control costs and improve cash flow; announcements of innovations or new products by us or by our competitors; changes in investor perceptions; and new products or product enhancements by us or our competitors.
If securities analysts or industry analysts downgrade our shares, resulting in substantial diminutionpublish negative research or reports, or cease to the value of shares held by existing stockholders.
The trading market for our common stock receivedis influenced by the research and reports that industry or securities analysts publish about us, our business and our industry. If one or more analysts adversely change their recommendation regarding our shares or our competitors’ stock, our share price would likely decline. If one or more analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in connection with the Equity Linefinancial markets, which in turn could cause our share price or 8% Note and then receiving additional shares of common stock in connection with a subsequent issuance. In this way, Old Main could sell more than 4.99% of the outstanding shares of common stock in a relatively short time frame while never holding more than 4.99% at any one time.trading volume to decline. As a result, existing stockholdersthe market price for our common stock may decline below the offering price and new investors could experience substantial diminution in the value of their shares of common stock. Additionally, we do not have the right to control the timing and amount of any sales by Old Main of the shares issued under the 8% Note or the Equity Line.
Item 2. Properties.
The mailing address of our principal offices are located atexecutive office is 11767 South Dixie Highway, Suite 115, Miami, Florida 33156. Alternative Solutions and the Oasis LLCs lease space for a dispensary and administrative offices at 1800 Industrial Road, Suites 100, 102, 160, and 180, Las Vegas, Nevada 89102, and for a cultivation and processing facility at 203 E. Mayflower Avenue, North Las Vegas, Nevada 89030.
Lease Arrangements
We currently maintain an administrativelease several facilities for office, at 3355 SW 59th Avenue, Miami, Florida 33155. We will lease properties in the states in which we conduct our operationswarehouse, and retail space as we open processing facilities.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 $1,866.70 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 will increase on September 1, 2022 to $2,084.14 with annual increases of 3%. | |
● | 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. |
● | 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 for initial rent of $3,210 per month, with annual increases of 4%. In February 2020, this lease was extended to February 28, 2030, and the lease was modified to include annual rent increases of 3%. | |
● | 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 to $29,000 per month on January 1, 2020. In June 2020, this lease was extended to February 28, 2026, and the monthly rent was amended as follows: $25,000 for the months of April, May, and June 2020; $22,500 for the months of March 2021 through February 2022; $23,175 for the months of March 2022 through February 2023; 23,870 for the months of March 2023 through February 2024; $24,586 for the months of March 2024 through February 2025; and $25,323 for the months of March 2025 through February 2026. | |
● | A lease that commenced on May 17, 2022 for approximately 20 acres of land for purposes of developing a cultivation facility along the Quinn River in Nevada at a cost of $3,500 per quarter beginning on or before May 31, 2022 (the “Quinn River Land Lease”). The Quinn River Land Lease has a term of 9 years, with two-year renewal options. The lessee under this Lease is CLS Nevada, Inc. |
Item 3. Legal Proceedings.
From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.
Item 4. Mine Safety Disclosures.
Not Applicable.
PART II
Item 5. Market for Registrant’sRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
We were initially incorporated on March 31, 2011 as Adelt Design, Inc. Effective August 21, 2013; our common stock became eligible for quotation on the OTC Bulletin Board under the symbol ADSN. On November 12, 2014, CLS Labs acquired 6,250,000 shares, or 55.6%, of theour outstanding common stock of the Company from itsour founder, Larry Adelt. As a condition to CLS Labs’ purchase of these shares, and pursuant to five stock purchase agreements each dated November 12, 2014, five people or entities unaffiliated with the Company purchased an aggregate of 4,984,376 shares of common stock in the Company from twenty-four stockholders other than Mr. Adelt. The total number of shares acquired by these five purchasers represented 44.3% of the Company’sour outstanding shares of common stock. On November 20, 2014, we adopted amended and restated articles of incorporation therein changing the Company’s name to CLS Holdings USA, Inc. Effective December 10, 2014 we changed our stock symbol to “CLSH” to reflect the name change of the Company. Our common stock is currently eligible for quotation on the OTC Bulletin BoardMarkets’ OTCQB under the symbol “CLSH”. As of August 15, 2017,Commencing in January 2019, we had 32,876,944 shares ofalso listed our common stock outstanding held by approximately twelve stockholders of record.on the CSE under the symbol “CLSH”. We have no outstanding shares of preferred stock.
The following table sets forth the range of high and low sales prices on the OTCQB for the applicable periods on a post-Reverse-Split basis.
Common Stock | ||||||||
Fiscal Year Ended May 31, 2022: | High ($) | Low ($) | ||||||
Fourth Quarter | $ | 0.10 | $ | 0.0618 | ||||
Third Quarter | 0.14 | 0.069 | ||||||
Second Quarter | $ | 0.1599 | $ | 0.109 | ||||
First Quarter | $ | 0.231 | $ | 0.1278 | ||||
Fiscal Year Ended May 31, 2021: | ||||||||
Fourth Quarter | $ | 0.2800 | $ | 0.1600 | ||||
Third Quarter | $ | 0.3896 | $ | 0.1019 | ||||
Second Quarter | $ | 0.1300 | $ | 0.0551 | ||||
First Quarter | $ | 0.0899 | $ | 0.0400 | ||||
At August 19, 2022, we had 128,208,082 outstanding shares of common stock and approximately 55 stockholders of record. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of bank, brokers and other nominees. We have neverno outstanding shares of preferred stock.
Dividend Policy
We have not paid any cash dividends on our capital stock and do not anticipate paying any cash dividends on our common stock to date. Any future decisions regarding dividends will be made by our board of directors. We do not anticipate paying dividends in the foreseeable future. We intendfuture, but expect to retain future earnings to fund ongoing operations and future capital requirements. Any future determinationfinance the growth of our business. Our board of directors has complete discretion on whether to pay cash dividends will be at the discretion ofdividends. Even if our board of directors decides to pay dividends, the form, frequency and amount will be dependentdepend upon financial condition, results ofour future operations and earnings, capital requirements and suchsurplus, general financial condition, contractual restrictions and other factors asthat the board of directors deemsmay deem relevant.
Purchases of Equity Securities by the Small Business Issuer and Affiliates
None.
Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes as of May 31, 20172022, the shares of our common stock subject to outstanding awards or available for future awards under our equity compensation plans.plans:
Plan Category | Number of shares to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of shares remaining available for future issuance under equity compensation plans (excluding shares reflected in the first column) | |||||||||
Equity compensation plans approved by security holders | -- | -- | -- | |||||||||
Equity compensation plans not approved by security holders (1) | -- | -- | -- | |||||||||
Total | -- | -- | -- | |||||||||
(1) | Pursuant to their respective employment agreements, Jeffrey Binder and |
Penny Stock Regulations
The SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share. Our common stock, when and if a trading market develops, may fall within the definition of penny stock and be subject to rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000, or annual incomes exceeding $200,000 individually, or $300,000, together with their spouse).
For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser’s prior written consent to the transaction. Additionally, for any transaction, other than exempt transactions, involving a penny stock, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Consequently, the penny stock rules may restrict the ability of broker-dealers to sell our common stock and may affect the ability of investors to sell their common stock in the secondary market.
Item 6. Selected Financial Data.
Item 7. Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations.
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 in this annual report.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. These concentrates may be ingested in a number of ways, including through vaporization via electronic cigarettes (“e-cigarettes”), and used for a variety of pharmaceutical and other purposes. Testing in conjunction with two Colorado growers of this extraction method and conversion process has revealed that it produces a cleaner, higher quality product and a significantly higher yield than the cannabinoid extraction processes currently existing in the marketplace.
On April 17, 2015, CLS Labs took its first step toward commercializing its proprietary methods and processes by entering into the Colorado Arrangementagreements through its wholly owned subsidiary, CLS Labs Colorado, with certain Colorado entities, including PRH. Recently,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 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 again. Instead, weproduces 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. We plan to pursue other revenue producing opportunities in other statesgenerate revenues through licensing, fee-for-service and joint venture arrangements related to our proprietary method of extracting cannabinoids from cannabis plants and converting the acquisition of cannabis and other complementary companies, including the Pure Harvest transaction. CLS Labs had not otherwise commercialized its proprietary process prior to the Merger and has not earned any revenues.resulting cannabinoid extracts into saleable concentrates.
We intend to monetize our extraction and conversion method and generate revenuerevenues through (i) the licensing of our patent pendingpatented proprietary methods and processes to others, as in the Colorado Arrangement, (ii) the processing of cannabis for others, and (iii) 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 can establish a position as one of the premier cannabinoid extraction and processing companies in the industry. Assuming we do so, we then intend to explore the creation of our own brand of concentrates for consumer use, which we would sell wholesale to cannabis dispensaries. We believe that we can create a “gold standard” national brand by standardizing the testing, compliance and labeling of our products in an industry currently comprised of small, local businesses with erratic and unreliable product quality, testing practices and labeling. We also plan to offer consulting services through a consulting subsidiary, CLSCannabis Life Sciences Consulting, LLC, which will generate revenue by providing consulting services to cannabis-related businesses, including growers, dispensaries and laboratories, and driving business to our processing facilities. 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.
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. If CLS Massachusetts exercised the IGH Option, the Company, a wholly-owned subsidiary of the Company and IGH would enter into a merger agreement (the form of which has been agreed to by the parties) (the “IGH Merger Agreement”). At the effective time of the merger contemplated by the IGH Merger Agreement, CLS Massachusetts would pay a purchase price of $47,500,000, subject to reduction as provided in the IGH Merger Agreement, payable as follows: $35 million in cash, $7.5 million in the form of a five-year promissory note, and $5 million in the form of restricted common stock of the Company, plus $2.5 million as consideration for a non-competition agreement with IGH’s President, payable in the form of a five-year promissory note. IGH and certain IGH stockholders holding sufficient aggregate voting power to approve the transactions contemplated by the IGH Merger Agreement had entered into agreements pursuant to which such stockholders had, among other things, agreed to vote in favor of such transactions. 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. To secure the obligations of IGH to us under the loan agreement and the promissory note, the Company and IGH entered into a security agreement dated as of October 31, 2018, pursuant to which IGH granted to us a first priority lien on and security interest in all personal property of IGH. If we did not exercise the Option on or prior to the date that was 30 days following the end of the option period, the loan amount was to be reduced to $2,500,000 as a break-up fee, subject to certain exceptions set forth in the IGH Option Agreement. On August 26, 2019, the parties amended the IGH Option Agreement to, among other things, delay the closing until January 2020. By letter agreement dated January 31, 2020, the parties extended the IGH Option Agreement to February 4, 2020. 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 hadadvised 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. This dispute, including whether IGH breached the IGH Option and whether CLS was entitled to collect default interest, was in litigation. During the twelve months ended May 31, 2021, we impaired the remaining amounts due under the IGH Note in the amount of $2,498,706, which included $2,497,884 in principal and $822 in accrued interest. As of November 30, 2021, the principal balance of the IGH Note was $0 and the interest receivable was $0.
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 shall pay 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 is being 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. As of May 31, 2022, $333,333 was due under the IGH Settlement Note. We record amounts paid under the IGH Settlement Note as gains when payments are received. The final payment under the IGH Settlement Note was recorded in July 2022.
On October 20, 2021, we entered into a management services agreement (the “Quinn River Joint Venture Agreement”) through our 50% owned subsidiary, Kealii Okamalu, LLC (“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. 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. Pursuant to the Quinn River Joint Venture Agreement, Kealii Okamalu is expected to lease approximately 20-30 acres of the Tribe’s land located along the Quinn River at a cost of $3,500 per quarter and manage the design, finance and construction of a cannabis cultivation facility on such tribal lands (the “Cultivation Facility”). Kealii Okamalu will also manage 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 will be branded as “Quinn River Farms.” We will provide 10,000 square feet of warehouse space at our Las Vegas facility, and will have preferred vendor status including the right to purchase cannabis flower and the business’s cannabis trim at favorable prices. Kealii Okamalu will contribute $6 million towards the construction of the Cultivation Facility and the working capital for the Quinn River Joint Venture. This 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. Kealii Okamalu will receive one-third of the net profits of the Quinn River Joint Venture.
On January 4, 2018, former Attorney General Jeff Sessions rescinded the memorandum issued by former Deputy Attorney General James Cole on August 29, 2013 (as amended on February 14, 2014, the “Cole Memo”), the Cole Banking Memorandum, and all other related Obama-era DOJ cannabis enforcement guidance. While the rescission did not change federal law, as the Cole Memo and other DOJ guidance documents were not themselves laws, the rescission removed the DOJ’s formal policy that state-regulated cannabis businesses in compliance with the Cole Memo guidelines should not be a prosecutorial priority. Notably, former Attorney General Sessions’ rescission of the Cole Memo has not affected the status of the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) memorandum issued by the Department of Treasury, which remains in effect. This memorandum outlines Bank Secrecy Act-compliant pathways for financial institutions to service state-sanctioned cannabis businesses, which echoed the enforcement priorities outlined in the Cole Memo. In addition to his rescission of the Cole Memo, Attorney General Sessions issued a one-page memorandum known as the “Sessions Memorandum”. The Sessions Memorandum explains the DOJ’s rationale for rescinding all past DOJ cannabis enforcement guidance, claiming that Obama-era enforcement policies are “unnecessary” due to existing general enforcement guidance adopted in the 1980s, in chapter 9.27.230 of the U.A. Attorneys’ Manual (“USAM”). The USAM enforcement priorities, like those of the Cole Memo, are based on the use of the federal government’s limited resources and include “law enforcement priorities set by the Attorney General,” the “seriousness” of the alleged crimes, the “deterrent effect of criminal prosecution,” and “the cumulative impact of particular crimes on the community.” Although the Sessions Memorandum emphasizes that cannabis is a federally illegal Schedule I controlled substance, it does not otherwise instruct U.S. Attorneys to consider the prosecution of cannabis-related offenses a DOJ priority, and in practice, most U.S. Attorneys have not changed their prosecutorial approach to date. However, due to the lack of specific direction in the Sessions Memorandum as to the priority federal prosecutors should ascribe to such cannabis activities, there can be no assurance that the federal government will not seek to prosecute cases involving cannabis businesses that are otherwise compliant with state law.
William Barr served as United States Attorney General from February 14, 2019 to December 23, 2020. The DOJ under Mr. Barr did not take a formal position on federal enforcement of laws relating to cannabis. On March 11, 2021, United States President Biden’s nominee, Merrick Garland was sworn in as the U.S. Attorney General. During his campaign, President Biden stated a policy goal to decriminalize possession of cannabis at the federal level, but he has not publicly supported the full legalization of cannabis. It is unclear what impact, if any, the new administration will have on U.S. federal government enforcement policy on cannabis. Nonetheless, there is no guarantee that the position of the Department of Justice will not change.
We incurred a net loss of $4,865,724$3,135,962 attributable to CLS Holdings, Inc. for the year ended May 31, 2017,2022, resulting in an accumulated deficit as of May 31, 20172022 of $8,991,610.$95,872,600. These conditions raise substantial doubt about our ability to continue as a going concern.
Recent Developments – COVID-19
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.
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. Upon expiration every 30 days, 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. The number of transactions at our dispensary have increased recently, although the amount of each transaction has decreased primarily as a result of the cessation of special federal unemployment benefits and the impact of the decline in the overall economy.
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 global pandemic of COVID-19 continues to evolve and the ways that our business may evolve to respond to the pandemic and the needs of our customers cannot be fully known.
Results of Operations for the Years Ended May 31, 2022 and May 31, 2021
The table below sets forth our select expenses as a percentage of revenue for the applicable periods:
Year Ended | Year Ended | |||||||
May 31, 2022 | May 31, 2021 | |||||||
Revenue | 100 | % | 100 | % | ||||
Cost of Goods Sold | 49 | % | 50 | % | ||||
Gross Margin | 51 | % | 50 | % | ||||
Selling, General, and Administrative Expenses | 55 | % | 56 | % | ||||
Impairment of Note Receivable | - | % | 13 | % | ||||
Loss on Extinguishment of Debt | - | % | 32 | % | ||||
Gain on Settlement of Notes Receivable | 12 | % | - | % | ||||
Provision for Income Tax | 9 | % | 13 | % | ||||
The table below sets forth certain statistical and financial highlights for the applicable periods:
Year Ended | Year Ended | |||||||
May 31, 2022 | May 31, 2021 | |||||||
Number of Customers Served (Dispensary) | 278,209 | 255,756 | ||||||
Revenue | $ | 22,662,895 | $ | 19,292,087 | ||||
Gross Profit | $ | 11,539,038 | $ | 9,647,326 | ||||
Impairment of Note Receivable | $ | - | $ | 2,498,706 | ||||
Loss on Amendment of Debt | $ | - | $ | 6,105,679 | ||||
Gain on Note Receivable | $ | 2,740,820 | $ | - | ||||
Net Loss | $ | (2,440,390 | ) | $ | (15,890,514 | ) | ||
EBITDA (1) | $ | 2,601,777 | $ | (9,507,822 | ) | |||
(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 years ended May 31, 20172022 and May 31, 2016.2021 to EBITDA:
Year Ended May 31, 2022 | Year Ended May 31, 2021 | |||||||
Net Loss | $ | (2,343,179 | ) | $ | (15,890,514 | ) | ||
Add: | ||||||||
Interest expense, net | $ | 2,149,729 | $ | 3,657,105 | ||||
Provision for income taxes | $ | 2,041,487 | $ | 2,490,295 | ||||
Depreciation and amortization | $ | 753,740 | $ | 685,292 | ||||
EBITDA | $ | 2,601,777 | $ | (9,057,822 | ) | |||
Revenues
We had no revenues for the years ended May 31, 2017 and 2016.
Cost of Goods Sold
Our cost of goods sold for the year ended May 31, 2022 was $11,123,857, an increase of $1,479,096, or 15%, compared to cost of goods sold of $9,644,761 for the year ended May 31, 2021. The increase in cost of goods sold for the year ended May 31, 2022 was due primarily to an increase in revenue. Cost of goods sold was 49% of sales during the year ended May 31, 2022 resulting in a gross margin of 51%; cost of goods sold was 50% for the year ended May 31, 2021 resulting in a gross margin of 50%. Costs of goods sold as a percentage of revenue declined due to our utilization of low-cost high volume purchasing and a shift in product mix at City Trees to increased THC distillate sales, which are no cost sales. Gross margin exceeded our target of 50% for the 2022 fiscal year. Cost of goods sold during the 2022 fiscal year primarily consisted of $9,878,545 of product cost, $739,578 of state and local fees and taxes, and $441,099 of supplies and materials.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, consisted primarily of general office expenses, travel costs, rent expense, financing fees, bank charges and payroll expenses.or SG&A, increased by $1,615,949, or approximately 15%, to $12,416,893 during the year ended May 31, 2022, compared to $10,800,944 for the year ended May 31, 2021. The decreaseincrease in selling general and administrativeSG&A expenses for the year ended May 31, 20172022 was primarily due to a decreaseincreases in non-cash compensationcosts associated with operating the Oasis LLCs and to a decrease in commitment feesoffering expenses associated with our credit arrangements. We expect generalprivate offering of 15% debentures (the “2021 Debentures”) and administrative expenses to increase in future periods as we implement our business plan and commence operations.warrants (the “November 2021 Debenture Offering”).
SG&A expense during the year ended May 31, 2022 was primarily attributable to an aggregate of $9,808,184 in costs associated with operating the Oasis LLCs, an increase of $1,558,595 compared to $8,249,589 during fiscal 2021. The major components of the $1,558,595 increase in SG&A associated with the operation of the Oasis LLCs during the year ended May 31, 2022 compared to the year ended May 31, 2021 were $141,739as follows: payroll and related costs of $4,294,088 compared to $4,106,544; lease, facilities and office costs of $2,392,146 compared to $1,824,421; and sales, marketing, and advertising costs of $1,452,478 compared to $1,167,028. Payroll costs increased during fiscal 2022 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 during fiscal 2022 due to costs incurred in connection with our response to COVID-19. Sales and marketing costs increased during fiscal 2022 due to our use of a third-party marketing firm for campaigns to promote brand awareness.
Finally, SG&A increased by $57,559 during the year ended May 31, 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 $2,608,710, from $2,551,151 during the year ended May 31, 2021. The major components of this increase compared to fiscal 2021 were as follows: expenses related to the November 2021 Debenture Offering were $411,298, and payroll and related costs increased by $147,905. Payroll and related costs increased during fiscal 2022 due to an increase in the number of administrative employees to support our expanding operations. These increases were partially offset by decreases in the following costs: professional fees decreased by $237,072 due to the settlement of the IGH litigation, and sales and marketing expenses decreased by $76,200 due to a decline in website design and development.
Impairment of Note Receivable
During the year ended May 31, 2021, we recorded an impairment of the IGH Note in the amount of $2,498,706; there was no comparable transaction in the current year. This impairment 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 with this assertion. On June 19, 2021 we entered into a settlement agreement with IGH regarding this dispute and IGH executed the $3,000,000 IGH Settlement Note, which was paid in accordance with its terms. IGH made the final payment on the IGH Settlement Note in July 2022.
Interest Expense, Net
Our interest expense, net of interest income, was $2,149,729 for the year ended May 31, 2017,2022, a decrease of $1,507,376, or 41%, compared to $0$3,657,105 for the year ended May 31, 2016. Startup costs consisted2021. The decrease in interest expense was primarily due to a $2,152,742 decrease in the amortization of costs incurred in preparing the discounts on debentures to commence operation of our processing facility in Colorado.
Gain on Modification of $2,169,150 or 540% compared to $402,021 forOperating Leases
During the yearyears ended May 31, 2016. Interest expense consisted2021, we revised several of $1,075our Nevada operating leases for the use of imputed interest associated with $17,930 due to related parties, $204,363 of interest on related party debt, $91,215 of interest on third party debt, $1,160,887 of amortization of discounts on convertible notes payable to third parties,warehouse and $1,114,101 of amortization of discounts on convertible notes payable to related parties. The amortization of discounts on notes payable is attributable to the beneficial conversion feature of these notes. Interest expense increased primarily due to the restructuring of the terms of the 2016 Convertible Notes and the related party notes (pursuant to the Omnibus Loan Agreement),office facilities, which resulted in writing-off the balance of the discount on the notes, and creating a new discount at the time of the restructuring.
Loss on Extinguishment of Debt
During the year ended May 31, 2017, we2021, certain of our convertible debentures in the aggregate principal amount of $19,729,822 were amended such that the conversion prices were reduced from $0.80 to $0.30 and the maturity dates were extended for one year. We recognized a loss on the modificationamendment of related party debt in the amount of $951,239. Effective$6,105,679 in connection with these amendments, which was charged to operations during fiscal 2021. There was no comparable transaction in the current fiscal year.
Loss on Equity Investment
During the year ended May 31, 2017, pursuant2022, we had a loss on equity investment in the amount of $112,139 compared to $0 during fiscal 2021. The Company, through its 50% owned subsidiary Kealii Okamalu, LLC, owns a one-third interest in the Quinn River grow facility. The fiscal 2022 loss represents our share of the results of Quinn River. The Quinn River grow facility had no sales during fiscal 2022, as it was in the grow stage of the production cycle. We expect Quinn River to commence the generation of revenue in the first quarter of fiscal 2023.
Gain on Settlement of Note Receivable
During the year ended May 31, 2022, we recorded a gain on the settlement of the IGH Note in the amount of $2,740,820; there was no comparable transaction during the prior fiscal year. 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 Omnibus Loan Agreement,IGH lawsuit entered into a confidential settlement agreement to resolve the holders of an aggregate of $2,537,750 of principalaction and $166,490 ofexecuted 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 converted these amounts at the rate of $0.25 per share into an aggregate of 7,609,910 shares of our common stock. Loss on modification of debt was calculated as the difference between the market price of our common stock at the conversion date of $0.125being paid in 12 equal monthly installments, and the conversion pricefinal installment was paid in July 2022.
Provision for Income Taxes
We recorded a provision for income taxes in the amount of $0.25, or $951,239.
Net lossLoss
Our net loss for the year ended May 31, 20172022 was $4,865,724$2,440,390 compared to $2,610,299a net loss of $15,890,514 for the year ended May 31, 2016. The2022, an improvement of $13,450,124, or 85%.
Non-Controlling Interest
During the year ended May 31, 2022, the cost of our non-controlling interest in Kealii Okamalu was $97,211. This amount is composed of our portion of the operating loss of the Quinn River Joint Venture and our loss on equity investment. There was no comparable expense during fiscal 2021.
Net Loss Attributable to CLS Holdings USA, Inc.
Our net loss per diluted shareattributable to CLS Holdings USA, Inc. for the year ended May 31, 20172022 was $0.23. This amount was computed based on the weighted average of 20,778,765 shares outstanding during the fiscal year. The$2,343,179 compared to a net loss per diluted shareof $15,890,514 for the year ended May 31, 2016 was $0.13. This amount was computed based on the weighted average2021, an improvement of 20,146,260 shares outstanding during the fiscal year.
Liquidity and Capital Resources
The following table summarizes our total current total assets, liabilities and working capital at May 31, 20172022 and 2016:2021:
| May 31, | May 31, | May 31, | May 31, | |||||||||||||
| 2017 | 2016 | 2022 | 2021 | |||||||||||||
| Current Assets | $ | 79,720 | $ | 94,986 | $ | 6,883,557 | $ | 3,840,563 | ||||||||
| Current Liabilities | $ | 1,826,478 | $ | 1,339,444 | $ | 28,112,190 | $ | 4,984,485 | ||||||||
| Working Capital (Deficit) | $ | (1,746,758 | ) | $ | (1,244,458 | ) | $ | (21,228,633 | ) | $ | (1,143,922 | ) | ||||
At May 31, 2017 and May 31, 2016,2022, we had a working capital deficit of $1,746,758 and $1,244,458, respectively. This$21,228,633, an increase of $20,084,711 from the working capital deficit occurredof $1,143,922 we had at May 31, 2021. Our working capital decreased primarily because we have not yet commenced earning revenues. Duedue to the suspensionreclassification of our plansthe U.S. Convertible Debentures and the Canaccord Debentures in the aggregate amount of $19,118,821 from long term to commence operations in Colorado, we cannot estimate when we will commence earning revenues. Duringcurrent liabilities during the year ended May 31, 2017, we obtained loans from our officers and directors to cover operating expenses and expenses associated with the construction of our processing facility in Colorado. Thisyear. Our working capital deficit will likelydecrease was partially offset due to an increase in inventory of $2,189,550 and an increase of cash in the amount of $886,596, which was the result of the November 2021 Debenture Offering in which we raised $2,500,000.
Our working capital needs are expected to continue to increase, untiland we begin earning revenues but should not be viewed as an indicatorwill seek additional debt or equity financing and re-financing to meet them. Except for the first quarter of our future performance oncefiscal 2022, we commence earning revenues. We have operated at a lossloss. Over the next twelve months we will require additional capital to pursue the re-financing of our convertible debt and the implementation of our business plan, including the development of other revenue sources, such as possible acquisitions and the start-up of the Quinn River Joint Venture.
The U.S. Convertible Debentures and the Canaccord Debentures mature in October 2022 and December 2022, respectively. We are actively seeking to re-finance the U.S. Convertible Debentures through one or more of the following means: extending the term of some of them, converting some or all of them to equity, and replacing a portion of them with longer term debt. We have not yet entered into any definitive agreements with respect to the U.S. Convertible Debentures. With respect to the Canaccord Debentures, on August 18, 2022, we announced that we are holding a meeting of debenture holders on September 15, 2022, to seek the affirmative vote of the holders of the Canaccord Debentures to accomplish the following things: (i) to permit the mandatory conversion, in our discretion, of $7,931,490 in principal amount of the Canaccord Debentures plus $132,192 in accrued interest on the Canaccord Debentures into units at the reduced conversion price of US$0.07125 per unit; (ii) to decrease the conversion price of the remaining Canaccord Debentures (following the mandatory conversion) to $0.10 per unit; (iii) to reduce the mandatory conversion VWAP provision in the Canaccord Debentures from $0.60 to $0.20; (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.
On October 20, 2021, we entered into the Quinn River Joint Venture Agreement through our 50% owned subsidiary, Kealii Okamalu, with CSI and the Tribe. Kealii Okamalu expects to loan approximately $6,000,000 to the Quinn River Joint Venture. We will invest 50% of this amount, or up to $3,000,000, for our equity interest in Kealii Okamalu. We anticipate using all of the proceeds from the November 2021 Debenture Offering toward this loan. We will obtain the balance of the funds required, if any, from our general working capital or from additional debt or equity financings. Our partner in Kealii has not yet made its capital contribution. The $6,000,000 loan will be repaid from the portion of the profits generated by the Quinn River Joint Venture otherwise payable to CSI and the Tribe at the rate of $750,000 per quarter for eight quarters. We expect the first harvest under the Quinn River Joint Venture to occur during the first quarter of fiscal 2023.
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 inception.such time. If we are able to re-finance our convertible debt on satisfactory terms, 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 their early stage of operations. To address these risks, we must, among other things, seek growth opportunities through additional debt and/or equity investments and acquisitions in our industry, successfully execute our business strategy, including our planned joint ventures, 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 operationsoperating activities were $1,182,305$3,157,670 during the year ended May 31, 2017,2022, an increase of $30,878$622,511, or approximately 25%, or 2.7%, compared to $1,151,427$2,535,159 during the year ended May 31, 2016. Although2021. In deriving cash flows used in operating activities from the net losses for fiscal year 2022 and fiscal year 2021, certain non-cash items were (deducted from) or added back to the net loss) for each such period. These amounts were ($1,458,805) and $11,561,585 for the years ended May 31, 2022 and 2021, respectively. For fiscal year 2022, the most significant item deducted from net income was $2,740,820 related to the gain on settlement of the IGH Note. During fiscal year 2021, we recognized an impairment on this note in the amount of $2,498,706. For fiscal 2022, the most significant item added back to net income was the amortization of discounts on the convertible debentures in the amount of $327,509, compared to $2,203,234 during fiscal 2021. For fiscal 2021, the most significant item added back was the loss related to the amendments to the conversion prices of our convertible debentures in the amount of $6,105,679. We also added back to the respective net losslosses for fiscal 2022 and fiscal 2021, $753,740 and $685,292, respectively, of depreciation and amortization expense.
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 a decrease in cash from operating activities in the amount of $1,534,308 during the year ended May 31, 2022, compared to a decrease in cash from operating activities of $622,511 during fiscal 2021. The more significant changes for fiscal 2022 were as follows: inventory increased by $2,189,550, compared to an increase of $652,810 during the prior fiscal year because of increased inventory levels necessary to support increased sales; accounts payable and accrued expenses increased by $709,273 during fiscal 2022 compared to $435,742 during the prior fiscal year due to increased payments of trade payables and an increase in city and state sales and excise taxes due; tax liability increased by $2,041,487 during fiscal 2022, compared to $2,490,295 during the prior year as we accrued potential taxes in connection with Section 280E of the tax code; and operating lease liability decreased by $292,424 during fiscal 2022 compared to $379,358 during the prior fiscal year as certain leases were renegotiated resulting in lower monthly amortization.
Cash flows provided by investing activities were $992,255 for the year ended May 31, 2017 increased by $2,255,425, or 86%, from the year ended May 31, 2016, most of this increase was due to non-cash expenses, such as the amortization of debt discount of $2,274,988, and cash used in operations increased by only $30,878, or approximately 2.7% for the year.
Cash flows provided by financing activities were $1,207,384$3,052,011 for the year ended May 31, 2022, an increase of $3,052,011, or 100%, compared to cash flow used in financing activities of $0 during the year ended May 31, 2017, an2021. This increase was primarily due to our sale of $67,164 or 5.9% compared to $1,140,250 during the year ended May 31, 2016. During the year ended May 31, 2017, we borrowed approximately $1,597,550 from our officers and directors. During the year ended May 31, 2016, we borrowed approximately $840,250 from our officers and directors and issued the 10% Notes to Old Main for cash.
Third Party Debt
The table below summarizes the first anniversarystatus of our third party debt, excluding our short term receivables-based debt facility and reflects whether such debt remains outstanding, has been repaid, or has been converted into or exchanged for our common stock:
Name of Note |
| Original Principal Amount |
| Outstanding or Repaid |
| Payment Details | |
|
|
|
|
|
|
|
|
Oasis Note |
| $ | 4,000,000 |
| Repaid |
| Repaid |
|
|
|
|
|
|
|
|
2018 U.S. Convertible Debentures |
| $ | 365,991 |
| Outstanding |
| Repaid |
|
|
|
|
|
|
|
|
Amended and Restated 2018 U.S. Convertible Debentures |
| $ | 6,229,672 |
| Outstanding |
| Due October 22-25, 2022. Amount due includes capitalized interest of $697,672. |
|
|
|
|
|
|
|
|
2018 Convertible Debentures |
| $ | 13,219,150 |
| Outstanding |
| Due December 2022. Amount includes capitalized interest of $1,514,006 less conversion of principal in the amount of $306,856. |
|
|
|
|
|
|
|
|
2021 Debentures* |
| $ | 2,500,000 |
| Outstanding |
| Due July 10, 2024. |
* The terms of the April 2015 Note, all then-accrued interest was due thereunder. Thereafter, principal together with accrued interest is due in eight (8) equal quarterly2021 Debentures provide for additional payments in arrears, commencing on July 1, 2016. All outstanding principal and any accumulated unpaid interest thereon is due and payable on the third anniversaryaggregate amount of note. Atnot less than $375,000 per year for five years after the holder's election, at any time prior to payment or prepaymentmaturity of the April 2015 Note in full, all principal and accrued interest under the April 2015 Note may be converted in whole, but not in part, into our securities. For each dollar converted, the holder shall receive two shares of common stock and a three-year warrant to purchase 1.33 shares of common stock at $0.75 per share.
Oasis Note
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 resultrate of 8% per annum, with capitalization of accrued interest on a quarterly basis for the First Amendment, effective September 1, 2016, we deferredfirst 18 months, by increasing the commencement of amortization payments on the 10% Notes by 30 days. As amended, at the earlier of October 18, 2016 or two (2) trading days after the SEC Effective Date, we were required to redeem 1/24th of the facethen-outstanding principal amount of the 10% Notes and any accrued but unpaid interestdebentures. The debentures originally matured on a bi-weekly basis. Such amortization payment may be made,date that was three years following their issuance. The debentures were convertible into units at our option, in cash or, subject to certain conditions, ina conversion price of $0.80 per unit. Each unit consists of (i) one share of our common stock, pursuantpar value $0.001 and (ii) one-half of one warrant, with each warrant exercisable for three years to purchase a conversion rate equal to the lowershare of (a) $0.80 (the “Fixed Conversion Price”) or (b) 75% of the lowest daily volume weighted averagecommon stock at an initial price of the common stock of (the “VWAP”) in the 20 consecutive trading days immediately prior to the applicable conversion date. At$1.10. The warrants also provided that we could force their exercise at any time after the issue datebid 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 Notes,debentures increased to $6,595,663.
The debentures have other features, such as mandatory conversion in the holder could convertevent our common stock trades at a particular price over a specified period of time and required redemption in the 10% Notes into sharesevent 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 holder’s option. Thewarrant.
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 wasof 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 Fixed Conversion Price. Subject to certain exclusions, ifrevised warrant exercise price.
On March 31, 2021, we sold or issued our common stock or certain common stock equivalents at an effective price per share thatamended the Canaccord Debentures. This Debenture Amendment (as hereafter defined) was lower than the Fixed Conversion Price,a dilutive issuance. As a result, the conversion price would beof the convertible debentures was automatically reduced from $0.80 per unit to equal to such lower price.
On April 2215, 2021 and May 27, 2016 (the “Second Amendment”)April 19, 2021, we amended three of the purchasers’ debentures and subscription agreements in order to amend(i) reduce the Agreements,conversion price of the debentures from $0.80 per unit to $0.30 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, by the First Amendment, in certain respects. Pursuantalso provide that we will file a registration statement to the Second Amendment, among other things, the 10% Notes were converted from installment notes to “balloon” notes, withregister for resale all principal and interest on the 10% Notes due on September 18, 2017 and the outstanding principal balances of the 10% Notes were increased by 10%; the Fixed Conversion Prices associated with the 10% Notes were changed to variable conversion prices equal to the lesser of the prior Fixed Conversion Price or 75% of the lowest VWAP in the fifteen trading days ending on the trading day immediately prior to the conversion date; our ability to repay the 10% Notes with our common stock was deleted except pursuant to a voluntary conversion by Old Main; and Old Main was prohibited from selling, per trading day, an amount of our common stock in excess of the greater of $5,000 or 25% of the average number of shares of common stock sold per day forissuable to these three purchasers upon conversion of the five trading days precedingdebentures and the dayexercise of sale multiplied by the average daily VWAP during the immediately preceding 5-trading day period. The Second Amendment resulted in a loss on modificationwarrants issuable upon conversion of debt in the amount of $33,334.
We are actively working to reach agreement on terms to re-finance the U.S. Convertible Debentures, but have not yet entered into any definitive agreements with the holders thereof to do so.
On October 25, 2021, we repaid three of the 8% Note and any accrued but unpaid interest on a monthly basis. Such amortization payment was to be made,debentures at our option, in cash or, subject to certain conditions, in our common stock pursuant to a conversion rate equal to the lowermaturity, which comprised $365,991 of (a) $1.07 (the “8% Note Fixed Conversion Price”) or (b) 75% of the lowest VWAP in the twenty (20) consecutive trading days ending on the trading day that is immediately prior to the applicable conversion date. Subject to certain exclusions, if we sold or issued our common stock or certain common stock equivalents at an effective price per share that is lower than the 8% Note Fixed Conversion Price, the conversion price would have been reduced to equal to such lower price.
2018 Convertible Debenture Offering
On July 6, 2017,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 fourth amendmentCompany 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 $0.80 per unit at any time prior to the 8% Note (the “Fourth Amendment”) to further amendclose of business on the terms of the 8% Note, which is the only note that remains outstanding. Pursuant to the Fourth Amendment,last business day immediately preceding the maturity date of the 8% Note was extended to July 15, 2017 anddebentures, being the outstanding balance ofdate that is three (3) years from the 8% Note as of June 30, 2017 was increased by multiplying it by 1.075. The Fourth Amendment was effective on June 30, 2017.
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 Omnibus Loan Agreement, on May 31, 2017, 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 184,375 units for advisory services; and (ii) a corporate finance fee equal to 375,375 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 rateprice; and (C)(i) an aggregate of this convertible note was reduced to $0.25 per share,442,500 advisory warrants; and (ii) the requirement900,900 broker warrants, which was equal to issue warrants upon conversion was deleted. Also on May 31, 2017, principal and accrued interest in the amounts of $150,000 and $9,247, respectively, on the note payable to CLS CO 2016 were converted into a total of 636,988 shares of our common stock.
The debentures are unsecured obligations of the Company, which became fully vested one yearrank 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 effectiveclosing date, payable on the last business day of each calendar quarter.
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 his employment agreement. We valued the shares at $327,500. DuringCanaccord Debentures from December 12, 2021 to December 12, 2022; (ii) reduce the years ended May 31, 2017conversion price from $0.80 per unit (as such term is defined in the indenture) to $0.30 per unit; (iii) reduce the mandatory conversion VWAP threshold from $1.20 to $0.60 per share; and 2016(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 $0.40 per share of our common stock. Simultaneously, we recognized $0amended the warrant indenture to make conforming amendments and $327,500 in share-based compensation, respectively.
On August 18, 2022, we announced that we are holding a meeting of debenture holders on September 15, 2022, to seek the saleaffirmative vote of the holders of the Canaccord Debentures to accomplish the following things: (i) to permit the mandatory conversion, in our discretion, of $7,931,490 in principal amount of the Canaccord Debentures plus $132,192 in accrued interest on the Canaccord Debentures into units at the reduced conversion price of US$0.07125 per unit; (ii) to decrease the conversion price of the remaining Canaccord Debentures (following the mandatory conversion) to $0.10 per unit; (iii) to reduce the mandatory conversion VWAP provision in the Canaccord Debentures from $0.60 to $0.20; (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 and equity securities, by obtaining additional loans and with cash generated through operations from companiesof ours now or in the future, as we may acquire in the future. There can be no assuranceelect, provided that we will beare able to meet our needs, however, as we have not yet received any commitments for the purchase of our equity securities or for additional loans, and although we have entered intosecure all regulatory approvals required to make such a non-binding letter of intent with Pure Harvest, we have not entered into any definitive agreements to acquire Pure Harvest or other companies. Because we do not know when we will re-visit commencing operations in Colorado, there can be no assurance that PRH will ever generate sufficient cash to repay the $500,000 loan from CLS Labs Colorado or meet PRH's obligations under the Licensing Agreement or Equipment Lease. Further, due to delay we encountered with the construction of our Colorado processing facility, we have placed our proposed Colorado operations on hold and will pursue revenue opportunities in other states. We anticipate that we will incur operating losses during the next twelve months.grant.
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.
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 $0.4125 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 3,030,304 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 $0.4125 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%. Loans under the facility cannot exceed an aggregate of $1,500,000 and are payable within 30 days.
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 28,973,014 special warrants at a price of CD$0.45 (USD$0.34) 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$0.65 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.
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 1,448,651 Special Warrants with a fair value of USD$1,413,300, and 2,317,842 Broker Warrants. Each Broker Warrant entitles the holder thereof to acquire one unit at a price of CD$0.45 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 3,042,167 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, 7,500,000 units ($0.40 per unit), representing (i) 7,500,000 shares of our common stock, and (ii) three-year warrants to purchase an aggregate of 7,500,000 shares of our common stock (the “Navy Warrant Shares”) at an exercise price of $0.60 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, 6,875,000 units ($0.40 per unit), representing (i) 6,875,000 shares of our common stock, and (ii) three-year warrants to purchase an aggregate of 6,875,000 shares of our common stock at an exercise price of $0.60 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.
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 have also utilizedperiodically use the services of outside investor relations consultants. Pursuant to a consulting agreement, we agreed to pay a consultant a monthly fee of $6,000 at the beginning of each month and agreed to issue the consultant 120,000 shares of restricted common stock vesting at a rate of 10,000 shares per month. During the three months ended May 31, 2015, we paid $12,000 to the consultant and 10,000 (post Reverse Split) shares vested. We terminated the consulting agreement during the year ended May 31, 2016 and issued the 60,000 shares of common stock that had vested, of which 50,000 shares with a value of $37,500 had been included in stock payable as of May 31, 2015.
On December 29, 2015, pursuant to a consulting agreement, we agreed to issue 25,000 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 May 31, 2016, and May 31, 2017,2022, we had 50,000 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.
On August 16, 2019, we amended a consulting agreement whereby we agreed to issue 25,000up to 200,000 shares of common stock valued at $3,250, to a consultantplus pay certain amounts in exchange for strategic advisory services. These shares have not yet been the consultant’s development for us of a corporate finance and investor relations campaign, which services will be provided over a six month period. We issued and the amount of $3,250 is included in stock payable on the accompanying balance sheet.
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 $8,991,610 and$95,079,817 as of May 31, 2022, compared to $92,736,638, as of May 31, 2021. We had a working capital deficit of $1,746,758$21,228,633 as of May 31, 2022, compared to a working capital deficit of $1,143,922 at May 31, 2017. In addition, we do not currently have2021. The report of our independent auditors for the cash resources to meet our operating commitments during the next twelve months.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 developmentalearly 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 to borrow capital and to raisesell equity to re-finance our debt and support our plans to acquire companies, support the opening ofoperating businesses, execute on joint ventures, open processing facilities and to finance ongoing operations. There can be no assurance however, that we will be successful in our efforts to raise additional debt or equity capital and/or that our 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 orof operations, liquidity, capital expenditures or capital resources that are material to stockholders.investors.
Recently Issued Accounting Standards
Accounting standards promulgated by the Financial Accounting Standards Board (the "FASB"“FASB”) issued ASU 2016-15, Statement of Cash Flows (Topic 230). The update addresses eight specific cash flow issues and is intendedare subject to reduce diversitychange. Changes in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update will be effective for reporting periods beginning after December 15, 2017, including interim periods within the reporting period. Early adoption is permitted. We are currently evaluating the potentialsuch standards may have an impact of the update 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 reportingIn 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 anyan interim period. We are currently assessingIf an entity early adopts the impactamendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that this standard will have on any awardsincludes that are modified once this standard is adopted.
On June 1, 2018, we adopted ASU 2017-11 and accordingly reclassified the fair value of the reset provisions embedded in convertible notes payable and certain warrants with embedded anti-dilutive provisions from liability to equity in the aggregate amount of $1,265,751.
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.
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 various other updates recently issued,the most of which represented technical correctionsimportant to the accounting literature or application to specific industries and are not expected to a have a material impact on presentation of our consolidated financial position, results of operations or cash flows. 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. |
Item 7A. Quantitative and Qualitative Disclosure about Market Risk.
This item is not applicable as we are currently considered a smaller reporting company.
Item 8. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS
Page | |
Financial Statements | |
F-1 | |
F-2 | |
F-3 | |
F-4 | |
F-5 | |
F-6 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of CLS Holdings USA, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of CLS Holdings USA, Inc. (the Company) as of May 31, 20172022 and 2016,2021, and the related consolidated statements of operations, stockholders’ equity (deficit),deficit, and cash flows for each of the years in the two-year period ended May 31, 2017. CLS Holdings USA, Inc.’s management is responsible for these consolidated2022, and the related notes (collectively referred to as the financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered a net losslosses from operations in current and prior periods and has a net capitalaccumulated deficiency, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are also describeddiscussed in Note 3.2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Income Taxes
As discussed in Note 23 to the financial statements, the Company recognizes income taxes in accordance with Section 280E of the Internal Revenue Code.
Auditing management’s evaluation of income taxes involves significant judgement related to allowable deductions of the Company.
To evaluate the appropriateness and accuracy of the assessment by management, we evaluated management’s estimates of allowable deductions and taxable income in accordance with Section 280E.
/s/ M&K CPAS, PLLC
We have served as the Company’s auditor since 2011.
Houston, TX
August 25, 2022
CLS Holdings USA, Inc.
Consolidated Balance SheetSheets
| May 31, | May 31, | |||||||
| 2017 | 2016 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 78,310 | $ | 88,244 | ||||
| Prepaid expenses | 1,410 | 6,742 | ||||||
| Total current assets | 79,720 | 94,986 | ||||||
| Security deposit | 50,000 | 50,000 | ||||||
| Property, plant and equipment, net of accumulated depreciation of $1,784 and $892 | 890 | 1,782 | ||||||
| Construction in progress | - | 106,726 | ||||||
| Intangible assets, net of accumulated amortization of $828 and $396 | 1,330 | 1,762 | ||||||
| Total assets | $ | 131,940 | $ | 255,256 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | 581,765 | $ | 432,260 | ||||
| Accrued compensation, related party | 53,750 | 266,250 | ||||||
| Due to related party | 17,930 | 17,930 | ||||||
| Accrued interest | 20,171 | 41,116 | ||||||
| Accrued interest, related party | 106,022 | 68,148 | ||||||
| Notes payable, related parties | 699,208 | - | ||||||
| Convertible notes payable, net of discount of $57,644 and $227,475 | 252,356 | 72,525 | ||||||
| Convertible notes payable, related party, net of discount of $0 and $95,447 | - | 22,678 | ||||||
| Derivative liability | 95,276 | 418,537 | ||||||
| Total current liabilities | 1,826,478 | 1,339,444 | ||||||
| Noncurrent liabilities | ||||||||
| Convertible notes payable, net of discount of $0 and $390,021 | - | 43,312 | ||||||
| Convertible notes payable, related parties, net of discount of $0 and $1,018,657 | 192,000 | 230,718 | ||||||
| Notes payable, related parties | - | 72,750 | ||||||
| Total Liabilities | 2,018,478 | 1,686,224 | ||||||
| Commitments and contingencies | - | - | ||||||
| Stockholder’s equity | ||||||||
| Common stock, $0.0001 par value; 250,000,000 shares authorized; 32,852,944 and 20,350,003 shares issued and outstanding at May 31, 2017 and May 31, 2016, respectively | 3,286 | 2,035 | ||||||
| Preferred stock, $0.001 par value; 20,000,000 shares authorized; no shares issued | - | - | ||||||
| Additional paid-in capital | 7,032,836 | 2,627,183 | ||||||
| Stock payable | 68,950 | 65,700 | ||||||
| Accumulated deficit | (8,991,610 | ) | (4,125,886 | ) | ||||
| Total stockholder’s equity (deficit) | (1,886,538 | ) | (1,430,968 | ) | ||||
| Total liabilities and stockholders’ equity (deficit) | $ | 131,940 | $ | 255,256 | ||||
May 31, | May 31, | |||||||
2022 | 2021 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 2,551,859 | $ | 1,665,263 | ||||
Accounts Receivable | 618,227 | 684,935 | ||||||
Inventory | 3,417,602 | 1,228,052 | ||||||
Prepaid expenses and other current assets | 295,869 | 262,313 | ||||||
Total current assets | 6,883,557 | 3,840,563 | ||||||
Property, plant and equipment, net of accumulated depreciation of $2,073,449 and $1,434,614 | 4,342,434 | 3,475,668 | ||||||
Right of use assets, operating leases | 2,154,517 | 2,250,009 | ||||||
Intangible assets, net of accumulated amortization of $473,308 and $358,403 | 1,190,285 | 1,305,190 | ||||||
Goodwill | 557,896 | 557,896 | ||||||
Investments | 469,575 | - | ||||||
Other assets | 229,500 | 167,455 | ||||||
Total assets | $ | 15,827,764 | $ | 11,596,781 | ||||
LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
Current liabilities | ||||||||
Accounts payable and accrued liabilities | $ | 2,317,898 | $ | 1,608,625 | ||||
Accrued interest, current | 419,206 | 267,945 | ||||||
Loan payable | 1,013,073 | - | ||||||
Lease liability – financing lease, current | 71,813 | - | ||||||
Lease liability - operating leases, current | 309,597 | 287,125 | ||||||
Taxes Payable | 4,531,782 | 2,490,295 | ||||||
Convertible notes payable - current, net of discount of $0 and $35,496 | 19,448,821 | 330,495 | ||||||
Total current liabilities | 28,112,190 | 4,984,485 | ||||||
Noncurrent liabilities | ||||||||
Lease liability - operating leases, non-current | 1,893,810 | 1,979,294 | ||||||
Lease liability – financing lease, non-current | 277,180 | |||||||
Notes payable, net of discount of $1,681,434 and $0 | 2,693,566 | - | ||||||
Convertible notes payable - long term, net of discount of $0 and $0 | - | 19,729,822 | ||||||
Total Liabilities | 32,976,746 | 26,693,601 | ||||||
Commitments and contingencies | - | - | ||||||
Stockholder's deficit | ||||||||
Preferred stock, $0.001 par value; 20,000,000 shares authorized; 0 shares issued | - | - | ||||||
Common stock, $0.0001 par value; 750,000,000 shares authorized at May 31, 2022 and 2021; 128,208,082 and 127,221,416 shares issued and outstanding at May 31, 2022 and 2021 | 12,822 | 12,723 | ||||||
Additional paid-in capital | 77,945,132 | 77,561,393 | ||||||
Common stock subscribed | 70,092 | 65,702 | ||||||
Accumulated deficit | (95,079,817 | ) | (92,736,638 | ) | ||||
Stockholder's deficit attributable to CLS Holdings, Inc. | (17,051,771 | ) | (15,096,820 | ) | ||||
Non-controlling interest | (97,211 | ) | - | |||||
Total stockholder's deficit | (17,148,982 | ) | (15,096,820 | ) | ||||
Total liabilities and stockholders' deficit | $ | 15,827,764 | $ | 11,596,781 | ||||
See notes to consolidated financial statements.
CLS Holdings USA, Inc.
Consolidated Statements of Operations
| For the Year | For the Year | |||||||||||||||
| Ended May 31, | Ended May 31, | For the | For the | |||||||||||||
| 2017 | 2016 | Year Ended | Year Ended | |||||||||||||
May 31, 2022 | May 31, 2021 | |||||||||||||||
| Revenue | $ | - | $ | - | $ | 22,662,895 | $ | 19,292,087 | ||||||||
| Cost of goods sold | - | - | 11,123,857 | 9,644,761 | ||||||||||||
| Gross margin | - | - | 11,539,038 | 9,647,326 | ||||||||||||
| Selling, general and administrative expenses | 718,770 | 1,314,225 | 12,416,893 | 10,800,944 | ||||||||||||
| Startup costs | 141,739 | - | ||||||||||||||
| Professional fees | 750,446 | 955,810 | ||||||||||||||
Impairment of note receivable | - | 2,498,706 | ||||||||||||||
| Total operating expenses | 1,610,955 | 2,270,035 | 12,416,893 | 13,299,650 | ||||||||||||
| Operating loss | (1,610,955 | ) | (2,270,035 | ) | (877,855 | ) | (3,652,324 | ) | ||||||||
| Other (income) expense: | ||||||||||||||||
| Interest expense | 2,571,171 | 402,021 | ||||||||||||||
| Loss on modification of related party debt | 951,239 | - | ||||||||||||||
Loss on modification of debt | 43,334 | - | ||||||||||||||
| Change in fair value of derivative | (310,975 | ) | (61,757 | ) | ||||||||||||
| Total other expense | 3,254,769 | 340,264 | ||||||||||||||
Interest expense, net | 2,149,729 | 3,657,105 | ||||||||||||||
Gain on modification of operating leases | - | (14,889 | ) | |||||||||||||
Loss on extinguishment of debt | - | 6,105,679 | ||||||||||||||
Loss on equity investment | 112,139 | - | ||||||||||||||
Gain on settlement of note receivable | (2,740,820 | ) | - | |||||||||||||
Total other (income) expense | (478,952 | ) | 9,747,895 | |||||||||||||
| Income (Loss) before income taxes | (4,865,724 | ) | (2,610,299 | ) | (398,903 | ) | (13,400,219 | ) | ||||||||
| Income tax expense | - | - | ||||||||||||||
Provision for income tax | (2,041,487 | ) | (2,490,295 | ) | ||||||||||||
| Net income (loss) | $ | (4,865,724 | ) | $ | (2,610,299 | ) | (2,440,390 | ) | (15,890,514 | ) | ||||||
Non-controlling interest | 97,211 | - | ||||||||||||||
Net income (loss) attributable to CLS Holdings, Inc. | $ | (2,343,179 | ) | $ | (15,890,514 | ) | ||||||||||
| Net income (loss) per share - basic | $ | (0.23 | ) | $ | (0.13 | ) | $ | (0.02 | ) | $ | (0.13 | ) | ||||
| Net income (loss) per share - diluted | $ | (0.23 | ) | $ | (0.13 | ) | $ | (0.02 | ) | $ | (0.13 | ) | ||||
| Weighted average shares outstanding - basic | 20,778,785 | 20,146,260 | 128,128,975 | 126,664,839 | ||||||||||||
| Weighted average shares outstanding - diluted | 20,778,785 | 20,146,260 | 128,128,975 | 126,664,839 | ||||||||||||
See notes to consolidated financial statements.
CLS Holdings USA, Inc.
Consolidated Statements of Stockholders’ EquityStockholders' Deficit
| Additional | ||||||||||||||||||||||||
| Common Stock | Paid In | Stock | Accumulated | |||||||||||||||||||||
| Amount | Value | Capital | Payable | Deficit | Total | |||||||||||||||||||
| Balance, May 31, 2015 | 20,000,003 | $ | 2,000 | $ | 887,614 | $ | 37,500 | $ | (1,515,587 | ) | $ | (588,473 | ) | |||||||||||
| Stock issued for services | 100,000 | 10 | 89,840 | 28,200 | - | 118,050 | ||||||||||||||||||
| Share based compensation | 250,000 | 25 | 327,475 | - | - | 327,500 | ||||||||||||||||||
| Discount on notes from beneficial conversion feature | - | - | 1,321,176 | - | - | 1,321,176 | ||||||||||||||||||
| Imputed interest | - | - | 1,078 | - | - | 1,078 | ||||||||||||||||||
| Net loss | - | - | - | - | (2,610,299 | ) | (2,610,299 | ) | ||||||||||||||||
| Balance, May 31, 2016 | 20,350,003 | 2,035 | 2,627,183 | 65,700 | (4,125,886 | ) | (1,430,968 | ) | ||||||||||||||||
| Settlement of derivative liability | - | - | 612,850 | - | - | 612,850 | ||||||||||||||||||
| Common stock issued for conversion of debt | 1,685,981 | 169 | 137,331 | - | - | 137,500 | ||||||||||||||||||
| Common stock issued for conversion of related party debt | 10,816,960 | 1,082 | 2,703,158 | - | - | 2,704,240 | ||||||||||||||||||
| Common stock payable for services | - | - | - | 3,250 | - | 3,250 | ||||||||||||||||||
| Loss on modification of related party debt | - | - | 951,239 | - | - | 951,239 | ||||||||||||||||||
| Imputed interest | - | - | 1,075 | - | - | 1,075 | ||||||||||||||||||
| Net loss | - | - | - | - | (4,865,724 | ) | (4,865,724 | ) | ||||||||||||||||
| Balance, May 31, 2017 | 32,852,944 | $ | 3,286 | $ | 7,032,836 | $ | 68,950 | $ | (8,991,610 | ) | $ | (1,886,538 | ) | |||||||||||
Common Stock | Additional Paid In | Stock | Accumulated | Non-controlling | ||||||||||||||||||||||||
Amount | Value | Capital | Payable | Deficit | interest | Total | ||||||||||||||||||||||
Balance, May 31, 2020 | 126,521,416 | $ | 12,653 | $ | 71,196,814 | $ | 241,109 | $ | (76,846,124 | ) | $ | - | $ | (5,395,548 | ) | |||||||||||||
Common stock issued to officer from stock payable | 550,000 | 55 | 230,415 | (230,470 | ) | - | - | - | ||||||||||||||||||||
Common stock to be issued to officer | - | - | - | 80,813 | - | - | 80,813 | |||||||||||||||||||||
Common stock to be issued to consultant | - | - | - | (25,750 | ) | - | - | (25,750 | ) | |||||||||||||||||||
Common stock issued to employee | 150,000 | 15 | 28,485 | - | - | - | 28,500 | |||||||||||||||||||||
Loss on extinguishment of debt | - | - | 6,105,679 | - | - | - | 6,105,679 | |||||||||||||||||||||
Net loss for the year ended May 31, 2021 | - | - | - | - | (15,890,514 | ) | - | (15,890,514 | ) | |||||||||||||||||||
Balance, May 31, 2021 | 127,221,416 | $ | 12,723 | $ | 77,561,393 | $ | 65,702 | $ | (92,736,638 | ) | $ | - | $ | (15,096,820 | ) | |||||||||||||
Common stock issued for conversion of debt | 936,666 | 94 | 280,906 | - | - | 281,000 | ||||||||||||||||||||||
Common stock to be issued to employee | - | - | - | 8,780 | - | - | 8,780 | |||||||||||||||||||||
Common stock issued to employee | 50,000 | 5 | 4,385 | (4,390 | ) | - | - | - | ||||||||||||||||||||
Fair value of warrants issued with debenture offering | - | - | 98,448 | - | - | - | 98,448 | |||||||||||||||||||||
Net loss for the year ended May 31, 2022 | - | - | - | - | (2,343,179 | ) | (97,211 | ) | (2,440,390 | ) | ||||||||||||||||||
Balance, May 31, 2022 | 128,208,082 | $ | 12,822 | $ | 77,945,132 | $ | 70,092 | $ | (95,079,817 | ) | $ | (97,211 | ) | $ | (17,148,982 | ) | ||||||||||||
See notes to consolidated financial statements.
CLS Holdings USA, Inc.
Consolidated Statements of Cash Flows
| For the Year | For the Year | |||||||
| Ended May 31, | Ended May 31, | |||||||
| 2017 | 2016 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income (loss) | $ | (4,865,724 | ) | $ | (2,610,299 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Imputed interest | 1,075 | 1,078 | ||||||
| Change in fair value of derivative | (310,975 | ) | (61,757 | ) | ||||
| Interest expense - excess of discount over principal | - | 11,330 | ||||||
| Loss on modification of debt | 43,334 | - | ||||||
| Loss on modification of debt – related party | 951,239 | - | ||||||
| Issuance of stock for services | 3,250 | 118,050 | ||||||
| Note issued as commitment | - | 200,000 | ||||||
| Stock-based compensation | - | 327,500 | ||||||
| Amortization of debt discounts | 2,274,519 | 286,317 | ||||||
| Depreciation and amortization expense | 1,324 | 1,288 | ||||||
| Start-up costs | 141,739 | - | ||||||
| Changes in assets and liabilities: | ||||||||
| Prepaid expenses | 5,332 | 25,058 | ||||||
| Accounts payable and accrued expenses | 238,387 | 285,993 | ||||||
| Accrued compensation | 150,000 | 161,243 | ||||||
| Due to related parties | - | (525 | ) | |||||
| Accrued interest, related party | 204,364 | 64,811 | ||||||
| Accrued interest | (20,169 | ) | 38,486 | |||||
| Net cash used in operating activities | (1,182,305 | ) | (1,151,427 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Payments to acquire equipment | - | (2,674 | ) | |||||
| Payment for construction in progress | (35,013 | ) | (106,726 | ) | ||||
| Net cash used in investing activities | (35,013 | ) | (109,400 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Proceeds from related party convertible notes payable | 150,000 | 767,500 | ||||||
| Proceeds from related party notes payable | 1,447,550 | 72,750 | ||||||
| Proceeds from issuance of convertible note | - | 300,000 | ||||||
| Principal payments on related party notes payable | (61,000 | ) | - | |||||
| Principal payments on notes payable | (329,166 | ) | - | |||||
| Net cash provided by financing activities | 1,207,384 | 1,140,250 | ||||||
| Net increase in cash and cash equivalents | (9,934 | ) | (120,577 | ) | ||||
| Cash and cash equivalents at beginning of period | 88,244 | 208,821 | ||||||
| Cash and cash equivalents at end of period | $ | 78,310 | $ | 88,244 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Interest paid | $ | 53,837 | $ | - | ||||
| Income taxes paid | $ | - | $ | - | ||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Convertible note issued for unpaid accrued salary | $ | 362,500 | $ | - | ||||
| Discount on notes due to derivatives | $ | 600,564 | $ | 502,296 | ||||
| Discount on related party notes from beneficial conversion feature and warrants | $ | - | $ | 1,321,176 | ||||
| Related party notes payable reclassified as related party convertible notes payable | $ | 849,750 | $ | 1,367,500 | ||||
| Common stock issued for conversion of related party notes payable | $ | 2,704,240 | $ | - | ||||
| Common stock issued for conversion of convertible notes payable | $ | 137,500 | $ | - | ||||
| Settlement of derivative liability | $ | 612,850 | ||||||
For the | For the | |||||||
Years Ended | Years Ended | |||||||
May 31, 2022 | May 31, 2021 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net loss | $ | (2,440,390 | ) | $ | (15,890,514 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Loss on extinguishment of debt | - | 6,105,679 | ||||||
Fair value of cancellation of shares issued to consultants | - | (25,750 | ) | |||||
Gain on modification of leases | - | (14,889 | ) | |||||
Loss on equity investment | 112,139 | - | ||||||
Amortization of debt discounts | 327,509 | 2,203,234 | ||||||
Fair value of shares vested by officers | 8,780 | 109,313 | ||||||
Gain on settlement of note receivable | (2,740,820 | ) | - | |||||
Impairment of note receivable | - | 2,498,706 | ||||||
Depreciation and amortization expense | 753,740 | 685,292 | ||||||
Bad debt expense | 79,847 | 15,798 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | 64,361 | (539,324 | ) | |||||
Prepaid expenses and other current assets | (111,056 | ) | (28,221 | ) | ||||
Inventory | (2,189,550 | ) | (652,810 | ) | ||||
Interest receivable | - | 2,500 | ||||||
Right of use asset | 324,904 | 341,035 | ||||||
Accounts payable and accrued expenses | 709,273 | 435,742 | ||||||
Accrued interest | 235,425 | 258,113 | ||||||
Contingent liability | - | (150,000 | ) | |||||
Deferred tax liability | 2,041,487 | 2,490,295 | ||||||
Financing lease liability | (40,895 | ) | - | |||||
Operating lease liability | (292,424 | ) | (379,358 | ) | ||||
Net cash used in operating activities | (3,157,670 | ) | (2,535,159 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Payments to purchase property, plant and equipment | (1,104,806 | ) | (269,437 | ) | ||||
Cash paid for construction deposit on grow facility | (62,045 | ) | - | |||||
Investment in Quinn River | (581,714 | ) | - | |||||
Proceeds from collection of note receivable | 2,740,820 | 1,544,291 | ||||||
Net cash provided by (used in) investing activities | 992,255 | 1,274,854 | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Proceeds from loan payable | 2,322,875 | - | ||||||
Repayments of loan payable | (1,393,966 | ) | - | |||||
Principal payments of finance leases | (10,907 | ) | ||||||
Proceeds from debenture offering | 2,500,000 | - | ||||||
Principal payments on notes payable | (365,991 | ) | - | |||||
Net cash provided by financing activities | 3,052,011 | - | ||||||
Net increase in cash and cash equivalents | 886,596 | (1,260,305 | ) | |||||
Cash and cash equivalents at beginning of period | 1,665,263 | 2,925,568 | ||||||
Cash and cash equivalents at end of period | $ | 2,551,859 | $ | 1,665,263 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
Interest paid | $ | 1,656,774 | $ | 943,817 | ||||
Income taxes paid | $ | - | $ | - | ||||
NONCASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
Capitalized interest on convertible debentures | $ | - | $ | 212,601 | ||||
Shares issued for conversion of notes payable | $ | 281,000 | $ | - | ||||
Shares issued for services issued from stock payable | $ | - | $ | 230,470 | ||||
Initial ROU asset and lease liability - operating | $ | 229,412 | $ | - | ||||
Initial ROU asset and lease liability- financing | $ | 400,795 | $ | - | ||||
Original issue discount on notes payable | $ | 1,875,000 | $ | - | ||||
Discount on notes payable due to warrants | $ | 98,448 | $ | - | ||||
Initial lease right of use asset and lease liability from lease modification | $ | - | $ | 1,172,726 | ||||
See notes to consolidated financial statements.
CLS HOLDINGS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BUSINESS ORGANIZATION AND NATURE OF OPERATIONS
CLS Holdings USA, Inc. (the “Company”) was originally incorporated as Adelt Design, Inc. (“Adelt”) on March 31, 2011 to manufacture and market carpet binding art. Production and marketing of carpet binding art never commenced.
On November 12, 2014, CLS Labs Inc. (“CLS Labs”) acquired 10,000,000 shares, or 55.6%, of the outstanding shares of common stock of Adelt from its founder, Larry Adelt. On that date, Jeffrey Binder, the Chairman, President and Chief Executive Officer of CLS Labs, was appointed Chairman, President and Chief Executive Officer of the Company. On November 20, 2014, Adelt adopted amended and restated articles of incorporation, thereby changing its name to CLS Holdings USA, Inc. Effective December 10, 2014, the Company effected a reverse stock split of its issued and outstanding common stock at a ratio of 1-for-0.625 (the “Reverse Split”), wherein 0.625 shares of the Company’s common stock were issued in exchange for each share of common stock issued and outstanding. As a result, 6,250,000 (post Reverse-Split) shares of the Company’s common stock were issued to CLS Labs in exchange for the 10,000,000 shares that it owned by virtue of the above-referenced purchase from Larry Adelt.
On April 29, 2015, the Company, CLS Labs and CLS Merger Inc., a Nevada corporation and wholly owned subsidiary of CLS Holdings (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) and completed a merger, whereby CLS Merger Inc. merged with and into CLS Labs, with CLS Labs remaining as the surviving entity (the “Merger”). Upon the consummation of the Merger, the shares of the common stock of CLS Holdings owned by CLS Labs were extinguished and the former stockholders of CLS Labs were issued an aggregate of 15,000,000 (post Reverse Split) shares of common stock in CLS Holdings in exchange for their shares of common stock in CLS Labs. As a result of the Merger, the Company acquired the business of CLS Labs and abandoned its previous business.
The Company has been issued a U.S. patent pendingwith respect to its proprietary method of extracting cannabinoids from cannabis plants and converting the resulting cannabinoid extracts into concentrates such as oils, waxes, edibles and shatter. These concentrates may be ingested in a number of ways, including through vaporization via electronic cigarettes (“e-cigarettes”), and used for a variety of pharmaceutical and other purposes. Internal testing of this extraction method and conversion process has revealed that it produces a cleaner, higher quality product and a significantly higher yield than the cannabinoid extraction processes currently existing in the marketplace. The Company has not commercialized its patent pendingpatented proprietary process or otherwise earned any revenues.revenues from it. The Company plans to generate revenues through licensing, fee-for-service and joint venture arrangements related to its patent pendingpatented proprietary method of extracting cannabinoids from cannabis plants and converting the resulting cannabinoid extracts into saleable concentrates.
On December 4, 2017, the Company and Alternative Solutions, entered into a Membership Interest Purchase Agreement (the “Acquisition Agreement”), as amended, for the Company to acquire the Oasis LLCs from Alternative Solutions. Pursuant to the Acquisition Agreement, the Company initially contemplated acquiring all of the membership interests in the Oasis LLCs from Alternative Solutions. Just prior to closing, the parties agreed that the Company 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.
Pursuant to the Acquisition Agreement, the Company paid a non-refundable deposit of $250,000 upon signing, which was followed by an additional payment of $1,800,000 paid in February 2018, for an initial 10% of each of the Oasis LLCs. At that time, the Company applied for regulatory approval to own an interest in the Oasis LLCs, which approval was received. On June 27, 2018, the Company made the payments to indirectly acquire the remaining 90% of the Oasis LLCs, which were equal to cash in the amount of $5,995,543, a $4.0 million promissory note due in December 2019 (the “Oasis Note”), and 22,058,823 shares of its common stock (the “Purchase Price Shares”) (collectively, the “Closing Consideration”). 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 Company used the proceeds of a Canadian private securities offering to fund the cash portion of the Closing Consideration. The Company then applied for regulatory approval to own the additional 90% in membership interests in the Oasis LLCs, which it received on December 12, 2018. The Company received final regulatory approval to own its interest in the Oasis LLCs through Alternative Solutions under the revised structure of the transaction on April 26, 2022.
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. If CLS Massachusetts exercised the IGH Option, the Company, a wholly-owned subsidiary of the Company and IGH would enter into a merger agreement (the form of which had been agreed to by the parties) (the “IGH Merger Agreement”). At the effective time of the merger contemplated by the IGH Merger Agreement, CLS Massachusetts would pay a purchase price of $47,500,000, subject to reduction as provided in the IGH Merger Agreement, payable as follows: $35 million in cash, $7.5 million in the form of a five-year promissory note, and $5 million in the form of restricted common stock of the Company, plus $2.5 million as consideration for a non-competition agreement with IGH’s President, payable in the form of a five-year promissory note. IGH and certain IGH stockholders holding sufficient aggregate voting power to approve the transactions contemplated by the IGH Merger Agreement entered into agreements pursuant to which such stockholders, among other things, agreed to vote in favor of such transactions. On October 31, 2018, as consideration for the IGH Option, the Company 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. To secure the obligations of IGH to the Company under the loan agreement and the promissory note, the Company and IGH entered into a security agreement dated as of October 31, 2018, pursuant to which IGH granted to the Company a first priority lien on and security interest in all personal property of IGH. If the Company did not exercise the Option on or prior to the date that was 30 days following the end of the option period, the loan amount would be reduced to $2,500,000 as a break-up fee, subject to certain exceptions set forth in the IGH Option Agreement. On August 26, 2019, the parties amended the IGH Option Agreement to, among other things, delay closing until January 2020. By letter agreement dated January 31, 2020, the Company, CLS Massachusetts and IGH extended the IGH Option Agreement to February 4, 2020. 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, the Company informed IGH that as a result of its breaches of the IGH Option, which remained uncured, an event of default had occurred under the IGH Note. The Company advised IGH that it was electing to cause the IGH Note to bear interest at the default rate of 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 excused additional payments. This dispute, including whether IGH breached the IGH Option and whether CLS was entitled to collect default interest, was in litigation. During the twelve months ended May 31, 2021, the Company impaired the remaining amounts due under the IGH Note in the amount of $2,498,706, which included $2,497,884 in principal and $822 in accrued interest.
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 the Company effective on June 11, 2021 (the “IGH Settlement Note”). Pursuant to the IGH Settlement Note, IGH shall pay the Company $3,000,000, $500,000 of which was paid on or before June 21, 2021. A second payment of $500,000 was paid on or before July 12, 2021. The remaining $2,000,000 and accrued interest is being paid in 12 equal monthly installments beginning on August 12, 2021, pursuant to the terms of the promissory note. During the year ended May 31, 2022, the Company received $2,740,820 under the IGH Settlement Note, which includes $2,666,670 in principal and $74,150 in accrued interest. As of May 31, 2022, the amount due under the IGH Settlement Note was $166,667. The Company records amounts paid under the IGH Settlement Note as gains when payments are received.
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, 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. 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. Pursuant to the Quinn River Joint Venture Agreement, Kealii Okamalu expects to lease approximately 20-30 acres of the Tribe’s land located along the Quinn River at a cost of $3,500 per quarter and manage the design, finance and construction of a cannabis cultivation facility on such tribal lands (the “Cultivation Facility”). Kealii Okamalu will also manage 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 will be branded as “Quinn River Farms.” The Company will provide 10,000 square feet of warehouse space at its Las Vegas facility, and will have preferred vendor status including the right to purchase cannabis flower and the business’s cannabis trim at favorable prices. Kealii Okamalu is expected to contribute $6 million towards the construction of the Cultivation Facility and the working capital for the Quinn River Joint Venture. This 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. Kealii Okamalu will receive one-third of the net profits of the Quinn River Joint Venture.
On January 4, 2018, the former Attorney General, Jeff Sessions, rescinded the memorandum issued by former Deputy Attorney General James Cole on August 29, 2013 (as amended on February 14, 2014, the “Cole Memo”), the Cole Banking Memorandum, and all other related Obama-era DOJ cannabis enforcement guidance. While the rescission did not change federal law, as the Cole Memo and other DOJ guidance documents were not themselves laws, the rescission removed the DOJ’s formal policy that state-regulated cannabis businesses in compliance with the Cole Memo guidelines should not be a prosecutorial priority. Notably, former Attorney General Sessions’ rescission of the Cole Memo has not affected the status of the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) memorandum issued by the Department of Treasury, which remains in effect. This memorandum outlines Bank Secrecy Act-compliant pathways for financial institutions to service state-sanctioned cannabis businesses, which echoed the enforcement priorities outlined in the Cole Memo. In addition to his rescission of the Cole Memo, Attorney General Sessions issued a one-page memorandum known as the “Sessions Memorandum”. The Sessions Memorandum explains the DOJ’s rationale for rescinding all past DOJ cannabis enforcement guidance, claiming that Obama-era enforcement policies are “unnecessary” due to existing general enforcement guidance adopted in the 1980s, in chapter 9.27.230 of the U.A. Attorneys’ Manual (“USAM”). The USAM enforcement priorities, like those of the Cole Memo, are based on the use of the federal government’s limited resources and include “law enforcement priorities set by the Attorney General,” the “seriousness” of the alleged crimes, the “deterrent effect of criminal prosecution,” and “the cumulative impact of particular crimes on the community.” Although the Sessions Memorandum emphasizes that cannabis is a federally illegal Schedule I controlled substance, it does not otherwise instruct U.S. Attorneys to consider the prosecution of cannabis-related offenses a DOJ priority, and in practice, most U.S. Attorneys have not changed their prosecutorial approach to date. However, due to the lack of specific direction in the Sessions Memorandum as to the priority federal prosecutors should ascribe to such cannabis activities, there can be no assurance that the federal government will not seek to prosecute cases involving cannabis businesses that are otherwise compliant with state law.
William Barr served as United States Attorney General from February 14, 2019 to December 23, 2020. The DOJ under Mr. Barr did not take a formal position on federal enforcement of laws relating to cannabis. On March 11, 2021, United States President Biden’s nominee, Merrick Garland was sworn in as the U.S. Attorney General. During his campaign, President Biden stated a policy goal to decriminalize possession of cannabis at the federal level, but he has not publicly supported the full legalization of cannabis. It is unclear what impact, if any, the new administration will have on U.S. federal government enforcement policy on cannabis. Nonetheless, there is no guarantee that the position of the Department of Justice will not change.
NOTE 2 – GOING CONCERN
As shown in the accompanying financial statements, the Company has incurred net losses from operations resulting in an accumulated deficit of $8,991,610$95,079,817 as of May 31, 2017.2022. Further losses are anticipated in the development of itsthe Company’s business raising substantial doubt about the Company’s ability to continue as a going concern. The ability to continue as a going concern is dependent upon the Company refinancing certain of its debt, 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 from operations, with loans and/orthe proceeds from the sale of debt securities, and/or equity securities.revenues from operations. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty.
NOTE 3 – SUMMARY OF 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., and its direct and indirect wholly owned operating subsidiaries, CLS Nevada, Inc., (“CLS Nevada”), CLS Labs, Inc. and(“CLS Labs”), CLS Labs Colorado, Inc. (“CLS Colorado”), CLS Massachusetts, Inc. (“CLS Massachusetts”), and Alternative Solutions, LLC (“Alternative Solutions”). 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”). All material intercompany transactions have been eliminated upon consolidation of these entities.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassification
Certain amounts in the prior period have been reclassified 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 $78,310$2,551,859 and $88,244$1,665,263 as of May 31, 20172022 and 2016.2021, respectively.
Allowance for Doubtful Accounts
The Company generates the majority of its revenues and corresponding accounts receivable from the sale of cannabis, and cannabis related products. The Company evaluates the collectability of its accounts receivable considering a combination of factors. In circumstances where it is aware of a specific customer’s inability to meet its financial obligations to it, the Company records a specific reserve for bad debts against amounts due in order to reduce the net recognized receivable to the amount it reasonably believes will be collected. For all other customers, the Company recognizes reserves for bad debts based on past write-off experience and the length of time the receivables are past due. The Company had $79,847 and $15,798 of bad debt expense during the year ended May 31, 2022 and 2021, 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 edibles 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. ComputerProperty acquired in a business combination is recorded at estimated initial fair value. Property, plant, and equipment is beingare depreciated using the straight-line method based on the lesser of the estimated useful lives of the assets or the lease term based upon the following life expectancy:
Years | ||||
Office equipment | 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 May 31, 2022, the net carrying value of goodwill on the Company’s balance sheet remained at $557,896.
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 three-year period.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 year ended May 31, 2022, the Company reported a non-controlling interest in the amount of $97,200 representing 50% of the 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 – Joint Ventures” for additional information on the Company’s VIEs.
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 $1,453,727 and $1,237,326 for the years ended May 31, 20172022 and 2016.2021, respectively.
Research and Development
Research and development expenses are charged to operations as incurred. The Company incurred research and development costs of $0$17,361 and $0$37,122 for the years ended May 31, 20172022 and 2016,2021, respectively.
Fair Value of Financial Instruments
Pursuant to Accounting Standards Codification (“ASC”) No. 825 - Financial Instruments, the Company is required to estimate the fair value of all financial instruments included on its balance sheets. The carrying amounts of the Company’s cash and cash equivalents, notenotes receivable, convertible notes payable, accounts payable and accrued expenses, none of which is held for trading, approximate their estimated fair values due to the short-term maturities of those financial instruments.
A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable, either directly or indirectly.
Level 3 - Significant unobservable inputs that cannot be corroborated by market data.
Revenue Recognition
Revenue from the yearsale of cannabis products is recognized by Oasis at the point of sale, at which time payment is received, the product is delivered, and the Company’s performance obligation has been met. Management estimates an allowance for sales returns.
The Company also recognizes revenue from Serenity Wellness Products LLC and Serenity Wellness Growers LLC, d/b/a City Trees (“City Trees”). City Trees recognizes revenue from the sale of the following cannabis products and services to licensed dispensaries, cultivators and distributors within the State of Nevada:
● | Premium organic medical cannabis sold wholesale to licensed retailers |
● | Recreational marijuana cannabis products sold wholesale to licensed distributors and retailers |
● | Extraction products such as oils and waxes derived from in-house cannabis production |
● | Processing and extraction services for licensed medical cannabis cultivators in Nevada |
● | High quality cannabis strains in the form of vegetative cuttings for sale to licensed medical cannabis cultivators in Nevada |
Effective June 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers. Under ASC 606, the Company recognizes revenue from commercial sales of products and licensing agreements by applying the following steps: (1) identifying the contract with a customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to each performance obligation in the contract; and (5) recognizing revenue when each performance obligation is satisfied.
Disaggregation of Revenue
The following table represents a disaggregation of revenue for the years ended May 31, 2017:2022 and 2021:
2022 | 2021 | |||||||
Cannabis Dispensary | $ | 14,869,852 | $ | 14,595,115 | ||||
Cannabis Production | 7,793,043 | 4,696,972 | ||||||
| $ | 22,662,895 | $ | 19,292,087 | |||||
Basic and Diluted Earnings or Loss Per Share
Basic net earnings per share is based on the weighted average number of shares outstanding during the period, while fully diluted net earnings per share is based on the weighted average number of shares of common stock and potentially dilutive securities assumed to be outstanding during the period using the treasury stock method. Potentially dilutive securities consist of options and warrants to purchase common stock, and convertible debt. Basic and diluted net loss per share are computed based on the weighted average number of shares of common stock outstanding during the period. At May 31, 20172022 and 2016,2021, the Company excluded fromhad the calculation of fully diluted shares outstandingfollowing potentially dilutive instruments outstanding: At May 31, 2022, a total of 1,180,350 and 2,658,44175,306,426 shares respectively,(6,451,339 issuable upon the exercise of warrants, 3,041,290 issuable upon the exercise of unit warrants, 65,693,797 issuable upon the conversion of convertible notes payable becauseand accrued interest, and 120,000 in stock to be issued). At May 31, 2021 a total of 129,623,809 shares (53,997,645 issuable upon the result would have been anti-dilutive.
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.calculations.
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 years ended May 31, 2022 and 2021. For the year ended May 31, 20172022, the Company excluded from the calculation of fully diluted earnings per share the following instruments which were anti-dilutive: shares issuable pursuant to the conversion of notes payable and 2016. accrued interest, shares issuable pursuant to the exercise of stock options and warrants, and 120,000 shares of common stock issuable.
Income Taxes
The Company accounts for income taxes under the asset and liability method in accordance with ASC 740. The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The components of the deferred tax assets and liabilities are classified as current and non-current based on their characteristics. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations.
Section 280E of the Internal Revenue Code, as amended, prohibits businesses from deducting certain expenses associated with trafficking controlled substances (within the meaning of Schedule I and II of the Controlled Substances Act). The IRS has invoked Section 280E in tax audits against various cannabis businesses in the U.S. that are permitted under applicable state laws. Although the IRS has issued a clarification allowing the deduction of certain expenses, the bulk of operating costs and general administrative costs are generally not permitted to be deducted. The operations of certain of the Company’s subsidiaries are subject to Section 280E. This results in permanent differences between ordinary and necessary business expenses deemed non-deductible under IRC Section 280E. Therefore, the effective tax rate can be highly variable and may not necessarily correlate with pre-tax income or loss.
Commitments and Contingencies
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims brought to such legal counsel’s attention as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed.
Recent Accounting Pronouncements
In January 2017, the FASB issued ASU No. 2017-04,
Simplifying the Test for Goodwill Impairment,In August 2020, the FASB issued ASU 2020-06, Debt, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40) to simplify accounting for certain financial instruments. ASU 2020-06 eliminates the current models that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity. The amendmentsnew standard also introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in thisan entity’s own equity. ASU will2020-06 amends the diluted earnings per share guidance, including the requirement to use the if-converted method for all convertible instruments. ASU 2020-06 is effective January 1, 2022 and should be applied on a prospective basis. Earlyfull or modified retrospective basis, with early adoption is permitted for interim or annual goodwill impairment tests performed.
Company’s financial statements.
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 the Company'sCompany’s consolidated financial position, results of operations or cash flows.
NOTE 4 – PREPAID EXPENSES JOINT VENTURE AND OPTIONS TRANSACTION
In Good Health
On October 31, 2018, the Company, CLS Massachusetts, and IGH, which converted to a for-profit corporation on November 6, 2018 (the “Conversion”), entered into 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 was 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 (the “Option Period”). If CLS Massachusetts exercised the IGH Option, the Company, a wholly-owned subsidiary of the Company and IGH would enter into the IGH Merger Agreement (the form of which had been agreed to by the parties). At the effective time of the merger contemplated by the IGH Merger Agreement, CLS Massachusetts would pay a purchase price of $47,500,000, subject to reduction as provided in the IGH Merger Agreement, payable as follows: $35 million in cash, $7.5 million in the form of a five-year promissory note, and $5 million in the form of restricted common stock of the Company, plus $2.5 million as consideration for a non-competition agreement with IGH’s President, payable in the form of a five-year promissory note. IGH and certain IGH stockholders holding sufficient aggregate voting power to approve the transactions contemplated by the IGH Merger Agreement entered into agreements pursuant to which such stockholders, among other things, agreed to vote in favor of such transactions.
On October 31, 2018, as consideration for the IGH Option, the Company made a loan to IGH (the “IGH Loan”), in the principal amount of $5,000,000 (the “IGH Loan Amount”), 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 “IGH Loan Agreement”). The IGH Loan was evidenced by a secured promissory note of IGH (the “IGH Note”), which bore interest at the rate of 6% per annum and was scheduled to mature on October 31, 2021. The Company had prepaid expensesrecorded interest income in the amounts of $1,410$149,972 and $6,742 at$296,450 on the IGH Loan during the twelve months ended May 31, 20172021 and 2020, respectively. On March 1, 2020, the Company capitalized interest in the amount of $399,453 into the principal amount due. During the years ended May 31, 2016, respectively, consisting of prepaid legal fees.
On June 14, 2021, the parties to the IGH lawsuit entered into a confidential settlement agreement to resolve the action and the IGH Settlement Note. Pursuant to the IGH Settlement Note, IGH shall pay the Company $3,000,000, $500,000 of which was paid on or before June 21, 2021. A second payment of $500,000 was paid on or before July 12, 2021. The remaining $2,000,000 and accrued interest is being paid in 12 equal monthly installments beginning on August 12, 2021, pursuant to the terms of the promissory note. During the year ended May 31, 2022, the Company received $2,740,820 under the IGH Settlement Note, which includes $2,666,670 in principal and $74,150 in accrued interest. The Company records amounts paid under the IGH Settlement Note as gains when payments are received.
Quinn River 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 is 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 has 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 Quinn River Joint Venture Agreement, Kealii Okamalu is expected to lease approximately 20-30 acres of the Tribe’s land located along the Quinn River at a cost of $3,500 per quarter and manage the design, finance and construction in progressof a cannabis cultivation facility on such tribal lands (“the Cultivation Facility”). Kealii Okamalu will also manage 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 will be branded as “Quinn River Farms.” The Company will provide 10,000 square feet of warehouse space at its leasedLas Vegas facility, and will have preferred vendor status including the right to purchase cannabis flower and the business’s cannabis trim at favorable prices. Kealii Okamalu is expected to contribute $6 million towards the construction of the Cultivation Facility and the working capital for the Quinn River Joint Venture. This amount will 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 will receive one-third of the net profits of the Quinn River Joint Venture.
The Company is the manager of and holds a 50% ownership interest in Colorado. AlsoKealii Okamalu. Kealii Okamalu is a VIE which the Company consolidates. The Quinn River Joint Venture is not a legal entity but rather a business operated by Kealii Okamalu. The Company uses the equity method of accounting to record one-third of the profit or loss generated by the Quinn River Joint Venture, which accrues to Kealii Okamalu. Since the Company is a 50% owner of Kealii Okamalu, 50% of the profit or loss of Kealii Okamalu is recorded as minority interest in the Company’s statement of operations.
During the year ended May 31, 2022, Kealii Okamalu made cash investments in the aggregate amount of $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, 2022, the Quinn River Joint Venture recorded a loss in the amount of $336,416. One-third of this amount, or $112,139, was charged to the financial statements of Kealii Okamalu and recorded as a loss on equity investment in the Company’s financial statements for the year ended May 31, 2022, reducing the Company’s equity investment in the Quinn River Joint Venture from $581,714 to $469,575 at May 31, 2022.
NOTE 5 – ACCOUNTS RECEIVABLE
Accounts receivable was $618,227 and $684,935 at May 31, 2022 and 2021, respectively. The Company had bad debt expense of $79,847 and $15,798 during the year ended May 31, 2017,2022 and 2021. No allowance for doubtful accounts was necessary during the years ended May 31, 2022 and 2021.
NOTE 6 – INVENTORY
Inventory, consisting of material, overhead, labor, and manufacturing overhead, is stated at the lower of cost (first-in, first-out) or market, and consists of the following:
May 31, | May 31, | |||||||
2022 | 2021 | |||||||
Raw materials | $ | 297,563 | $ | 344,085 | ||||
Finished goods | 3,120,039 | 883,967 | ||||||
Total | $ | 3,417,602 | $ | 1,228,052 | ||||
Raw materials consist of cannabis plants and the materials that are used in our production process prior to being tested and packaged for consumption. Finished goods consist of pre-packaged materials previously purchased from other licensed cultivators and our manufactured edibles and extracts.
NOTE 7 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following at May 31, 2022 and 2021:
May 31, | May 31, | |||||||
2022 | 2021 | |||||||
Deposits | $ | 2,016 | 2,244 | |||||
Prepaid expenses | 293,853 | 250,069 | ||||||
Other receivables | - | 10,000 | ||||||
Total | $ | 295,869 | $ | 262,313 | ||||
Deposits consist of amounts paid in advance for the acquisition of property and equipment. Prepaid expenses consist primarily of annual license fees charged by the State of Nevada; these fees are paid in advance, and amortized over the one-year term of the licenses.
NOTE 8 – NOTES RECEIVABLE
IGH Note Receivable
On October 31, 2018, in connection with an option to purchase transaction (see note 4), the Company wrote-offloaned $5,000,000 pursuant to the IGH Note to IGH. On November 6, 2018, IGH converted to a for-profit corporation. The IGH Note bore interest at the rate of 6% per annum. On March 1, 2020 (the “Initial Payment Date”), all accrued interest was added to the outstanding principal due thereunder and such amount was payable in 8 equal quarterly installments, commencing on the Initial Payment Date, together with interest accruing after the Initial Payment Date. The IGH Note was to mature and all outstanding principal, accrued interest and any other amounts due thereunder, was due and payable in full on the third anniversary of $141,739the IGH Note. The IGH Note was issued in connection with a loan agreement and security agreement between the Company and IGH, and the IGH Option Agreement between the Company and IGH, among others, in both cases dated as of constructionOctober 31, 2018, and the other IGH Loan Documents, and was secured by the collateral described in progress at its leased facilitythe IGH Loan Documents and by such other collateral as may in Colorado.
By letter dated February 26, 2020, the Company informed IGH that as a result of its breaches of the IGH Option, which remained uncured, an event of default had occurred under the IGH Note. The Company advised IGH that it was electing to Picture Rock Holdings, LLC,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 Note. This dispute, including whether IGH breached the IGH Option and whether CLS was entitled to collect default interest, was in litigation. During the twelve months ended May 31, 2021, the Company impaired the remaining amounts due under the IGH Note in the amount of $2,498,706, which included $2,497,884 in principal and $822 in accrued interest.
On June 14, 2021, the parties to the IGH lawsuit entered into a Colorado limited liability company (“PRH”).confidential settlement agreement to resolve the action and the IGH Settlement Note. Pursuant to the IGH Settlement Note, as amended byIGH shall pay the parties effectiveCompany $3,000,000, $500,000 of which was paid on or before June 30, 2015, October 31, 2015, April 11, 2016,21, 2021. A second payment of $500,000 was paid on or before July 12, 2021. The remaining $2,000,000 and May 31, 2016, PRH will repay the principal due under the Note in twenty (20) equal quarterly installments of Twenty Five Thousand Dollars ($25,000) commencing in the month following the month in which PRH commences generating revenue at the grow facility, which commencement was originally anticipated to occur in the first quarter of 2017, and continuing untilaccrued interest is being paid in full. The Company is currently unable12 equal monthly installments beginning on August 12, 2021, pursuant to estimate when it will commence generating revenues at the grow facility. Interest will accrue on the unpaid principal balanceterms of the Note at the rate of twelve percent (12%) per annum and will be paid quarterly in arrears commencing after such initial payment and continuing until paid in full. All outstanding principal and any accumulated unpaid interest due under the Note is due and payable on the five-year anniversary of the initial payment thereunder. In the event of default as defined in the agreements underlying the Note, all amounts under the Note shall be due and payable at once.promissory note. During the year ended May 31, 2015,2022, the Company received $2,740,820 under the IGH Settlement Note, which included $2,666,670 in principal and $74,150 in accrued interest. As of May 31, 2022, the amount due under the IGH Settlement Note was $166,667. The Company records amounts paid under the IGH Settlement Note as gains when payments are received.
NOTE 9 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at May 31, 2022 and 2021:
May 31, | May 31, | |||||||
2022 | 2021 | |||||||
Office equipment | $ | 132,859 | $ | 120,068 | ||||
Furniture & fixtures | 148,358 | 145,103 | ||||||
Machinery & equipment | 2,447,715 | 1,823,094 | ||||||
Leasehold improvements | 3,686,951 | 2,822,017 | ||||||
Less: accumulated depreciation | (2,073,449 | ) | (1,434,614 | ) | ||||
Property and equipment, net | $ | 4,342,434 | $ | 3,475,668 | ||||
The Company made payments in the amounts of $1,104,806 and $269,437 for property and equipment during the years ended May 31, 2022 and 2021, respectively.
Depreciation expense totaled $638,835 and $569,278 for the years ended May 31, 2022 and 2021, respectively.
NOTE 10 – RIGHT TO USE ASSETS AND LIABILITIES – OPERATING LEASES
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 years ended May 31, 2022 and 2021 was entirely comprised of operating leases and amounted to $515,457 and $495,114, respectively. The Company’s right of use (“ROU”) asset amortization for the years ended May 31, 2022 and 2021 was $324,904 and $341,035, respectively. The difference between the lease expense and the associated ROU asset amortization consists of interest.
The Company has recorded an impairment relatedtotal right to the note receivableuse assets of $4,112,876 and liabilities in the amount of $500,000. This receivable$4,069,476 through May 31, 2022, resulting in gains in the amount of $28,511 during the year ended May 31, 2020 and $14,899 during the year ended May 31, 2021. During the year ended May 31, 2020, the Company entered into agreements to amend certain of its operating leases. The lease of the dispensary and administrative offices at 1800 Industrial Road was extended from June 30, 2023 to February 28, 2030, and the lease of the offices at 1718 Industrial Road was extended from August 31, 2020 to August 31, 2022. During the year ended May 31, 2021, the Company entered into an agreement to extend the lease of its cultivation and processing facility at 203 E. Mayflower Avenue through February 28, 2030.
On May 17, 2022, pursuant to the Quinn River Joint Venture Agreement (see note 4), the Company, through CLS Nevada, Inc., entered into an agreement (the “Quinn River Lease”) to use approximately 20 acres of land for purposes of building and operating a facility to grow cannabis. The lease has a term of 9 years, with two-year renewal options. Rent is recorded$3,500 per quarter. The initial amount of the right to use asset and operating lease liability under the Quinn River Lease was $221,469.
Right to use assets – operating leases are summarized below:
May 31, 2022 | ||||
Amount at inception of leases | $ | 4,112,876 | ||
Amount amortized | (1,958,359 | ) | ||
Balance – May 31, 2022 | $ | 2,154,517 | ||
Operating lease liabilities are summarized below:
Amount at inception of leases | $ | 4,069,476 | ||
Amount amortized | (1,866,069 | ) | ||
Balance – May 31, 2022 | $ | 2,203,407 |
Warehouse and offices | $ | 1,979,285 | ||
Land | 216,151 | |||
Office equipment | 7,971 | |||
Balance – May 31, 2022 | $ | 2,203,407 | ||
Lease liability | $ | 2,203,407 | ||
Less: current portion | (309,597 | ) | ||
Lease liability, non-current | $ | 1,893,810 |
Maturity analysis under these lease agreements is as follows:
Twelve months ended May 31, 2023 | $ | 493,327 | ||
Twelve months ended May 31, 2024 | 502,461 | |||
Twelve months ended May 31, 2025 | 515,988 | |||
Twelve months ended May 31, 2026 | 451,671 | |||
Twelve months ended May 31, 2027 | 227,053 | |||
Thereafter | 741,756 | |||
Total | $ | 2,932,256 | ||
Less: Present value discount | (728,849 | ) | ||
Lease liability | $ | 2,203,407 |
NOTE 11 – INTANGIBLE ASSETS
Intangible assets consisted of the following at May 31, 2022 and 2021:
May 31, 2022 | ||||||||||||
Accumulated | ||||||||||||
Gross | Amortization | Net | ||||||||||
Intellectual Property | $ | 319,600 | $ | (125,177 | ) | $ | 194,423 | |||||
License & Customer Relations | 990,000 | (193,875 | ) | 796,125 | ||||||||
Tradenames - Trademarks | 301,000 | (117,892 | ) | 183,108 | ||||||||
Non-compete Agreements | 27,000 | (27,000 | ) | - | ||||||||
Domain Names | 25,993 | (9,364 | ) | 16,629 | ||||||||
Total | $ | 1,663,593 | $ | (473,308 | ) | $ | 1,190,285 | |||||
May 31, 2021 | ||||||||||||
Accumulated | ||||||||||||
Gross | Amortization | Net | ||||||||||
Intellectual Property | $ | 319,600 | $ | (93,217 | ) | $ | 226,383 | |||||
License & Customer Relations | 990,000 | (144,375 | ) | 845,625 | ||||||||
Tradenames - Trademarks | 301,000 | (87,792 | ) | 213,208 | ||||||||
Non-compete Agreements | 27,000 | (27,000 | ) | - | ||||||||
Domain Names | 25,993 | (6,019 | ) | 19,974 | ||||||||
Total | $ | 1,663,593 | $ | (358,403 | ) | $ | 1,305,190 | |||||
Total amortization expense charged to operations for the years ended May 31, 2022 and 2021 was $114,905 and $116,014, respectively.
Amount to be amortized during the twelve months ended May 31, | ||||
2023 | $ | 114,896 | ||
2024 | 114,896 | |||
2025 | 114,896 | |||
2026 | 114,896 | |||
2027 | 114,854 | |||
Thereafter | 615,847 | |||
| $ | 1,190,285 | |||
NOTE 12 – GOODWILL
Goodwill in the amount of $557,896 is carried on the Company’s balance sheet at May 31, 2022 and 2021 in connection with the acquisition of Alternative Solutions on June 27, 2018.
Goodwill Impairment Test
The Company assessed its intangible assets as of May 31, 20172022 and 20162021 for purposes of determining if an impairment existed as set forth in ASC 350 – Intangibles – Goodwill and Other and ASC 360 – Property Plant and Equipment. Pursuant to ASC 360, the Company determined that the fair value of its intangible assets exceeded the carrying value of goodwill at May 31, 2022 and 2021. As a result, no impairment was recorded. At May 31, 2022 and 2021, the net amount of $0, netgoodwill on the Company’s balance sheet was $557,896.
NOTE 13 – OTHER ASSETS
Other assets included the following as of allowance in the amount of $500,000 (see note 10).May 31, 2022 and May 31, 2021:
May 31, | May 31, | |||||||
2022 | 2021 | |||||||
Security deposits | 229,500 | 167,455 | ||||||
| $ | 229,500 | $ | 167,455 | |||||
NOTE 814 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consisted of $581,765 and $432,260the following at May 31, 20172022 and May 31, 2016, respectively, consisting2021:
May 31, | May 31, | |||||||
2022 | 2021 | |||||||
Trade accounts payable | $ | 1,414,074 | $ | 771,843 | ||||
Accrued payroll and payroll taxes | 323,254 | 279,721 | ||||||
Accrued liabilities | 580,570 | 557,061 | ||||||
Total | $ | 2,317,898 | $ | 1,608,625 | ||||
NOTE 15 – LOAN PAYABLE
The Company is a party to an accounts receivable financing agreement with a lender (the “Short Term Financing Agreement”) for two of legal fees, consulting fees and other trade payables.
NOTE 16 – NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE
| Accrued | ||||||||||||
| Principal | Interest | # Shares | ||||||||||
| Jeffrey Binder | $ | 442,750 | $ | 19,427 | (1,848,708 | ) | ||||||
| Frank Koretsky | 1,485,000 | 130,069 | (6,460,276 | ) | ||||||||
| Newcan Investment Partners LLC | 460,000 | 7,747 | (1,870,988 | ) | ||||||||
| CLS CO 2016 LLC | 150,000 | 9,247 | (636,988 | ) | ||||||||
| Total | $ | 2,537,750 | $ | 166,490 | (10,816,960 | ) | ||||||
Convertible Notes Payable
May 31, 2022 | May 31, 2021 | |||||||
Convertible debenture in the principal amount of $4,000,000 (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 $0.80 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 $1.10. The value of the warrants will be recorded when the issuance becomes probable. 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. During the years ended May 31, 2022 and 2021, $0 and $1,537,034 of this discount was charged to operations, respectively. During the years ended May 31, 2022 and 2021, the Company accrued interest in the amounts of $360,357 and $360,357 on the U.S. Convertible Debenture 1, respectively. During the years ended May 31, 2022 and 2021, the Company made interest payments in the amounts of $360,357 and $330,327, respectively. On April 15, 2021, the U.S. Convertible Debenture 1 was amended as follows: (i) the conversion price of the debenture was reduced to $0.30 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 this amendment. | $ | 4,504,457 | $ | 4,504,457 | ||||
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 $0.80 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 $1.10. The value of the warrants will be recorded when the issuance becomes probable. 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. During the years ended May 31, 2022 and 2021, $0 and $384,259 of this discount was charged to operations, respectively. During the years ended May 31, 2022 and 2021, the Company accrued interest in the amounts of $90,089 and $90,090 on the U.S. Convertible Debenture 2, respectively. During the years ended May 31, 2022 and 2021, the Company made interest payments in the amounts of $90,089 and $82,582, respectively. On April 15, 2021, the U.S. Convertible Debenture 2 was amended as follows: (i) the conversion price of the debentures was reduced to $0.30 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. | 1,126,114 | 1,126,114 | ||||||
May 31, 2022 | May 31, 2021 | |||||||
Convertible debenture in the principal amount of $100,000 (the “U.S. Convertible Debenture 3”) dated October 24, 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 3. The U.S. Convertible Debenture 3 was to mature on a date that was three years following issuance. The U.S. Convertible Debenture 3 was convertible into Convertible Debenture Units at a conversion price of $0.80 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 $1.10. The value of the warrants will be recorded when the issuance becomes probable. On July 26, 2019, U.S. Convertible Debenture 3 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 3, the conversion price of U.S. Convertible Debenture 3 would be reduced to such issuance price, and the exercise price of the warrant issuable in connection with U.S. Convertible Debenture 3 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 3 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 3 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 $75,415 on the U.S. Convertible Debenture 3. During the years ended May 31, 2022 and 2021, $10,474 and $25,138 of this discount was charged to operations, respectively. During the years ended May 31, 2022 and 2021, the Company accrued interest in the amounts of $3,604 and $9,009 on the U.S. Convertible Debenture 3, respectively. During the years ended May 31, 2022 and 2021, the Company made interest payments in the amounts of $5,106 and $8,409, respectively. This debenture was repaid in full during the year ended May 31, 2022. | - | 112,613 | ||||||
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 $0.80 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 $1.10. 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, 2022 and 2021, $0 and $196,753 of this discount was charged to operations, respectively. During the years ended May 31, 2022 and 2021, the Company accrued interest in the amounts of $47,928 and $47,929 on the U.S. Convertible Debenture 4, respectively. During the years ended May 31, 2022 and 2021, the Company made interest payments in the amounts of $47,928 and $44,600, 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 $0.30 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 $271,164 during the year ended May 31, 2021. | 599,101 | 599,101 | ||||||
Convertible debenture in the principal amount of $150,000 (the “U.S. Convertible Debenture 5”) dated October 26, 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 5. The U.S. Convertible Debenture 5 was to mature on a date that was three years following issuance. The U.S. Convertible Debenture 5 was convertible into Convertible Debenture Units at a conversion price of $0.80 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 $1.10. The value of the warrants will be recorded when the issuance becomes probable. The U.S. Convertible Debenture 5 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 5 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 $120,100 on the U.S. Convertible Debenture 5. During the years ended May 31, 2022 and 2021, $16,681 and $40,033 of this discount was charged to operations, respectively. During the years ended May 31, 2022 and 2021, the Company accrued interest in the amounts of $5,480 and $13,513 on the U.S. Convertible Debenture 5, respectively. During the years ended May 31, 2022 and 2021, the Company made interest payments in the amounts of $7,733 and $12,537, respectively. This debenture was repaid in full during the year ended May 31, 2022. | - | 168,919 | ||||||
| May 31, | May 31, | |||||||
| 2017 | 2016 | |||||||
Note 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 Note 1; during the year ended May 31, 2016, $92,500 of this amount was transferred out of the Binder Funding Note 1 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 Note 1. In July 2016, the remaining principal balance of $2,750 in the Binder Funding Note 1 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 Note 1. Also during the year ended May 31, 2017, Mr. Binder loaned the Company an additional $49,700; which was credited to the Binder Funding Note 1. 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 Note 1 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 Note 1. During the year ended May 31, 2017, the Company accrued interest in the amount of $1,910 on the Binder Funding Note 1. 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. | $ | 77,550 | $ | 2,750 | ||||
| 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 (see Koretsky Convertible Note 3 below). 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). During the twelve months ended May 31, 2017, the Company accrued interest in the amount of $5,104 on the Koretsky Funding Notes. | - | 70,000 | ||||||
| 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 (see Koretsky Funding Notes, above). 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. | 621,658 | - | ||||||
| Total - Notes Payable, Related Parties | $ | 699,208 | $ | 72,750 | ||||
| May 31, | May 31, | |||||||
| 2017 | 2016 | |||||||
Unsecured convertible note issued to Jeffrey Binder, an officer and director of the Company, dated January 12, 2016 and due January 1, 2019 (the “Binder Convertible Note 1”). This note bears interest at the rate of 6% per annum. No payments are required until January 1, 2017, at which time all accrued interest becomes due and payable. Commencing on April 1, 2017, the first of eight principal payments in the amount of $6,250 will be due; subsequent principal payments will due on the first day of each July, October, January, and April until paid in full. This note and accrued interest under the note may be converted, in whole or in part, into one “Unit” for each $0.75 converted, with each Unit consisting of one (1) share of common stock and a five-year warrant to purchase (1) share of common stock at a price of $1.00 per share (post Reverse-Split). The Company recognized a discount of $50,000 on the value of the beneficial conversion feature at the time of issuance. During the twelve months ended May 31, 2016, $9,599 of this discount was charged to operations. During the twelve months ended May 31, 2016, the Company accrued interest in the amount of $1,151 on this note. Pursuant to the Omnibus Loan Agreement, on May 31, 2017, (i) the conversion rate of the Binder Convertible Note 1 was changed to $0.25 per share, and principal and accrued interest in the amounts of $50,000 and $3,872, respectively, were converted into a total of 215,488 shares of common stock; and (ii) the requirement to issue warrants upon conversion was deleted. During the twelve months ended May 31, 2017, the remaining discount on the Binder Convertible Note 1 in the amount of $40,401 was charged to operations, and the Company accrued interest in the amount of $3,000. | - | 50,000 | ||||||
Unsecured convertible note issued to Jeffrey Binder, an officer and director of the Company, dated April 8, 2016 and due April 1, 2019 (the “Binder Convertible Note 2”). During the year ended May 31, 2016, Mr. Binder made advances to the Company in the aggregate amount of $95,250 (see Binder Funding Notes); $42,500 of this amount was used to fund the Binder Convertible Note 2. This note bears interest at the rate of 6% per annum through February 29, 2017 and 10% per annum thereafter. No payments are required until April 1, 2017, at which time all accrued interest becomes due and payable. Commencing on July 1, 2017, the first of eight principal payments in the amount of $5,313 will be due; subsequent principal payments will due on the first day of each October, January, April, and July until paid in full. This note and accrued interest under the note may be converted, in whole or in part, into one “Unit” for each $1.07 converted, with each Unit consisting of one (1) share of common stock and a five-year warrant to purchase (1) share of common stock at a price of $1.07 per share (post Reverse-Split). The Company recognized a discount of $37,840 on the value of the beneficial conversion feature at the time of issuance. During the twelve months ended May 31, 2016, $7,263 of this discount was charged to operations. During the twelve months ended May 31, 2016, the Company accrued interest in the amount of $773 on this note. Pursuant to the Omnibus Loan Agreement, on May 31, 2017, (i) the conversion rate of the Binder Convertible Note 2 was changed to $0.25 per share, and principal and accrued interest in the amounts of $42,500 and $3,583, respectively, were converted into a total of 184,332 shares of common stock; and (ii) the requirement to issue warrants upon conversion was deleted. During the twelve months ended May 31, 2017, the remaining discount on the Binder Convertible Note 2 in the amount of $35,260 was charged to operations, and the Company accrued interest in the amount of $4,287. | - | 42,500 | ||||||
May 31, 2022 | May 31, 2021 | |||||||
Convertible debenture payable in the principal amount of $75,000 (the “U.S. Convertible Debenture 6”) dated October 26, 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 6. The U.S. Convertible Debenture 6 was to mature on a date that was three years following issuance. The U.S. Convertible Debenture 6 was convertible into Convertible Debenture Units at a conversion price of $0.80 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 $1.10. The value of the warrants will be recorded when the issuance becomes probable. The U.S. Convertible Debenture 6 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 6 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 $60,049 on the U.S. Convertible Debenture 6. During the years ended May 31, 2022 and 2021, $8,340 and $20,016 of this discount was charged to operations, respectively. During the years ended May 31, 2022 and 2021, the Company accrued interest in the amounts of $2,740 and $6,756 on the U.S. Convertible Debenture 6, respectively. During the years ended May 31, 2022 and 2021, the Company made interest payments in the amounts of $3,866 and $6,269, respectively. This debenture was repaid in full during the year ended May 31, 2022. | - | 84,459 | ||||||
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 $0.80 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 $1.10. The value of the warrants will be recorded when the issuance becomes probable. 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 32,321 shares of the Company’s common stock, and warrants to purchase 16,160 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 years ended May 31, 2022 and 2021, the Company accrued interest in the amounts of $1,058,531 and $1,076,445 on the Canaccord Debentures, respectively. During the years ended May 31, 2022 and 2021, the Company made interest payments in the amounts of $1,057,532 and $861,009, respectively. Also, during the years ended May 31, 2022 and 2021, the Company transferred the amounts of $0 and $212,601 from accrued interest to principal of the Canaccord Debentures, respectively. On March 31, 2021, the Canaccord Debentures were amended as follows: (i) the conversion price of the debentures was reduced to $0.30 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 $1.20 per share to $0.60 per share for the preceding ten consecutive trading days; and (iv) the exercise price of the warrants issuable upon conversion was reduced from $1.10 to $0.40 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 936,666 shares of the Company’s common stock, and warrants to purchase 468,333 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. | 13,219,149 | 13,500,150 | ||||||
Total - Convertible Notes Payable | $ | 19,448,821 | $ | 20,095,813 | ||||
Less: Discount | (- | ) | (35,496 | ) | ||||
Convertible Notes Payable, Net of Discounts | $ | 19,448,821 | $ | 20,060,317 | ||||
May 31, 2022 | May 31, 2021 | |||||||
Total - Convertible Notes Payable, Net of Discounts, Current Portion, net of discount of $0 and $35,496 | $ | 19,448,821 | $ | 330,495 | ||||
Total - Convertible Notes Payable, Net of Discounts, Long-term Portion, net of discount of $0 and $0 | $ | - | $ | 19,729,822 | ||||
May 31, 2022 | May 31, 2021 | |||||||
Discounts on notes payable amortized to interest expense – years ended May 31, 2022 and 2021, respectively | $ | 35,496 | $ | 2,203,234 | ||||
Note 17 – Notes Payable
May 31, 2022 | May 31, 2021 | |||||||
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 303,030 shares of common stock at an exercise price of $0.4125 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 the Debenture 1. During the years ended May 31, 2022 and 2021, $3,334 and $0 of this discount was charged to operations, respectively. The Company recorded an original issue discount in the amount of $187,500 on the Debenture 1. During the years ended May 31, 2022 and 2021, $36,290 and $0 of this original issue discount was charged to operations, respectively. During years ended May 31, 2022 and 2021, the Company accrued interest in the amounts of $18,750 and $0 on the Debenture 1, respectively. | $ | 250,000 | $ | - | ||||
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 303,030 shares of common stock at an exercise price of $0.4125 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 the Debenture 2. During the years ended May 31, 2022 and 2021, $1,682 and $0 of this discount was charged to operations, respectively. The Company recorded an original issue discount in the amount of $187,500 on the Debenture 2. During the years months ended May 31, 2022 and 2021, $30,242 and $0 of this original issue discount was charged to operations, respectively. During the years ended May 31, 2022 and 2021, the Company accrued interest in the amounts of $16,563 and $0 on the Debenture 1, respectively. | 250,000 | - | ||||||
May 31, | May 31, | |||||||
Debenture in the principal amount of $500,000 (the “Debenture 3”) dated December 21, 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 | - | |||||||
Debenture in the principal amount of $500,000 (the “Debenture 4”) dated January 4, 2022, which bears interest, payable quarterly commencing six 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 | ||||||||
| - | ||||||||
Debenture in the principal amount of $500,000 (the “Debenture 5”) dated January 4, 2022, which bears interest, payable quarterly commencing six 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 | - | |||||||
Debenture in the | 500,000 | - | ||||||
Total | 2,500,000 | - | ||||||
Original Issue Discount | 1,875,000 | - | ||||||
Notes Payable, Gross | 4,375,000 | - | ||||||
Less: Discount | (1,681,434 | ) | - | |||||
Notes Payable, Net of Discount | 2,693,566 | - | ||||||
May 31, 2017 | May 31, 2016 | |||||||
Unsecured convertible note issued to Newcan, dated January 10, 2017 and due January 2, 2020 (the “Newcan Convertible Note 2”). The Newcan Convertible Note 2 was funded with $410,000 of advances Newcan made to the Company under the Newcan Funding Notes. This note bears interest at the rate of 10% per annum. No payments are required until January 2, 2018, at which time all accrued interest becomes due and payable. Commencing on April 1, 2018, the first of eight principal payments in the amount of $51,250 will become due; subsequent principal payments will become due on the first day of each, July, October, January, and April until paid in full. This note and accrued interest under the note may be converted, in whole or in part, into one “Unit” for each $1.07 converted, with each Unit consisting of one (1) share of common stock and a five-year warrant to purchase (1) share of common stock at a price of $1.07 per share. Pursuant to the Omnibus Loan Agreement, on May 31, 2017, (i) the conversion rate of the Newcan Convertible Note 2 was changed to $0.25 per share, and principal and accrued interest in the amounts of $410,000 and $7,527, respectively, were converted into a total of 1,670,108 shares of common stock; and (ii) the requirement to issue warrants upon conversion was deleted. During the twelve months ended May 31, 2017, the Company accrued interest in the amount of $15,838 on the Newcan Convertible Note 2. | - | - | ||||||
Unsecured convertible note issued to Newcan, dated January 10, 2017 and due January 2, 2020 (the “Newcan Convertible Note 3”). The Newcan Convertible Note 3 was funded with $50,000 of advances Newcan made to the Company under the Newcan Funding Notes. This note bears interest at the rate of 10% per annum. No payments are required until January 2, 2018, at which time all accrued interest becomes due and payable. Commencing on April 1, 2018, the first of eight principal payments in the amount of $6,250 will become due; subsequent principal payments will become due on the first day of each July, October, January, and April until paid in full. This note and accrued interest under the note may be converted, in whole or in part, into one “Unit” for each $1.07 converted, with each Unit consisting of one (1) share of common stock and a five-year warrant to purchase (1) share of common stock at a price of $1.07 per share. Pursuant to the Omnibus Loan Agreement, on May 31, 2017, (i) the conversion rate of the Newcan Convertible Note 3 was changed to $0.25 per share, and principal and accrued interest in the amounts of $50,000 and $220, respectively, were converted into a total of 200,880 shares of common stock; and (ii) the requirement to issue warrants upon conversion was deleted. During the twelve months ended May 31, 2017, the Company accrued interest in the amount of $2,822 on the Newcan Convertible Note 3. | - | - | ||||||
| Total – Convertible Notes Payable, Related Parties | $ | 192,000 | $ | 1,367,500 | ||||
| Less: Discount | - | (1,114,104 | ) | |||||
| Convertible Notes Payable, Related Parties, Net of Discounts | $ | 192,000 | $ | 253,396 | ||||
| Convertible Notes Payable, Related Parties, Current Portion | $ | - | $ | 118,125 | ||||
| Convertible Notes Payable, Related Parties, Long-term Portion | $ | 192,000 | $ | 1,249,375 | ||||
| Convertible Notes Payable, Related Parties, Net of Discounts, Current Portion | $ | - | $ | 22,678 | ||||
| Convertible Notes Payable, Related Parties, Net of Discounts, Long-term Portion | $ | 192,000 | $ | 230,718 | ||||
May 31, 2022 | May 31, 2021 | |||||||
Discounts on notes payable amortized to interest expense – years ended May 31, 2022 and 2021, respectively | $ | 277,017 | $ | - | ||||
Aggregate maturities of notes payable and convertible notes payable as of May 31, 2022 are as follows:
For the twelve months ended May 31,
2022 | $ | 19,448,821 | ||
2024 | 1,250,000 | |||
2025 | 1,250,000 | |||
2026 | 375,000 | |||
2027 | 375,000 | |||
Thereafter | 1,125,000 | |||
Total | $ | 23,823,821 |
During the year ended May 31, 2022, the Company offered for sale a maximum of $5,500,000 of debentures (the “2021 Debentures”) and warrants to purchase shares of the Company’s common stock at a price of $0.4125 per share in an aggregate amount equal to one-half of the aggregate purchase price for the 2021 Debentures (the “2021 Debenture Warrants”) (collectively, the “November 2021 Offering”). During the year ended May 31, 2022, the Company received the amount of $2,500,000 pursuant to the November 2021 Offering and issued an aggregate of 3,030,304 warrants to purchase its common stock at an exercise price of $0.4125 per share to the investors.
NOTE 18 – LEASE LIABILITIES - FINANCING LEASES
May 31, 2022 | May 31, 2021 | |||||||
(unaudited) | ||||||||
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 year ended May 31, 2022, the Company made principal and interest payments on this lease obligation in the amounts of $10,907 and $9,439, respectively. | $ | 348,993 | $ | - | ||||
Total | $ | 348,993 | $ | - | ||||
Current portion | $ | 71,813 | $ | - | ||||
Long-term maturities | 277,180 | - | ||||||
Total | $ | 348,993 | $ | - | ||||
Aggregate maturities of lease liabilities – financing leases as of May 31, 2022 are as follows:
For the period ended May 31,
2023 | $ | 71,813 | ||
2024 | 84,064 | |||
2025 | 98,405 | |||
2026 | 94,711 | |||
2027 | - | |||
Thereafter | - | |||
Total | $ | 348,993 |
NOTE 19 – CONTINGENT LIABILITY
The terms of the Company’s acquisition of Alternative Solutions, included a payment of $1,000,000 contingent upon the Oasis LLCs achieving certain revenue targets. (see note 3). The fair value of this contingent consideration at the time of the Acquisition Agreement was $678,111 as determined by the Company’s outside valuation consultants. Management reviewed the value of the contingent consideration, and concluded that, due to the increased revenue of Alternative Solutions, the fair value of this contingent liability was $1,000,000 at May 31, 2019. The Company recorded a charge to operations in the amount of $321,889 during the year ended May 31, 2019.
May 31, 2017 | May 31, 2016 | |||||||
Convertible promissory note issued to an unaffiliated third party due April 29, 2018 (the “April 2015 Note”). During the twelve months ended May 31, 2015, the lender loaned the Company the amount of $200,000 pursuant to this note. The April 2015 Note bears interest at a rate of 15% per annum. On the first anniversary of this note, the all then accrued interest became due. Thereafter, the Company is required to make eight equal payments of principal together with accrued interest, quarterly in arrears, commencing on July 1, 2016 until paid in full. The note and any accrued unpaid interest is convertible into common stock of the Company. For each dollar converted, the note holder shall receive two shares of common stock and one three-year warrant to purchase 1.33 shares 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. | 100,000 | 200,000 | ||||||
Convertible Promissory Note payable to Old Main Capital, LLC (“Old Main”) dated March 18, 2016, for the purchase of up to $555,555 in 10% Original Issue Discount Convertible Promissory Notes (the “10% Notes”). During the year ended May 31, 2016, Old Main loaned the Company the amount of $333,332 pursuant to these notes. These notes bear interest at the rate of 10% per annum. Old Main may, at its option, convert all or a portion of the notes and accrued but unpaid interest into shares of common stock at a conversion price of $0.80 per share (post Reverse-Split) (the “Fixed Conversion Price”). The Fixed Conversion Price is subject to adjustment if, at any time while this note is outstanding, the Company should issue any equity security with an effective price per share that is lower than the Fixed Conversion Price (the “Base Conversion Price”), other than certain exempt issuances. In such an instance, the Fixed Conversion Price will be lowered to match the Base Conversion Price. The shares underlying the 10% Notes are subject to a registration rights agreement. At the earlier of September 18, 2016 or two trading days after the registration statement is declared effective, the Company must begin to redeem 1/24th of the face amount of the notes and any accrued but unpaid interest on a bi-weekly basis. Such amortization payments may be made, at our option, in cash or, subject to certain conditions, in common stock pursuant to a conversion rate equal to the lower of (a) $0.80 or (b) 75% of the lowest daily volume weighted average price of the common stock in the twenty consecutive trading days immediately prior to the conversion date. The Company recognized a discount of $330,188 on the 10% Notes related to the value of the original issue discount and embedded derivative. During the twelve months ended May 31, 2016, $4,056 of this discount was charged to operations. During the twelve months ended May 31, 2016, the Company accrued interest in the amount of $5,160 on this note. On October 6, 2016, the 10% Notes were amended to increase the interest rate to 15% (effective August 1, 2016) and subsequently amended November 28, 2016 to convert the 10% Notes from installment notes to “balloon” notes, with all principal and accrued interest due on September 18, 2017. In exchange for amending the terms of the 10% Notes, the Company increased the outstanding principal balance by 10% to $366,666; pursuant to this modification, the Company recorded a loss on modification of debt in the amount of $33,334. In addition, the Fixed Conversion Price was changed to a variable conversion price equal to the lesser of the prior Fixed Conversion Price or 75% of the lowest VWAP in the fifteen trading days ending on the trading day immediately prior to the conversion date. The 10% Notes were revalued as of the November 28, 2016 amendment and the Company recognized a discount of $366,666 on the value of the embedded derivative. During the three months ended February 28, 2017, Old Main converted an aggregate of $100,000 of principal, in six transactions, into 828,173 shares of common stock. On March 27, 2017, the Company entered into a further amendment to the Convertible Promissory Notes issued on March 18, April 22 and May 27, 2016, whereby the Company agreed to prepay all amounts due under the 10% Notes on or before April 1, 2017, which amount was agreed to be $372,670, consisting of principal in the amount of $229,166, accrued interest in the amount of $57,504, and a prepayment penalty in the amount of $86,000. The payment to Old Main of $372,670 was made from the proceeds of loans to the Company made by Newcan and Jeffrey Binder, who are either officers and directors of the Company or affiliates of officers and directors of the Company. These loans are reflected in the Newcan Funding Notes (see above, $323,000); and the Binder Funding Note 1 (see above, $49,700). Also, during the year ended May 31, 2017, the Company accrued interest in the amount of $52,344 on the 10% notes. | - | 333,332 | ||||||
May 31, 2017 | May 31, 2016 | |||||||
Convertible promissory note payable to Old Main dated March 18, 2016 and bearing interest at a rate of 8% (the “8% Note”). The 8% Note was issued for Old Main’s commitment to enter into an equity line transaction with the Company and prepare all of the related transaction documents. Old Main may, at its option, convert all or a portion of the note and accrued but unpaid interest into shares of common stock at a conversion price of $1.07 per share (post Reverse-Split) (the “8% Fixed Conversion Price”). The 8% Fixed Conversion Price is subject to adjustment if, at any time while this note is outstanding, the Company should issue any equity security with an effective price per share that is lower than the 8% Fixed Conversion Price (the “8% Base Conversion Price”), other than certain exempt issuances. In such an instance, the 8% Fixed Conversion Price will be lowered to match the 8% Base Conversion Price. The shares underlying the 8% Note are subject to a registration rights agreement. At the earlier of September 18, 2016 or two trading days after this registration statement becomes effective, the Company must begin to redeem 1/6th of the face amount of the note and any accrued but unpaid interest on a monthly basis. Such amortization payment may be made, at its option, in cash or, subject to certain conditions, in common stock pursuant to a conversion rate equal to the lower of (a) $1.07 (post Reverse-Split) or (b) 75% of the lowest daily volume weighted average price of the common stock in the twenty consecutive trading days ending on the trading day that is immediately prior to the applicable conversion date. The Company recognized a discount of $172,108 on the value of the embedded derivative. On November 28, 2016, the 8% Note was amended converting the note from an installment note to a “balloon” note, with all principal and accrued interest due on March 18, 2017. In addition, the Fixed Conversion Price was changed to a variable conversion price equal to the lesser of the prior Fixed Conversion Price or 75% of the lowest VWAP in the fifteen trading days ending on the trading day immediately prior to the conversion date. The November 28, 2016 amendment required an extinguishment analysis of the 8% Note resulting in gain on extinguishment of debt in the amount of $81,496 for the nine months ended February 28, 2017. The gain on extinguishment of debt was included in additional paid-in capital at February 28, 2017. The 8% Note was revalued as of the November 28, 2016 amendment and the Company recognized a discount of $169,476 on the value of the embedded derivative. At February 28, 2017 and May 31, 2016, the amount of discount remaining on these notes was $118,998 and $163,586, respectively. On March 27, 2017, the Company entered into a further amendment to the convertible promissory notes issued on March 18, April 22 and May 27, 2016, whereby the Company agreed to increase the outstanding amount due under the 8% Note as of March 18, 2017 by 5%, or $10,000. In exchange for doing so, Old Main agreed to extend the maturity of the 8% Note until July 1, 2017 and to suspend conversions under the 8% Note until July 1, 2017. Also during the year ended May 31, 2017, the Company accrued interest in the amount of $17,207 on the 8% Note. | 210,000 | 200,000 | ||||||
| Total - Convertible Notes Payable | $ | 310,000 | $ | 733,332 | ||||
| Less: Discount | (57,644 | ) | (617,495 | ) | ||||
| Convertible Notes Payable, Net of Discounts | $ | 252,356 | $ | 115,837 | ||||
| Total - Convertible Notes Payable, Current Portion | $ | 310,000 | $ | 300,000 | ||||
| Total - Convertible Notes Payable, Long-term Portion | $ | - | $ | 433,332 | ||||
| Total - Convertible Notes Payable, Net of Discounts, Current Portion | $ | 252,356 | $ | 72,525 | ||||
| Total - Convertible Notes Payable, Net of Discounts, Long-term Portion | $ | - | $ | 43,312 | ||||
| Discounts on notes payable amortized to interest expense: | $ | 252,356 | $ | 286,317 | ||||
NOTE 20 – STOCKHOLDERS’ EQUITY
| May 31, | ||||||||
| 2017 | 2016 | |||||||
| Volatility | 64% to 138 | % | 89% to 107 | % | ||||
| Dividends | - | - | ||||||
| Risk-free interest rates | 0.86% to 1.19 | % | 1.18% to 0.91 | % | ||||
| Term (years) | 1.25 to 3 | 3 | ||||||
The Company’s authorized capital stock consists of 250,000,000750,000,000 shares of common stock, par value $0.0001, per shareat May 31, 2022 and 2021, and 20,000,000 shares of preferred stock, par value $0.001 per share. The Company had 32,852,944128,208,082 and 20,350,003127,221,416 shares of common stock issued and outstanding as of May 31, 20172022 and 2016,2021, respectively.
Year ended May 31, 20172022:
Common Stock and 2016 on related party payables dueWarrants Issued upon Conversion of Notes Payable:
On June 17, 2021, the Company issued 936,666 shares of common stock and three-year warrants to acquire 468,333 shares of common stock at a director and officerprice of $1.10 (now $0.40 as a result of the Company.amendment of the Canaccord Debentures) per share to Canaccord Genuity Corp., as nominee, in connection with the conversion of a portion of the Canaccord Debentures in the principal amount of $281,000. No gain or loss was recorded on this transaction because the conversion was made pursuant to the terms of the original agreement.
On August 1, 2015,February 4, 2022, the Company and Alan Bonsett entered into a five-year employment agreement. Pursuantgranted 50,000 shares of common stock to an employee effective February 14, 2022. The Company charged the agreement, Mr. Bonsett commenced serving asvalue of these shares, which was $4,390, to common stock subscribed. Effective February 14, 2022, the Company’s Chief Operating Officer on August 15, 2015. Mr. Bonsett was entitled to a one-time signing bonus of 250,000Company granted an additional 50,000 shares of restricted common stock ofto the same officer, which vest on December 31, 2022 if the officer remains employed by the Company and charged the value of these shares, which became fully vested one year from the effective date of the agreement. The shares were issued on January 19, 2016. The Company valued the shares at $327,500 based on thewas also $4,390, to common stock price at August 3, 2015.subscribed. During the year ended May 31, 2016,2022, the Company recognized $327,500 in share based compensation.issued 50,000 of these shares to the officer at the same value of $4,390. The remining 50,000 shares had not been issued as of May 31, 2022.
Year ended May 31, 2021:
Common Stock Issued and To Be Issued to Officers and Service Providers:
On April 18, 2016,October 11, 2020, the Company entered into an equity purchase agreement (the “Equity Purchase Agreement”) with Old Main providing that, upon the terms and subject to the conditions thereof, Old Main is committed to purchase, on an unconditional basis,issued 50,000 shares of common stock (the “Commitment Shares”) at an aggregate priceto a former officer. The fair value of up to $4,000,000 over the course of a 24-month term (the “Equity Line”). From time to time over the 24-month term of the Equity Purchase Agreement, the Company may, in its sole discretion, provide Old Main with a put notice (each, a “Put Notice”), to purchase a specified number of Commitment Shares (each, the “Put Amount Requested”). The actual amount of proceeds the Company receives pursuant to each Put Notice (each, the “Put Amount”) will be determined by multiplying the Put Amount Requested by the applicable purchase price. The purchase price of each Commitment Share will equal 80% of the market price of the Company’s common stock during the five consecutive trading days immediately following the clearing date associated with the applicable Put Notice.
During the year ended May 31, 2017:
On April 1, 2021, the Company charged the amount $143,325 to additional paid-in capital related to settlement of derivative liability. See note 10.
During the year ended May 31, 2017, these2021, the Company recognized the cancellation of a consulting contract, which resulted in a credit to operations in the amount of $22,500 and the cancellation of 100,000 shares had not been issued, andof common stock to be issued.
During the year ended May 31, 2021, the Company recognized the cancellation of a consulting contract, which resulted in a credit to operations in the amount of $3,250 is includedand the cancellation of 25,000 shares of common stock to be issued.
Charge to Additional Paid-in Capital for Amendment of Debt
The Company charged $3,286,012 to additional paid-in capital in stock payable onconnection with the Company’s balance sheet.amendments to the Canaccord Debentures dated March 31, 2021, and $2,819,667 in connection with the amendments to U.S. Convertible Debentures 1, 2, and 4 dated April 15 and April 19, 2021 (a total of $6,105,679). See note 16.
Warrants
The Company values warrants using the Black-Scholes valuation model utilizing the following variables. On March 2017,31, 2021, the Company entered into a modification agreement regardingreduced the 8% Promissory Note due to Old Main, and the derivative liability in the amount of $70,143 related to the conversion feature of this note was charged to additional paid-in capital. See note 10.
In April 2021, the Company had included 20,000 shares of common stock, valued at $23,200amended $6,229,672 in stock payable onoutstanding debentures to reduce the accompanying balance sheets. The shares were valued based on the closing marketconversion price of the common stock ondebentures from $0.80 per unit to $0.30 per unit, increasing the grant date.
From December 1, 2021 through January 4, 2022 the Company issued $2,500,000 in debentures and it is uncertain whether any shares will be issued. Asissued 3,030,304 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 $0.4125 per share for three years after its date of issuance.
The following table summarizes the significant terms of warrants outstanding at May 31, 2016,2022. 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 | |||||||||||||||||
| $ | 0.40-0.41 | 3,326,339 | 1.92 | $ | 0.41 | 3,326,339 | $ | 0.41 | ||||||||||||||
| 0.60 | 3,125,000 | 0.95 | 0.60 | 3,125,000 | 0.60 | |||||||||||||||||
| 6,451,339 | 1.45 | $ | 0.50 | 6,451,339 | $ | 0.50 | ||||||||||||||||
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, 2020 | 54,835,145 | $ | 0.53 | |||||
Granted | - | $ | 1.10 | |||||
Exercised | - | $ | - | |||||
Cancelled / Expired | (837,500 | ) | $ | 0.75 | ||||
Warrants outstanding at May 31, 2021 | 53,997,645 | $ | 0.53 | |||||
Granted | 3,030,304 | $ | 0.41 | |||||
Exercised | - | $ | - | |||||
Cancelled / Expired | (50,576,610 | ) | $ | 0.52 | ||||
Warrants outstanding at May 31, 2022 | 6,451,339 | $ | 0.50 | |||||
Unit Warrants
In February and March 2018, in connection with the Westpark offering, the Company had 50,000issued five-year warrants to purchase 205,238 of the Company’s units at an exercise price of $1.25 per unit. Each unit consists of four 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 priceand one warrant to purchase a share of the common stock on the grant date.for $0.75 per share.
On June 20, 2018, in connection with the special warrant offering, the Company issued Canaccord Genuity Corp. 2,317,842 three-year broker warrants at an exercise price of C$0.45 per share as compensation. Each warrant entitles the holder to purchase one unit, which consists of one share of common stock and a warrant to purchase one share of common stock, for C$0.65 per share. These warrants were valued at $1,495,373, and this amount was charged to operations during the year ended May 31, 2019. These warrants expired on June 20, 2021.
On December 12, 2018, in connection with the issuance of the temporary differencesCanaccord Debentures, the Company issued Canaccord Genuity Corp. as compensation 1,074,720 three-year agent and advisory warrants. Each warrant entitles the holder to purchase a unit for $0.80, which unit consists of one share of common stock and a warrant to purchase one-half share of common stock at an exercise price of $1.10 per share. The Company, in connection with the issuance of the Canaccord Debentures, also issued to National Bank Financial Inc., as compensation, 268,680 three-year agent and advisory warrants. Each warrant entitles the holder to purchase a unit for $0.80, which unit consists of one share of common stock and a warrant to purchase one-half share of common stock at an exercise price of $1.10 per share. The aggregate value of these warrants was $874,457, which was charged to operations during the year ended May 31, 2019. These warrants expired on December 12, 2021.
Because the unit warrants are exercisable for Common Stock and warrants, they are not included in the warrant tables above.
NOTE 21 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has issued convertible notes containing beneficial conversion features. One of the features is a ratchet reset provision which, in general, reduces the conversion price should the Company issue equity with an effective price per share that give riseis lower than the stated conversion price in the note. The Company accounts for the fair value of the conversion feature in accordance with ASC 815- Accounting for Derivatives and Hedging and Emerging Issues Task Force (“EITF”) 07-05- Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock (“EITF 07-05”). The Company carries the embedded derivative on its balance sheet at fair value and accounts for any unrealized change in fair value as a component of its results of operations.
The following summarizes the Company’s estimated deferred tax assets andfinancial liabilities that are as follows:
| May 31, | May 31, | |||||||
| 2017 | 2016 | |||||||
| Federal and state statutory rate | 34 | % | 34 | % | ||||
| Net operating loss carry forwards | 1,386,438 | 787,513 | ||||||
| Valuation allowance for deferred tax assets | (1,386,438 | ) | (787,513 | ) | ||||
| Net deferred tax assets | - | - | ||||||
May 31, 2022 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Liabilities | ||||||||||||||||
Derivative liabilities | $ | - | $ | - | $ | - | $ | - | ||||||||
May 31, 2021 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Liabilities | ||||||||||||||||
Derivative liabilities | $ | - | $ | - | $ | - | $ | - | ||||||||
NOTE 1322 – RELATED PARTY TRANSACTIONS
As of May 31, 2022 and 2021, 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 year ended May 31, 2022, the Company granted 100,000 shares, which were valued at $8,780, to an officer of the Company. Of these shares, 50,000 are restricted and vest on December 31, 2022 if the officer remains employed by the Company. As of May 31, 2022, 50,000 of these shares have been issued and the value of these shares in the amount of $4,390 was charged to operations.
NOTE 23 – INCOME TAXES
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:
Revenue (2022) | $ | 22,662,895 | ||
Directly attributable costs | (12,941,530 | ) | ||
Deferred | 9,721,365 | |||
Tax rate | 21 | % | ||
Tax expense | $ | 2,041,487 |
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.
The tax effects of the temporary differences that give rise to the Company’s estimated deferred tax assets and liabilities are as follows:
Year Ended May 31, | ||||||||
2022 | 2021 | |||||||
Federal and state statutory tax | 21 | % | 21 | % | ||||
Net operating loss carryforward | $ | 2,563,035 | $ | 1,566,016 | ||||
Valuation allowance for deferred tax assets | (2,563,035 | ) | (1,566,016 | ) | ||||
Deferred tax assets | $ | - | $ | - | ||||
The total net operating loss carryforward at May 31, 2022 and 2021 was $12,204,928 and $7,457,218, respectively.
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.
NOTE 24 – COMMITMENTS AND CONTINGENCIES
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 $1,866.70 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 will increase on September 1, 2022 to $2,084.14 with annual increases of 3%. see Note 23. |
● | 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. |
● | 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 for initial rent of $3,210 per month, with annual increases of 4%. In February 2020, this lease was extended to February 28, 2030, and the lease was modified to include annual rent increases of 3%. |
● | 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 to $29,000 per month on January 1, 2020. In June 2020, this lease was extended to February 28, 2026, and the monthly rent was amended as follows: $25,000 for the months of April, May, and June 2020; $22,500 for the months of March 2021 through February 2022; $23,175 for the months of March 2022 through February 2023; 23,870 for the months of March 2023 through February 2024; $24,586 for the months of March 2024 through February 2025; and $25,323 for the months of March 2025 through February 2026. |
● | A lease that commenced on May 17, 2022 for approximately 20 acres of land for purposes of developing a cultivation facility along the Quinn River in Nevada at a cost of $3,500 per quarter beginning on or before May 31, 2022 (the “Quinn River Land Lease”). The Quinn River Land Lease has a term of 9 years, with two-year renewal options. The lessee under this Lease is CLS Nevada, Inc. See note 3. |
In connection with the Company’s planned Colorado operations, on April 17, 2015, pursuant to an Industrial Lease Agreement (the “Lease”), CLS Labs Colorado leases 42,392leased 14,392 square feet of warehouse and office space (the “Leased Space”Real Property”) in a building located on 1.92 acres in Denver, Colorado. CLS Labs Colorado subleases the Leased Space to Picture Rock Holdings, LLC as part of an arrangement whereby Picture Rock Holdings, LLC and its affiliate will conductwhere certain intended activities, including growing, extraction, conversion, assembly and packaging of cannabis and other plant materials, asare permitted by and in compliance with state, city and local laws, rules, ordinances and regulations. Total expense forThe Lease had an initial term of seventy-two (72) months and provided CLS Labs Colorado with two options to extend the term of the lease was $177,844 forby up to an aggregate of ten (10) additional years. In August 2017, as a result of the years ended May 31,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, and 2016.
| For the 12 months ended May 31, | ||||
| 2018 | 177,845 | |||
| 2019 | 177,845 | |||
| 2020 | 177,845 | |||
| 2021 | 148,202 | |||
| Thereafter | - | |||
| Total | 681,737 | |||
Employment Agreements
CLS Labs and Jeffrey Binder entered into a five-year employment agreement effective October 1, 2014. Under the agreement, Mr. Binder serves as CLS Labs’ Chairman President and Chief Executive Officer and is entitled to receive an annual salary of $150,000. Under the agreement, Mr. Binder is also entitled to receive a performance bonus equal to 2% of CLS Labs’ annual EBITDA, up to a maximum annual cash compensation of $1 million (including his base salary), and annual stock options, exercisable at the fair market value of CLS Labs’ common stock on the date of grant, in an amount equal to 2% of its annual EBITDA up to $42.5 million and 4% of its annual EBITDA in excess of $42.5 million. On April 28, 2015, CLS Labs and the Company entered into an addendum to Mr. Binder’s employment agreement whereby Mr. Binder agreed that following the Merger,merger of CLS Labs and a subsidiary of the Company, in addition to his obligations to CLS Labs, he would serve the Company and its subsidiaries in such roles as the Company may request. In exchange, the Company agreed to assume the obligations of CLS Labs to grant Mr. Binder annual stock options, as referenced above. Mr. Binder continues to receive an annual salary of $150,000 from CLS Labs for serving as its Chairman, President and Chief Executive Officer. My Binder deferred all of the salary payable to him under his employment agreement through May 31, 2016. On July 20, 2016, March 31, 2017, August 23, 2017, October 9, 2017, January 5, 2018 and April 6, 2018, the Company issued Mr. Binder a convertible notenotes in exchange for $250,000, $112,500, $62,500, $39,521, $37,500 and $37,500 respectively, in deferred salary, among other amounts owed to Mr. Binder by the Company; on February 28, 2017,Company. On October 14, 2019 but effective October 1, 2019, CLS Labs, Inc., the Company, issuedand Jeffrey Binder entered into an amendment to Mr. Binder’s employment agreement to provide that the Company would assume all obligations of CLS Labs under the employment agreement. The amendment also extends the term of Mr. Binder’s employment agreement by three years instead of relying on the automatic one-year renewal provision in the employment agreement, and increases Mr. Binder’s annual base salary to $200,000. Additionally, the amendment provides for certain change of control provisions, including a payment of up to three years base salary and bonuses up to a maximum of $1,000,000, if Mr. Binder an additional convertible noteresigns or is terminated in exchange for $112,500connection with a change in deferred salary. Ascontrol of the Company. In connection with the amendment, the parties also amended and restated that certain Confidentiality, Non-Compete and Property Rights Agreement entered into by and between RJF Labs, Inc. (now CLS Labs), and Mr. Binder effective as of July 16, 2014. On April 25, 2022, but effective on May 31, 2017 and 2016,1, 2022, the Company had accrued compensation dueentered into a Second Amendment to Employment Agreement with Mr. Binder, to extend the term of Mr. Binder’s employment agreement to expire on April 30, 2024. All other terms of Mr. Binder’s employment agreement remain in the amount of $37,500full force and $250,000.effect.
On March 1, 2015,2019, the Company and Alan BonsettMr. Glashow entered into a five-yeartwo-year employment agreement. Pursuant to the agreement and Mr. BonsettGlashow commenced serving as the Company’s President and Chief Operating Officer on August 15, 2015.Officer. Under the agreement, Mr. BonsettGlashow is entitled to receive an annual salary of $150,000.$175,000. Further, he is entitled to receive a performance bonus equal to 2%1% of the Company’s annual EBITDA, and annual restricted stock awards in an amount equal to 1% of the Company’s annual EBITDA. Additionally, Mr. Glashow is entitled to a one-time signing bonus of 500,000 shares of the Company’s restricted common stock, half of which vested on March 1, 2020, and half of which vested on March 1, 2021. Effective March 1, 2019, and in connection with the employment agreement, Mr. Glashow and the Company entered into a Confidentiality, Non-Compete and Proprietary Rights Agreement. Pursuant thereto, Mr. Glashow agreed (i) not to compete with us during the term of his employment and for a period of one year thereafter, (ii) not to release or disclose our confidential information, and (iii) to assign the rights to all work product to us, among other terms. On October 14, 2019, but effective October 1, 2019, the Company and Mr. Glashow entered into an amendment to his employment agreement to extend the term by one year instead of relying on the automatic one-year renewal provision in the employment agreement, and to increase Mr. Glashow’s annual base salary to $200,000. The amendment also provides that in addition to his base salary, Mr. Glashow is entitled to receive, on an annual basis, a performance-based bonus equal to two percent (2%) of the Company’s annual EBITDA up to a maximum annual cash compensation of $1 million (including hisincluding base salary),salary, and annual stock options, exercisable at the fair market value of the Company’s common stock on the effective date of grant, in an amount equal to 2% of its annualthe Company’s EBITDA up to $42.5 million and 4% of its annual EBITDA in excess of $42.5 million. Additionally, the amendment provides for certain change of control provisions, including a payment of up to three years base salary and bonuses up to a maximum of $1,000,000, if Mr. BonsettGlashow resigns or is terminated in connection with a change in control of the Company. On April 25, 2022, but effective on May 1, 2022, the Company entered into a Second Amendment to Employment Agreement with Mr. Glashow to extend the term of Mr. Glashow’s employment for two years commencing on May 1, 2022 and ending on April 30, 2024. Mr. Glashow’s base salary increased to $250,000 effective on May 1, 2022 and he received a one-time signing bonus of 250,000 (post Reverse-Split)$50,000. All other terms of Mr. Glashow’s employment agreement remain in full force and effect.
On June 6, 2019, Alternative Solutions and Ms. Soco entered into an employment agreement with an initial term beginning June 17, 2019, pursuant to which Ms. Soco was appointed as Assistant Controller of Alternative Solutions. Under the agreement, Ms. Soco is entitled to receive an annual salary of $70,000. On June 6, 2019, and in connection with the employment agreement, Ms. Soco and the Company entered into a Confidentiality, Non-Compete and Proprietary Rights Agreement. Pursuant thereto, Ms. Soco agreed (i) not to compete with the Company during the term of her employment and for a period of one year thereafter, (ii) not to release or disclose the Company’s confidential information, and (iii) to assign the rights to all work product to the Company, among other terms.
On October 27, 2021, Ms. Soco’s employment agreement was amended to increase her annual salary to $117,500 and extend her employment agreement review date to November 1, 2022. On February 4, 2022, Ms. Soco’s employment agreement was further amended to grant Ms. Soco 50,000 shares of restrictedthe Company’s common stock ofand increase her base annual salary to $137,500. The amendment also extended Ms. Soco’s employment agreement review date to February 4, 2023. On May 19, 2022, Alternative Solutions, the Company withand Ms. Soco entered into a fair valueClarification to Second Amendment to Employment Agreement to clarify certain terms of $327,500, which became fully vested one year from the effective dateher employment agreement, as amended, including her promotion to Controller of the agreement. Mr. Bonsett, as an ownerAlternative Solutions and then to Vice President of PRH, will indirectly receive the benefitsFinance of the Colorado Arrangement, as discussed in Note 10.Alternative Solutions and CLS Nevada.
At May 31, 2016,2022 and 2021, 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 $16,290.$16,250.
| May 31, 2017 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities | ||||||||||||||||
| Derivative liabilities | $ | - | $ | - | $ | 95,276 | $ | 95,276 | ||||||||
| May 31, 2016 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities | ||||||||||||||||
| Derivative liabilities | $ | - | $ | - | $ | 418,537 | $ | 418,537 | ||||||||
| Derivative | ||||
| Liability | ||||
| Liabilities Measured at Fair Value | ||||
| Balance as of May 31, 2015 | $ | - | ||
| Issuances | 480,294 | |||
| Revaluation gain | (61,757 | ) | ||
| Balance as of May 31, 2016 | $ | 418,537 | ||
| Issuances | 600,564 | |||
| Convert or Redeem | (612,850 | ) | ||
| Revaluation gain | (310,975 | ) | ||
| Balance as of May 31, 2017 | $ | 95,276 | ||
NOTE 1525 – SUBSEQUENT EVENTS
Effective August 16, 2022, Jeffrey Binder, the Company’s Chairman, Chief Executive Officer and a director, resigned from all of his officer and director positions with the Company and its subsidiaries for personal reasons. On the same date, Mr. Andrew Glashow, the Company’s President and a director, succeeded Mr. Binder as the Company’s Chief Executive Officer. In order to assure a smooth transition in management, Mr. Binder entered into Amendment #4 to Convertible Promissory Note Issued on March 18, 2016 (the “Fourth Amendment”) to further amenda one-year consulting agreement with the Company for no compensation other than reimbursement of his expenses. The Company and Mr. Binder also terminated his employment agreement and Amended and Restated Confidentiality, Non-Compete and Property Rights Agreement. Under the terms of the 8% Note, which isconsulting agreement, however, Mr. Binder agreed not to compete with the only NoteCompany in the State of Nevada for one year.
On August 18, 2022, we announced that remains outstanding. Pursuantwe are holding a meeting of debenture holders on September 15, 2022, to seek the affirmative vote of the holders of the Canaccord Debentures to accomplish the following things: (i) to permit the mandatory conversion, in our discretion, of $7,931,490 in principal amount of the Canaccord Debentures plus $132,192 in accrued interest on the Canaccord Debentures into units at the reduced conversion price of $0.07125 per unit; (ii) to decrease the conversion price of the remaining Canaccord Debentures (following the mandatory conversion) to $0.10 per unit; (iii) to reduce the mandatory conversion VWAP provision in the Canaccord Debentures from $0.60 to $0.20; (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 Fourth Amendment,date of the meeting of debenture holders; (v) to change the maturity date of the 8% Note was extended to July 15, 2017Canaccord Debentures so that half of the remaining Canaccord Debentures mature on December 31, 2023 and the outstandingremaining 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 8% Noteaccrued 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 June 30, 2017 was increased by multiplying it by 1.075. The Fourth Amendment was effective on June 30, 2017.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.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
There have been no disagreements regarding accounting and financial disclosure matters with our independent certified public accountants.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Andrew Glashow, our Chief Executive Officer, and Principal Financial and Accounting Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on the evaluation, Mr. BinderGlashow concluded that our disclosure controls and procedures are not effective in timely alerting himthem to material information relating to us that is required to be included in our periodic SEC filings and ensuring that information required to be disclosed by us in the reports we file or submit under the Act is accumulated and communicated to our management, including our chief financial officer,Chief Financial Officer, or person performing similar functions, as appropriate to allow timely decisions regarding required disclosure, for the following reasons:
● We do not have an independent audit committee or adequate segregation of duties;
● We have not established a formal written policy for the approval, identification and authorization of related party transactions
● We do not have an independent body to oversee our internal controls over financial reporting and lack segregation of duties due to our limited resources.
We plan to rectify these weaknesses by implementing an independent board of directors and hiring additional accounting personnel once we have additional resources to do so.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal controls over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not Applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this Item 10 is incorporated herein by reference to the applicable information in the Company on November 12, 2014, Jeffrey I. Binder,Proxy Statement for our 2022 Annual Meeting of Stockholders to be filed with the Chairman, President and Chief Executive Officer of CLS Labs, was appointed Chairman, President and Chief Executive OfficerCommission not later than 120 days after the close of the Company, and Michael Abrams, the former Chief Operating Officer of CLS Labs, was appointed the Chief Operating Officer of the Company. Effective August 15, 2015, Mr. Abrams resigned as Chief Operating Officer of the Company and was replaced by Alan Bonsett. Mr. Binder and Mr. Bonsett remain the only two employees of the Company. Mr. Binder and Frank Koretsky are the directors of the Company.fiscal year.
| Name | Age | Title | Term Expires | ||||
| Jeffrey Binder | 70 | Chairman, President, Chief Executive Officer and Director | 2017 | ||||
| Frank Koretsky | 54 | Director | 2016 | ||||
| Alan Bonsett | 43 | Chief Operating Officer | -- |
Item 11. Executive Compensation.
The information required by this Item 11 is incorporated herein by reference to disclose the executive compensationapplicable information in the Proxy Statement for our 2022 Annual Meeting of our named executive officers, which consistStockholders to be filed with the Commission not later than 120 days after the close of the following individuals, for the fiscal years ended May 31, 2016 and May 31, 2017, respectively: (i) any individual serving as our principal executive officer or acting in a similar capacity during such fiscal years; (ii) the two other most highly compensated executive officers of the Company serving as executive officers at the end of the most recently completed fiscal year; and (iii) any additional individuals for whom disclosure would have been provided but for the fact that the individual was not serving as an executive officer at the end of the most recently completed fiscal year.
Name and Principal Position | Fiscal Year | Salary ($) | Bonus ($) | Stock Awards ($) | Non-Equity Incentive Plan Compensation ($) | Non-Qualified Deferred Compensation ($) | All Other Compensation ($) | Total ($) | ||||||||||||||||||||||
| Jeffrey Binder, | 2017 | 150,000 | — | — | — | — | — | 150,000 | ||||||||||||||||||||||
| Chairman, President and Chief Executive Officer(1) | 2016 | 150,000 | — | — | — | — | — | 150,000 | ||||||||||||||||||||||
| Alan Bonsett, | 2017 | 150,000 | 9,000 | (3) | 159,000 | |||||||||||||||||||||||||
| Chief Operating Officer(2) | 2016 | 118,750 | — | 327,500 | (4) | — | — | --- | 446,250 | |||||||||||||||||||||
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth information with respectrequired by this Item 12 is incorporated herein by reference to the beneficial ownershipapplicable information in the Proxy Statement for our 2022 Annual Meeting of our common stock as of August 15, 2017 by (i) each stockholder known by usStockholders to be filed with the beneficial owner of moreCommission not later than 5% of our common stock, (ii) each of our directors and executive officers, and (iii) all of our directors and executive officers as a group. Our only class of voting securities is our common stock. To our knowledge, none120 days after the close of the shares listed below are held under a voting trust or similar agreement. To our knowledge, there are no pending arrangements, including any pledges by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the Company. There were 32,876,944 shares of common stock issued and outstanding on August 15, 2017.fiscal year.
Name and Address of Beneficial Owner(1) | Amount and Nature of Beneficial Ownership | Percentage of Class | |||||||
| Jeffrey I. Binder | 7,734,908 | (2 | ) | 22.9 | % | ||||
| Raymond Keller | 5,000,000 | 15.2 | % | ||||||
| Frank Koretsky | 16,920,252 | (3 | ) | 47.2 | % | ||||
| Newcan Investment Partners, LLC (4) | 4,822,988 | 13.5 | % | ||||||
| Alan Bonsett | 250,000 | 0.8 | % | ||||||
| All directors and executive officers as a group (3 persons) (5) | 29,905,160 | (5 | ) | 81.5 | % | ||||
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item 13 is incorporated herein by reference to Alan Bonsett’s appointment as Chief Operating Officer, the Company, through CLS Labs Colorado, entered intoapplicable information in the Colorado Arrangement with PRH to, among other things, (i) license its proprietary technology, methods and processes to PRH in Colorado in exchangeProxy Statement for a fee; (ii) sub-lease warehouse and office space in Denver, Colorado to PRH where PRH can extract and process cannabis and other plant products in exchange for lease payments totaling an aggregateour 2022 Annual Meeting of $1,067,067 over a seventy-two (72) month term; (iii) build a processing facility and lease such facility, including equipment, to PRH in exchange for a monthly fee; and (iv) loan to PRH $500,000 pursuant to a promissory note (the “PRH Note”),Stockholders to be used by PRH in connectionfiled with financing the building out, equipping, and developing of a grow facility by PRH that will be operated by a licensed third-party marijuana grower. Pursuant toCommission not later than 120 days after the PRH Note, as amended by the parties, PRH will repay the principal due under the PRH Note in twenty (20) equal quarterly installments of Twenty-five Thousand Dollars ($25,000) commencing in the first month following the month in which PRH commences generating revenue at the grow facility and continuing until paid in full. Interest will accrue on the unpaid principal balanceclose of the PRH Note at the rate of twelve percent (12%) per annum and will be paid quarterly in arrears commencing on the Payment Date and continuing until paid in full. All remaining outstanding principal and any accumulated unpaid interest due under the PRH Note will be due and payable on the fifth anniversary of the date of the initial payment. In the event of default as defined in the agreements related to the PRH Note, all amounts under the PRH Note shall become at once due and payable. Mr. Bonsett, as an owner of PRH, will indirectly receive the benefits of the Colorado Arrangement. CLS Labs Colorado is currently unable to estimate when it will commence generating revenue through the grow facility due to difficulties it has encountered in obtaining regulatory approvals required to complete construction of its processing facility. As a result, we have decided to place our proposed Colorado operations on hold and pursue revenue producing opportunities in other states. Once we commence generating revenues elsewhere, we will likely re-visit our plans in Colorado.fiscal year.
Item 14. Principal Accounting Fees and Services.
The information required by this Item 14 is incorporated herein by reference to the applicable information in the Proxy Statement for audit services totaled approximately $23,900 during the year ended May 31, 2017. These amounts include fees associatedour 2022 Annual Meeting of Stockholders to be filed with the annual auditCommission not later than 120 days after the close of our financial and statutory statements, reviews of our quarterly financial statements and of our quarterly and annual reports on Form 10-Q and Form 10-K, respectively.
PART IV
Item 15. Exhibits
The following exhibits are included as part of this Annual Report on Form 10-K by reference:
Exhibit | Description | |
2.1 | ||
2.2 | ||
2.3 | ||
2.4 | ||
2.5 | ||
2.6 | ||
2.7 | ||
3.1 | ||
3.2 | ||
3.3* | Certificate of Amendment to Amended and Restated Articles of Incorporation of CLS Holdings USA, Inc. | |
3.4 | ||
3.5* | ||
3.6 | ||
4.1 | ||
4.2 | ||
4.2.A | ||
4.3 |
4.3.A | ||
4.4* | ||
10.1 | ||
10.1.A | ||
10.1.B | ||
10.1.C | ||
10.2 | ||
10.3 | ||
10.4 | ||
10.5 |
| Form of Indemnification Agreement (incorporated by reference from Exhibit 10.1 in the Company’s Current Report on Form 8-K filed with the SEC on December 22, | ||
| 10.6 | ||
10.8 | ||
10.9.A | ||
10.9.B | ||
10.9.C | ||
10.9.D | ||
10.10 | ||
10.11 | ||
10.12 | ||
10.13 |
10.14 | ||
10.14.A | ||
10.14.B | ||
10.14.C | ||
10.15.A | ||
10.15.B |
10.15.C | ||
10.16 | ||
10.16.A | ||
10.17 | ||
10.17.A | ||
10.18 | ||
10.19 | ||
10.20 | ||
10.21* | ||
10.22 |
10.23 | ||
10.24 | ||
10.25 |
10.26 | ||
10.26.A | ||
10.26.B | ||
10.26.C | ||
10.26.D* | ||
21.1* | ||
31.1* | ||
32.1* | ||
101.INS* | Inline XBRL Instance | |
101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104* | Cover Page Interactive Data File (formatted as Inline XBRL |
(1) | Management Contract or Compensation Plan | |
* | ||
Filed herewith. |
Item 16. Form 10-K Summary
Not Applicable.
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: August | By: | /s/ | Andrew Glashow |
Andrew Glashow | |||
President and Chief Executive Officer | |||
(Principal Executive, | |||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name and Signature | Title | Date | ||
/s/ | President, Chief Executive Officer and Director | August | ||
Andrew Glashow | (Principal Executive, Financial and Accounting Officer) | |||
/s/ Ross Silver | Director | August 25, 2022 | ||
Ross Silver | ||||
/s/ | ||||
| David Zelinger | ||||
David Zelinger | Director | August 25, 2022 | ||