As filed with the Securities and Exchange Commission on June 3, 2011April 21, 2016
Registration No. 333-_________333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ADELT DESIGNCLS HOLDINGS USA, INC.
(Exact Namename of Small Business Issuerregistrant as specified in its Charter)charter)
| Nevada | 5900 | 27-33698102833 | | 45-1352286 |
(State or other Jurisdictionjurisdiction of Incorporation)
incorporation) | | (Primary Standard Industrial Classification Code)Code Number) | | (IRSI.R.S. Employer Identification No.) |
ADELT DESIGN, INC.
3217 South Orchard Street
Salt Lake City, Utah 84106
Tel.: (801) 467-3530
(Address and Telephone Number of Registrant’s Principal
Executive Offices and Principal Place of Business)
Paracorp, Incorporated
318 North Carson Street, Suite 208
Carson City, Nevada 89032
Tel.: 1-775-883-0104
(Name, Address and Telephone Number of Agent for Service)
Copies of communications to:
BK Consulting & Associates, P.C.
1844 South 3850 West, Suite B
Salt Lake City, UT 84104
Telephone: 888-283-4256
Facsimile: 877-255-9218
E- Mail corporate@bbkconsultinginc.com| 1435 Yarmouth Street | | | |
| Boulder, Colorado | | | 80304 |
| (Address of principal executive offices) | | | (Zip Code) |
Registrant’s telephone number, including area code: (888) 438-9132
Jeffrey Binder
Chief Executive Officer
11767 South Dixie Highway, Suite 115
Miami, Florida 33156
Telephone: (888) 438-9132
Telefax: (305) 507-9081
With copies to:
Kathleen L. Deutsch, P.A.
Matthew Kissner, Esq.
Broad and Cassel
One North Clematis Street, Suite 500
West Palm Beach, Florida 33401
Telephone: (561) 832-3300
Telefax: (561) 655-1109
Approximate date of commencement of proposed sale to the publicpublic:: from From time to time after the effective date of this Registration Statement as determined by market conditions and other factors. registration statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. x
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, of 1933, please check the following box and list the Securities Act registration Statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o¨
If delivery of the prospectusthis Form is expected to be madea post-effective amendment filed pursuant to Rule 434, please462(c) under the Securities Act, check the following box.box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | o¨ | Accelerated filer | o¨ |
| Non-accelerated filer | o¨ | Smaller reporting company | x |
| (Do not check if a smaller reporting company) | | |
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities to be Registered | Amount to be Registered | Proposed Maximum Aggregate Offering Price per Security | Proposed Maximum Aggregate Offering Price | Amount of Registration Fee |
| | | | | |
| Common Stock, $0.001 par value (1) | 8,000,000 | $0.001(2) | $8,000 | $0.93 |
| TOTAL | 8,000,000 | $0.001(2) | $8,000 | $0.93 |
| Title of Each Class of Securities to be Registered | | Amount to be Registered | | | Proposed Maximum Aggregate Offering Price Per Share | | | Proposed Maximum Aggregate Offering Price (1) | | | Amount of Registration Fee | |
| | | | | | | | | | | | | | | | | |
Common stock, $0.0001 par value per share | | | | | | | | | | | | | | | | |
(1) | The shares of Adelt Design, Inc. common stock being registered hereunder are being registered primarily for resale by the Company’s CEO, Mr. Larry A. Adelt. |
(1) Estimated pursuant to Rule 457(a) of the Securities Act of 1933, as amended (the “Securities Act”) solely for purposes of calculating the registration fee.
(2) | Estimated solely for purposes of calculating the registration fee under Rule 457. |
In the event of a stock split, stock dividend, or similar transaction involving the common stock, the number of shares registered shall automatically be increased to cover the additional(2) Represents shares of common stock issuable by the registrant as follows: (i) up to 2,181,370 shares of common stock issuable upon conversion or redemption of 10% Original Issue Discount Convertible Promissory Notes issued pursuant to the Securities Purchase Agreement between the registrant and Old Main Capital, LLC (the "Selling Stockholder") dated March 18, 2016 (the “Securities Purchase Agreement”); (ii) up to 785,294 shares of common stock issuable upon conversion or redemption of an 8% Convertible Promissory Note dated March 18, 2016, issued as a commitment fee pursuant to the Equity Purchase Agreement between the registrant and the Selling Stockholder dated April 18, 2016 (the “Equity Purchase Agreement”); and (iii) up to 2,033,336 shares of common stock issuable under the equity line established by the Equity Purchase Agreement. The Company's calculation of the maximum number of shares that may be registered for resale under the equity line pursuant to this Registration Statement is as follows: non-affiliate float of 5,100,003 shares multiplied by $1.22, which represents the average of the high and low prices for the common stock on February 22, 2016, divided by three, which yields $2,074,001.20. Based on the average of the high and low prices for the common stock of $1.02 on April 15, 2016, which was the last business day before the date the Equity Purchase Agreement was executed, we can register up to 2,033,336 shares of common stock for resale pursuant to the equity line.
(3) This offering price has been estimated solely for the purpose of calculating the registration fee pursuant to Rule 416457(c) of the Securities Act with respect to the shares of common stock registered hereunder, based upon the price of $1.02, which was the average of the high and low prices for the Company’s common stock on April 15, 2016, as reported on the OTC Market Group, Inc.’s OTCQB tier.
(4) Computed in accordance with Section 6(b) of the Securities Act as in effect on April 18, 2016.
In accordance with Rule 416(a) under the Securities Act.Act, the registrant is also registering hereunder an indeterminate number of shares that may be issued and resold resulting from stock splits, stock dividends or similar transactions.
THE REGISTRANTWE HEREBY AMENDSAMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT ALLWE SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SUCHSAID SECTION 8(a), MAY DETERMINE.
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You should rely only on the information contained in this preliminary prospectusProspectus. We have not authorized anyone to provide you with information that is not complete and may be changed. These securities may not be sold until the registration statement filed with the U.S. Securities and Exchange Commission (“SEC”) is effective.different from that contained in this Prospectus. This preliminary prospectusProspectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdictionstate where the offer or sale is not permitted. The information in this Prospectus is complete and accurate only as of the date on the front cover regardless of the time of delivery of this Prospectus or of any sale of our securities.
SUBJECT TO COMPLETION, DATED APRIL 21, 2016
PROSPECTUS
Subject to completion, dated June 3, 2011
ADELT DESIGN INC5,000,000 shares of common stock
8,000,000 SHARES OF COMMON STOCKCLS HOLDINGS USA, INC.
This prospectusProspectus (this “Prospectus”) relates to the resaleoffer and sale of an aggregate of 8,000,000up to 5,000,000 shares of common stock, par value $0.001,$0.0001 of CLS Holdings USA, Inc., a Nevada corporation, by Larry A. Adelt, the Selling Stockholder (as defined below). We are registering the resale of (i) up to 2,181,370 shares of Common Stock issuable upon conversion or redemption of 10% Original Issue Discount Convertible Promissory Notes (the “10% Notes”) issued pursuant to the Securities Purchase Agreement between the registrant and Old Main Capital, LLC (the “Selling Stockholder”), dated March 18, 2016 (the “Securities Purchase Agreement”); (ii) up to 785,294 shares of Common Stock issuable upon conversion or redemption of an 8% Convertible Promissory Note (the “8% Note") issued as a commitment fee pursuant to the Equity Purchase Agreement between the registrant and the Selling Stockholder dated April 18, 2016 (the “Equity Purchase Agreement” (the 10% Notes and 8% Note are together referred to as the "Notes"); and (iii) up to 2,033,336 shares of common stock issuable under an equity line in the amount of $4,000,000 (the “Equity Line”) established by the Equity Purchase Agreement, each as more fully described in this Prospectus. The resale of such shares by the Selling Stockholder pursuant to this Prospectus is referred to as the “Offering.”
We are not selling security holderany securities under this prospectus. These securities will be offered for sale by the selling security holder identified in this prospectus in accordance with the methodsProspectus and terms described in the section of this prospectus entitled “Plan of Distribution."
We will not receive any of the proceeds from the sale of these shares.shares of common stock by the Selling Stockholder. We will, pay all expenses, except forhowever, receive proceeds from our sale to the brokerage expenses, fees, discountsSelling Stockholder of the 10% Notes and commissions, which will all be paid byunder the selling security holder, incurred in connection with the offering described in this prospectus. Our common stock is more fully described in the section of this prospectus entitled “Description of Securities."Equity Line.
Our common stockThe Selling Stockholder is presently not traded on any market or securities exchange. Common stock being registered in this registration statement may be sold by selling security holder at a fixed price of $0.001 per share or in transactions that are not in the public market at a fixed price of $0.001 per share. The offering will not be extended beyond the offering period of 29 days from the date of effectiveness.
The selling security holder Larry A. Adelt (hereinafter also referred to as “Mr. Adelt”) is the ”underwriter”an “underwriter” within the meaning of Section 2(a)(11) of the Securities Act of 1933, as amended with respect to all shares being offered hereby.
Act. The selling security holder has set an offering period of 29 days from the date of effectiveness and a fixed price of $0.001 per share.
We have never declared or paid any cash dividends or distributions on our capital stock. We currently intend to retain our future earnings, if any, to support operations and to finance expansion and therefore we do not anticipate paying any cash dividends on our common stock in the foreseeable future.
The Company has no equity compensation plans and individual compensation arrangement and does not intend to enter into any equity compensation plans and individual compensation arrangement in the future.
Adelt Design, Inc. is a development stage company. Adelt Design, Inc. has a limited history of development stage operations. We presently do not have the funding to execute our business plan. As of the date of this prospectus, we have generated no revenues from our development stage business operations.
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. See "Risk Factors” beginning on page 5 for risks of an investment in the securities offered by this prospectus, which you should consider before you purchase any shares.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Date of This Prospectus is: June 3, 2011
This prospectus is not an offer toSelling Stockholder may sell any securities other than the shares of common stock offered hereby. This prospectus is not an offer to sell securitiesdescribed in any circumstancesthis Prospectus in which such an offer is unlawful.
We have not authorized anyone, including any salesperson or broker, to give oral or writtena number of different ways and at varying prices. See “Plan of Distribution” for more information about this offering,how the Company, orSelling Stockholder may sell the shares of common stock offered hereby that is different from the information included in this prospectus. You should not assume that the information in this prospectus, or any supplementbeing registered pursuant to this prospectus,Prospectus.
We will pay the expenses incurred in registering the shares, including legal and accounting fees. See “Plan of Distribution.”
Our common stock is accurate at any date other than the date indicatedcurrently quoted on the coverOTC Market Group, Inc.’s OTCQB tier under the symbol “CLSH.” On April 19, 2016, the last reported sale price of our common stock was $1.03.
Our principal executive offices are located at 1435 Yarmouth Street, Boulder, Colorado 80304.
Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 6 of this prospectusProspectus.
Neither the Securities and Exchange Commission (the "SEC") nor any state securities commission has approved or any supplementdisapproved of these securities or determined if this Prospectus is truthful or complete. Any representation to it. the contrary is a criminal offense.
The date of this Prospectus is April 21, 2016.
TABLE OF CONTENTS
PROSPECTUS SUMMARY | 1 |
THE OFFERING | 3 |
RISK FACTORS | 5 |
(A) RISKS RELATED TO OUR BUSINESS AND THIS OFFERING | 5 |
(B) RISKS RELATED TO THE INDUSTRY | 9 |
(C) RISKS RELATED TO THE OWNERSHIP OF OUR SECURITIES AND RISKS RELATED TO THIS OFFERING | 10 |
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS | 11 |
USE OF PROCEEDS TO ISSUER | 11 |
DETERMINATION OF OFFERING PRICE | 12 |
DILUTION | 12 |
SELLING SECURITY HOLDER | 12 |
PLAN OF DISTRIBUTION | 12 |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 14 |
RESULTS OF OPERATIONS | 16 |
LIQUIDITY AND CAPITAL RESOURCES | 18 |
PLAN OF OPERATION | 21 |
DESCRIPTION OF BUSINESS | 21 |
MANAGEMENT | 24 |
MANAGEMENT BIOGRAPHIES | 25 |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT | 26 |
REMUNERATION OF DIRECTORS AND OFFICER | 26 |
EXECUTIVE COMPENSATION | 27 |
SUMMARY COMPENSATION TABLE | 27 |
COMPENSATION OF DIRECTORS | 27 |
STOCK INCENTIVE PLAN | 27 |
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS | 27 |
INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS | 28 |
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES ACT LIABILITIES | 28 |
DESCRIPTION OF SECURITIES | 29 |
LEGAL MATTERS | 30 |
EXPERTS | 30 |
INTEREST OF NAMED EXPERTS AND COUNSEL | 30 |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE | 31 |
AVAILABLE INFORMATION | 31 |
REPORTS TO SECURITY HOLDER | 31 |
EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES | 33 |
FINANCIAL STATEMENTS | F-1 |
PART II INFORMATION NOT REQUIRED IN PROSPECTUS | II-1 |
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this prospectus. This summaryProspectus and does not contain all of the information that you should consider beforein making your investment decision. Before investing in the common stock. Youour securities, you should carefully read thethis entire prospectus,Prospectus, including “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”our financial statements and the Financial Statements, before making an investment decision. Indocuments to which we refer you. The following summary is qualified in its entirety by reference to the detailed information appearing elsewhere in this Registration Statement on Form S-1 (the "Registration Statement") of which this Prospectus is a part.
Unless the terms “Adelt Design, Inc.,context indicates or suggests otherwise, references to “we,” “Company,” “we,“our,” “us,” and “our,the “Company,” “CLS Holdings USA,” “CLS” or the “Registrant” refer to “ADELT DESIGN, INC”CLS Holdings USA, Inc., a Nevada corporation, and its subsidiaries.
Business Overview
We were incorporatedFor the past two years, one of the founders of CLS Labs, Inc. (“CLS Labs”), a Nevada corporation which became a wholly-owned subsidiary of the Company on April 29, 2015 pursuant to a merger (the “Merger”) whereby we acquired the business of CLS and abandoned our prior business, 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 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 State of Nevada on March 31, 2011 under the name of Adelt Design, Inc.marketplace.
Adelt Design,On April 17, 2015, CLS Labs took its first step toward commercializing its proprietary methods and processes by entering into an arrangement (the “Colorado Arrangement”), through its wholly owned subsidiary, CLS Labs Colorado, Inc. will market the sale of customized carpet binding art. The carpet binding art can be customized, a Florida corporation (“CLS Labs Colorado”), with certain Colorado entities, to, among other things, (i) license its proprietary technology, methods and processes to Picture Rock Holdings, LLC (“PRH”) in exchange for a purchaser’s personal use as well as corporate use. Since its inception, on March 31, 2011, Adelt Design, Inc. has incurred losses of $15,530fee; (ii) build a processing facility and lease such facility, including equipment, to May 31, 2011.
GENERAL INTRODUCTION
Adelt Design, Inc. will market the sale of customized carpet binding art. This carpet binding art can be customized for a purchaser’s personal use or for corporate use. Since its inception, on March 31, 2011, Adelt Design, Inc. has incurred lossesPRH; and (iii) loan certain funds to May 31, 2011.
Fashioning carpet into custom carpet binding art based on photographs is a specialty of Adelt Design, Inc. As a commercial artist, Mr. Adelt has refined this medium. Unlike portraits and other subjects done simply with inlays, Mr. Adelt’s carpet binding art begins with a detailed sketch of a photo of the carpet binding art subject. The sketch shows every cut that will havePRH to be made in the carpet, such as the eyes, nose, mouth, and other features. Following the sketch, Mr. Adelt hand carves and crafts all the features through repeated carving and applications of various dyes (the same acid based dyes used by the mills), until the desired tones and shading are obtained. Typical artists use clay or canvas as their media, while Mr. Adelt uses fine white wool or other blended carpet as the starting point.
Adelt Design, Inc. can produce carpet binding art as small or as large as ordered. Any requested design can be fashioned into carpet binding art once commissioned.
Adelt Design, Inc. has not commenced its major operations of having its carpet binding art marketed, and the Company has not distributed the product to anyone. The Company will market its carpet binding art in the Salt Lake City, Utah area. The Company will not start production of its carpet binding art until the Company has sold the product to a client. Adelt Design, Inc. is considered a development stage company because it has not commenced its major operations. In addition, the Company has not achieved any revenuePRH in connection with its business to date. Asfinancing of the building out, equipping, and development of a result, we aremarijuana grow facility that will be operated by a startup company, which means that the Company has no operating history or revenue, and are at a competitive disadvantage.licensed third-party marijuana grower.
We are payingintend to monetize our extraction method and generate revenues through (i) the expenseslicensing of our proprietary methods and processes to others, as in the offering because we seekColorado Arrangement, (ii) the processing of cannabis for others, and (iii) the purchase of cannabis and the processing and sale of cannabis-related products. We plan to (i) become a reporting Companyaccomplish this through the creation of joint ventures, licensing agreements, and fee-for-service arrangements with the Commission under the Securities Exchange Actgrowers and dispensaries of 1934 (the "1934 Act"); and (ii) enable our common stock to be traded on the OTC Bulletin Board.cannabis products. We believe that the registrationwe can establish a position as one of the resale of shares on behalfpremier cannabinoid extraction and processing companies in the industry. Assuming we do so, we then intend to explore the creation of our existing security holders may facilitateown 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 developmenttesting, 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 public market inconsulting subsidiary, 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 common stock if our common stock is approved for trading on the OTC Bulletin Board.processing facilities.
We expect to continue to incur losses for at least the next 12 months. We do not expect to generate revenue that is sufficient to cover our expenses, and we do not have sufficient cash and cash equivalents to execute our plan of operations for at least the next twelve months. We will need to obtain additional financing, in the amount of $75,000, to conduct our day-to-day operations, and to fully execute our business plan. We plan to raise the capital necessary to fund our business through the sale of equity securities. (See "Plan of Operation")
BUSINESS DEVELOPMENT
The Company was incorporated on March 31, 2011. The Company has had limited development stage operations from incorporation (March 31, 2011) to May 31, 2011.
Initial Sales Strategy
We have established a two-prong sales approach; our approach utilizes direct sales through Mr. Adelt. Our direct sales will be conducted by Mr. Adelt. He will market the product locally in the Salt Lake City, Utah area. The Company’s current marketing strategy consists of various Point of Sale materials to include material to include advertising posters, flyers and magnetic strips with the Company name and its product developed by Mr. Adelt in the past several months. We also intend to derive sales from our internet website which is currently under development at: http://www.adeltdesign.com. We need further funding to complete the Company’s internet website. In addition, sales will be done by word of mouth, referrals, and online marketing.
Financing Transactions Related to the Offering
Convertible Notes
On March 18, 2016, we entered into the Securities Purchase Agreement with the Selling Stockholder, whereby the Selling Stockholder agreed to purchase an aggregate of up to $500,000 in subscription amount corresponding to an aggregate of up to $555,555 in principal amount of 10% Original Issue Discount Convertible Promissory Notes (the “10% Notes”) due, subject to the terms therein, as set forth below. The purchase will occur, at our option, in up to five tranches, with the first tranche of $200,000 having been purchased on March 18, 2016; the second tranche of $50,000 being purchased on the first Friday which is a trading day after the date that this Registration Statement is filed with the SEC; the third tranche of $50,000 being purchased on the first Friday which is a trading day at least three (3) trading days after we receive initial comments from the SEC on this Registration Statement, or the date that we are notified by the SEC that this Registration Statement will not be reviewed; the fourth tranche of $100,000 being purchased on the first Friday which is a trading day at least three (3) trading days after of the date that this Registration Statement is declared effective by the SEC; and the fifth Tranche of $100,000 being purchased on the first Friday which is a trading day after the thirty (30) day anniversary of the date that this Registration Statement is declared effective. The terms of the Securities Purchase Agreement require the Selling Stockholder, on an unconditional basis, to purchase the second through fifth tranches of the 10% Notes upon the occurrence of the events set forth above at a fixed price.
The 10% Notes will bear interest at the rate of 10% per annum. At the earlier of September 18, 2016 or two (2) trading days after this Registration Statement is declared effective, we must begin to redeem 1/24th of the face amount of the 10% Notes and any accrued but unpaid interest on a bi-weekly basis. Such amortization payment may be made, at our option, in cash or, subject to certain conditions, in common stock pursuant to a conversion rate equal to the lower of (a) $0.80 (the “Fixed Conversion Price”) or (b) 75% of the lowest daily volume weighted average price of the common stock of CLS (the “VWAP”) in the 20 consecutive trading days immediately prior to the applicable conversion date. The holder may, at its option, convert all or a portion of the 10% Notes into shares of common stock at a conversion price equal to the Fixed Conversion Price. On March 18, 2016, we issued the Selling Stockholder a 10% Note in the principal amount of $222,222 in exchange for payment of $200,000 pursuant to the Securities Purchase Agreement, representing the first tranche thereunder.
Commitment Fee Note
In connection with the closing of the Securities Purchase Agreement, on March 18, 2016, we also issued the Selling Stockholder an 8% Convertible Promissory Note (the “8% Note”) in the principal amount of $200,000 with the original issue date of March 18, 2016 in exchange for the Selling Stockholder’s commitment to enter into the Equity Line and prepare the Equity Purchase Agreement and related transaction documents. The 8% Note bears interest at the rate of 8% per annum. At the earlier of September 18, 2016 or two (2) trading days after this Registration Statement becomes effective, we must begin to redeem 1/6th of the face amount of the 8% Note and any accrued but unpaid interest on a monthly basis. Such amortization payment 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) $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. The terms of the Equity Purchase Agreement required us to issue the 8% Note as a commitment fee for the Equity Line. This commitment fee was earned in full when the Selling Stockholder delivered and executed the Equity Purchase Agreement on April 18, 2016.
The Equity Line
On April 18, 2016, we entered into the Equity Purchase Agreement with the Selling Stockholder providing for the Equity Line. The Equity Purchase Agreement provides that, upon the terms and subject to the conditions thereof, the Selling Stockholder is committed to purchase, on an unconditional basis, shares of common stock (the “Commitment Shares”) at an aggregate price of up to $4,000,000 over the course of its 24-month term. The Selling Stockholder's obligation to purchase all $4,000,000 of Commitment Shares is referred to as the "Total Commitment."
From time to time over the 24-month term of the Equity Purchase Agreement, we may, in our sole discretion, provide the Selling Stockholder 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 we receive 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 equals 80% of the market price during the five (5) consecutive trading days immediately following the clearing date associated with the applicable Put Notice.
Subsequent Sales Strategy
Adelt Design, Inc. will commence the marketingUse of the carpet binding art for sale to the general public. The Company is presently developing its marketing program for the sale of its carpet binding art to the general public. The Company is not offering the product to anyone at this time. Adelt Design, Inc. is considered a development stage company because it has not commenced its major operations. In addition, the Company has not achieved any revenue in connection with its business to date. As a result, we are a startup company, which means that the Company has no operating history or revenue, and therefore is at a competitive disadvantage.
We have no operating history and expect to incur losses for the foreseeable future. Should we continue to incur losses for a significant amount of time, the value of your investment in the common shares could be affected downward, and you could even lose your entire investment.
We have not yet received any revenues from our development stage operations, nor have we otherwise engaged in any business operations. Adelt Design, Inc. is a development stage company and in the absence of revenues and operations the Independent Auditor’s Report dated June 3, 2011, cites a going concern issue. The going concern statement opinion issued by the independent auditors is the result of a lack of operations and working capital.
The Company will need to raise capital which is a concern to the independent auditors because there is insufficient cash for operations for the next twelve months. The Company will have to seek other sources of capitalProceeds
We establishedintend to use the minimum amount of $75,000 thatproceeds from the 10% Notes and the Equity Line to capitalize the Company will needwith an amount anticipated to be sufficient to establish the Company's management team; lease real estate for one marijuana processing facility; purchase and lease equipment for one marijuana processing facility; lease real estate for one hemp processing facility; purchase and lease equipment for one hemp processing facility; provide working capital for the Company's management to pursue joint venture and fee-for-services opportunities for the Company; repay a portion of the Company’s existing debt; and for other working capital needs.
We intend to raise additional capital through equity and debt instrumentsfinancing as needed, though there cannot be any assurance that such as bank loans, or private financing so operations can start in order to generate some type of revenue. Presently, no other sources of financing has been identified and it is unknown if any other sourcesfunds will be identified. There is no assurance that the Company will be ableavailable to obtain any bank loansus on acceptable terms, on an acceptable schedule, or private financing.
DESCRIPTION OF PROPERTY
The Company uses a corporate office located at: 3217 South Orchard Street, Salt Lake City, Utah 84106. This facility is being provided to the Company free of charge. There are currently no proposed programs for renovation, improvement or development of the facility currently in use.
PRINCIPAL OPERATIONS, PRODUCTS AND SERVICES OF THE COMPANY
Adelt Design, Inc. was incorporated in the State of Nevada on March 31, 2011. Adelt Design, Inc. will market carpet binding art.at all.
Adelt Design, Inc. is a development stage company. Adelt Design, Inc. has a limited history of development stage operations. The Company presently does not have the funding to execute its business plan.
Achievement of the Adelt Design, Inc.’s business objective is basically dependent upon the judgment, skill and knowledge the Company’s management. Mr. Adelt is currently the Company’s sole executive officer and director. There can be no assurance that a suitable replacement could be found for any of our officers upon their retirement, resignation, inability to act on our behalf, or death.
Corporate Information
Our principal executive officeoffices are located at 1435 Yarmouth Street, Boulder, CO. Our telephone number is located at: 3217 South Orchard Street, Salt Lake City, Utah 84106.(888) 438-9132. We maintain a corporate website at www.clsholdingsinc.com
INTERNET ADDRESSTransfer Agent
Our Internet address is: www.adeltdesign.com
RISK FACTORSThe transfer agent for our common stock is VStock Transfer at 18 Lafayette Place, Woodmere, NY 11598. The transfer agent’s telephone number is (212) 828-8436.
The Company's financial condition, business, operation and prospects involve a high degree of risk. You are urged to carefully read and consider the risks and uncertainties described below as well as the other information in this report before deciding to invest in our Company. If any of the following risks are realized, our business, operating results and financial condition could be harmed and the value of our stock could go down. This means that our stockholders could lose all or a part of their investment. For a more detailed discussion of some of the risks associated with our Company, you are urged to carefully review and consider the section entitled "Risk Factors” beginning on page 5 of this prospectus.
THE OFFERINGOffering
Common stock offeredSecurities Offered by selling security holder
| | 8,000,0005,000,000 shares of common stock. This number represents approximately 45% of our current outstanding common stock.
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| Common Stock Outstanding before Offering | | 20,350,003 shares |
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Common Stock Outstanding after Offering price | | 25,350,003 shares, assuming 2,966,664 shares are issued upon conversion or redemption of the Notes, and assuming all 2,033,336 shares are sold to the Selling Stockholder under the Equity Line. If we do not elect to use common stock to pay interest on the Notes or to redeem the Notes, or if we sell less shares of common stock to the Selling Stockholder under the Equity Line, we have substantially less common stock outstanding after the Offering |
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Minimum numberUse of sharesProceeds
| We will not receive any of the proceeds from the sale of the common stock registered hereunder. We will receive proceeds from the delivery of the unissued 10% Notes and our sales of Commitment Shares to be sold in this offering | | the Selling Stockholder under the Equity Line. We intend to use such proceeds, if any, as set forth under “Use of Proceeds” beginning on page 18. |
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Minimum numberRisk Factors
| An investment in our securities involves a high degree of risk and could result in a loss of your entire investment. Further, the issuance to, or sale by, the Selling Stockholder of a significant amount of shares being registered in this Registration Statement at any given time could cause the market price of our common stock to decline and to be offered per investor | | highly volatile and we do not have the right to control the timing and amount of any sales by the Selling Stockholder of such shares. Prior to making an investment decision, you should carefully consider all of the information in this Prospectus and, in particular, you should evaluate the risk factors set forth under the caption “Risk Factors” beginning on page 6. |
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Common stock outstanding beforeSymbol on the offering
| CLSH |
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| (1) | 18,000,000 commonConsists of: (i) 2,181,370 shares asissuable upon conversion or redemption of May 31, 2011.
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Common stock outstanding after the offering
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| | The selling security holder will determine when and how they will sell the common stock offered in this prospectus. |
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Termination of the Offering | | The offering will conclude upon the earliest of (i) such time as all of the common stock has been sold pursuant to the registration statement or (ii) within 29 days of the registration statement being declared effective (iii) such time as all of the common stock becomes eligible for resale without volume limitations pursuant to Rule 144 under the Securities Act, or any other rule of similar effect. |
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| | We are not selling any shares of the common stock covered by this prospectus. |
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| | The Common Stock offered hereby involves a high degree of risk and should not be purchased by investors who cannot afford the loss of their entire investment. See “Risk Factors” beginning on page 5. |
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| | Based on 18,000,000 shares of common stock outstanding as of May 25, 2011. |
This prospectus relates to the sale of up to 8,000,000 shares of our common stock by the selling shareholder identified in the section of this prospectus entitled "Selling Security Holder." These 8,000,000 common shares are being offered hereby by Larry A. Adelt, the selling security holder, under this prospectus.
The number of common shares offered by this prospectus represents up to approximately 45% of the total common stock outstanding after the offering.
The selling security holder Larry A. Adelt is the "underwriter” within the meaning of the Securities Act of 1933, as amended with respect to all shares being offered hereby. The selling security holder has set an offering period of 29 days from the date of effectiveness and a fixed price of $0.001 per share.
Adelt Design, Inc. has never declared or paid any cash dividends or distributions on its capital stock. The Company currently intends to retain its future earnings, if any, to support operations and to finance expansion and therefore does not anticipate paying any cash dividends on its common stock in the foreseeable future.
The Company has no equity compensation plans and individual compensation arrangements and does not intend to enter into any equity compensation plans and individual compensation arrangements in the future.
Adelt Design, Inc. is a development stage company. Adelt Design, Inc. has a limited history of development stage operations. We presently do not have the funding to execute our business plan. As of the date of this prospectus, the Company has not generated any revenues from its development stage business operations.
Information regarding the selling security holder, the common shares being offered to sell under this prospectus, and the times and manner in which they may offer and sell those shares, is provided in the sections of this prospectus entitled "Selling Security Holder" and "Plan of Distribution." Adelt Design, Inc. will not receive any of the proceeds from these sales. The registration of common shares pursuant to this prospectus does not necessarily mean that any of those shares will ultimately be offered or sold by the selling Security Holder.
SUMMARY OF FINANCIAL INFORMATION
The following table provides summaryhistorical financial statement data as of the period from Inception (March 31, 2011) through May 31, 2011. The financial statement data as of the period ended May 31, 2011 has been derived from our audited financial statements. The results of operations for past accounting periods are not necessarily indicative of the results to be expected for any future accounting period. The data set forth belowinformation should be read in conjunction with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,Operations” and our financial statements and the related notes included elsewhere in this Prospectus. The historical results are not necessarily indicative of results to be expected for any future periods:
| Statements of Operations Data: | | Nine Months Ended February 29, 2016 | | | Nine Months Ended February 28, 2015 | | | Year Ended May 31, 2015 | | | For the Period May 1, 2014 (Inception) through May 31, 2014 | | |
| | | (unaudited) | | | (unaudited) | | | | | | | | |
| Total Revenues | | $ | - | | | $ | - | | | $ | -- | | | $ | - | |
| Cost of goods sold | | $ | | | | $ | | | | $ | - | | | $ | - | |
| Net income (loss) | | $ | (1,862,610 | ) | | $ | (659,748 | ) | | $ | (1,515,587 | ) | | $ | - | |
| Net loss per share attributable to common stockholders, basic and diluted | | $ | (0.09 | ) | | $ | (0.04 | ) | | $ | (0.24 | ) | | $ | - | |
| Weighted average shares used to compute net loss per share attributable to common stockholders, basic and diluted | | $ | 20,081,901 | | | $ | 15,000,000 | | | $ | 6,356,167 | | | $ | - | |
| Balance Sheet Data | | February 29, 2016 | | | May 31, 2015 | | | May 31, 2014 | |
| | | (unaudited) | | | | | | | |
| Cash | | $ | 30,170 | | | $ | 208,821 | | | $ | - | |
| Current assets | | $ | 44,332 | | | $ | 240,621 | | | $ | - | |
| Total assets | | $ | 140,010 | | | $ | 292,779 | | | $ | - | |
| Current liabilities | | $ | 1,082,691 | | | $ | 875,696 | | | $ | - | |
| Total Liabilities | | $ | 1,202,736 | | | $ | 881,252 | | | $ | - | |
| Stockholders' equity | | $ | (1,062,726 | ) | | $ | (588,473 | ) | | $ | - | |
| Total liabilities and stockholders' equity | | $ | 140,010 | | | $ | 292,779 | | | $ | - | |
An investment in our securities is subject to numerous risks, including the risk factors described below. You should carefully consider the risks, uncertainties, and other factors described below, in addition to the other information set forth in this Prospectus, before making an investment decision with regard to our securities. Any of these risks, uncertainties, and other factors could materially and adversely affect our business, financial condition, results of operations, cash flows, or prospects. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. See also “Cautionary Note Regarding Forward-Looking Statements.”
Risks Related to the Marijuana Industry
Because the use, sale or possession of marijuana is illegal under federal law, THE COMPANY AND ITS OFFICERS AND EMPLOYEES COULD BE SUBJECT TO CRIMINAL AND CIVIL SANCTIONS.
The U.S. Government classifies marijuana as a Schedule I controlled substance, meaning marijuana is an illegal substance under federal law and its prescription, use, sale or possession is a violation thereof. Although 23 states and the District of Columbia allow the use of medical marijuana, four states and the District of Columbia have legalized marijuana for adult recreational use, and recently-enacted federal spending legislation prohibits the Department of Justice from using federal funds to prevent states from implementing their own marijuana laws, the United States Supreme Court has ruled that federal laws criminalizing the use of marijuana pre-empt state laws. Thus, even if we limit our business to marijuana-friendly states, 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 face the prospect of criminal and/or civil sanctions for engaging in activities in violation of federal law and the Company could be at risk of civil and/or criminal forfeiture actions against its assets and operations for such violations. As our business plan depends upon the possession, sale, and use of marijuana and certain cannabinoid extracts, such sanctions or forfeiture actions would be debilitating to the business of the Company and would have a material adverse effect on our operations.
Changes in federal law enforcement policy concerning federal marijuana laws could force a suspension or termination of our operations.
The commercial production, processing, distribution and sale of marijuana within the various states of the United States that have legalized these activities for medical and/or recreational purposes is currently proceeding largely free from federal investigation and prosecution as the result of a number of formal written statements issued by the United States Department of Justice deferring federal law enforcement action on these activities to state and local laws and law enforcement under certain circumstances and recently-enacted federal spending legislation prohibiting the Department of Justice from using federal funds to prevent states from implementing their own marijuana laws. The statements issued by the Department of Justice are, however, only guidelines provided to federal law enforcement agencies in setting priorities for the investigation and prosecution of violations of federal laws criminalizing marijuana and the effects of the federal spending legislation are not yet apparent.
Further, major changes in the executive administration, including the 2016 presidential election, particularly ones resulting in a change of political party holding the office of the President, could result in changes to, or even the withdrawal or reversal of, current federal law enforcement policy concerning the investigation and prosecution of activities involving marijuana including those which are legal under certain state laws. Likewise, there are no guarantees that legislation enacted in subsequent years will contain similar marijuana-friendly provisions. As our business plan depends upon the possession, sale, and use of marijuana and certain cannabinoid extracts, a change or reversal of federal law enforcement policy and/or federal spending legislation concerning marijuana would be debilitating to our business as it could result in a temporary suspension or the permanent cessation of our operations.
Even in states where the sale and use of recreational or medicinal marijuana is permitted, we may be unable to obtain a license and may have to rely on collaborative arrangements with licensed entities.
Certain states in which we seek to operate may prohibit non-resident companies from conducting business directly in the state and/or may require certain licensure, such as a Medical Marijuana Infused Product Manufacturer License (MMIP), for us to conduct our business. In such states, we may be required to enter into a collaborative arrangement with a local entity holding the necessary MMIP license, whereby we would agree to lease 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 would have a material adverse effect on our operations.
In states where we are permitted to operate directly, licensing requirements may be difficult and/or expensive to satisfy and maintain.
In states where we are permitted to operate directly, the licensure application and approval process may require significant time and expense. Additionally, upon becoming authorized to do business in a state, it may be difficult or expensive for us to comply with the various laws, regulations and licensure requirements of each state. Compliance may also include a subjective factor that could allow a state to revoke our MMIP license even though we believed we were complying with all applicable requirements. The loss of such an MMIP license for any reason would likely result in a material adverse effect on our operations.
In states where the sale and use of recreational or medicinal marijuana is permitted, local ordinances and regulations may adversely affect the Company and our strategic collaborators, such as growers and dispensaries.
In addition to the federal pre-emption and state law issues mentioned above, local laws and regulations may impact the Company and our strategic collaborators, such as growers and dispensaries, in jurisdictions where marijuana is legal under state law. Ordinances and regulations related to zoning, limiting the size of growers or levying exorbitant taxes and fees on marijuana-related businesses may have a material adverse effect on business and operations.
Laws and regulations affecting the regulated marijuana industry are constantly changing and we cannot predict the impact of future regulations.
Local, state and federal medical marijuana laws and regulations are broad in scope and subject to evolving interpretations. Legal or regulatory changes in the jurisdictions in which we operate or intend to operate may require us to incur substantial costs associated with compliance or alterations to our business plan. Further, violations of these ever-changing laws and regulations, or allegations of such violations, could disrupt our business and result in a material adverse effect on our operations.
Our ability to achieve significant financial success is dependent on additional states and local governments legalizing marijuana.
There can be no assurance that the number of states that allow the use of medicinal or recreational marijuana will increase and there can be no assurance that the 23 existing states that permit the medicinal use of marijuana will not reverse their position in the future. As our growth is dependent upon the continued legalization of marijuana for medical and recreational use, the failure of additional states and local governments to legalize marijuana would significantly curtail our growth potential.
The difficulty of the Company to obtain various insurances that are typically available to businesses may expose us to additional risk and financial liabilities.
Workers compensation, general liability, and directors and officers insurance, among other types of business-related insurance, may be more difficult and/or more expensive to secure due to our engagement in the marijuana industry. If we are forced to go without such insurance or pay a substantially higher premium than anticipated, we may be prevented from engaging in certain strategic collaborations or partnerships, our growth may be inhibited, and we may be exposed to additional risk and financial liabilities.
The Company and its clients, partners and strategic collaborators may have difficulty accessing the service of banks.
On February 14, 2014, the U.S. government issued rules allowing banks to legally provide financial services to state-licensed marijuana-related businesses. However, such guidance fell short of the explicit legal authorization that banking industry officials requested from the federal government. To date, it is unclear whether any banks have relied on the guidance and accepted marijuana-related companies as customers. If we, as well as our clients, partners and strategic collaborators, have difficulty accessing the service of banks, we may not have access to the capital necessary to maintain our operations or may be subject to the security risks of a cash business.
The market for our products is unproven.
While consumer demand for marijuana-based products is well established, consumer demand for marijuana e-cigarettes 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 products could have a material adverse effect on the Company and could prevent the Company 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.
The medical marijuana industry faces strong opposition.
Well-funded, politically significant businesses may provide strong economic and political opposition to the medical marijuana industry and the industry could face a material threat from the pharmaceutical companies as marijuana continues to take market share from their products. Any inroads the pharmaceutical industry makes in halting or rolling back the medical marijuana movement could have a detrimental impact on the market for our products and thus on our business, operations and financial condition.
Risks Related to an Investment in our Securities
CLS Labs is newly formed and has minimal operations.
CLS Labs was formed on May 1, 2014 and it has not yet generated revenues. Accordingly, the Company's operations are subject to all of the risks inherent with start-up business enterprises. The likelihood of the Company's success must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered in connection with the start-up and initial growth of a new business and the competitive and growing market in which the Company operates. The Company must be regarded as a high-risk new and unproven venture with all the unforeseen costs, expenses, problems, and difficulties to which such ventures are subject and no assurance can be given that the Company will ever have enough revenues so as to be profitable.
We may never be profitable.
The Company has never earned a profit and we expect to incur losses during the foreseeable future and may never be profitable. We will need to obtain additional financing until we are able to earn a profit. As a result of our short operating history and the Merger, it is difficult for potential investors to evaluate our business. There can be no assurance that we can implement our business plan, that we will be profitable, or that the securities which may be sold pursuant to this Prospectus will have any value. Continued losses could make it difficult to fund our operations or successfully execute our business plan, and could adversely affect our stock price.
We may encounter start-up delays.
We cannot accurately project the timing of our initial sales although we currently anticipate to commence earning revenue in the fourth quarter of 2016. Delays in raising capital, establishing and implementing our management team, securing relationships with partners and strategic collaborators such as growers and dispensaries, developing products, finalizing sales and marketing structures and/or implementing other portions of CLS Labs’ business plan may delay start-up, which could negatively affect an investment in the Company.
Investors may not realize any return on their investment.
There can be no assurance that we will ever achieve revenues or be able to develop into a successful or profitable business. Accordingly, there is no assurance that Investors will realize a return on their investment or that they will not lose their entire investment in the Company.
We have not yet identified or hired a complete management, operations or sales and marketing team and if it takes longer than anticipated or if costs are more than anticipated to do so, the Company could be adversely affected.
We have not yet identified a complete management, sales or marketing team. As a result, aside from the directors, officers and key employees referenced in this Prospectus, investors will not have the benefit of knowing the identities and backgrounds of such team members in making their investment decisions. In addition, we have estimated the compensation we will have to pay to recruit a qualified management, operations and sales and marketing team and have not engaged a compensation consultant or other professional to estimate such costs, but have relied solely on the judgment of our 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 our 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 issues could have a material adverse impact on the Company.
We are subject to penny stock regulations and restrictions and you may have difficulty selling shares of our common stock.
Our common stock is subject to the provisions of Section 15(g) and Rule 15g-9 of the Exchange Act, commonly referred 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. The SEC generally defines a penny stock to be any equity security that has a market price less than $5.00 per share, subject to certain exceptions. We are subject to the SEC’s penny stock rules.
Since our common stock is deemed to be penny stock, trading in the shares of our common stock is subject to additional sales practice requirements on broker-dealers who sell penny stock to persons other than established customers and accredited investors. “Accredited investors” are persons with assets in excess of $1,000,000 (excluding the value of such person’s primary residence) or annual income exceeding $200,000 or $300,000 together with their spouse. For transactions covered by these rules, broker-dealers must make a special suitability determination for the purchase of such security and must have the purchaser’s written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the first transaction, of a risk disclosure document, prepared by the SEC, relating to the penny stock market. A broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information for the penny stocks held in an account and information about the limited market in penny stocks. Consequently, these rules may restrict the ability of brokers-dealers to trade and/or maintain a market in our common stock and may affect the ability of the Company’s stockholders to sell their shares of common stock.
There can be no assurance that our shares of common stock will qualify for exemption from the penny stock rule. In any event, even if our common stock was exempt from the penny stock rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any person from participating in a distribution of penny stock if the SEC finds that such a restriction would be in the public interest.
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 shareholder 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; and require advance notice for business to be conducted at shareholder meetings, among other anti-takeover provisions.
Our directors have the authority to issue common and preferred shares without shareholder 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. 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 shareholders 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 have not retained independent professionals for investors.
We have not retained any independent professionals to comment on or otherwise protect the interests of potential investors. Although we have retained our own counsel, neither such counsel nor any other independent professionals have made any examination of any factual matters herein, and potential investors should not rely on our counsel regarding any matters herein described.
We have not obtained an Internal Revenue Service (“IRS”) ruling with respect to the tax consequences of our structure, the Merger or potential offerings of our securities.
There are risks under the internal revenue code that must be considered by any potential investor, and an investment in the Company should be considered only after obtaining advice from an independent, professional adviser. We believe the Merger was a tax-free transaction, but we have not sought or obtained any rulings from the IRS, nor do we intend to seek such rulings in the future, with respect to the tax consequences of our structure, the Merger or any of the matters described in this Prospectus.
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 pursuant to this Prospectus, in which case, investors could experience dilution of their investment.
Risks Related to this Offering
Our common stock is thinly traded.
Although our common stock trades on the OTCQB, there is limited trading in our common stock in the over-the-counter market. Such thinly traded, illiquid stocks are more susceptible to significant and sudden price changes than stocks that are widely followed by the investment community and that are actively traded on an exchange. Thus, we cannot assure investors that there will at any time in the future be an active trading market for our common stock. Our stock is not listed on a stock exchange and we currently do not intend to seek listing on an exchange. Even if we successfully list the common stock on a stock exchange, we nevertheless could not assure shareholders that an organized public market for our common stock would develop. Investors should purchase shares for long-term investment only and should purchase our securities if and only if they are capable of making and are seeking to make a long-term investment in the Company.
Financial Industry Regulatory Authority (“FINRA”) sales practice requirements may also limit a stockholder’s ability to buy and sell our common stock, which could depress the price of our common stock.
In addition to the “penny stock” rules described above, FINRA has adopted rules that require a broker-dealer to have reasonable grounds for believing that the investment is suitable for that customer before recommending an investment to a customer. Prior to recommending speculative low priced securities to their 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. Under interpretations 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 that their customers buy our common stock, which may limit your ability to buy and sell our shares of common stock, have an adverse effect on the market for our shares of common stock, and thereby depress our price per share of common stock.
Our securities are traded on the OTCQB, which may not provide as much liquidity for our investors as more recognized senior exchanges such as the NASDAQ Stock Market or other national or regional exchanges.
Our securities are quoted on the OTCQB Market (“the OTC Markets”). The OTC Markets are inter-dealer, over-the- counter markets that provide significantly less liquidity than the NASDAQ Stock Market or other national or regional exchanges. Securities traded on these OTC Markets 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 OTC Markets. Quotes for stocks included on the OTC Markets are not listed in newspapers. Therefore, prices for securities traded solely on the OTC Markets may be difficult to obtain and holders of our securities may be unable to resell their securities at or near their original acquisition price, or at any price.
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 the 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.
The issuance to the Selling Stockholder of a significant number of shares may negatively impact the value of our common stock.
All shares being registered in this Registration Statement are expected to be freely tradable. The sale by the Selling Stockholder of a significant amount of shares being registered in this Registration Statement at any given time could cause the market price of our common stock to decline and to be highly volatile.
The Selling Stockholder may sell a large number of shares, resulting in substantial diminution to the value of shares held by existing stockholders.
Pursuant to the Equity Purchase Agreement, we are prohibited from delivering a Put Notice to the Selling Stockholder to the extent that the issuance of shares would cause the Selling Stockholder to beneficially own more than 4.99% of our then-outstanding common stock. These restrictions however, do not prevent the Selling Stockholder from selling shares of common stock received in connection with the Equity Line, 10% Notes or 8% Note and then receiving additional shares of common stock in connection with a subsequent issuance. In this way, the Selling Stockholder could sell more than 4.99% of the outstanding common stock in a relatively short time frame while never holding more than 4.99% at any one time. As a result, existing stockholders 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 the Selling Stockholder of the shares issued under the 10% Notes, 8% Note or the Equity Line.
Risks Relating to Competitive Factors
We compete in an industry characterized by extensive research and development efforts and rapid technological progress.
New developments occur and are expected to continue to occur at a rapid pace in the marijuana industry, and there can be no assurance that discoveries or commercial developments by our competitors will not render some or all of our potential products obsolete or non-competitive, which could have a material adverse effect on our business, financial condition and results of operations. We expect to compete with fully integrated and well-established companies in the near and long term. Most of these companies have substantially greater financial, manufacturing and marketing experience and resources than us and represent substantial long-term competition. Such companies may succeed in discovering and developing products and/or extraction processes more rapidly than us and may be more successful than us in manufacturing, sales and marketing.
Strategic collaborations may never materialize or may fail.
We intend to explore a variety of strategic collaborations with existing marijuana growers, dispensaries and related businesses. At the current time, we cannot predict what form such a strategic collaboration might take. We are likely to face significant competition in seeking appropriate strategic collaborators, and these strategic collaborations can be complicated and time consuming to negotiate and document. We may not be able to negotiate strategic collaborations on acceptable terms, or at all, and we are unable to predict when, if ever, we will enter into any such strategic collaborations due to the numerous risks and uncertainties associated with establishing strategic collaborations.
Risks relating to Intellectual Property Protection
Our pending patent application may not be approved.
Our success depends on our ability to protect our proprietary process and methods. Although we filed a patent application regarding our extraction and conversion process, there can be no assurances that such application will result in the issuance of a patent. Further, even if a patent is issued, there can be no assurances that future patent claims will be held valid and enforceable against third-party infringement or that our methods and processes will not infringe any third-party patent or intellectual property or that such claims will afford us protection against competitors with similar technology or permit the commercialization of our products without infringing third-party patents or other intellectual property rights.
If we are unable to protect the secrecy of our proprietary process and methods, we may not be able to compete effectively or operate profitably.
Our success will depend, in large part, on our ability to protect the secrecy of our patent pending process and methods. As we hire employees, enter into strategic collaborations and bring our products to market, maintaining this secrecy will become increasingly difficult, especially if our patent application is denied or the issuance of the patent is delayed. If competitors are made aware of the aspects of our proprietary process and methods that are not protected by a patent, they may be able to duplicate them or independently develop similar or alternative technologies without infringing on our intellectual property rights.
We may rely on trade secrets to protect our process and methods and may attempt to protect these trade secrets, in part, with confidentiality and non-disclosure agreements with our employees, consultants, partners, strategic collaborators and certain contractors, but there can be no assurance that these agreements would not be breached, that we would have adequate remedies for any breach, or that our trade secrets will not otherwise become known or be independently discovered by competitors. If our patent pending proprietary process, methods or related trade secrets become known to competitors, we may be unable to compete effectively, resulting in a material adverse effect on our business, financial condition and results of operations.
We may be subject to litigation with respect to the ownership and use of intellectual property that will be costly to defend or pursue and uncertain in its outcome.
Our success also will depend, in part, on refraining from infringing patents or otherwise violating intellectual property owned or controlled by others. Others may have filed patent applications or have received, or may obtain, issued patents in the United States or elsewhere relating to aspects of our extraction processes or methods, and they may institute litigation against us to protect their intellectual property rights. Such litigation, regardless of the merits, would be extremely expensive and detrimental to our operations. Additionally, it is uncertain whether the issuance of any third-party patents will require us to alter our products or processes, obtain licenses, or cease certain activities. If any licenses are required, there can be no assurance that we will be able to obtain any such licenses on commercially favorable terms, if at all, and if these licenses are not obtained, we might be prevented from pursuing the development and commercialization of certain of our potential products.
Other Risks
There are other unidentified risks.
The risks set forth above are not a complete list of the risks facing our potential investors. We acknowledge that there may exist significant risks yet to be recognized or encountered to which we may not be able to effectively respond. There can be no assurance that we will succeed in addressing these risks or future potential risks, and any failure to do so could have a material adverse effect on our business, financial condition and results of operations.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS Except for statements of historical facts, this Prospectus contains forward-looking statements involving risks and uncertainties. The words “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan,” or the negative of these terms and similar expressions or variations thereof are intended to identify forward-looking statements. Such statements reflect our current view with respect to future events and are subject to risks, uncertainties, assumptions, and other factors (including the risks contained in the section of this Prospectus entitled “Risk Factors”) relating to our industries, operations, and results of operations and any businesses that may be acquired by us. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date stated, or if no date is stated, as of the date hereof.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results. The following discussion should be read in conjunction with our financial statements and the related notes included in this prospectus, and the statements and related notes included in this prospectus.Prospectus.
ADELT DESIGN, INC.
STATEMENT OF OPERATIONS
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 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 Company adopted amended and restated articles of incorporation, thereby changing its name to CLS Holdings USA, Inc.
| | | March 31, 2011 | |
| | | (inception) to | |
| | | May 31, 2011 | |
| | | | |
| Revenue | | $ | - | |
| | | | | |
| Operating expenses: | | | | |
| General and administrative | | | 2,530 | |
| Professional fees | | | 13,000 | |
| | | | | |
| Total operating expenses | | | 15,530 | |
| | | | | |
| Net operating loss | | | (15,530 | ) |
| | | | | |
| Other income (expense) | | | - | |
| | | | | |
| Loss before provision for income taxes | | | (15,530 | ) |
| | | | | |
| Provision for income taxes | | | - | |
| | | | | |
| Net (loss) | | $ | (15,530 | ) |
| | | | | |
| | | | | |
| Weighted average number of common shares outstanding - basic and fully diluted | | | 18,000,000 | |
| | | | | |
| Net (loss) per share - basic and fully diluted | | $ | (0.00 | ) |
On April 29, 2015, the Company entered into a merger agreement (the “Merger Agreement”) with CLS Labs and a newly-formed, wholly owned subsidiary of the Company (the “Merger Sub”) and effected the Merger. Upon the consummation of the Merger, the separate existence of the Merger Sub ceased and CLS Labs, the surviving corporation in the Merger, became a wholly owned subsidiary of the Company, with the Company acquiring the stock of CLS Labs, 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 pending proprietary method of extracting cannabinoids from cannabis plants and converting the resulting cannabinoid extracts into saleable concentrates.
Operations
For the past two years, 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 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 patent pending proprietary methods and processes by entering into the Colorado Arrangement. CLS Labs had not otherwise commercialized its patent pending proprietary process prior to the Merger and has not earned any revenues.
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 and the processing and sale of cannabis-related products. We plan to accomplish this through 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 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.
Our mission is to be the industry leader in the extraction, conversion and marketing of cannabinoid oils, wax, edibles and shatter by leveraging our extraction methods and conversion processes. We have an experienced team of executives and consultants who each contribute significant value in the scientific, marketing and licensure arenas. Jeffrey Binder, a founder of CLS Labs and our Chairman, President and Chief Executive Officer, is a seasoned executive with experience in the strategic start-up and growth of companies in several different industries. Raymond Keller, a founder of CLS Labs, developed the aforementioned patent pending proprietary process of extracting, cleaning and converting the cannabinoids from the cannabis plant and the associated delivery materials and systems for such cannabinoids. Frank Koretsky, a founder of CLS Labs and director of the Company, is a successful entrepreneur who has proven to be a marketing and brand specialist. Alan Bonsett, our Chief Operating Officer, has extensive experience in the cannabis industry, spanning production and processing facility buildouts, business development and strategic planning, licensing and compliance, and supply chain management.
Mr. Keller developed our patent pending proprietary process for extracting, cleaning and converting cannabinoids from cannabis plants. He has also created various delivery systems and materials to ready the converted cannabis product for different uses by different potential distributors. Mr. Keller contributed this intellectual property to CLS Labs in exchange for stock in CLS Labs, which was subsequently exchanged for stock in the Company in the Merger. A patent application has been filed with respect to the process. As there can be no assurances that the application will be granted, the process is currently maintained as a trade secret by the Company. We believe that this patent pending proprietary process will allow us to extract and convert cannabinoids contained in cannabis in a manner that produces a greater yield than methods currently used in the industry. We believe this ability and 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.
Competitive Advantages
Our patent pending proprietary process is expected to reduce growers' costs and provide them with double the amount of Delta-9 THC compared to our competitors.
Although the current standard within the marijuana extraction industry is to process only the bud and trim from plants, the sophistication of our lab and patent pending proprietary process allow us to use the entire plant, with no trimming or preparation required by the grower prior to delivery. We estimate that this will result in cost savings for growers of 18%-22% versus our competitors' current methods. Further, the trimming process damages some of the crystals present on the plants, thus reducing the levels of Delta-9 THC, marijuana’s primary psychoactive ingredient. By processing the entire plant, we expect to eliminate this loss of crystals. We believe that this, along with our patent pending proprietary extraction and conversion method, will result in a concentration of Delta-9 THC that is approximately twice that of the current industry standard.
We expect to produce a much larger amount of Delta-9 THC from plants resulting in higher revenues to us.
As it is customary within the industry to charge growers per gram of Delta-9 THC returned to them following processing, in producing twice the concentration of Delta-9 THC, we anticipate that we will generate per-plant revenues twice that of the current industry standard while also providing greater per-plant value to growers.
Our patent pending proprietary process is expected to result in market-changing product consistency.
The sophistication of our patent pending proprietary process and proposed labs will allow us to analyze, break down and mix the various cannabinoids extracted from marijuana plants. Doing so will allow us to control the different cannabinoid levels in our products, and should result in market-changing product consistency. As the cannabinoid makeup of plants varies significantly from grower-to-grower, the products generated by most extractors vary based on the source of the plants. Our potential ability to produce a consistent product regardless of the grower will likely be highly desirable among both consumers looking for reliable products and dispensaries desiring to market a consistent brand of products sourced from multiple growers.
We expect to produce cleaner, safer products as a result of the advanced testing that will be used at our sophisticated labs.
Although states currently require testing of marijuana plants for certain chemicals and pesticides prior to processing, such testing does not identify many harmful and undesirable contaminates such as heavy metals, which might be present in plants as a by-product of certain fertilizers used in their growth. Through our patent pending proprietary process, we will conduct testing that is significantly more extensive than current state laws require or industry standards dictate, then remove such harmful contaminates. This should result in a cleaner, safer product that we believe will be preferred by growers and consumers alike.
We expect to provide one-stop, multi-state services to companies wishing to build private label brands that deliver consistent products.
Marijuana cannot currently be transported across state lines, which means that a processor with a single facility cannot process marijuana grown in more than one state. This means that companies that wish to produce private label products in multiple states must contract with multiple processors to process, package and label their products, which leads to a lack of internal consistency within the brand. Our multi-state business plan should allow us to provide consistent processing, packaging and labeling services, setting us apart from these “mom and pop” extractors prevalent in the industry. This should allow us to produce currently unavailable multi-state consistency in private label products.
The Colorado Arrangement
As CLS Labs is currently unable to obtain a license in Colorado to operate a cannabis processing facility due to residency requirements, on April 17, 2015, it entered into an arrangement through CLS Labs Colorado with PRH, which will be licensed by the State of Colorado 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 processing facility and lease such facility, including equipment, to PRH; and (iii) loan certain funds to PRH to be used by PRH in connection with its financing of the building out, equipping, and development of the grow facility that will be operated by the Grower.
Licensing Agreement
On April 17, 2015, CLS Labs Colorado entered into a Licensing Agreement with PRH whereby, in exchange for a license fee payable over the ten (10) year term 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 distribution of the Products. The Licensing Agreement was subsequently amended on June 30, 2015 and again on October 31, 2015. The term of the Licensing Agreement will commence once CLS Labs Colorado has completed building a fully equipped lab at the Leased Real Property, the first harvest of marijuana plants at the grow facility has occurred. Pursuant to Colorado law, PRH cannot obtain Colorado marijuana-infused products licenses (the “MIP Licenses”) for the Leased Real Property until the processing facility is built out and ready for operation. PRH has an agreement with one of its affiliates that holds the required MIP Licenses to transfer such MIP Licenses to PRH, subject to State of Colorado Department of Revenue Marijuana Enforcement Division ("MED") approval, within three (3) days after the MED is ready to attached the MIP Licenses to the Leased Real Property, which is expected to occur during the third quarter of 2016.
Payments by PRH to CLS Labs Colorado under the Licensing Agreement will commence during the fourth quarter of 2016. Pursuant to the Licensing Agreement, if during its term, applicable state and local laws change to permit, in whole or in part, the ownership or issuance of a MIP License, directly or indirectly, by or to a person or entity who is not a Colorado resident, CLS Labs Colorado has the option to demand the transfer of up to a fifty six percent (56%) ownership interest in the MIP Licenses owned by PRH to CLS Labs Colorado or its designees. In exchange for such a transfer, the license fee due to CLS Labs Colorado under the Licensing Agreement will be reduced in proportion to the percentage ownership interest in the MIP Licenses transferred by PRH to CLS Labs Colorado or its designees.
Lease and Sublease
In connection with the Colorado Arrangement, on April 17, 2015, pursuant to an Industrial Lease Agreement (the “Lease”), CLS Labs Colorado leased 14,392 square feet of warehouse and office space (the “Leased Real Property”) in a building in Denver, Colorado where certain intended activities, including growing, extraction, conversion, assembly and packaging of cannabis and other plant materials, are permitted by and in compliance with state, city and local laws, rules, ordinances and regulations. The Lease has an initial term of seventy-two (72) months and provides CLS Labs Colorado with two options to extend the term of the lease by up to an aggregate of ten (10) additional years.
Contemporaneously with the execution of the Lease, CLS Labs Colorado entered into a Sublease Agreement with PRH (the “Sublease”), thereby subletting the entire Leased Real Property to PRH. The Sublease was subsequently amended effective October 31, 2015. The term of the Sublease will commence once the Grower commences planting marijuana plants at the grow facility on the Leased Real Property and rent payments shall commence thirty (30) days after the first harvest of marijuana plants at the grow facility. The balance of the terms of the Sublease is the same as the Lease and PRH is required to pay CLS Labs Colorado monthly rent equal to the total rent due under the Lease for the corresponding month.
In connection with the Sublease, PRH entered into an arrangement with the Grower to grow marijuana on a portion of the Leased Real Property. The Grower obtained zoning approval, a certificate of occupancy to begin planting cannabis and operating the grow facility at the Leased Real Property and a Colorado Retail Marijuana Cultivation Facility License before commencing planting in December 2015.
Equipment Lease
In addition to the above-referenced Sublease, on April 17, 2015, CLS Labs Colorado 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 at the Leased Real Property, including purchasing all equipment necessary to extract, convert and provide quality control of all cannabis products of PRH. The term of the Equipment Lease commences upon delivery of the equipment and terminates upon the earlier of ten (10) years from its effective date or such earlier date upon which the Lease is terminated. PRH has the option to renew the Equipment Lease for a period of five (5) years, or such lesser period as remains under the Lease at the time of the renewal.
If during the term of the Equipment Lease applicable state and local laws change to permit, in whole or in part, the ownership or issuance of an MIP License, directly or indirectly, by or to a person or entity who is not a Colorado resident, CLS Labs Colorado has the option to demand the transfer of up to a fifty six percent (56%) ownership interest in the MIP Licenses owned by PRH to CLS Labs Colorado or its designees. In the event of a transfer of MIP Licenses by PRH to CLS Labs Colorado or its designees, the payment due to CLS Labs Colorado under the Equipment Lease will be reduced proportionally by the percentage ownership interest in the MIP Licenses that is transferred.
The Promissory Note
On April 17, 2015, CLS Labs Colorado loaned Five Hundred Thousand Dollars ($500,000) to PRH pursuant to a promissory note (the “Note”) to be used by PRH in connection with the financing of the building out, equipping, and development of the grow facility by PRH that will be operated by a licensed third-party marijuana grower. Pursuant to the Note, as amended by the parties effective June 30, 2015 and October 31, 2015, 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 fourth quarter of 2016 and continuing until paid in full. Interest will accrue on the unpaid principal balance 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.
Sale of Non-Pharmaceutical Solutions
In connection with the Colorado Arrangement, CLS Labs Colorado intends to enter into an agreement with PRH whereby PRH will purchase from CLS Labs certain proprietary, non-pharmaceutical solutions developed by CLS Labs or its affiliates that enable consumers who ingest the Products to absorb a greater percentage of the cannabinoid extracts contained therein and, in turn, will enable PRH to incorporate a lower percentage of cannabinoid extracts in the Products without diminishing the potency thereof. The terms of the proposed arrangement have not been finalized and a definitive agreement between the parties has not been reached.
Products and Services
Licensing Operations
In states such as Colorado, where we are unable to obtain a license to operate a cannabis processing facility due to residency or other requirements that we cannot meet, we will continue to enter into arrangements similar to the Colorado Arrangement, whereby we will agree to build out a processing facility and then lease the facility and equipment therein to the customer for what will generally be a ten year term. As part 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 use in the processing facility.
Processing Revenue
We also intend to enter into arrangements with cannabis growers whereby we will process their cannabis for a fee. Under such arrangements, growers will deliver cannabis plants to one of our facilities for processing. We will then apply our proprietary extraction and conversion technology to generate cannabinoid concentrates which may be delivered to the grower in bulk form or, for an additional fee, in individually-labeled retail-ready packages of oils, edibles, wax or shatter. In exchange for our services, we will either charge the grower a flat fee by weight of the finished product or, in certain instances, we may render our services in exchange for a percentage of the finished product which we will then sell to cannabis distributors or dispensaries.
Processing Facilities
We plan to lease buildings at which to construct processing facilities. We estimate the cost to develop each facility, including equipping the facility with appropriate equipment, to be between $1,000,000 and $3,000,000 and anticipate that we can complete each build out in approximately 4-6 months after any applicable licensing and permitting requirements have been met. We currently anticipate, subject to the availability of adequate capital, that we will be able to open between two and three processing facilities, for use either by a licensee or by us directly, in the next 18-24 months.
We expect that each processing facility will have the capacity to process, depending on size, between 2,000 and 5,000 pounds of cannabis per month. It is our intent not to build out a processing facility unless we believe that it has the potential to process at least 1,000 pounds of cannabis per month after its first twelve months of operations. The revenue generated from processing will vary, state by state and facility by facility, depending upon state law requirements and other factors.
Sale of Products and Brand Creation
Rather than charging growers a fee for our processing services, we may at times purchase unprocessed cannabis plants from growers, process the cannabis in our facility, and then sell the resulting cannabinoid concentrates, such as oils, wax, edibles and shatter, in the wholesale market to distributors or dispensaries. Eventually, we may explore creation of our own brand of concentrates for consumer use, which we would wholesale to cannabis dispensaries. We believe that by standardizing our quality, testing, compliance and labeling, we can create a national brand of concentrates that will be instantly recognizable in each new state that legalizes marijuana sales.
Consulting Services
Through CLS Consulting, we will offer consulting services to cannabis-related businesses such as growers and dispensaries. CLS Consulting consultants will advise clients regarding a variety of areas, such as licensure, growing, marketing and distribution. In addition to the revenue generated for consulting services, we anticipate that CLS Consulting will generate processing and sales business for the Company from grower and dispensary clients.
Growth Strategy
Our growth strategy includes the following plans:
· Securing capital for the construction of processing centers. We estimate the cost to develop each facility, including equipping the facility with the necessary equipment, to be between $1,000,000 and $3,000,000.
· Obtaining the necessary state and local licensure for each proposed facility.
· Securing initial licensing, processing or sales arrangements, as applicable, with growers and dispensaries. Such arrangements may result from marketing efforts, relationships within the industry or the CLS Consulting business.
· Constructing processing facilities. We anticipate that the construction of each facility can be completed in approximately four to six months after any applicable licensing and permitting requirements have been met. We currently anticipate, subject to the availability of adequate capital, that we will be able to open between two and three processing facilities within the next 24 months.
· Expanding per-facility capacity and increasing revenues. After a twelve-month ramp up period, we expect that each processing facility will be able to process, depending on size, between 2,000 to 5,000 pounds of cannabis per month, with the revenue generated therefrom varying state-by-state and facility-by-facility depending upon state law requirements and other factors.
· Developing a national brand of cannabis concentrates, which will be sold wholesale to dispensaries, through standardization of the testing, compliance and labeling process.
Marketing, Distribution and Customers
The medical marijuana industry is rapidly expanding and is expected to continue to expand as additional states legalize marijuana for medical use. Additionally, the recreational use of marijuana by adults is currently legal in four states and the District of Columbia and a number of states have decriminalized the use of marijuana in some fashion. As various states continue to legalize marijuana for medical and/or recreational use, the number of potential grower and dispensary clients is expected to increase accordingly.
As such, our initial target market consists of licensed cannabis growers and dispensaries. As 10-20% of the cannabis plants harvested by licensed growers are currently being converted to cannabinoid oil, growers are expected to immediately recognize 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.
In cases where we either purchase cannabis for processing or keep a portion of the converted cannabis in exchange for processing a larger amount of product for a grower, we will likely sell such processed product either to the grower or dispensary who sold or supplied us 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, such as an edible, and sell the processed product to a licensed bakery.
Competition
The cannabinoid extraction business is extremely competitive. We will compete with numerous entities engaged in cannabinoid extraction and conversion, from large commercial enterprises to local “mom and pop” extractors that provide services and wholesale concentrates to local growers. Although many of our expected competitors enjoy established relationships with growers and dispensaries, we intend to differentiate our company by producing higher quality, tested and labeled products and generating a higher yield, and therefore higher profit margins, for growers and dispensaries. A significant challenge that we will encounter, however, is that the quality of cannabis products is not presently regulated or standardized. Products bear quality and concentration labels, but these labels may or may not be accurate or the result of scientific testing. As a result, we will have to educate the market about the value of our testing, compliance and labeling and the higher quality of the cannabinoid concentrates produced by our patent pending proprietary process as we cannot readily compare laboratory results of our products to other products on the market.
Trademarks and Other Intellectual Property
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.
Our extraction and processing methods are proprietary, but we do not currently have any issued patents with respect to them. We filed a patent application regarding our proprietary process on October 27, 2015. This patent, if granted, is expected to result in market-changing product consistency, cost savings for growers, and increased anticipated revenues for us due to the larger amount of Delta-9 THC that we believe we can produce through our patent pending proprietary process. As with our trade market, there can be no assurances that the patent application will be granted, for, among other reasons, the fact that it references cannabis.
Until such time as our patent application is granted (assuming it will be granted), we will rely on a combination of confidentiality agreements and procedures as well as trademark and trade secret laws to protect our intellectual property rights with respect to our proprietary process. Our means of protecting our proprietary rights, however, may not be adequate. Despite our efforts, we may be unable to prevent or deter infringement or other unauthorized use of our intellectual property. Time-consuming and expensive litigation may be necessary in the future to enforce these intellectual property rights even if our patent application is granted.
In addition, although we do not believe we are infringing on 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.
Regulation and Licensure
Despite 23 states and the District of Columbia having legalized or decriminalized marijuana use for medical purposes, the prescription, use and possession of marijuana 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. 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 marijuana 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.
Employees
We currently have two employees, Jeffrey Binder, who serves as the Chairman, President and Chief Executive Officer of the Company, and Alan Bonsett, who was appointed Chief Operating Officer of the Company effective August 15, 2015. We plan to hire a Chief Financial Officer, administrative staff, a lab manager and a consultant, for a total of approximately six employees. In addition, each processing facility will require six to eight employees, depending upon the size of the facility.
Our principal offices are located at 1435 Yarmouth Street, Boulder, Colorado 80304. We currently lease office and warehouse space located at 1955 South Quince Street, Denver, Colorado 80231, which is subleased to PRH pursuant to the Colorado Arrangement. We also maintain an administrative office at 3355 SW 59th Avenue, Miami, Florida 33155 and a mailing address at 11767 S. Dixie Highway, Suite 115, Miami, Florida 33156. We will lease additional properties in the states in which we conduct our operations as we open processing facilities.
The
None.
This Prospectus relates to shares of our common stock beingthat may be offered for resaleand sold from time to time by the selling security holder are highly speculative in nature, involve a high degreeSelling Stockholder. We will receive no proceeds from the sale of risk and should be purchased only by persons who can afford to lose the entire amount invested in the common stock. Before purchasing any of the shares of common stock you should carefully considerby the following factors relatingSelling Stockholder in this Offering. The proceeds from the sales will belong to the Selling Stockholder. However, we will receive proceeds from the sale of the 10% Notes and Commitment Shares to the Selling Stockholder pursuant to the Securities Purchase Agreement and the Equity Purchase Agreement.
We intend to use the proceeds that we may receive from the sale of 10% Notes and Commitment Shares to execute our businessgrowth strategy, to establish our management team; lease real estate for one marijuana processing facility; purchase and prospects. Iflease equipment for one marijuana processing facility; lease real estate for one hemp processing facility; purchase and lease equipment for one hemp processing facility; provide working capital for our management to pursue joint venture and fee-for-services opportunities for the Company; repay a portion of our existing debt; and for other startup and working capital needs.
There can be no assurance that we will sell any of the following risks actually occurs, our business, financial condition or operating results could be materially adversely affected. In such case, you may lose all or part of your investment. You should carefully consider the risks described below and the other information in this prospectus before investing in our common stock.Commitment Shares.
Risks RelatedWe cannot provide any assurance that we will be able to Our Businessdraw down any or all of the Total Commitment, such that the proceeds received would be a source of financing for us.
We intend to raise additional capital through equity and debt financing, as needed, though there cannot be any assurance that such funds will be available to us on acceptable terms, on an acceptable schedule, or at all.
The amounts and timing of our actual expenditures will depend on numerous factors, including the amount of cash generated through our Colorado Arrangement and any additional strategic collaborations into which we may enter.
As a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act), we are not required to provide the information called for by Item 304 of Regulation S-K.
A) RISKS RELATED TO OUR BUSINESS19
WE HAVE RECEIVED AN OPINION OF GOING CONCERN FROM OUR AUDITORS. IF WE DO NOT RECEIVE ADDITIONAL FUNDING, WE WOULD HAVE TO CURTAIL OR CEASE DEVELOPMENT STAGE OPERATIONS. AN INVESTMENT IN OUR SECURITIES REPRESENTS SIGNIFICANT RISK AND YOU MAY LOSE ALL OR PART OF YOUR ENTIRE INVESTMENT.
Our independent auditors notedMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOVERVIEW 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 their report accompanyingexchange 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 Prospectus.
CLS Labs was originally incorporated in the state of Nevada on May 1, 2014 under the name RJF Labs, Inc. before changing its name to CLS Labs, Inc. on October 24, 2014. It was formed to commercialize a proprietary method of extracting cannabinoids from cannabis plants and converting the resulting cannabinoid extracts into concentrates such as oils, waxes, edibles and shatter. These concentrates may be ingested in a number of ways, including through vaporization via electronic cigarettes (“e-cigarettes”), and used for a variety of pharmaceutical and other purposes. Testing in conjunction with two Colorado growers of this extraction method and conversion process has revealed that it produces a cleaner, higher quality product and a significantly higher yield than the cannabinoid extraction processes currently existing in the marketplace.
On April 17, 2015, CLS Labs took its first step toward commercializing its proprietary methods and processes by entering into the Colorado Arrangement through its wholly owned subsidiary, CLS Labs Colorado, with certain Colorado entities, including Picture Rock Holdings, LLC. CLS Labs had not otherwise commercialized its proprietary process prior to the Merger and has not earned any revenues.
We intend to generate revenue through (i) the licensing of our patent pending proprietary methods and processes to others, as in the Colorado Arrangement, (ii) the processing of cannabis for others, and (iii) the purchase of cannabis and the processing and sale of cannabis-related products. We plan to accomplish this through the 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, 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.
For the reasons above, our net loss for the periodyear ended May 31, 2011 that we have not earned a profit. As of May 31, 2011, we2015 was $1,515,587. We had a net loss of $15,530, and they further stated that$1,862,610 for the uncertainty related to thesenine months ended February 29, 2016, resulting in an accumulated deficit as of February 29, 2016 of $3,378,197. These conditions raisedraise substantial doubt about our ability to continue as a going concern. At
Results of Operations for the Three Months Ended February 29, 2016 compared to the Three Months Ended February 28, 2015
Revenues
We had no revenues during the three month periods ended February 29, 2016 and February 28, 2015.
General and administrative expenses
General and administrative expenses increased $253,948, or approximately 167%, to $406,323 during the three months ended February 29, 2016, compared to $152,375 for the three month ended February 28, 2015. General and administrative expenses consisted primarily of general office expenses, travel costs, rent expense, bank charges and payroll expenses. We expect general and administrative expenses to increase in future periods as we implement our business plan and commence operations.
Professional fees
Professional fees increased $157,539, or approximately 85%, to $343,818 during the three months ended February 29, 2016 compared to $186,279 for the three months ended February 28, 2015. This increase was due primarily to the payment of fees for consulting and investor relations services pursuant to consulting agreements and legal fees. We expect professional fees to increase in future periods as our business grows.
Interest expense
Interest expense for the three months ended February 29, 2016 was $106,599, an increase of $106,334 compared to $265 for the three months ended February 28, 2015. Interest expense consists of $268 of imputed interest, $17,696 of interest on related party debt, $7,479 of interest on debt and $81,156 of amortization of debt discounts on notes payable.
Net loss
For the reasons above, we had a net loss for the three months ended February 29, 2016 of $856,740, which is an increase of $517,821, or approximately 153%, compared to a net loss of $338,919 during the three months ended February 28, 2015.
Results of Operations for the Nine Months Ended February 29, 2016 compared to the Nine Months ended February 28, 2015
Revenues
We had no revenues during the nine month periods ended February 29, 2016 and February 28, 2015.
General and administrative expenses
General and administrative expenses increased $555,273, or approximately 153%, to $917,726 during the nine months ended February 29, 2016, compared to $362,453 for the nine months ended February 28, 2015. General and administrative expenses consisted primarily of general office expenses, travel costs, rent expense, bank charges and payroll expenses. We expect general and administrative expenses to increase in future periods as we implement our business plan and commence operations.
Professional fees
Professional fees increased $470,570, or approximately 159%, to $767,420 during the nine months ended February 29, 2016, compared to $296,850 for the nine months ended February 28, 2015. This increase was due primarily to the payment of fees for consulting and investor relations services pursuant to consulting agreements and legal fees. We expect professional fees to increase in future periods as our business grows.
Interest expense
Interest expense for the nine months ended February 29, 2016 was $177,464 compared to $445 for the nine months ended February 28, 2015. Interest expense consists of $807 of imputed interest, $39,647 of interest on related party debt, $22,521 of interest on debt and $114,489 of amortization of debt discounts on notes payable.
Net loss
For the reasons above, we had a net loss for the nine months ended February 29, 2016 of $1,862,610, which is an increase of $1,202,862, or approximately 182%, compared to a net loss of $659,748 during the nine months ended February 28, 2015.
Results of Operations for the year ended May 31, 2011,2015 compared to the period from May 1, 2014 (inception) through May 31, 2014.
Revenues
We had no revenues for the year ended May 31, 2015 and for the period from inception (May 1, 2014) to May 31, 2014.
Selling, general and administrative expenses
Our general and administrative expenses were $998,994 for the year ended May 31, 2015 compared to $0 for the period from May 1, 2014 (inception) through May 31, 2014. General and administrative expenses consisted primarily of general office expenses, travel costs, costs related to the protection of intellectual property, impairment charges, bank charges and cost associated with research and development. We expect general and administrative expenses to increase over the next twelve months as we implement our business plan and operations expand.
Professional fees
Our professional fees were $504,354 for the year ended May 31, 2015 compared to $0 for the period from May 1, 2014 (inception) through May 31, 2014. Professional fees consisted primarily of legal, investor relations, and business development services. We expect professional fees to increase in future periods as our business grows.
Interest Expense
Our interest expense was $12,239 for the year ended May 31, 2015 compared to $0 for the period from May 1, 2014 (inception) through May 31, 2014. Interest expense consists of $716 of imputed interest, $5,967 of interest on debt and $5,556 of amortization of debt discounts on notes payable.
Net loss
For the reasons above, our net loss for the year ended May 31, 2015 was $1,515,587 compared to $0 for the period from May 1, 2014 (inception) through May 31, 2014. The net loss per diluted share for the year ended May 31, 2015 was $0.24. This amount was computed based on the weighted average of 6,356,167 shares outstanding during the fiscal year. Following the issuance of common stock in connection with the Merger, there are currently 20,000,003 shares outstanding. If the net loss per share had been computed based on this number rather than the weighted average, the net loss per diluted share would have been $0.13. We believe this adjusted number is meaningful to shareholders as it is based on our outstanding shares on a post-Merger basis, which represents our initial capitalization as a public company with a new business plan and is the capitalization against which shareholders will likely wish to measure our performance in the future.
Liquidity and Capital Resources
The following table summarizes total current assets, liabilities and working capital at February 29, 2016 compared to May 31, 2015.
| | | February 29, 2016 | | | May 31, 2015 | |
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Working Capital (Deficit) | | | | | | | | |
At February 29, 2016 and May 31, 2015, we had a working capital deficit of $1,038,359 and $635,075, respectively. This working capital deficit occurred primarily because we have not yet commenced earning revenues. We anticipate that we will commence earning revenues by the fourth quarter of 2016. During the nine months ended February 29, 2016, we obtained loans from our officers and directors to cover operating expenses and expenses related to the Merger and the Colorado Arrangement. In March 2016, we also closed on the Securities Purchase Agreement and used the proceeds from the first 10% Note for working capital purposes. This working capital deficit will likely continue to increase until we begin earning revenues but should not be viewed as an indicator of our future performance once we commence earning revenues. We have operated at a loss since inception.
Cash flows from operations used $871,924 during the nine months ended February 29, 2016 compared to $569,404 during the nine months ended February 28, 2015. This increase is primarily due to the Company having entered into the Colorado Arrangement and having commenced active trading in its common stock on the OTCQB during 2015. As a result, during the nine months ended February 29, 2016, the Company issued its stock to pay for investor relations services, issued stock to its new COO, and incurred deferred compensation owed to its CEO for the entire nine-month period versus only five months during the comparable period in 2014. The increase was also due to the amortization of the debt discount associated with the Company's convertible loans, deferred liabilities associated with the Colorado Arrangement and an increase in accounts payable because the Company was incurring expenses associated with the Colorado Arrangement but has not yet commenced earning revenue.
Cash flows from investing activities used $44,477 during the nine months ended February 29, 2016 compared to $297,408 during the nine months ended February 28, 2015. During the nine months ended February 29, 2016 the Company invested in equipment and had leasehold improvements on its Colorado facility. During the nine months ended February 28, 2015, the Company paid a fee to acquire the "public shell."
Cash flows from financing activities provided $737,750 during the nine months ended February 29, 2016 compared to $1,000,000 during the nine months ended February 28, 2015. During the nine months ended February 29, 2016, the Company borrowed funds from its officers and directors. During the nine months ended February 28, 2015, these same officers and directors purchased equity in the Company.
On April 29, 2015, we issued a convertible promissory note (the “April 2015 Note”) to an unaffiliated individual in the amount of $200,000. Interest accrues on the April 2015 Note at a rate of 15% per annum. On the first anniversary of the April 2015 Note, we will pay all then-accrued interest. Thereafter, we will make eight (8) equal quarterly payments of principal together with accrued interest, in arrears, commencing on July 1, 2016. All outstanding principal and any accumulated unpaid interest thereon shall be due and payable on the third anniversary of note. At the holder’s election, at any time prior to payment or prepayment of the April 2015 Note in full, all principal and accrued interest under the April 2015 Note may be converted in whole, but not in part, into the Company’s 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.
To fund operations during the nine months ended February 29, 2016, we borrowed $50,000 from Jeffrey Binder, an officer and director of the Company, and $295,000 from Frank Koretsky, a director of the Company. The $295,000 borrowed from Mr. Koretsky is in addition to a prior $600,000 loan from Mr. Koretsky to the Company under identical terms. The terms of these loans were memorialized in convertible notes in favor of each of Mr. Binder and Mr. Koretsky. Pursuant to the terms thereof, these loans are unsecured and bear interest at a rate of 6% per annum. No payments are required until January 1, 2017, at which time all accrued interest becomes due and payable. Principal and additional accrued interest will be paid in eight equal quarterly installments beginning on April 1, 2017. At the election of the holder, at any time prior to payment or prepayment of the loans in full, all principal and accrued interest under loans may be converted, in whole or in part, into the Company’s securities. Upon such an election, the holder will receive 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.
During January and February 2016, we borrowed an additional $12,750 from Jeffrey Binder, a director and officer of the Company, and $380,000 from Frank Koretsky, a director of the Company, to fund operations. These loans, each of which was memorialized in a convertible promissory note dated April 11, 2016, are unsecured and bear interest at a rate of 6% per annum through February 29, 2016 and 10% per annum thereafter. Accrued interest will become due on April 1, 2017, with principal being paid in eight equal quarterly installments, together with accrued interest, beginning on July 1, 2017. At the holder’s election, at any time prior to payment or prepayment of the loans in full, all principal and accrued interest under the loans may be converted, in whole or in part, into the Company’s securities. Upon such an election, the holder will receive one “Unit” for each $1.07 converted, with each Unit consisting of one (1) share of common stock and a five-year warrant to purchase (1) share of common stock at a price of $1.07 per share.
Over the next twelve months we will require significant additional capital to cover our projected cash on hand was $15,570. flow deficits due to the Colorado Arrangement and related agreements, the repayment of the April 2015 Note and the loans from Jeffrey Binder and Frank Koretsky, the implementation of our business plan, and the development of alternative revenue sources. Additionally, we anticipate that we will devote resources to research and development related to the refinement of our patent pending proprietary methods and processes and development of new products. We estimate research and development costs of between $50,000 and $100,000 during the next 12 months. Finally, during the next 18-24 months, we plan to construct and open two to three processing facilities for use either by a licensee or by us directly. We anticipate that the build out and opening of each processing facility will require between $1,000,000 and $3,000,000 in capital, with additional capital required for liquidity to cover personnel, equipment, and other operating expenses with respect to each opened facility.
We currently have two employees, Jeffrey Binder, who serves as the Chairman, President and Chief Executive Officer of the Company; and Alan Bonsett, who serves as the Chief Operating Officer of the Company. In an effort to assist us conserve cash, Mr. Binder has deferred all of his salary (approximately $212,500 as of February 29, 2016) to date. During the nine months ended February 29, 2016, the Company issued to Mr. Bonsett a one-time signing bonus of 250,000 (post Reverse Split) shares of restricted common stock of the Company, which will become fully vested one year from the effective date of his employment agreement. The Company valued the shares at $327,500. During the nine months ended February 29, 2016 we recognized $327,500 in share-based compensation.
We do not currently have sufficientthe capital resourcesnecessary to meet our liquidity needs, fund operations. To stay in business, we will need to raise additionalour capital through publicrequirements or private sales of our securities, debt financing or short-term bank loans, or a combination of the foregoing.
We will need additional capital to fully implement our business operatingplan. We intend to fund our cash flow and development plans. However, additional fundingcapital requirements during the next year from an alternate source or sources may not be available to us on favorable terms, if at all. To the extent that money is raised throughproceeds of the unissued 10% Notes and the Equity Line, the sale of our securities, the issuance of those securities could result in dilution to our existing security holder. If we raise money through debt financing or bank loans, we may be required to secure the financing with some or all of our business assets, which could be sold or retained by the creditor should we default in our payment obligations. If we fail to raise sufficient funds, we would have to curtail or cease operations.
IF WE DO NOT OBTAIN ADDITIONAL FINANCING, OUR BUSINESS WILL FAIL.
We will need to obtain additional financing in order to complete our business plan because we currently do not have any income. We do not have any arrangements for financing and we may not be able to find such financing if required. Obtaining additional financing would be subject to a number of factors, including investor acceptance, the availability additional financing to the Company and the ability of the Company to obtain additional financing on acceptable terms. These factors may adversely affect the timing, amount, terms, or conditions of any financing that we may obtain or make any additional financing unavailable to us. If we do not obtain additional financing our business will fail.
Through May 31, 2011, we have incurred losses of approximately $15,530. Our currently estimated annual expenses are approximately $75,000. To stay in business, we anticipate that we will need approximately $75,000 to complete all necessary stages in order to market our one product in the United States annually until our sales increase. Management anticipates that losses will continue to increase from current levels because the Company expects to incur additional costs and expenses related to: marketing and promotional activities; the possible addition of new personnel. It is anticipated that said amount will be obtained by a loan from Mr. Adelt. In the event that we are unable to secure such a loan from Mr. Adelt, or some other source(s), unknown at this time, we will not be able to continue forward and our business will fail.
Additionally, it is estimated that the amount of additional costs and expenses associated with public Company reporting requirements will be approximately $10,000 on an annual basis. It is also estimated that the amount of additional costs and expenses associated with newly applicable corporate governance requirements will be approximately $5,000 on an annual basis.
It is anticipated that we may need to obtain a loan from Mr. Adelt to cover these additional costs and expenses. In the event that we are unable to secure such a loan from Mr. Adelt, or some other source(s), unknown at this time, we will not be able to continue forward and our business will fail.
Obtaining additional financing will be subject to a number of factors, including Adelt Design’s lack of revenue. These factors may have an effect on the timing, amount, terms or conditions of additional financing and make such additional financing unavailable to us. See “Description of Business.”
WE HAVE NO OPERATING HISTORY AND FACE MANY OF THE RISKS AND DIFFICULTIES FREQUENTLY ENCOUNTERED BY A YOUNG COMPANY.
Adelt Design, Inc. was incorporated in the State of Nevada on March 31, 2011. We have no operating history for investors to evaluate the potential of our business development. The Company has had no revenues or expenses prior to this time period.
THERE ARE MANY INHERENT RISKS AND DIFFICULTIES IN INTRODUCING A NEW PRODUCT TO THE MARKET PLACE.
The Company will begin to market its product in the Salt Lake City, Utah area and develop our brand name. We face, however, many of the risks and difficulties inherent in introducing a new product. These risks include, but are not limited to, the ability to:
| ● | Increase awareness of our brand name; |
| ● | Develop an effective business plan; |
| ● | Meet customer standards; |
| ● | Implement an advertising and marketing plan; |
| ● | Attain customer loyalty; |
| ● | Maintain current strategic relationships and develop new strategic relationships; |
| ● | Respond effectively to competitive pressures; |
| ● | Continue to develop and upgrade our product; and |
| ● | Attract, retain and motivate qualified personnel. |
ADELT DESIGN, INC. HAS A HISTORY OF LOSSES. FUTURE LOSSES AND NEGATIVE CASH FLOW MAY LIMIT OR DELAY ITS ABILITY TO BECOME PROFITABLE. IT IS POSSIBLE THAT ADELT DESIGN, INC. MAY NEVER ACHIEVE PROFITABILITY. AN INVESTMENT IN ADELT DESIGN, INC. SECURITIES REPRESENTS SIGNIFICANT RISK AND YOU MAY LOSE ALL OR PART OF YOUR ENTIRE INVESTMENT.
Adelt Design, Inc. has yet to establish profitable development stage operations or a history of profitable development stage operations. The Company anticipates that it will continue to incur substantial development stage operating losses for an indefinite period of time due to the significant costs associated with the development of its business.
The Company’s ability to become profitable depends on its ability to generate and sustain sales while maintaining reasonable expense levels. If the Company does achieve profitability, it cannot be certain that it would be able to sustain or increase profitability on a quarterly and/or annual basis in the future. An investment in the Company’s securities represents significant risk and you may lose all or part of your entire investment.
WE HAVE LESS THAN $20,000 IN WORKING CAPITAL AVAILABLE AND WILL RECEIVE NO PROCEEDS FROM THE SALES OF THE SECURITIES IN THIS OFFERING, BUT COSTS OF THIS OFFERING ARE ANTICIPATED AT $20,000. AN INVESTMENT IN OUR SECURITIES REPRESENTS SIGNIFICANT RISK AND YOU MAY LOSE ALL OR PART OF YOUR ENTIRE INVESTMENT.
We have less than $20,000 in working capital available and will receive no proceeds from the sales of securities in this offering, but costs of this offering are anticipated to total $20,000. Therefore, you should be aware that the risk that the expense of the offering will likely exhaust substantially all of your assets and, without additional sources of financing, you will have no funds with which to continue as a going concern. As a result, an investment in our securities represents significant risk and you may lose all or part of your entire investment.
WE HAVE NO OPERATING HISTORY AND EXPECT TO INCUR LOSSES FOR THE FORESEEABLE FUTURE. SHOULD WE CONTINUE TO INCUR LOSSES FOR A SIGNIFICANT AMOUNT OF TIME, THE VALUE OF YOUR INVESTMENT IN THE COMMON SHARES WILL BE AFFECTED, AND YOU COULD EVEN LOSE YOUR ENTIRE INVESTMENT.
We were incorporated in the State of Nevada on March 31, 2011. The Company has had no revenues or expenses for this time period.
Presently, we have no revenues and are considered to be in the development stage. We have operating losses from inception on March 31, 2011, to May 31, 2011. We expect to incur further losses for the foreseeable future due to additional costs and expenses related to:
| ● | The implementation of our direct sales model by Mr. Adelt through the commencement of sales will cost at least $75,000. We need to establish and print all of the marketing material. We have allocated $35,000 toward marketing materials which include flyers, brochures, and website design. The Company intends to allocate these funds as soon as they are available. |
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| ● | $10,000 towards costs associated with public Company reporting requirements, and $5,000 related to expenses associated with newly applicable corporate governance requirement |
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| ● | Software and hardware updates to maintain service and maintain the Company office will cost the Company at least $10,000. As a direct sales Company continued improvements and upgrade to our systems is required. User features and website content updates are vital to continued visitations by online users. This cost signifies the system modifications. The Company intends to allocate these funds with four month of the funds becoming available. |
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| ● | Program administration and working capital expenses until such time as there are sufficient sales to cash-flow operations will cost the Company at least $15,000. This is the necessary working capital to fund operations until such time as revenues exceed expenses. This will cover audit fees, legal and all other management expenses such as those from industry consultants and advisors, and the possible addition of new personnel. The Company intends to pay audit fees and legal and all other management fees as they become due. |
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IF WE DO NOT OBTAIN ADDITIONAL FINANCING, OUR BUSINESS WILL FAIL.
Adelt Design, Inc. will need to obtain additional financing in order to complete its business plan because it currently does not have any income. The Company does not have any arrangements for financing and it may not be able to find such financing if required. Obtaining additional financing would be subject to a number of factors, including investor acceptance. These factors may adversely affect the timing, amount, terms, or conditions of any financing that the Company may obtain or make any additional financing unavailable to us. If Adelt Design, Inc. does not obtain additional financing, its business will fail.
To stay in business, we anticipate that we will need approximately $75,000 to complete all necessary stages in order to market our one product in the United States annually until our sales increase. Management anticipates that losses will continue to increase from current levels because the Company expects to incur additional costs and expenses related to: (i) marketing and promotional activities; and (ii) the possible addition of new personnel. It is anticipated that said amount will be obtained through a loan from Larry A. Adelt. In the event that we are unable to secure such a loan from Mr. Adelt, or some other source(s), which are unknown at this time, the Company will not be able to continue any and all further operations and its business will fail.
Additionally, it is estimated the additional costs and expenses associated with public Company reporting requirements will be approximately $10,000 on an annual basis. It is also estimated that the amount of additional costs and expenses associated with newly applicable corporate governance requirements will be approximately $5,000 on an annual basis.
It is anticipated that we may need to obtain a loan from Larry A. Adelt to cover these additional costs and expenses. In the event that we are unable to secure such a loan from Mr. Adelt, or some other source(s), which is unknown at this time, the Company will not be able to continue any and all further operations and its business will fail.
No assurance can be given that the Company will obtain access to capital markets in the future or that adequate financing to satisfy the cash requirements of implementing our business strategies will be available on acceptable terms. The inability of the Company to gain access to capital markets or obtain acceptable financing will have a material adverse effect upon the results of its operations and its financial conditions. The proceeds from the sale of the securities offered in this registration statement will go directly to the selling security holder and not to the Company. As such, this offering might negatively affect Adelt Design, Inc.’s ability to raise needed funds through a primary offering of its securities in the future.
Due to the fact we are small and do not have much capital, we must limit our marketing activities to a relatively small number of potential customers having the likelihood of purchasing our product. We intend to generate revenue through the sale of our one product. Because we will be limiting the scope of our marketing activities, we may not be able to generate timely or sufficient sales to operate profitably. If we cannot operate profitably, we may have to suspend or cease operations. The Company’s financing requirements for next twelve month are the following:
| $35,000 toward marketing materials which include filers, broachers, direct marketing DVD’s and mailing costs. |
| $10,000 Software and hardware to develop an internet site |
| $15,000 Program administration and working capital, and the possible addition of new personnel
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| $10,000 Costs and expenses associated with public Company reporting requirements |
| $5,000 expenses associated with newly applicable corporate governance requirements |
ADELT DESIGN, INC.’S CURRENT BUSINESS DEVELOPMENT STAGE OPERATIONS RELY HEAVILY UPON ITS KEY EMPLOYEE AND FOUNDER, MR. LARRY A. ADELT.
The Company is heavily dependent upon the expertise and management of Mr. Adelt, our Chief Executive Officer, President, sole director (Principle Executive Officer) and our future performance will depend upon his continued services. The loss of the services of Mr. Adelt’s services could seriously interrupt the Company’s business operations, and could have a very negative impact on its ability to fulfill its business plan and to carry out its existing development stage operations. The Company currently does not maintain key man life insurance on this individual. There can be no assurance that a suitable replacement could be found for him upon retirement, resignation, inability to act on our behalf, or death. The Company has no plans of entering into an employment agreement with Mr. Adelt.
MR. LARRY ADELT CURRENTLY DEVOTES TEN HOURS A WEEK TO THE COMPANY BUT WILL DEVOTE 40 HOURS A WEEK OR MORE ONCE THE COMPANY RAISES $75,000 IN CAPITAL. FAILURE OF THE COMPANY TO RAISE $75,000 IN CAPITAL TO HAVE MR. ADELT DEVOTE 40 HOURS A WEEK TO THE COMPANY REPRESENTS A SIGNIFICANT RISK AND YOU MAY LOSE ALL OR PART OF YOUR ENTIRE INVESTMENT.
Larry Adelt currently devotes approximately 10 hours per week to the affairs of the Company. Once the Company raises $75,000 in capital, Mr. Adelt will devote 40 hours per week to the Company or more, and draw a salary of $2,000 per month. Until such time, however, Mr. Adelt’s inability to devote more than 40 hours a week to the Company represents a significant risk to the Company and you may lose all or part of your entire investment. Additionally, failure of the Company to raise $75,000 in capital represents a significant risk and you may lose all or part of your entire investment.
ADELT DESIGN, INC.’S FUTURE GROWTH MAY REQUIRE RECRUITMENT OF QUALIFIED EMPLOYEES.
In the event of our future growth in administration, marketing, and customer support functions, the Company may have to increase the depth and experience of its management team by adding new members. Adelt Design, Inc.’s future success will depend to a large degree upon the active participation of its key officers and employees. There is no assurance that the Company will be able to employ qualified persons on acceptable terms. Lack of qualified employees may adversely affect our business development.
(B) RISKS RELATED TO THE INDUSTRY
WE MAY NOT BE ABLE TO BUILD OUR BRAND AWARENESS.
Development and awareness of our brand Adelt Design, Inc. will depend largely upon our success in creating a customer base and potential referral sources. In order to attract and retain customers and to promote and maintain its brand in response to competitive pressures, management plans to gradually increase the Company’s marketing and advertising budgets. If we are unable to economically promote or maintain our brand, then our business, results of operations and financial condition could be severely harmed. The Company presently has working capital of $2,470.
WE MAY INCUR SIGNIFICANT COSTS TO BE A PUBLIC COMPANY TO ENSURE COMPLIANCE WITH U.S. CORPORATE GOVERNANCE AND ACCOUNTING REQUIREMENTS AND WE MAY NOT BE ABLE TO ABSORB SUCH COSTS.
We may incur significant costs associated with our public Company reporting requirements, costs associated with newly applicable corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 and other rules implemented by the SEC. We expect all of these applicable rules and regulations to significantly increase our legal and financial compliance costs and to make some activities more time consuming and costly. We also expect that these applicable rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these newly applicable rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. In addition, we may not be able to absorb these costs of being a public Company, which will negatively affect our business operations.
It is estimated that the amount of additional costs and expenses associated with public Company reporting requirements will be approximately $10,000. It is also estimated that the amount of additional costs and expenses associated with newly applicable corporate governance requirements will be approximately $5,000.
It is anticipated that we may need to obtain a loan from Mr. Adelt to cover these additional costs and expenses. In the event that we are unable to secure such a loan from Mr. Adelt, or some other source(s), unknown at this time, we will not be able to continue forward and our business will fail.
THE LACK OF PUBLIC COMPANY EXPERIENCE OF OUR MANAGEMENT TEAM COULD ADVERSELY IMPACT OUR ABILITY TO COMPLY WITH THE REPORTING REQUIREMENTS OF U.S. SECURITIES LAWS.
The Company’s management team has no public Company experience, which could impair its ability to comply with legal and regulatory requirements such as those imposed by Sarbanes-Oxley Act of 2002. The Company’s senior management has never had sole responsibility for managing a publicly traded Company. Such responsibilities include complying with federal securities laws and making required disclosures on a timely basis. The Company’s senior management may not be able to implement programs and policies in an effective and timely manner that adequately respond to such increased legal, regulatory compliance and reporting requirements, including the establishing and maintaining internal controls over financial reporting. Any such deficiencies, weaknesses or lack of compliance could have a materially adverse effect on the Company’s ability to comply with the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which is necessary to maintain its public Company status. If we were to fail to fulfill those obligations, our ability to continue as a U.S. public Company would be in jeopardy in which event you could lose your entire investment in our Company.
ADELT DESIGN, INC.’S DEVELOPMENT STAGE OPERATING RESULTS MAY FLUCTUATE DUE TO FACTORS WHICH ARE NOT WITHIN ITS CONTROL.
Adelt Design, Inc.’s development stage operating results are expected to fluctuate in the future based on a number of factors, many of which are not in its control. The Company’s development stage operating expenses primarily include marketing and general administrative expenses that are relatively fixed in the short-term. If our revenues are lower than we expect because demand for our service diminishes, or if we experience an increase in defaults among approved advertising applicants or for any other reasons we may not be able to quickly return to acceptable revenue levels.
Because of the unique nature of our business and the fact that there are no comparable past business models to rely on, future factors that may adversely affect our business are difficult to forecast. Any shortfall in Adelt Design, Inc.’s revenues would have a direct impact on its business. In addition, fluctuations in the Company’s quarterly results could adversely affect the market price of its common stock, in a manner unrelated to its long-term operating performance.
(C) RISKS RELATED TO THE OWNERSHIP OF OUR SECURITIES AND RISKS RELATED TO THIS OFFERING.
WE MAY NEVER PAY ANY DIVIDENDS TO SHAREHOLDERS.
The Company has never declared or paid anyby obtaining additional loans and with cash dividends or distributions on its capital stock. We currently intend to retain our future earnings, if any, to supportgenerated through operations and to finance expansion and therefore we do not anticipate paying any cash dividends on our common stock in the foreseeable future.
The declaration, payment and amount of any future dividends will be made at the discretion of the board of directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors as the board of directors considers relevant. There is no assurance that future dividends will be paid, and, if dividends are paid, there is no assurance with respect to the amount of any such dividend.
OUR CONTROLLING SECURITY HOLDER MAY TAKE ACTIONS THAT CONFLICT WITH YOUR INTERESTS.
Mr. Adelt beneficially owns approximately 100% of the Company’s capital stock with voting rights. In this case, Mr. Adelt will be able to exercise control over all matters requiring stockholder approval, including the election of directors, amendment of the Company’s certificate of incorporation and approval of significant corporate transactions, and he will have significant control over its management and policies. The directors elected by our controlling security holder will be able to significantly influence decisions affecting our capital structure. This control may have the effect of delaying or preventing changes in control or changes in management, or limiting the ability of our other security holders to approve transactions that they may deem to be in their best interest. For example, our controlling security holder will be able to control the sale or other disposition of our operating businesses and subsidiaries to another entity.
THE OFFERING PRICE OF THE COMMON STOCK WAS ARBITRARILY DETERMINED, AND THEREFORE SHOULD NOT BE USED AS AN INDICATOR OF THE FUTURE MARKET PRICE OF THE SECURITIES. THEREFORE, THE OFFERING PRICE BEARS NO RELATIONSHIP TO OUR ACTUAL VALUE, AND MAY MAKE OUR SHARES DIFFICULT TO SELL.
Since our shares are not listed or quoted on any exchange or quotation system, the offering price of $0.001 per share for the shares of common stock was arbitrarily determined. The facts considered in determining the offering price were our financial condition and prospects, our limited operating history and the general condition of the securities market. The offering price bears no relationship to the book value; assets or earnings of our Company or any other recognized criteria of value. The offering price should not be regarded as an indicator of the future market price of the securities.
YOU MAY EXPERIENCE DILUTION OF YOUR OWNERSHIP INTEREST BECAUSE OF THE FUTURE ISSUANCE OF ADDITIONAL SHARES OF OUR COMMON STOCK AND OUR PREFERRED STOCK.
In the future, we may issue our authorized but previously unissued equity securities, resulting in the dilution of the ownership interests of our present stockholders. We are currently authorized to issue an aggregate of 100,000,000 shares of capital stock consisting of 90,000,000 shares of common stock, par value $0.001 per share, and 10,000,000 shares of preferred stock, par value $0.001 per share.
We may also issue additional shares of our common stock or other securities that are convertible into or exercisable for common stock in connection with hiring or retaining employees or consultants, future acquisitions, future sales of our securities for capital raising purposes, or for other business purposes. The future issuance of any such additional shares of our common stock or other securities may create downward pressure on the trading price of our common stock.Colorado Arrangement. There can be no assurance that we will be able to meet our needs, however, as we have not be required to issue additional shares, warrants or other convertible securities inyet received any commitments for the future in conjunction with hiring or retaining employees or consultants, future acquisitions, future salespurchase of our equity securities for capital raising purposes or for other business purposes.additional loans. Further, although we anticipate that we will begin receiving payments pursuant to the Licensing Agreement and Equipment Lease during the fourth quarter of 2016, the Colorado Arrangement has not generated revenue to date and, as described above, there can be no assurance that it will ever generate sufficient cash to repay the $500,000 loan from CLS Labs Colorado or to meet PRH's obligations under the Licensing Agreement or Equipment Lease. We anticipate that we will incur operating losses during the next twelve months.
Consulting Agreements
We also utilize 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 nine months ended February 29, 2016 and issued the 60,000 shares of common stock that had vested, of which 50,000 shares with a value of $37,500 were included in stock payable as of May 31, 2015.
On July 22, 2015, pursuant to a consulting agreement, we agreed to issue 5,000 shares of common stock, valued at $5,750, to a consulting firm in exchange for investor relations consulting services. On August 17, 2015, the consulting agreement was amended, whereby we agreed to issue 5,000 additional shares of common stock, valued at $6,350. On August 26, 2015, we extended the consulting agreement and agreed to issue the consultant an additional 10,000 shares of common stock, valued at $12,700. On October 9, 2015, we extended the consulting agreement and agreed to issue the consultant an additional 10,000 shares of common stock, valued at $11,700. On December 15, 2015, we extended the consulting agreement and agreed to issue the consultant an additional 10,000 shares of common stock, valued at $8,000. All shares were valued based on the closing market price on the grant date. During the nine months ended February 29, 2016, we issued 10,000 shares to this consultant, and at February 29, 2016 have 30,000 shares of common stock, valued at $32,750, included in stock payable on the accompanying balance sheets.
During the nine months ended February 29, 2016, pursuant to a consulting agreement, we agreed to issue 10,000 shares of common stock per month, valued at $11,600 per month, to a consultant in exchange for investor relations consulting services. The consulting agreement was terminated during the first month of its term. The parties are in discussions regarding whether any shares of our common stock have been earned and it is uncertain whether any shares will be issued. As of February 29, 2016, we have included 20,000 shares of common stock, valued at $23,200 in stock payable on the accompanying balance sheets. The shares were valued based on the closing market price on the grant date.
On December 18, 2015, pursuant to a consulting agreement, we agreed to issue 25,000 shares of common stock per month, valued at $19,750, 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 February 29, 2016, we had 50,000 shares of common stock, valued at $39,500 included in stock payable on the accompanying balance sheet. The shares were valued based on the closing market price on the grant date.
Arrangements with the Selling Stockholder
On March 18, 2016, we entered into the Purchase Agreement with the Selling Stockholder, whereby the Selling Stockholder agreed to purchase an aggregate of up to $500,000 in subscription amount corresponding to an aggregate of up to $555,555 in principal amount of 10% Original Issue Discount Convertible Promissory Notes due, subject to the terms therein, in installments as set forth below. The purchase will occur, at our option, in up to five tranches, with the first tranche of $200,000 being purchased on March 18, 2016; the second tranche of $50,000 being purchased on the first Friday which is a trading day after the filing date of this Registration Statement; the third tranche of $50,000 being purchased on the first Friday which is a trading day at least three (3) trading days after the Company receives initial comments from the SEC on the Registration Statement, or the date that we are notified by the SEC that the Registration Statement will not be reviewed; the fourth tranche of $100,000 being purchased on the first Friday which is a trading day at least three trading days after of the date that the Registration Statement is declared effective by the SEC (the “SEC Effective Date”); and the fifth Tranche of $100,000 being purchased on the first Friday which is a trading day after the thirty (30) day anniversary of the SEC Effective Date.
At the earlier of September 18, 2016 or the two (2) trading days after the SEC Effective Date, we must begin to redeem 1/24th of the face amount of the 10% Notes and any accrued but unpaid interest on a bi-weekly basis. Such amortization payments may be made, at our option, in cash or, subject to certain conditions, in our common stock pursuant to a conversion rate equal to the lower of (a) $0.80 (the “Fixed Conversion Price”) or (b) 75% of the lowest daily VWAP of our common stock in the twenty (20) consecutive trading days immediately prior to the applicable conversion date. At any time after the issue date of the Notes, the holder may convert the 10% Notes into shares of our common stock at the holder’s option. The conversion price will be the Fixed Conversion Price. Subject to certain exclusions, if we sell or issue our common stock or certain common stock equivalents at an effective price per share that is lower than the Fixed Conversion Price, the conversion price will be reduced to be equal to such lower price. On March 18, 2016, we issued Old Main a 10% Original Issue Discount Convertible Note in the principal amount of $222,222 in exchange for $200,000 pursuant to the Purchase Agreement, representing the first tranche under the Purchase Agreement. The proceeds from the first tranche were used by the Company to fund general working capital requirements.
OUR COMMON STOCK IS CONSIDERED PENNY STOCKS, WHICH MAY BE SUBJECT TO RESTRICTIONS ON MARKETABILITY, SO YOU MAY NOT BE ABLE TO SELL YOUR SHARES.
IfOn March 18, 2016, we also issued Old Main an 8% Convertible Promissory Note in the principal amount of $200,000 for Old Main’s commitment to enter into an equity line transaction with us and prepare all of the related transaction documents. The 8% Note bears interest at the rate of 8% per annum. At the earlier of September 18, 2016 or two (2) trading days after the SEC Effective Date, we must begin to redeem 1/6th of the face amount of the 8% Note and any accrued but unpaid interest on a monthly basis. Such amortization payments may be made, at the option of the Company, in cash or, subject to certain conditions, in common stock of the Company pursuant to a conversion rate equal to the lower of (a) $1.07 (the “8% Note Fixed Conversion Price”) or (b) 75% of the lowest VWAP in the twenty (20) consecutive trading days ending on the trading day that is immediately prior to the applicable conversion date. Subject to certain exclusions, if we sell or issue our common stock becomes tradable inor certain common stock equivalents at an effective price per share that is lower than the secondary market,8% Note Fixed Conversion Price, the conversion price will be reduced to be equal to such lower price.
On April 18, 2016, we will beentered into the Equity Purchase Agreement with the Selling Stockholder providing for the Equity Line. The Equity Purchase Agreement provides that, upon the terms and subject to the penny stock rules adopted byconditions thereof, the SEC that require brokersSelling Stockholder is committed to provide extensive disclosurepurchase the Commitment Shares at an aggregate price of up to their customers prior$4,000,000 over the course of its 24-month term.
From time to executing trades in penny stocks. These disclosure requirements may cause a reduction intime over the 24-month term of the Equity Purchase Agreement, commencing on the trading activityday immediately following the date on which the Registration Statement of which this Prospectus is a part becomes effective, we may, in our common stock, which in all likelihood would make it difficult for our shareholders to sell their securities.
Penny stocks generally are equity securitiessole discretion, provide the Selling Stockholder with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system). Penny stock rules requirePut Notice to purchase a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. The broker-dealer must also make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security that becomesPut Amount Requested subject to the penny stock rules. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in our securities, which could severely limitlimitations discussed below. Upon delivery of a Put Notice, we must deliver the market price and liquidity of our securities. These requirements may restrictPut Amount Requested as Deposit Withdrawal at Custodian (“DWAC”) shares to the ability of broker-dealers to sell our common stock and may affect your ability to resell our common stock.
THERE IS NO ASSURANCE OF A PUBLIC MARKET OR THAT OUR COMMON STOCK WILL EVER TRADE ON A RECOGNIZED EXCHANGE. THEREFORE, YOU MAY BE UNABLE TO LIQUIDATE YOUR INVESTMENT IN OUR STOCK.Selling Stockholder within two (2) trading days.
ThereThe actual amount of proceeds we receive pursuant to each Put Notice (each, the “Put Amount”) is no established public trading market for our common stock. Our shares have not been listed or quoted on any exchange or quotation system. There canto be no assurance that a market maker will agree to filedetermined by multiplying the necessary documents with FINRA, which operatesPut Amount Requested by the OTCBB, nor can there be any assurance that such an application for quotation will be approved or that a regular trading market will develop or that if developed, will be sustained. In the absenceapplicable purchase price. The purchase price of a trading market, an investor may be unable to liquidate their investment.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The information contained in this report, including in the documents incorporated by reference into this report, includes some statement that are not purely historical and that are “forward-looking statements.” Such forward-looking statements include, but are not limited to, statements regarding our and their management's expectations, hopes, beliefs, intentions or strategies regarding the future, including our financial condition, results of operations, and the expected impacteach Commitment Share equals 80% of the Share Exchange onMarket Price (as defined below) during the parties' individual and combined financial performance. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipates,” “believes,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “possible,” “potential,” “predicts,” “projects,” “seeks,” “should,” “will,” “would” and similar expressions, orfive (5) consecutive trading days immediately preceding the negatives of such terms, may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.
The forward-looking statements contained in this report are based on current expectations and beliefs concerning future developments and the potential effects on the parties and the transaction. There can be no assurance that future developments actually affecting us will be those anticipated. These that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements, including the following forward-looking statements involve a number of risks, uncertainties (some of which are beyond the parties' control) and/or other assumptions.
USE OF PROCEEDS
The Company will not receive any proceeds from the saledate of the shares byapplicable Put Notice. The “Market Price” is the selling security holder. All proceeds from the salelowest VWAP of the shares offered hereby will be for the account of the selling security holder, as described below in the sections entitled "Selling Security Holder" and "Plan of Distribution."
The Company is registering 8,000,000 shares for gross proceeds of $8,000 from the sale of the selling security holder’s common stock under the investment agreement. All of the proceeds from the sale of the shares of common stock offered herein will be received by the selling security holder.
With the exception of any brokerage fees and commission which are the obligation of the selling security holder, we are responsible for the fees, costs and expenses of this offering which are estimated to be $20,000, inclusive of our legal and accounting fees, printing costs, filings and other miscellaneous fees and expenses of which the Company has paid $2,430 as of May 31, 2011.
DETERMINATION OF OFFERING PRICE
Since our common stock is not listed or quoted on any exchange or quotation system, the offering price of the shares of common stock was arbitrarily determined. The offering price of the shares of our common stock has been determined arbitrarily by us and does not necessarily bear any relationship to our book value, assets, past developmental stage operating results, financial condition or any other established criteria of value. The facts considered in determining the offering price were our financial condition and prospects, no operating history and the general condition of the securities market.
Although our common stock is not listed on a public exchange, we will be filing to obtain a listing on the OTCBB concurrently with the filing of this prospectus. In order to be quoted on the OTCBB, a market maker must file an application on our behalf in order to make a market for our common stock. There can be no assurance that a market maker will agree to file the necessary documents with FINRA, which operates the OTC Bulletin Board, nor can there be any assurance that such an application for quotation will be approved.
In addition, there is no assurance that our common stock will trade at market prices in excess of the initial offering price as prices for the common stock in the five-trading-day-period immediately following the clearing date associated with the applicable Put Notice (the “Valuation Period”). Within two (2) trading days following the end of the Valuation Period, the Selling Stockholder will deliver the Put Amount to us via wire transfer.
The Put Amount Requested pursuant to any public market which may develop will be determinedsingle Put Notice must have an aggregate value of at least $25,000 based upon the Market Price and cannot exceed the lesser of (i) 200% of the average daily share volume of the common stock in the marketplace and may be influenced by many factors, includingfive (5) trading days immediately preceding the depth and liquidity.
DILUTION
The common stock to be sold by the selling security holder is common stock that is currently issued and outstanding. Accordingly, there will be no dilution to our existing security holder. Upon the successful completion of this offering, the number of shares will total 18,000,000 common shares outstanding.
SELLING SECURITY HOLDER
On May 15, 2011, the Company issued 18,000,000 founder’s shares at the par value of $0.001 in exchange for proceeds of $18,000. The common shares being offered for resale by the selling security holder consist of the 8,000,000 shares of our common stock held by one shareholder (founder).
The following table sets forth the name of the selling security holder, thePut Notice or (ii) such number of shares of common stock beneficially owned bythat has an aggregate value of $500,000, based upon the selling stockholder asMarket Price.
In order to deliver a Put Notice, certain conditions set forth in the Equity Purchase Agreement must be met. In addition, we are prohibited from delivering a Put Notice if: (i) the sale of May 31, 2011Commitment Shares pursuant to such Put Notice would cause us to issue and sell to the Selling Stockholder, or the Selling Stockholder to acquire or purchase, a number of shares of common stock being offeredthat, when aggregated with all shares of common stock purchased by the selling stockholder. The shares being offered hereby are being registeredSelling Stockholder pursuant to permit public secondary trading, andall prior Put Notices issued under the selling stockholders may offer allEquity Purchase Agreement, would exceed the total Commitment Shares; or part(ii) the sale of the Commitment Shares pursuant to the Put Notice would cause us to issue and sell to the Selling Stockholder, or the Selling Stockholder to acquire or purchase, an aggregate number of shares for resale from time to time. However,of common stock that would result in the selling stockholder is under no obligation to sell all or any portionSelling Stockholder's beneficially owning more than 4.99% of such shares nor is the selling stockholder obligated to sell any shares immediately upon effectiveness of this prospectus. All information with respect to share ownership has been furnished by the selling stockholders.
| | | Name | | Shares beneficially owned prior to Offering | | | Shares to be Offered | | | Shares Beneficially Owned after Offering if all 8,000,000 sold | | | Percent Beneficially Owned after Offering if all 8,000,000 sold | |
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The selling shareholder Larry A. Adelt is not a broker-dealer or an affiliate of a broker- dealer.
(1) | Larry A. Adelt is the founder and officer and director of the Company. He presently owns 18,000,000 shares of the Company stock, which he obtained on May 31, 2011. Mr. Adelt is the Company’s sole shareholder. |
PLAN OF DISTRIBUTION
We are registering 8,000,000issued and outstanding shares of our common stock for resale bystock.
Unless earlier terminated, the selling security holder identified inEquity Purchase Agreement will terminate automatically on the section above entitled “Selling Security Holder." We will receive noneearlier to occur of: (i) March 17, 2018, (ii) the date on which the Selling Stockholder has purchased or acquired all of the proceeds from the sale of these shares by the selling security holder.
The selling security holder may sell some of all of their common stock in oneCommitment Shares or more transactions, including block transactions:
| * | On such public markets or exchanges as the common stock may from time to time be trading; |
| * | In privately negotiated transactions; |
| * | Through the writing of options on the common stock; |
| * | Settlement of short sales; or, |
| * | In any combination of these methods of distribution. |
The selling security holder has set an offering price for these securities of $0.001 per share, with a minimum number of shares to be offered per investor of 100 and an offering period of twenty nine days from(iii) the date of this prospectus.
The shares may also be sold in compliance with the Securities and Exchange Commission’s Rule 144. In the event of the transfer by the selling security holder of shares to any pledgee, donee, or other transferee, we will amend this prospectus and the registration statement ofon which this prospectus forms a part by the filing of a post-effective registration statement in order to name the pledgee, donee, or other transferee in place of the selling security holder who have transferred his shares.
The selling security holder may also sell shares directly to market makers acting as principals or brokers or dealers, who may act as agent or acquire the common stock as a principal. Any broker or dealer participating as agent in such transactions may receive a commission from the selling security holder or, if they act as agent for the purchaser of such common stock, a commission from the purchaser. The selling security holder will likely pay the usual and customary brokerage fees for such services. Brokers or dealers may agree with the selling security holder to sell a specified number of shares at a stipulated price of $0.001 per share and, to the extent such broker or dealer is unable to do so acting as agent for the selling security holder, to purchase, as principal, any unsold shares at the price required to fulfill the respective broker's or dealer's commitment to the selling security holder. Brokers or dealers who acquire shares as principals may thereafter resell such shares from time to time in transactions in a market or on an exchange, in negotiated transactions or otherwise, at market prices of $0.001, and in connection with such re-sales may pay or receive commissions to or from the purchasers of such shares. These transactions may involve cross and block transactions that may involve sales to and through other brokers or dealers. We can provide no assurance that all or any of the common stock offered will be sold by the selling security holder.
If, after the date of this prospectus, the selling security holder enters into an agreement to sell their shares to a broker-dealer as principal and the broker-dealer is acting as an underwriter, we will need to file a post-effective amendment to the registration statement of which this prospectus is a part. We will need to identify the broker-dealer, provide required information on the plan of distribution, and revise the disclosures in that amendment, and file the agreement as an exhibit to the registration statement. Also, the broker-dealer would have to seek and obtain clearance of the underwriting compensation and arrangements from the NASD Corporate Finance Department.
The selling security holder listed in this prospectus is the underwriter within the meaning of section 2(11) of the Securities Act of 1933, as amended, in connection with the sales and distributions contemplated under this prospectus, and may have civil liability under Sections 11 and 12 of the Securities Act for any omissions or misstatements in this prospectus and the registration statement of which it is a part and any broker-dealers or agents thatcertain bankruptcy proceedings are involved in selling the shares may be deemed to be an "underwriter" within the meaning of section 2(11) of the Securities Act of 1933, as amended, in connection with the sales and distributions contemplated under this prospectus, and may have civil liability under Sections 11 and 12 of the Securities Act for any omissions or misstatements in this prospectus and the registration statement of which it is a part. Additionally, any profits, which our selling security holder may receive, would be deemed to be underwriting compensation under the Securities Act. Because the selling security holder is the underwriter under Section 2(11) of the Securities Act, the selling security holder will be subject to the prospectus delivery requirements of the Securities Act.
We are bearing all costs relating to the registration of the common stock, which are estimated at $20,000 inclusive of our legal and accounting fees, printing costs, filings and other miscellaneous fees and expenses of which the Company has incurred $15,530 as of May 31, 2011. The selling security holder, however, will pay any commissions or other fees payable to brokers or dealers in connection with any sale of the common stock.
In order to comply with the applicable securities laws of certain states, the securities will be offered or sold in those only if they have been registered or qualified for sale; an exemption from such registration or if qualification requirement is available and with which Adelt Design, Inc. has complied.
In addition and without limiting the foregoing, the Company will be subject to applicable provisions, rules and regulations under the Exchange Act with regard to security transactions during the period of time when this Registration Statement is effective.
We are paying the expenses of the offering because we seek to: (i) become a reporting company with the Commission under the Securities Exchange Act of 1934 (the "1934 Act"); and (ii) enable our common stock to be traded on the OTC Bulletin Board. We believe that the registration of the resale of shares on behalf of the existing security holder may facilitate the development of a public market in our common stock if our common stock is approved for trading on the OTC Bulletin Board.
We consider that the development of a public market for our common stock will make an investment in our common stock more attractive to future investors. We will at some point, in the near future, need to raise additional capital through private placement offerings. We believe that obtaining reporting company status under the 1934 Act and trading on the OTC Bulletin Board should increase our ability to raise these additional funds from investors.
There is no assurance that we will find a market maker and no assurance that our shares will be approved for trading on the OTC Bulletin.
The selling security holder and any broker-dealers or agents must comply with the requirements of the Securities Act and the Securities Exchange Act in the offer and sale of the common stock. In particular, during such times as the selling security holder is engaged in a distribution of the common stock, and therefore be considered to be an underwriter, he must comply with applicable law and may, among other things may be deemed to be engaged in a distribution of the common stock, and therefore be considered to be an underwriter, he must comply with applicable law and may, among other things:
| * | Not engage in any stabilization activities in connection with our common stock; |
| * | Furnish each broker or dealer through which common stock may be offered, such copies of this prospectus, as amended from time to time, as may be required by such broker or dealer; and, |
| * | Not bid for or purchase any of our securities or attempt to induce any person to purchase any of our securities other than as permitted under the Securities Exchange Act. |
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our securities are not listed on any exchange or quotation service. We are not required to comply with the timely disclosure policies of any exchange or quotation service. The requirements to which we would be subject if our securities were so listed typically include the timely disclosure of a material change or factinitiated with respect to our affairs and the making of required filings. Although we are not required to deliver an annual report to security holders, the Company intends to provide an annual report to our security holders, which will include audited financial statements.Company.
When we become a reporting company with the Securities and Exchange Commission, the public may read and copy any materials filed with the Securities and Exchange Commission at the Security and Exchange Commission’s Public Reference Room at 100 F Street N.E., Washington, D.C. 20549. The public may also obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Securities and Exchange Commission. The address of that site is www.sec.gov.
There are no outstanding options or warrants to purchase, or securities convertible into, shares of our common stock.Going concern
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
The following plan of operation provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read along with ourOur financial statements and notes thereto. This section includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward-looking statements are often identified by words like: “believe,” ”expect,” ”estimate,” “anticipate,” “intend,” “project,” and similar expressions, or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements and/or the aforementioned identifying words. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our predictions.
OVERVIEW
Adelt Design, Inc. was formedwere prepared using accounting principles generally accepted in the stateUnited States of Nevada on March 31, 2011America applicable to establish salesa going concern, which contemplate the realization of carpet binding art to the general public. The Company expects to generate its corporate revenue from the saleassets and liquidation of its carpet binding art.
The Company has adopted a fiscal year end of May 31st.
Adelt Design, Inc. is presently developing a plan to market its carpet binding art to the general public. Adelt is a development stage company with a limited history of development stage operations.
Adelt Design, Inc. was foundedliabilities in the Statenormal course of Nevada on March 31, 2011. The Company plans to market the carpet binding art through a combination of direct sales, referrals and networking. To date the Company has not generated any sales. We expect to establish an internet website in August of 2011, where customers may purchase its carpet binding art.
To commence active business operations, the Company will need to engage in a number of planning stage and preliminary activities. We will commence activities that include finishing our internet website for our carpet binding art, preparing marketing materials and direct mail. We will undertake and work to finish these activities upon completion of this registration statement.
business. We have started someincurred continuous losses from operations since inception, have an accumulated deficit of the activities, by developing the art picture$3,378,197 and carpet binding and creating the initial marketing material but the marketing completion cannot occur without the raisinghad a working capital deficit of additional funds in the amount of $75,000. From March 31, 2011 (inception) to date,$1,038,359 at February 29, 2016. In addition, we have spent a substantial amount of time in developing the Company’s carpet binding art such as, among other things, which dyes to use, which black or colored, which tools to use, and which wools to use. Additionally, the Company has spent a substantial amount of time developing it marketing material, strategic planning, budgeting, and preliminary work.
We have determined what we believe the price of our product should be along with the relative cost todo not currently have the product manufactured, packaged and shippedcash resources to customers. The Company has estimated the selling price ofmeet our product, which includes manufacturing, packaging, and Company profit, to range from $3,000 to $100,000 based on: (1) the complexity of the carpet binding art; (2) the size of the carpet binding art; (3) the dyes used, and the amounts used, in the carpet binding art; and (4) the amount of black or colored used in the carpet binding art. If these projected prices are incorrect, it could result in an operating loss for us.
While budgetary manufacturing, packaging, shipping and marketing costs have been established for our product, no definitive work has commenced in development of these products and activities; therefore, it is possible that these prices could be incorrect. If, after development, a different price is deemed necessary, it could result in an operating loss for us. We have not devoted much time to raising capital other than the investments from Mr. Adelt. Furthermore, Adelt Design, Inc. has not commenced its major operations of manufacturing, packaging and shipping its art picture and carpet binding to any customer. Adelt Design, Inc. is considered a development stage company because it has not commenced its major operations. In addition, the Company has not achieved any revenue in connection with its business to date.
Overcommitments during the next twelve months, Adelt Design, Inc. plansmonths. Our ability to build out its reputation, carpet binding art, and begin sales to the general public. Presently, the Company has not sold any art pictures and carpet bindings.
Management feels the Company’s continuationcontinue as a going concern depends upon its ability to obtain additional sourcesmust be considered in light of capitalthe problems, expenses, and financing. Specifically, management intends to raise additional permanent capital through debt instruments such as bank loans and/or private financing. The goal of this effort is to provide working capital for the next year. Our twelve month operating plan is dependent on raising additional permanent capital through debt instruments such as bank loans, or private financing in the amount of $75,000. Presently, we do not have any existing sources or plans for financing.complications frequently encountered by developmental stage companies.
Based on our current operating plan, we do not expect to generate revenue that is sufficient to cover our expenses for the next six months, and we will need to obtain additional financing to operate our business for the next six months. Our “burn rate” is approximately $2,500 per month. Most of our expenses are anticipated to be legal, accounting, transfer agent, and other costs associated with being a public Company. Since we intend to utilize our officers and directors, who currently are part time and whose salaries are being accrued, to sell our product, our marketing costs should be minimal. Additional financing, whether through public or private equity or debt financing, arrangements with the security holder or other sources to fund operations, may not be available, or if available, may be on terms unacceptable to us. Our ability to maintain sufficient liquiditycontinue as a going concern is dependent on our ability to raise additional capital.
Ifgenerate sufficient cash from operations to meet our cash needs, to borrow capital and to sell equity to support the opening of processing facilities and to finance ongoing operations. There can be no assurance, however, that we issue additional equity securities to raise funds, the ownership percentage of our existing security holder wouldwill be reduced. New investors may demand rights, preferences or privileges senior to those of existing holders of our common stock. Debt incurred by us would be senior to equity in the ability of debt holders to make claims on our assets. The terms of any debt issued could impose restrictions on our operations. If adequate funds are not available to satisfy either short or long-term capital requirements, our operations and liquidity could be materially adversely affected and we could be forced to cease operations.
If we are successful in our efforts to raise the $75,000,additional debt or equity capital and/or that cash generated by our twelve month operating plan shallfuture operations will be adequate to meet our needs. These factors, among others, indicate that we may be unable to continue as follows. Additionally, we would not move into our operating phase until we have established our internet based services, even if successful in efforts to raise the $75,000a going concern for a reasonable period of capital:time.
| | The implementation of our direct sales model through Larry Adelt through the commencement of sales will cost at least $75,000. We need to establish and print all of the marketing material. We have allocated $35,000 toward marketing materials which include flyers, brochures, direct marketing DVD’s and mailing costs. The Company intends to allocate these funds as soon as they are available.
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| | $10,000 towards costs associated with public Company reporting requirements, and $5,000 related to expenses associated with newly applicable corporate governance requirement
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| | Software and hardware updates to maintain service and maintain the Company office will cost the Company at least $10,000. As a direct sales Company continued improvements and upgrade to our systems is required. User features and website content updates are vital to continued visitations by online users. This cost signifies the system modifications. The Company intends to allocate these funds with four month of the funds becoming available.
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| | Program administration and working capital expenses until such time as there are sufficient sales to cash-flow operations will cost the Company at least $15,000. This is the necessary working capital to fund operations until such time as revenues exceed expenses.
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INITIAL SALES STRATEGY
We have established a two-prong sales approach; our approach utilizes direct sales through Larry A. Adelt. Our direct sales will be conducted by Mr. Adelt, who will market the art picture and carpet bindings locally in the Salt Lake City, Utah area to retail customers. His current marketing strategy consists of various Point of Sale material to include advertising posters, flyers and magnetic strips with the Company name and its product developed by Larry Adelt in the past several months. We also intend to derive sales from our internet website which is currently under development at: http://www.Adeltdesign.com. We need further funding to complete the Company’s internet website.
We intend to derive income from these sales and our goal is establish brand recognition. Over the next twelve months, Adelt Design, Inc. plans to build out and establish its reputation and network of clients and advisors in the carpet binding art business for sale to the general public.
SUBSEQUENT SALES STRATEGY
Adelt Design, Inc. will market its carpet binding art to the general public through a combination of direct sales, referrals and sales through its internet website. The Company is presently developing its marketing program to sell its art pictures and carpet bindings to the general public. The Company is not offering its products to anyone at this time. Adelt Design, Inc. is considered a development stage company because it has not commenced its major operations. In addition, the Company has not achieved any revenue in connection with its business to date. As a result, we are a startup company. This means that we have no operating history or revenue, and are at a competitive disadvantage.
RESULTS OF OPERATIONS
March 31, 2011 (inception) to May 31, 2011Off-Balance Sheet Arrangements
The following tables and narrative discussion set forth key components of our results of operations for the period indicated, in dollars, and key components of our revenue for the period indicated, in dollars.
| | | March 31, 2011 | |
| | | (inception) to | |
| | | May 31, 2011 | |
| | | | |
| Revenue | | $ | - | |
| | | | | |
| Operating expenses: | | | | |
| General and administrative | | | 2,530 | |
| Professional fees | | | 13,000 | |
| | | | | |
| Total operating expenses | | | 15,530 | |
| | | | | |
| Net operating loss | | | (15,530 | ) |
| | | | | |
| Other income (expense) | | | - | |
| | | | | |
| Loss before provision for income taxes | | | (15,530 | ) |
| | | | | |
| Provision for income taxes | | | - | |
| | | | | |
| Net (loss) | | $ | (15,530 | ) |
| | | | | |
| | | | | |
| Weighted average number of common shares outstanding - basic and fully diluted | | | 18,000,000 | |
| | | | | |
| Net (loss) per share - basic and fully diluted | | $ | (0.00 | ) |
Sales
From March 31, 2011 (inception) to May 31, 2011, we generated no revenues. There were no revenues as the Company has not yet commenced operations.
Operating Expenses
Total operating expenses for the period of March 31, 2011 (inception) to May 31, 2011 were $15,530. The costs primarily consisted of legal, accounting and other professional fees.
LIQUIDITY AND CAPITAL RESOURCES
We believe that our existing sources of liquidity will not be sufficient to fund our operations, anticipated capital expenditures, working capital and other financing requirements for at least the next twelve months. In the event the Company is unable to achieve profitable operations in the near term, it may require additional equity and/or debt financing, or reduce expenses, including officer’s compensation, to reduce such losses. However, we cannot assure that such financing will be available to us on favorable terms, or at all. We will continue to monitor our expenditures and cash flow position. We are presently debt free, but at some time in the future we may need to obtain additional financing to complete our business plan. There is no assurance that we will be able to obtain such financing if needed and the failure to do so could negatively impact the viability of our Company to continue with this business and the business may fail.
The following table summarizes total assets, accumulated deficit, stockholder’s equity (deficit) and working capital at May 31, 2011.
| | | May 31, 2011 | |
| Total Assets | | $ | 15,570 | |
| | | | | |
| Accumulated Deficit | | $ | (15,530 | ) |
| | | | | |
| Stockholders’ Equity | | $ | 2,470 | |
| | | | | |
| Working Capital | | $ | 2,470 | |
Since our inception on March 31, 2011, we have incurred a loss of ($15,530). Our cash and cash equivalent balances were $15,570 at May 31, 2011. At May 31, 2011 we had an accumulated deficit of ($15,530), and total current liabilities were $13,100.
For the period from March 31, 2011 (inception) to May 31, 2011, net cash used in operating activities was $2,430 and proceeds from the sale of common stock totaled $18,000.
SATISFACTION OF OUR CASH OBLIGATION FOR THE NEXT TWELVE MONTHS
We will have additional capital requirements during the fiscal year ending May 31, 2012. We do not expect to be able to satisfy our cash requirements through our product sales, and therefore we will attempt to raise additional capital through the sale of our common stock and debt financing activities.
We cannot assure that we will have sufficient capital to finance our growth and business operations or that such capital will be available on terms that are favorable to us or at all. We are currently incurring operating deficits that are expected to continue for the foreseeable future.
Based on our current operating plan, we do not expect to generate revenue that is sufficient to cover our expenses for at least the next twelve months. In addition, we do not have sufficient cash and cash equivalents to execute our operations for at least the next twelve months. We will need to obtain additional financing, in the amount of $75,000, to conduct our day-to-day operations, and to fully execute our business plan. We will raise the capital necessary to fund our business through a subsequent offering of equity securities. Additional financing, whether through public or private equity or debt financing, arrangements with security holders or other sources to fund operations, may not be available, or if available, may be on terms unacceptable to us.
Management feels the Company’s continuation as a going concern depends upon its ability to obtain additional sources of capital and financing. Specifically, management intends to raise additional permanent capital through debt instruments such as bank loans, or private financing. The goal of this effort is to provide working capital for the next year. Our twelve month operating plan is dependent on raising additional permanent capital through debt instruments such as bank loans, or private financing in the amount of $75,000. Presently we do not have any existing sources or plans for financing.
If we are successful in our efforts to raise the $75,000, our twelve month operating plan shall be as follows (we would not move into our operations phase until we have established our internet website even if we are successful in our efforts to raise the $75,000 in capital):
| • | The implementation of our direct sales model through Mr. Adelt through the commencement of sales will cost at least $75,000. We need to establish and print all of the marketing material. We have allocated $35,000 toward marketing materials which include flyers, brochures, direct marketing DVD’s and mailing costs. The Company intends to allocate these funds as soon as they are available. |
| | |
| • | $10,000 towards costs associated with public Company reporting requirements, and $5,000 related to expenses associated with newly applicable corporate governance requirement. |
| | |
| • | Software and hardware to develop an internet site will cost the Company at least $10,000. As an art Company continued improvements and upgrades will be required. User features and website content updates are vital to continued visitations by online users. This cost signifies the system creation. The Company intends to allocate these funds within four months of the funds becoming available. |
| | |
| • | Program administration and working capital expenses until such time as there are sufficient sales to cash-flow operations will cost the Company at least $15,000. This is the necessary working capital to fund operations until such time as revenues exceed expenses. This will cover audit fees, legal fees associated with the offering and all other management expenses such as those from industry consultants and advisors. The Company intends to pay its legal and accounting and all other management fees as they become due. |
All manufacturing costs associated with the Company’s product will come from additional funding from Mr. Adelt and/or the selling of the product. Additionally, all funds related to the offering will be provided by Mr. Adelt.
Our ability to maintain sufficient liquidity is dependent on our ability to raise additional capital. If we issue additional equity securities to raise funds, the ownership percentage of our existing security holders would be reduced. New investors may demand rights, preferences or privileges senior to those of existing holders of our common stock. Debt incurred by us would be senior to equity in the ability of debt holders to make claims on our assets. The terms of any debt issued could impose restrictions on our operations. If adequate funds are not available to satisfy either short or long-term capital requirements, our operations and liquidity could be materially adversely affected and we could be forced to cease operations.
EXPECTED PURCHASE OR SALE OF SIGNIFICANT EQUIPMENT
We do not anticipate the purchase or sale of any significant equipment as such items are not required by us at this time or in the next twelve months.
We are paying the expenses of the offering because we seek to (i) become a reporting company with the Commission under the Securities Exchange Act of 1934 (the "1934 Act"); and (ii) enable our common stock to be traded on the OTC Bulletin Board. We believe that the registration of the resale of shares on behalf of our existing security holders may facilitate the development of a public market in our common stock if our common stock is approved for trading on the OTC Bulletin Board.
INFLATION
The rate of inflation has had little impact on the Company's results of operations and is not expected to have a significant impact on the continuing operations.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that isare material to investors.
CRITICAL ACCOUNTING POLICIESRecently Issued Accounting Standards
Accounting standards promulgated by the Financial Accounting Standards Board (“FASB”) are subject to change. Changes in such standards may have an impact on our future financial statements. The following are a summary of recent accounting developments.
In November 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-17, “Balance Sheet Classification of Deferred Taxes,” which requires that deferred tax liabilities and assets be classified as non-current on the balance sheet. ASU 2015-17 is effective in fiscal years beginning after December 15, 2016. Early adoption is permitted on either a prospective or retrospective basis. We have elected early adoption as of the interim period beginning December 1, 2015, effective for the annual period ending May 31, 2016, and has selected the prospective application. Prior periods have not been retrospectively adjusted.
In September 2015, the FASB issued ASU No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments,” which requires the acquirer in a business combination to recognize in the reporting period in which adjustment amounts are determined, any adjustments to provisional amounts that are identified during the measurement period, calculated as if the accounting had been completed at the acquisition date. Prior to the issuance of ASU 2015-16, an acquirer was required to restate prior period financial statements as of the acquisition date for adjustments to provisional amounts. ASU 2015-16 is effective for annual and interim periods beginning after December 15, 2015. The adoption of ASU 2015-16 is not expected to have a material impact on our financial position or results of operations.
In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date.” This amendment defers the effective date of the previously issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)," until the interim and annual reporting periods beginning after December 15, 2017. The FASB’s ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)," was issued in three parts: (a) Section A, “Summary and Amendments That Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs-Contracts with Customers (Subtopic 340-40),” (b) Section B, “Conforming Amendments to Other Topics and Subtopics in the Codification and Status Tables” and (c) Section C, “Background Information and Basis for Conclusions.” The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Earlier application is permitted for interim and annual reporting periods beginning after December 15, 2016. We intend to adopt the provisions of ASU 2015-14 for interim and annual reporting periods beginning after December 15, 2017. We are currently evaluating the impact of the adoption of ASU 2015-14 on its consolidated financial statements.
In July 2015, the FASB, issued ASU No. 2015-11,“Inventory (Topic 330): Simplifying the Measurement of Inventory,” which requires an entity to measure inventory within the scope of the ASU at the lower of cost or net realizable value. The amendments in ASU 2015-11 are effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period. Earlier adoption is permitted. The adoption of ASU 2015-11 is not expected to have a material impact on our financial position or results of operations.
Management does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the accompanying unaudited condensed consolidated financial statements.
Upon CLS Labs’ acquisition of a majority interest in the Company on November 12, 2014, Jeffrey I. Binder, the Chairman, President and Chief Executive Officer of CLS Labs, was appointed Chairman, President and Chief Executive Officer 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. Messrs. Binder, Koretsky and Raymond Keller are the founders and directors of CLS Labs.
The following sets forth information about our directors and executive officers as of the date of this Memorandum.
Name | | Age | | Position |
| Jeffrey Binder | | 69 | | Chairman, President, CEO and Director |
| Frank Koretsky | | 53 | | Director |
| Alan Bonsett | | 42 | | Chief Operating Officer |
Select information about Messrs. Binder, Koretsky, and Bonsett, and about Mr. Keller, one of the founders of CLS Labs, is set forth below.
Jeffrey Binder. Mr. Binder was one of the individuals who founded CLS Labs in 2014 and he has served as its Chairman, President, Chief Executive Officer and a director since its inception. Upon CLS Labs' acquiring control of the Company on November 12, 2014, Mr. Binder was appointed Chairman, President, Chief Executive Officer and a director of the Company. He continues to serve in these roles. Since 2008, Mr. Binder has served as founder, Chairman and President of Power 3 Network, Inc., a company that develops websites and back offices for home-based businesses. In 2003, Mr. Binder founded Infinity 8, Inc., a software development company, where he served as its Chairman, Treasurer and a director until 2011. In addition to his employment history, Mr. Binder has invested in and mentored several start-up and mid-stage companies through his private holding company, JeMJ Financial Services, Inc., which he formed in 1988 and for which he serves as Chairman, President and a director. Through JeMJ, Mr. Binder invested in GGL Industries, Inc., a private holding company that owned Sterling Yacht and Classic Motor Carriages, as well as various other companies, and had extensive real estate holdings. Mr. Binder received his Juris Doctorate from the National Law Center, George Washington University, in 1971, where he received the honor of membership in the Order of the Coif. He also served as a legislative assistant to Adlai Stevenson II, a United States Senator for Illinois, and practiced Law at Sonnenschein Nath & Rosenthal, LLP, Chicago, Illinois for five years.
Frank Koretsky. Mr. Koretsky is a founder and has served as a director of CLS Labs since its formation in 2014. Upon consummation of the Merger, Mr. Koretsky was also appointed a director of the Company. It is expected that Mr. Koretsky will serve as a consultant to the Company in the future. Since 1995, Mr. Koretsky has served as the President of East Coast News Corp., a leading company in the adult product distribution industry. As a result of Mr. Koretsky's business experience, he brings a strong background in management, marketing and branding to the Company.
Alan Bonsett. Mr. Bonsett joined the Company on August 1, 2015 and was appointed Chief Operating Officer effective August 15, 2015. Mr. Bonsett has extensive experience in the cannabis industry, spanning production and processing facility buildouts, business development and strategic planning, licensing and compliance, and supply chain management from grower to processing center to dispensary. From December 2014 until July 2015, Mr. Bonsett was a principal of Picture Rock Holdings, LLC, a marijuana extraction company, and President of Picture Rock Management, Inc., its management company. From February 2014 until July 2015, Mr. Bonsett served as Chief Executive Officer of Redwood Investment Partners, LLC, a wholesale medical and recreational marijuana grow facility in Denver, Colorado. From March 2014 until July 2015, Mr. Bonsett was a member and head of sales and marketing of Herbal Medical Institute, LLC, a medically-infused marijuana production kitchen and wholesaler. From November 2014 until July 2015, Mr. Bonsett served as Chief Operating Officer of NoBo Investment Partners, LLC, a marijuana consulting firm. From November 2014 until April 2015, Mr. Bonsett was a consultant for Personalized Organic Treatments, LLC, a medical marijuana dispensary and grow facility. From June 2013 until October 2014, Mr. Bonsett served as co-owner and general manager of Colorado Product Services, LLC d/b/a Doctor’s Garden, a multi-location medical marijuana dispensary and grow facility. From December 2012 until May 2013, Mr. Bonsett was employed as head of the wholesale department of Holly Medicinal Services, LLC d/b/a The Clinic, a multi-location medical marijuana dispensary and grow facility. Mr. Bonsett, who graduated from Arizona State University with a bachelor’s degree in business, was self-employed as a real estate project manager from December 2009 until November 2012 and spent over twelve years as a mortgage and real estate professional prior to his involvement in the marijuana industry.
Raymond Keller. Mr. Keller is a founder and has served as a director of CLS Labs since its formation in 2014. Mr. Keller also contributed his intellectual property rights related to the patent pending proprietary process of extracting, cleaning and converting the cannabinoids from the cannabis plant and the associated delivery materials and systems for such cannabinoids to CLS Labs in exchange for shares therein, which shares were later exchanged for his shares in the Company pursuant to the Merger. It is expected that Mr. Keller will serve as a consultant to the Company in the future. Since 2009, Mr. Keller has served as the founder and Chief Executive Officer of GoodCat, LLC, an FDA-approved laboratory that produces e-cigarette liquid for a number of distributors and brands. Mr. Keller graduated from the College of Charleston with a degree in Biology in 1989.
Our amended and restated articles of incorporation provide that the board of directors be divided into three classes with each class serving a staggered three-year term. The term of Class I expires at our 2018 annual meeting, the term of Class II expires at our 2016 annual meeting, and the term of Class III expires at our 2017 annual meeting. Frank Koretsky serves as the sole member of Class II and Jeffrey Binder serves as the sole member of Class III. Class I is currently unrepresented. We did not hold a 2015 annual meeting due to our present desire to conserve cash and focus on financing the Company. As a result, the Class I director may be elected by our existing directors once we identify a suitable candidate. Executive officers are appointed by the board of directors and serve at its pleasure. None of our directors are independent, as that term is defined by NASDAQ rules. None of our directors is a financial expert, as that term is defined by the SEC.
We are not currently listed on any national securities exchange or quoted on an inter-dealer quotation system that has a requirement that certain of the members of the board of directors be independent. In evaluating the independence of its members and the composition of its planned committees, the board of directors utilizes the definition of “independence” developed by the Nasdaq Stock Market and in SEC rules, including the rules relating to the independence standards of audit committee members and the non-employee director definition of Rule 16b-3 promulgated under the Exchange Act. The board of directors has determined that none of its current members is independent.
The board of directors expects to continue to evaluate whether and to what extent the members of the board of directors are independent. The Company intends to appoint persons to the board of directors who will meet the corporate governance requirements imposed by a national securities exchange. Therefore, the Company expects that in the future a majority of its directors will be independent directors of which at least one director will qualify as an “audit committee financial expert,” within the meaning of SEC rules.
Additionally, the board of directors expects to appoint an audit committee, governance committee and compensation committee and to adopt charters relative to each such committee in the future.
As a smaller reporting company, we are required to disclose for fiscal years 2014 and 2015 the executive compensation of our “Named Executive Officers,” which consist of the following individuals: (i) any individual serving as our principal executive officer or acting in a similar capacity; (ii) the two other most highly compensated executive officers of the Company serving as executive officers at the most recently completed fiscal year; and (iii) any additional individuals for whom disclosure would have been provided but for the fact the individual was not serving as an executive officer at the end of the most recently completed fiscal year.
Summary Compensation Table
The following table discloses compensation paid or to be paid to our named executive officers for the fiscal years ended May 31, 2014 and May 31, 2015, respectively.
Name and Principal Position | | Fiscal | | Salary ($) | | | Bonus ($) | | | Option Awards ($) | | | Non-Equity Incentive Plan Compensation ($) | | | Non-Qualified Deferred Compensation ($) | | | All Other Compensation ($) | | | Total ($) | |
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| Larry Adelt, | | 2015 | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Former President and Chief Executive Officer(1) | | 2014 | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
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| Jeffrey Binder, | | 2015 | | | 106,250 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 106,250 | |
| Chairman, President and Chief Executive Officer(2) | | 2014 | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
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| Michael Abrams, | | 2015 | | | 100,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 100,000 | |
| Former Chief Operating Officer(3) | | 2014 | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
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| Alan Bonsett, | | 2015 | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Chief Operating Officer(4) | | 2014 | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| 1 | Mr. Adelt resigned as an officer and director of the Company on November 12, 2014 following the sale of all of his shares of common stock in the Company to CLS Labs. On the same date, Jeffrey Binder was appointed Chairman, President and Chief Executive Officer of the Company. |
| 2 | Mr. Binder was appointed Chairman, President and Chief Executive Officer of the Company on November 12, 2014. Although Mr. Binder’s employment agreement provides for an annual salary of $150,000 per annum; to date, he has deferred all compensation from the Company, including the referenced salary. |
| 3 | Mr. Abrams earned a salary of $150,000 per annum during the fiscal year ended May 31, 2015 pursuant to his employment agreement. Mr. Abrams resigned as Chief Operating Officer effective August 15, 2015 and was replaced by Alan Bonsett on that date. |
| 4 | Mr. Bonsett and the Company entered into an employment agreement effective August 1, 2015 and he was appointed Chief Operating Officer of the Company effective August 15, 2015. |
Narrative Disclosure to Summary Compensation Table
We currently do not have a stock option plan. We do not currently have an incentive plan that provides compensation intending to serve as an incentive for performance.
The following is a narrative discussion of our officers’ employment agreements that we believe is necessary to understand the information disclosed in the foregoing Summary Compensation Table with respect to fiscal year 2015.
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, Mr. Binder, CLS Labs and the Company entered into an addendum to Mr. Binder’s employment agreement whereby Mr. Binder agreed that following the Merger, 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 would continue to receive an annual salary of $150,000 from CLS Labs for serving as its Chairman, President and Chief Executive Officer.
CLS Labs and Michael Abrams entered into a five-year employment agreement effective October 1, 2014. Under the agreement, Mr. Abrams served as CLS Labs’ Chief Operating Officer and was entitled to receive an annual salary of $150,000. Under the agreement, Mr. Abrams was 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. Additionally, Mr. Abrams was entitled to a one-time signing bonus of 250,000 shares of common stock of CLS Labs, which shares did not vest.
On April 28, 2015, Mr. Abrams, CLS Labs and the Company entered into an addendum to Mr. Abrams’s employment agreement whereby Mr. Abrams agreed that following the Merger, in addition to his obligations to CLS Labs, he would serve the Company and its subsidiaries in such roles as the Company may request. Subsequently, effective August 15, 2015, Mr. Abrams left the Company and was replaced as Chief Operating Officer by Alan Bonsett.
Effective August 1, 2015, the Company and Alan Bonsett entered into a five-year employment agreement. Pursuant to the agreement, Mr. Bonsett commenced serving as the Company’s Chief Operating Officer on August 15, 2015. Under the agreement, Mr. Bonsett is entitled to receive an annual salary of $150,000. Further, he is entitled to receive a performance bonus equal to 2% of the Company’s annual EBITDA, up to a maximum annual cash compensation of $1 million (including his base salary), and annual stock options, exercisable at the fair market value of the Company’s common stock on the date of grant, in an amount equal to 2% of its annual EBITDA up to $42.5 million and 4% of its annual EBITDA in excess of $42.5 million. Additionally, Mr. Bonsett is entitled to a one-time signing bonus of 250,000 (post Reverse Split) shares of restricted common stock of the Company, which will become fully vested one year from the effective date of the agreement.
Outstanding Equity Awards at Fiscal Year Ended May 31, 2015
The Company has never issued equity awards. As such, there were no outstanding stock options or other equity awards at May 31, 2015.
Director Compensation
To date, the Company has not paid its directors any compensation for services on its board of directors. Our directors are, however, entitled to receive compensation as determined by the board of directors.
Board of Directors and Corporate Governance
The board of directors currently consists of two (2) members and is divided into three classes with each class of directors serving a staggered three-year term. Frank Koretsky holds office until our 2016 annual meeting and Jeffrey Binder holds office until our 2017 annual meeting.
Board Independence and Committees
We are not currently listed on any national securities exchange or quoted on an inter-dealer quotation system that has a requirement that certain of the members of the board of directors be independent. In evaluating the independence of its members and the composition of the committees of the board of directors, the board of directors utilizes the definition of “independence” developed by the Nasdaq Stock Market and in SEC rules, including the rules relating to the independence standards of audit committee members and the non-employee director definition of Rule 16b-3 promulgated under the Exchange Act. The board of directors has determined that none of its current members is independent.
The board of directors expects to continue to evaluate whether and to what extent the members of the board of directors are independent. The Company intends to appoint persons to the board of directors who will meet the corporate governance requirements imposed by a national securities exchange. Therefore, the Company expects that in the future a majority of its directors will be independent directors of which at least one director will qualify as an “audit committee financial expert,” within the meaning of SEC rules.
Additionally, the board of directors expects to appoint an audit committee, governance committee and compensation committee and to adopt charters relative to each such committee in the future.
Code of Ethics
The Company’s board of directors expects to adopt a code of ethics that is reasonably designed to deter wrongdoing and promote honest and ethical conduct; provide full, fair, accurate, timely and understandable disclosure in public reports; comply with applicable laws; ensure prompt internal reporting of code violations; and provide accountability for adherence to the code.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial ownership of our common stock as of April 19, 2016 by (i) each stockholder known by us to be the beneficial owner of more 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 the best of our knowledge, except as otherwise indicated, each of the persons named in the table has sole voting and investment power with respect to the shares of our common stock beneficially owned by such person, except to the extent such power may be shared with a spouse. To our knowledge, none 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. Unless otherwise indicated in the following table, the address for each person named in the table is c/o CLS Holdings USA, Inc., 11767 S. Dixie Hwy, Suite 115, Miami, FL 33156.
Name and Address of Beneficial Owner1 | | Amount and Nature of Beneficial Ownership2 | | | Percentage of Class3 | |
| Jeffrey I. Binder | | | 5,000,000 | | | | 24.6 | % |
| Raymond Keller | | | 5,000,000 | | | | 24.6 | % |
| Frank Koretsky | | | 5,000,000 | | | | 24.6 | % |
| Charles DeAngelo | | | 1,096,094 | | | | 5.4 | % |
| Marc Douglas | | | 1,096,094 | | | | 5.4 | % |
| Alan Bonsett | | | 250,000 | | | | 1.2 | % |
| All directors and executive officers as a group (3 persons) | | | 10,250,000 | | | | 50.4 | % |
1 Except as otherwise indicated, the persons named in this table have identifiedsole voting, investment and dispositive power with respect to all shares of common stock listed.
2 Reflects the policies outlinedextinguishment of the 6,250,000 (post Reverse Split) shares of common stock owned by CLS Labs and the issuance of 15,000,000 shares of common stock to the stockholders of CLS Labs in connection with the Merger and the issuance of 250,000 shares of common stock to Alan Bonsett pursuant to his employment agreement, as amended. Excludes any impact of stock options expected to be issued in connection with employment agreements for Mr. Binder and Mr. Bonsett.
3 Percentages are based upon 20,350,000 shares of our common stock outstanding as of April 18, 2016.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS AND DIRECTOR INDEPENDENCE Related Party Transactions
Colorado Arrangement
On April 17, 2015, prior to Alan Bonsett’s appointment as Chief Operating Officer, the Company, through CLS Labs Colorado, entered into the Colorado Arrangement with PRH to, among other things, (i) license its proprietary technology, methods and processes to PRH in Colorado in exchange for a fee; (ii) sub-lease warehouse and office space in Denver, Colorado to PRH where PRH can grow, extract and process cannabis and other plant products in exchange for lease payments totaling an aggregate of $1,067,067 over a seventy-two (72) month term; (iii) build a processing facility and lease such facility, including equipment, to PRH in exchange for a monthly fee; and (iv) loan to PRH $500,000 pursuant to a promissory note (the “PRH Note”), to be used by PRH in connection with financing the building out, equipping, and developing a grow facility by PRH that will be operated by a licensed third-party marijuana grower. Pursuant to 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 fourth quarter of 2016 (the “Payment Date”) and continuing until paid in full. Interest will accrue on the unpaid principal balance 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 Payment Date. 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.
Koretsky Notes
During the year ended May 31, 2015, we borrowed $600,000 from Frank Koretsky, a director of the Company, to fund operations (the “Koretsky Funding Note 1”). From June 1, 2015 through January 12, 2016, the Company borrowed an additional $295,000 from Mr. Koretsky under the Koretsky Funding Note 1. These loans were unsecured, due not less than one year after the date the loans were made, and carried interest at the rate of 6% per annum. On January 12, 2016, we entered into a new loan agreement with Mr. Koretsky (the “Koretsky Convertible Note”), and the principal balance of $895,000 and accrued interest in the amount of $31,008 from the Koretsky Funding Note 1 were transferred into the Koretsky Convertible Note. This note is unsecured and 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. Principal will be paid in eight equal quarterly installments, together with accrued interest, beginning on April 1, 2017. At Mr. Koretsky’s election, at any time prior to payment or prepayment of the loans in full, all principal and accrued interest under the loans may be converted, in whole or in part, into our securities. Upon such an election, Mr. Koretsky will receive 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.
During January and February 2016, we borrowed an additional $380,000 from Mr. Koretsky to fund operations at an interest rate of 6% per annum with the balance of the loan terms remaining unfinalized. The interest rate was increased to 10% per annum effective March 1, 2016 and the terms of the loans were subsequently��memorialized in a convertible promissory note dated April 11, 2016 (the “Koretsky Funding Note 2”). The Koretsky Funding Note 2 is unsecured and bears interest at a rate of 6% per annum through February 29, 2016 and 10% per annum commencing March 1, 2016. All accrued interest will become due on April 1, 2017, with principal paid in eight equal quarterly installments together with accrued interest beginning on July 1, 2017. At Mr. Koretsky’s election, at any time prior to payment or prepayment of the loans in full, all principal and accrued interest under the loans may be converted, in whole or in part, into our securities. Upon such an election, Mr. Koretsky will receive one “Unit” for each $1.07 converted, with each Unit consisting of one (1) share of common stock and a five-year warrant to purchase (1) share of common stock at a price of $1.07 per share.
Binder Notes
From June 1, 2015 through January 12, 2016, we borrowed $50,000 from Mr. Binder, a director and officer of the Company, to fund operations (the “Binder Funding Note 1”). These loans were unsecured, due not less than one year after the date the loans were made, and carried interest at the rate of 6% per annum. On January 12, 2016, the Company entered into a new loan agreement with Mr. Binder (the “Binder Convertible Note”), and the principal balance of $50,000 and accrued interest in the amount of $962 from the Binder Funding Note 1 were transferred into the Binder Convertible Note. This note is unsecured and 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. Principal will be paid in eight equal quarterly installments together with accrued interest beginning on April 1, 2017. At Mr. Binder’s election, at any time prior to payment or prepayment of the loans in full, all principal and accrued interest under the loans may be converted, in whole or in part, into the Company’s securities. Upon such an election, Mr. Binder will receive 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 one (1) share of common stock at a price of $1.00 per share.
During January and February 2016, we borrowed an additional $12,750 from Mr. Binder to fund operations at an interest rate of 6% per annum with the balance of the loan terms remaining unfinalized. The interest rate was increased to 10% per annum effective March 1, 2016. During March 2016, the Company borrowed an additional $29,750 from Mr. Binder to fund operations at an interest rate of 10% per annum. The terms of the loans were subsequently memorialized in a convertible promissory note dated April 11, 2016 (the “Binder Funding Note 2”) with an original principal amount of $42,500. The Binder Funding Note 2 is unsecured and bears interest at a rate of 6% per annum through February 29, 2016 and 10% commencing March 1, 2016. All accrued interest will become due on April 1, 2017, with principal paid in eight equal quarterly installments together with accrued interest beginning on July 1, 2017. At Mr. Binder’s election, at any time prior to payment or prepayment of the loans in full, all principal and accrued interest under the loans may be converted, in whole or in part, into the Company’s securities. Upon such an election, Mr. Binder will receive one “Unit” for each $1.07 converted, with each Unit consisting of one (1) share of common stock and a five-year warrant to purchase one (1) share of common stock at a price of $1.07 per share.
Director Independence
The Board currently does not have any independent directors or separately designated standing committees.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock became eligible for trading on the OTCQB on August 27, 2014 under the symbol “ADSN.” Prior to August 27, 2014, there was no public market for our common stock. Effective December 3, 2014, our trading symbol was changed to “CLSH” in connection with the Company’s name change. Trading activity commenced on June 23, 2015 following the April 29, 2015 consummation of the Merger. All historical trading prices have been adjusted to reflect the Reverse Split. The following table sets forth the range of high and low sales prices for the applicable period on a post-Reverse-Split basis.
| | | Common Stock | |
| | | High ($) | | | Low ($) | |
| Fiscal Year Ending May 31, 2016: | | | | | | |
| Fourth Quarter* | | $ | 1.22 | | | $ | 0.95 | |
| Third Quarter | | $ | 1.22 | | | $ | 0.72 | |
| Second Quarter | | $ | 1.31 | | | $ | 0.77 | |
| First Quarter | | $ | 1.80 | | | $ | 0.75 | |
| Fiscal Year Ended May 31, 2015: | | | | | | | | |
| Fourth Quarter** | | $ | 0.20 | | | $ | 0.20 | |
| Third Quarter** | | $ | 0.20 | | | $ | 0.20 | |
| Second Quarter** | | $ | 0.20 | | | $ | 0.20 | |
* Through April 19, 2016
** Reflects historical share price listed by OTC Markets for dates prior to the commencement of trading. Although our common stock became eligible for trading on the OTCBB on August 27, 2014, trading activity did not commence until June 23, 2015.
At April 18, 2016, we had 20,350,003 outstanding shares of common stock and approximately twelve (12) shareholders 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 not paid 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, but expect to retain earnings to finance the growth of our business. Our board of directors has complete discretion on whether to pay dividends. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.
Securities Authorized for Issuance under Equity Compensation Plans
We do not have in effect any compensation plans under which our equity securities are authorized for issuance.
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.
This Prospectus relates to the possible resale from time to time by the Selling Stockholder named in the table below of any or all of the shares of common stock that has been or may be issued by us to the Selling Stockholder under the Securities Purchase Agreement and Equity Purchase Agreement. For additional information regarding the transaction relating to the issuance of common stock covered by this Prospectus, see "Management's Discussion and Analysis of Results of Operation and Financial Condition – Liquidity and Capital Resources – Arrangements with Selling Stockholders” above. We are registering the shares of common stock pursuant to the provisions of the Registration Rights Agreement in order to permit the Selling Stockholder to offer the shares for resale from time to time.
The table below presents information regarding the Selling Stockholder and the shares of common stock that it may offer from time to time under this Prospectus. This table is prepared based on information supplied to us by the Selling Stockholder, and reflects holdings as criticalof April 11, 2016. As used in this Prospectus, the term “Selling Stockholder” includes the Selling Stockholder, and any donees, pledgees, transferees, or other successors-in-interest selling shares received after the date of this Prospectus from the Selling Stockholder as a gift, pledge, or other non-sale related transfer. The number of shares in the column “Maximum Number of Shares of Common Stock to be Offered Pursuant to this Prospectus” represents all of the shares of common stock that the Selling Stockholder may offer under this Prospectus. The Selling Stockholder may sell some, all or none of its shares offered by this Prospectus. We do not know how long the Selling Stockholder will hold the shares before selling them, and we currently have no agreements, arrangements, or understandings with the Selling Stockholder regarding the sale of any of the shares.
Beneficial ownership is determined in accordance with Rule 13d-3(d) promulgated by the SEC under the Exchange Act, and includes shares of common stock with respect to which the Selling Stockholder has voting and investment power. With respect to the Equity Line with the Selling Stockholder, because the purchase price of the shares of common stock issuable under the Equity Purchase Agreement is determined on each settlement date, the number of shares that may actually be sold by us under the Equity Purchase Agreement may be fewer than the number of shares being offered by this Prospectus. The fourth column assumes the sale of all of the shares offered by the Selling Stockholder pursuant to this Prospectus.
| | | Number of Shares of Common Stock Owned Prior to Offering | | Maximum Number of Shares of Common Stock to be Offered | | Number of Shares of Common Stock Owned after Offering |
| Name of Selling Stockholder | | Number | | Percent | | Pursuant to this Prospectus | | Number (1) | | Percent |
| Old Main Capital, LLC (2) | | 881,360 (3) | | 4.15% | | 5,000,000 | | 0 | | * |
* Represents beneficial ownership of less than one percent of the outstanding shares of our common stock.
(1) Assumes the sale of all shares being offered pursuant to this Prospectus.
(2) The Selling Stockholder’s principal business is that of a private investment firm. We have been advised that the Selling Stockholder is not a member of FINRA, or an independent broker-dealer, and that neither the Selling Stockholder nor any of its affiliates is an affiliate or an associated person of any FINRA member or independent broker-dealer.
(3) Represents 694,444 shares of common stock issuable upon conversion of all of the 10% Notes that the Selling Stockholder is obligated to purchase, and which 10% Notes are, or will be upon issuance, immediately convertible; and 186,916 shares of common stock issuable upon conversion of the 8% Note held by the Selling Stockholder that is presently convertible. This number excludes an additional 2,085,304 shares of common stock that may be issued to the Selling Stockholder either as payment of interest on either the 10% Notes or the 8% Note or in redemption of either the 10% Note or the 8% Note, in each case in accordance with the terms of such applicable note. In accordance with Rule 13d-3(d) under the Exchange Act, we have excluded from the number of shares beneficially owned prior to the Offering all of the shares that the Selling Stockholder may be required to purchase under the Equity Purchase Agreement because the issuance of such shares is solely at our discretion and is subject to certain conditions, the satisfaction of all of which are outside of the Selling Stockholder’s control, including, but not limited to, the Registration Statement of which this Prospectus is a part becoming and remaining effective. Furthermore, the maximum dollar value of each Put of common stock to the Selling Stockholder under the Equity Purchase Agreement is subject to certain agreed upon threshold limitations set forth therein. Also, under the terms of the Equity Purchase Agreement, we may not issue shares of our common stock to the Selling Stockholder to the extent that the Selling Stockholder or any of its affiliates would, at any time, beneficially own more than 4.99% of our outstanding common stock.
The Selling Stockholder, including any of its pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their securities covered hereby on the OTC Bulletin Board or any other stock exchange, market or trading facility on which the securities are traded or in private transactions. These sales may be at fixed or negotiated prices. A Selling Stockholder may use any one or more of the following methods when selling securities:
| · | ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; |
| · | block trades in which the broker-dealer will attempt to sell the securities as agent but may position and resell a portion of the block as principal to facilitate the transaction; |
| · | purchases by a broker-dealer as principal and resale by the broker-dealer for its account; |
| · | exchange distributions in accordance with the rules of the applicable exchange; |
| · | privately negotiated transactions; |
| · | settlements of short sales; |
| · | transactions through broker-dealers that agree with the Selling Stockholders to sell a specified number of such securities at a stipulated price per security; |
| · | writings or settlements of options or other hedging transactions, whether through an options exchange or otherwise; |
| · | combinations of any such methods of sale; or |
| · | any other methods permitted pursuant to applicable law. |
The Selling Stockholder may also sell securities under Rule 144 under the Securities Act, if available, rather than under this Prospectus.
Broker-dealers engaged by the Selling Stockholder may arrange for other broker-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Stockholder (or, if any broker-dealer acts as agent for the purchaser of securities, from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this Prospectus, in the case of an agency transaction not in excess of a customary brokerage commission in compliance with FINRA Rule 2440; and in the case of a principal transaction a markup or markdown in compliance with FINRA IM-2440.
In connection with the sale of the securities or interests therein, the Selling Stockholder may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the securities in the course of hedging the positions they assume. The Selling Stockholder may also sell securities short where a corresponding Notice of Conversion is tendered to the Company and deliver these securities to close out their short positions, or loan or pledge the securities to broker-dealers that in turn may sell these securities. The Selling Stockholder may also enter into option or other transactions with broker-dealers or other financial institutions or create one or more derivative securities which require the delivery to such broker-dealer or other financial institution of securities offered by this prospectus, which securities such broker-dealer or other financial institution may resell pursuant to this Prospectus (as supplemented or amended to reflect such transaction).
The Selling Stockholder and any broker-dealers or agents that are involved in selling the securities may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the securities purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. The Selling Stockholder has informed the Company that it does not have any written or oral agreement or understanding, directly or indirectly, with any person to distribute the securities.
The Company is required to pay certain fees and expenses incurred by the Company incident to the registration of the securities. The Company has agreed to indemnify the Selling Stockholder against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.
Because the Selling Stockholder may be deemed to be an “underwriter” within the meaning of the Securities Act, it will be subject to the prospectus delivery requirements of the Securities Act including Rule 172 thereunder. In addition, any securities covered by this Prospectus which qualify for sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144 rather than under this Prospectus. The Selling Stockholder has advised us that there is no underwriter or coordinating broker acting in connection with the proposed sale of the resale securities by the Selling Stockholder.
We have agreed to keep this Prospectus effective until the earlier of (i) the date on which the securities may be resold by the Selling Stockholder without registration and without regard to any volume or manner-of-sale limitations by reason of Rule 144, without the requirement for the Company to be in compliance with the current public information under Rule 144 under the Securities Act or any other rule of similar effect or (ii) the sale of all of the securities pursuant to this Prospectus or Rule 144 under the Securities Act or any other rule of similar effect. The resale securities will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the resale securities covered hereby may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the resale securities may not simultaneously engage in market making activities with respect to the common stock for the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution. In addition, the Selling Stockholder will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of securities of the common stock by the Selling Stockholder or any other person. We will make copies of this Prospectus available to the Selling Stockholder and have informed it of the need to deliver a copy of this Prospectus to each purchaser at or prior to the time of the sale (including by compliance with Rule 172 under the Securities Act).
General
The following summary includes a description of material provisions of our capital stock, however the description does not purport to be complete and is subject to, and is qualified by, our Articles of Incorporation and Bylaws, which are filed as exhibits to the Registration Statement of which this Prospectus is a part.
Common Stock
We are authorized to issue 250,000,000 shares of common stock. As of the date of the Memorandum, there are 20,350,003 shares of common stock outstanding. Holders of common stock do not have preemptive rights to subscribe to additional shares we may issue in the future. There are no conversions, redemption, sinking fund or similar provisions regarding the common stock. All outstanding shares of common stock are fully paid and non-assessable. The holders of common stock are entitled to one vote per share on all matters submitted to a vote of the stockholders, including the election of directors. Generally, all matters to be voted on by stockholders must be approved by a majority (or, in the case of election of directors, by a plurality) of the votes entitled to be cast by all shares of common stock that are present in person or represented by proxy. Except as otherwise provided by law, amendments to our articles of incorporation generally must be approved by a majority of the votes entitled to be cast by the holders of all outstanding shares of common stock. The articles do not provide for cumulative voting in the election of directors. The holders of common stock will be entitled to such cash dividends as may be declared from time to time by our board of directors from funds available, subject to any preferential rights of holders of preferred stock. Upon liquidation, dissolution or winding up of the Company, the holders of common stock will be entitled to receive pro rata all assets available for distribution to such holders, subject to the rights of holders of preferred stock, if any.
Preferred Stock
We are authorized to issue 20,000,000 shares of preferred stock. As of the date of this Memorandum, there are no shares of preferred stock outstanding. Our board of directors has the authority, without further action by the our stockholders, to issue preferred stock in any number of series or classes, and to determine the terms of each such series or class within the limits of our articles and bylaws. Such terms that may be determined by the board of directors include the voting rights of each class or series; the number of shares comprising each class or series; redemption prices and rights; whether or not a class or series will be subject to a retirement or sinking fund; dividend rights and dividend rate; amounts payable upon liquidation, dissolution or winding up; and conversion rights. All shares of preferred stock that may be offered in the future will be fully paid and non-assessable. Any shares of preferred stock that are issued and outstanding may have priority over the common stock with respect to dividend or liquidation rights, or both.
Registration Rights
In accordance with the Registration Rights Agreement, the Selling Stockholder is entitled to certain rights with respect to the registration of the shares of common stock issued in connection with the Securities Purchase Agreement and Equity Purchase Agreement (the “Selling Stockholder Registrable Securities”).
We are obligated to file a registration statement with respect to the Selling Stockholder Registrable Securities. Upon becoming effective, such registration statement shall remain effective at all times until the earliest of (i) the date that the Selling Stockholder may sell all of the Selling Stockholder Registrable Securities required to be covered by such registration statement without restriction pursuant to Rule 144 and without the need for current public information as required by Rule 144(c)(1) (or Rule 144(i)(2), if applicable), and (ii) the date the Selling Stockholder no longer owns any of the Selling Stockholder Registrable Securities. We must also take such action as is necessary to register and/or qualify the Selling Stockholder Registrable Securities under such other securities or blue sky laws of all applicable jurisdictions in the United States.
We will pay all reasonable expenses incurred in connection with the registrations described above. However, we will not be responsible for any broker or similar concessions or any legal fees or other costs of The Selling Stockholder.
We have also granted registration rights pursuant to each of the April 2015 Note, Koretsky Convertible Note, Koretsky Funding Note 2, Binder Convertible Note and Binder Funding Note 2. Specifically, with respect to the shares of our common stock underlying such notes, we granted “piggyback” registration rights containing such terms as we reasonably determine. Mr. Binder and Mr. Koretsky subsequently agreed to waive their registration rights with respect to the Registration Statement of which this Prospectus is a part.
Dividends
Dividends, if any, will be contingent upon our revenues and earnings, if any, capital requirements, and financial conditions. The payment of dividends, if any, will be within the discretion of our Board. We intend to retain earnings, if any, for use in our business operations and an understandingaccordingly, our Board does not anticipate declaring any dividends in the foreseeable future.
SHARES ELIGIBLE FOR FUTURE SALE We cannot predict the effect, if any, that market sales of shares of our resultscommon stock or the availability of operations.shares of our common stock for sale will have on the market price of our common stock prevailing from time to time. Future sales of our common stock in the public market, or the availability of such shares for sale in the public market, could adversely affect market prices prevailing from time to time. The listavailability for sale of a substantial number of shares of our common stock acquired through the exercise of outstanding warrants could materially adversely affect the market price of our common stock. In addition, sales of our common stock in the public market after the restrictions lapse as described below, or the perception that those sales may occur, could cause the prevailing market price to decrease or to be lower than it might be in the absence of those sales or perceptions.
Sale of Restricted Shares
As of April 18, 2016, there were 20,350,003 shares of common stock outstanding. The 5,000,000 shares of common stock being offered by this Prospectus will be freely tradable, other than by any of our “affiliates,” as defined in Rule 144(a) under the Securities Act, without restriction or registration under the Securities Act. In addition, 20,350,003 outstanding shares were issued and sold by us in private transactions and those shares, as well as shares issuable on exercise of currently outstanding convertible notes are, or will be, eligible for public sale if registered under the Securities Act or sold in accordance with Rule 144 under the Securities Act. These remaining shares are “restricted securities” within the meaning of Rule 144 under the Securities Act.
Rule 144
In general, under Rule 144, as currently in effect, a person (or persons whose shares are required to be aggregated), including a person who may be deemed an “affiliate” of a company, who has beneficially owned restricted securities for at least six months may sell, within any three-month period, a number of shares that does not exceed the greater of: (1) 1% of the then-outstanding shares of common stock, or (2) if and when the common stock is listed on a national securities exchange, the average weekly trading volume of the common stock during the four calendar weeks preceding the date on which notice of such sale was filed under Rule 144. Sales under Rule 144 are also subject to certain requirements as to the manner of sale, notice, and availability of current public information about our company. A person who is not intendeddeemed to behave been an affiliate of us at any time during the 90 days preceding a comprehensive listsale by such person, and who has beneficially owned the restricted shares for at least one year, is entitled to sell such shares under Rule 144 without regard to any of allthe restrictions described above.
We cannot estimate the number of shares of our common stock that our existing stockholders will elect to sell under Rule 144.
Transfer Agent
The transfer agent for our common stock is V-Stock Transfer, LLC at 18 Lafayette Place, Woodmere, NY. V-Stock’s Transfer’s telephone number is (212) 828-8436.
Broad and Cassel will provide opinions regarding the validity of the shares of our common stock offered pursuant to this Prospectus. Broad and Cassel may also provide opinions regarding certain other matters.
The consolidated financial statements of the Company and its subsidiaries as of May 31, 2015 and May 31, 2014 and for the year and period then ended, respectively, have been audited by M&K CPAs, PLLC, an independent registered public accounting policies.firm, and upon the authority of said firm as experts in accounting and auditing.
None.
DISCLOSURE OF THE SEC POSITION OF INDEMNIFICATION FOR SECURITIES ACT LIABILITIES Sections 78.7502 and 78.751 of the Nevada Revised Statutes authorizes a court to award, or a corporation’s board of directors to grant, indemnity to directors and officers in terms sufficiently broad to permit indemnification, including reimbursement of expenses incurred, under certain circumstances for liabilities arising under the Securities Act. In many cases,addition, our Bylaws provide that we have the accounting treatmentauthority to indemnify our directors and officers and may indemnify our employees and agents (other than officers and directors) against liabilities to the fullest extent permitted by Nevada law. We are also empowered under our Bylaws to purchase insurance on behalf of any person whom we are required or permitted to indemnify.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, or persons controlling us pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event that a particular transactionclaim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by a director, officer, or controlling person in the successful defense of any action, suit, or proceeding) is specifically dictatedasserted by such director, officer, or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed hereby in the Securities Act and we will be governed by the final adjudication of such issue.
WHERE YOU CAN FIND MORE INFORMATION We have filed the Registration Statement, together with all amendments and exhibits, with the SEC. This Prospectus, which forms a part of the Registration Statement, does not contain all information included in the Registration Statement. Certain information is omitted and you should refer to the Registration Statement and its exhibits. With respect to references made in this Prospectus to any of our contracts or other documents, the references are not necessarily complete and you should refer to the exhibits attached to the Registration Statement for copies of the actual contracts or documents. You may read and copy any document that we file at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. Our filings and the Registration Statement, of which this Prospectus is a part, can also be reviewed by accessing the SEC’s website at www.sec.gov.
We file periodic reports and other information with the SEC. Such periodic reports and other information are available for inspection and copying at the public reference room and website of the SEC referred to above. We maintain a website at www.clsholdingsinc.com. You may access our annual reports on Form 10-K and quarterly reports on Form 10-Q free of charge at our website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The information and other content contained on any of our websites are not part of this Prospectus.
INDEX TO FINANCIAL STATEMENTS As of February 29, 2016 and May 31, 2015 for the Three and Nine Months Ended
February 29, 2016 and February 28, 2015 (Unaudited)
As of May 31, 2015 and 2014 and for the Year Ended May 31, 2015 and for the
Period from Inception (May 1, 2014) to May 31, 2014 (Audited)
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CONDENSED CONSOLIDATED BALANCE SHEETS
| | | February 29, | | | May 31, | |
| | | 2016 | | | 2015 | |
| | | (unaudited) | | | | |
| ASSETS | | | | | | |
| Current assets | | | | | | |
| Cash and cash equivalents | | $ | 30,170 | | | $ | 208,821 | |
| Prepaid expenses | | | 14,162 | | | | 31,800 | |
| Total current assets | | | 44,332 | | | | 240,621 | |
| | | | | | | | | |
| Security deposit | | | 50,000 | | | | 50,000 | |
| Property, plant and equipment, net of accumulated depreciation of $669 and $0 | | | 2,005 | | | | - | |
| Construction in progress | | | 41,803 | | | | - | |
| Note receivable related party, noncurrent, net of allowance of $500,000 and $500,000 | | | - | | | | - | |
| Intangible assets, net of accumulated amortization of $288 and $0 | | | 1,870 | | | | 2,158 | |
| Total assets | | $ | 140,010 | | | $ | 292,779 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
| Current liabilities | | | | | | | | |
| Accounts payable and accrued liabilities | | $ | 343,488 | | | $ | 145,024 | |
| Deferred rent liability | | | 47,888 | | | | - | |
| Accrued compensation, related party | | | 212,500 | | | | 106,250 | |
| Due to related party | | | 17,930 | | | | 18,455 | |
| Accrued interest | | | 25,151 | | | | 2,630 | |
| Accrued interest, related party | | | 42,984 | | | | 3,337 | |
| Notes payable, related party | | | 392,750 | | | | 600,000 | |
| Total current liabilities | | | 1,082,691 | | | | 875,696 | |
| | | | | | | | | |
| Noncurrent liabilities | | | | | | | | |
| Related party convertible notes, net of debt discount of $880,510 and $0 | | | 64,489 | | | | - | |
| Convertible notes payable, net of debt discount of $144,444 and $194,444 | | | 55,556 | | | | 5,556 | |
| Total Liabilities | | | 1,202,736 | | | | 881,252 | |
| | | | | | | | | |
| Commitments and contingencies | | | - | | | | - | |
| | | | | | | | | |
| Stockholder's equity | | | | | | | | |
| Common stock, $0.0001 par value; 250,000,000 shares authorized; 20,320,003 and 20,000,003 shares issued and outstanding at February 29, 2016 and May 31, 2015 | | | 2,032 | | | | 2,000 | |
| Preferred stock, $0.001 par value; 20,000,000 shares authorized; no shares issued | | | - | | | | - | |
| Additional paid-in capital | | | 2,217,989 | | | | 887,614 | |
| Stock payable | | | 95,450 | | | | 37,500 | |
| Accumulated deficit | | | (3,378,197 | ) | | | (1,515,587 | ) |
| Total stockholder's equity (deficit) | | | (1,062,726 | ) | | | (588,473 | ) |
| | | | | | | | | |
| Total liabilities and stockholders' equity (deficit) | | $ | 140,010 | | | $ | 292,779 | |
See accompanying notes to these financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| | | For the Three | | | For the Three | | | For the Nine | | | For the Nine | |
| | | Months Ended | | | Months Ended | | | Months Ended | | | Months Ended | |
| | | February 29, | | | February 28, | | | February 29, | | | February 28, | |
| | | 2016 | | | 2015 | | | 2016 | | | 2015 | |
| | | | | | | | | | | | | |
| Revenue | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| Cost of goods sold | | | - | | | | - | | | | - | | | | - | |
| Gross margin | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | |
| Selling, general and administrative expenses | | | 406,323 | | | | 152,375 | | | | 917,726 | | | | 362,453 | |
| Professional fees | | | 343,818 | | | | 186,279 | | | | 767,420 | | | | 296,850 | |
| Total operating expenses | | | 750,141 | | | | 338,654 | | | | 1,685,146 | | | | 659,303 | |
| | | | | | | | | | | | | | | | | |
| Operating loss | | | (750,141 | ) | | | (338,654 | ) | | | (1,685,146 | ) | | | (659,303 | ) |
| | | | | | | | | | | | | | | | | |
| Other (income) expense: | | | | | | | | | | | | | | | | |
| Interest expense | | | 106,599 | | | | 265 | | | | 177,464 | | | | 445 | |
| Total other expense | | | 106,599 | | | | 265 | | | | 177,464 | | | | 445 | |
| | | | | | | | | | | | | | | | | |
| Income (Loss) before income taxes | | | (856,740 | ) | | | (338,919 | ) | | | (1,862,610 | ) | | | (659,748 | ) |
| | | | | | | | | | | | | | | | | |
| Income tax expense | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | (856,740 | ) | | $ | (338,919 | ) | | $ | (1,862,610 | ) | | $ | (659,748 | ) |
| | | | | | | | | | | | | | | | | |
| Net income (loss) per share - basic | | $ | (0.04 | ) | | $ | (0.02 | ) | | $ | (0.09 | ) | | $ | (0.04 | ) |
| | | | | | | | | | | | | | | | | |
| Net income (loss) per share - diluted | | $ | (0.04 | ) | | $ | (0.02 | ) | | $ | (0.09 | ) | | $ | (0.04 | ) |
| | | | | | | | | | | | | | | | | |
| Weighted average shares outstanding - basic | | | 20,182,640 | | | | 15,000,000 | | | | 20,081,901 | | | | 15,000,000 | |
| | | | | | | | | | | | | | | | | |
| Weighted average shares outstanding - diluted | | | 20,182,640 | | | | 15,000,000 | | | | 20,081,901 | | | | 15,000,000 | |
See accompanying notes to these financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | For the Nine | | | For the Nine | |
| | | Months Ended | | | Months Ended | |
| | | February 29, | | | February 28, | |
| | | 2016 | | | 2015 | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
| Net income (loss) | | $ | (1,862,610 | ) | | $ | (659,748 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
| Imputed interest | | | 807 | | | | 445 | |
| Issuance of stock for services | | | 115,050 | | | | - | |
| Stock-based compensation | | | 327,500 | | | | - | |
| Amortization of debt discount | | | 114,489 | | | | - | |
| Depreciation and amortization expense | | | 957 | | | | - | |
| Changes in assets and liabilities: | | | | | | | | |
| Due from related parties | | | - | | | | (6,497 | ) |
| Prepaid expenses | | | 17,638 | | | | (102,216 | ) |
| Accounts payable and accrued expenses | | | 198,464 | | | | 111,932 | |
| Deferred liabilities | | | 47,888 | | | | - | |
| Accrued compensation, related party | | | 106,250 | | | | 68,750 | |
| Due to related parties | | | (525 | ) | | | 17,930 | |
| Accrued interest, related party | | | 39,647 | | | | - | |
| Accrued interest | | | 22,521 | | | | - | |
| | | | | | | | | |
| Net cash used in operating activities | | | (871,924 | ) | | | (569,404 | ) |
| | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
| Payments to acquire equipment | | | (2,674 | ) | | | - | |
| Payment for construction in progress | | | (41,803 | ) | | | - | |
| Payments to acquire intangible assets | | | - | | | | (2,158 | ) |
| Payments for investment in shell company | | | - | | | | (295,250 | ) |
| | | | | | | | | |
| Net cash used in investing activities | | | (44,477 | ) | | | (297,408 | ) |
| | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
| Proceeds from sale of common stock | | | - | | | | 1,000,000 | |
| Proceeds from related party convertible notes payable | | | 345,000 | | | | | |
| Proceeds from related party notes payable | | | 392,750 | | | | - | |
| | | | | | | | | |
| Net cash provided by financing activities | | | 737,750 | | | | 1,000,000 | |
| | | | | | | | | |
| Net increase in cash and cash equivalents | | | (178,651 | ) | | | 133,188 | |
| | | | | | | | | |
| Cash and cash equivalents at beginning of period | | | 208,821 | | | | - | |
| | | | | | | | | |
| Cash and cash equivalents at end of period | | $ | 30,170 | | | $ | 425,302 | |
| | | | | | | | | |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | | | | |
| Interest paid | | $ | - | | | $ | - | |
| Income taxes paid | | $ | - | | | $ | - | |
| | | | | | | | | |
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | | | | | | | | |
| Stock issued to founder for intellectual property | | $ | - | | | $ | 500 | |
| Discount on notes payable | | $ | 945,000 | | | $ | - | |
| Transfer principle from related party notes payable to related party convertible notes payable | | $ | 945,000 | | | $ | - | |
See accompanying notes to these financial statements.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
February 29, 2016
(Unaudited)
Note 1 – Nature of Business and Significant Accounting Policies
Nature of Business
CLS Holdings USA, Inc. (the “Company”) was originally incorporated as Adelt Design, Inc. (“Adelt”) on March 31, 2011 to manufacture and market carpet binding art. Production and marketing of carpet binding art never commenced.
On November 12, 2014, CLS Labs, Inc. (“CLS Labs”) acquired 10,000,000 shares, or 55.6%, of the outstanding shares of common stock of Adelt from its founder, Larry Adelt. On that date, Jeffrey Binder, the Chairman, President and Chief Executive Officer of CLS Labs, was appointed Chairman, President and Chief Executive Officer of the Company. On November 20, 2014, Adelt adopted amended and restated articles of incorporation, thereby changing its name to CLS Holdings USA, Inc. Effective December 10, 2014, the Company effected a reverse stock split of its issued and outstanding common stock at a ratio of 1-for-0.625 (the “Reverse Split”), wherein 0.625 shares of the Company’s common stock were issued in exchange for each share of common stock issued and outstanding. As a result, 6,250,000 shares of the Company’s common stock were issued to CLS Labs in exchange for the 10,000,000 shares that it owned by virtue of the above-referenced purchase from Larry Adelt.
On April 29, 2015, the Company, CLS Labs and CLS Merger Inc., a Nevada corporation and wholly owned subsidiary of CLS Holdings, 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 a patent pending proprietary method of extracting cannabinoids from cannabis plants and converting the resulting cannabinoid extracts into concentrates such as oils, waxes, edibles and shatter. These concentrates may be ingested in a number of ways, including through vaporization via electronic cigarettes (“e-cigarettes”), and used for a variety of pharmaceutical and other purposes. Internal testing of this extraction method and conversion process has revealed that it produces a cleaner, higher quality product and a significantly higher yield than the cannabinoid extraction processes currently existing in the marketplace. The Company has not commercialized its patent pending proprietary process or otherwise earned any revenues. The Company plans to generate revenues through licensing, fee-for-service and joint venture arrangements related to its patent pending proprietary method of extracting cannabinoids from cannabis plants and converting the resulting cannabinoid extracts into saleable concentrates.
The Company has adopted a fiscal year end of May 31st.
Basis of Presentation
These financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States with no need for management's judgmentand are expressed in their application. US dollars.
Principals of Consolidation
The impactaccompanying consolidated financial statements include the accounts of CLS Holdings USA, Inc., and any associated risks related toits wholly owned operating subsidiaries, CLS Labs, Inc. and CLS Labs Colorado, Inc. All material intercompany transactions have been eliminated upon consolidation of these policies on our business operations is discussed throughout management's Discussion and Analysis or Planentities.
Use of Operation where such policies affect our reported and expected financial results. Note that ourEstimates
The preparation of the financial statements in conformity with generally accepted accounting principles requires usmanagement to make estimates and assumptions that affect the reported amountamounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of ourthe financial statements and the reported amountsamount of revenuerevenues and expenses during the reporting period. There can be no assurance that actualActual results will notcould differ from those estimates.
REVENUE RECOGNITIONCash 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 $30,170 and $208,821 as of February 29, 2016 and May 31, 2015, respectively.
Property, Plant and Equipment
Property and equipment is recorded at the lower of cost or estimated net recoverable amount, and is depreciated using the straight-line method over the estimated useful lives. Computer equipment is being depreciated over a three-year period.
Concentrations of Credit Risk
The Company maintains its cash in bank deposit accounts, the balances of which at times may exceed federally insured limits. The Company continually monitors its banking relationships and consequently has not experienced any losses in such accounts.
Advertising and Marketing Costs
Advertising and marketing costs are expensed as incurred. The Company incurred no advertising and marketing costs for the three and nine months ended February 29, 2016 and February 28, 2015.
Research and Development
Research and development expenses are charged to operations as incurred. The Company incurred research and development costs of $0 and $32,769, respectively, for the nine months ended February 29, 2016 and February 28, 2015, respectively.
Income Taxes
The Company accounts for income taxes using the asset and liability method, which requires the establishment of deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided to the extent deferred tax assets may not be recoverable after consideration of the future reversal of deferred tax liabilities, tax planning strategies, and projected future taxable income.
Fair Value of Financial Instruments
Under FASB ASC 820-10-05, the Financial Accounting Standards Board established a framework for measuring fair value in generally accepted accounting principles and expanded disclosures about fair value measurements. This Statement reaffirms that fair value is the relevant measurement attribute. The adoption of this standard did not have a material effect on the Company’s financial statements as reflected herein. The carrying amounts of accrued expenses reported on the balance sheet are estimated by management to approximate fair value primarily due to the short term nature of the instruments. The Company had no items that required fair value measurement on a recurring basis.
Revenue Recognition
For revenue from product sales, the Company recognizes revenue using four basic criteria that must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgment regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required.
The Company has not generated revenuesrevenue to date.
STOCK-BASED COMPENSATIONBasic and Diluted Loss Per Share
Basic net earnings per share is based on the weighted average number of shares outstanding during the period, while fully-diluted net earnings per share is based on the weighted average number of shares of common stock and potentially dilutive securities assumed to be outstanding during the period using the treasury stock method. Potentially dilutive securities consist of options and warrants to purchase common stock, and convertible debt. Basic and diluted net loss per share is computed based on the weighted average number of shares of common stock outstanding during the period.
The Company adopted FASB guidance onuses the treasury stock based compensation upon inception on March 31, 2011. Under FASB ASC 718-10-30-2, all share-based paymentsmethod to employees, including grantscalculate the impact of employeeoutstanding stock options to be recognized inand warrants. Stock options and warrants for which the income statement based on their fair values. Pro forma disclosure is no longer an alternative. The Company did not issue any stock and stock options for services and compensation forexercise price exceeds the average market price over the period have an anti-dilutive effect on earnings per common share and, accordingly, are excluded from March 31, 2011 (Inception) through May 31, 2011.the calculation.
RECENT ACCOUNTING PRONOUNCEMENTSA net loss causes all outstanding stock options and warrants to be antidilutive. As a result, the basic and dilutive losses per common share are the same for the three and nine months ended February 29, 2016 and February 28, 2015.
Commitments and Contingencies
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In June 2009,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 as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed.
Recent Accounting Pronouncements
Accounting standards promulgated by the Financial Accounting Standards Board (“FASB”) issuedare subject to change. Changes in such standards may have an impact on the FASB Accounting Standards Codification (the “ASC”). The ASC has become the single source of non-governmental accounting principles generally accepted in the United States (“GAAP”) recognized by the FASB in the preparation ofCompany’s future financial statements. The ASC does not supersede the rules or regulationsfollowing are a summary of the Securities and Exchange Commission (“SEC”), therefore, the rules and interpretive releases of the SEC continue to be additional sources of GAAP for the Company. The Company adopted the ASC upon inception at March 31, 2011. The ASC does not change GAAP and did not have an effect on the Company’s financial position, results of operations or cash flows.recent accounting developments.
In February 2010,November 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-17, “Balance Sheet Classification of Deferred Taxes,” which requires that deferred tax liabilities and assets be classified as non-current on the balance sheet. ASU 2015-17 is effective in fiscal years beginning after December 15, 2016. Early adoption is permitted on either a prospective or retrospective basis. The Company has elected early adoption as of the interim period beginning December 1, 2015, effective for the annual period ending May 31, 2016, and has selected the prospective application. Prior periods have not been retrospectively adjusted.
In September 2015, the FASB issued ASU No. 2010-09 regarding subsequent events and amendments2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments”, which requires the acquirer in a business combination to certain recognition and disclosure requirements. Under this ASU, a public companyrecognize in the reporting period in which adjustment amounts are determined, any adjustments to provisional amounts that is a SEC filer,are identified during the measurement period, calculated as defined, is not requiredif the accounting had been completed at the acquisition date. Prior to disclose the date through which subsequent events have been evaluated. This ASU is effective upon the issuance of this ASU.ASU 2015-16, an acquirer was required to restate prior period financial statements as of the acquisition date for adjustments to provisional amounts. ASU 2015-16 is effective for annual and interim periods beginning after December 15, 2015. The adoption of this ASU did2015-16 is not expected to have a material impact on the Company’s financial statements.position or results of operations.
In January 2010,August 2015, the FASB issued ASU No. 2010-06 regarding fair value measurements2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date”. This amendment defers the effective date of the previously issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), until the interim and disclosuresannual reporting periods beginning after December 15, 2017. The FASB’s ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), was issued in three parts: (a) Section A, “Summary and improvementAmendments That Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs-Contracts with Customers (Subtopic 340-40),” (b) Section B, “Conforming Amendments to Other Topics and Subtopics in the disclosure about fair value measurements. This ASU requires additional disclosures regarding significant transfers inCodification and out of Levels 1Status Tables” and 2 of fair value measurements, including a description(c) Section C, “Background Information and Basis for Conclusions.” The core principle of the reasonsnew guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Earlier application is permitted for interim and annual reporting periods beginning after December 15, 2016. The Company intends to adopt the transfers. Further, thisprovisions of ASU 2015-14 for interim and annual reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact of the adoption of ASU 2015-14 on its consolidated financial statements.
In July 2015, the FASB, issued ASU No. 2015-11,“Inventory (Topic 330): Simplifying the Measurement of Inventory”, which requires additional disclosures foran entity to measure inventory within the activityscope of the ASU at the lower of cost and net realizable value. The amendments in Level 3 fair value measurements, requiring presentation of information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements. This ASU is2015-11 are effective for fiscal years beginning after December 15, 2010, and for2016, including interim periods within those fiscal years.that reporting period. Earlier adoption is permitted. The adoption of this ASU did2015-11 is not expected to have a material impact on the Company’s financial statements.
position or results of operations.
Management does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the accompanying unaudited condensed consolidated financial statements.
Note 2 – Going Concern
PLAN OF OPERATION
We will not receive any proceeds fromAs shown in the sale of shares under this prospectus. Our continued existence is dependent upon our ability to obtain additional financing. Our capital requirements for the next twelve months will continue to be significant. Adelt Design, Inc. has not commenced its major operations of having its carpet binding art sold to anyone. The Company will not manufacture its carpet binding art until it has an order from a client. We plan during the next twelve months to create a client base by aggressively marketing our product to generate: (1) sales to individual clients who place orders; (2) sales on our website; and (3) sales through word of mouth advertising. Adelt Design, Inc. is considered a development stage Company because it has not commenced its major operations. In addition,accompanying financial statements, the Company has not achieved any revenueincurred net losses from operations resulting in connection withan accumulated deficit of $3,378,197 as of February 29, 2016. Further losses are anticipated in the development of its business to date. As a result we are a startup Company. This means we have no operating history or revenue, and are at a competitive disadvantage.
Based on our current operating plan, we do not expect to generate revenue that is sufficient to cover our expenses for the next twelve months. In addition, we do not have sufficient cash and cash equivalents to execute our operations and will need to obtain additional financing to operate our business for the next twelve months. Adelt Design, Inc. will continue to develop its marketing program for its carpet binding art. The Company will need additional capital of $75,000 for marketing and sales and working capital associated with Adelt over the next year. The Company intends to create a client base within this twelve month time frame. Additional financing, whether through public or private equity or debt financing, arrangements with the security holder or other sources to fund operations, may not be available, or if available, may be on terms unacceptable to us. Our ability to maintain sufficient liquidity is dependent on our ability to raise additional capital.
If we issue additional equity securities to raise funds, the ownership percentage of our existing security holder would be reduced. New investors may demand rights, preferences or privileges senior to those of existing holders of our common stock. Debt incurred by us would be senior to equity in the ability of debt holders to make claims on our assets. The terms of any debt issued could impose restrictions on our operations. If adequate funds are not available to satisfy either short or long-term capital requirements, our operations and liquidity could be materially adversely affected and we could be forced to cease operations.
Our independent auditors have added an explanatory paragraph to their report of our financial statements for the period ended May 31, 2011, stating that our net loss of ($15,530), lack of revenues and dependence on our ability to raise additional capital to continue our existence, raiseraising substantial doubt about ourthe Company’s ability to continue as a going concern. Our consolidatedThe ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management intends to finance operating costs over the next twelve months with loans and/or the proceeds from the sale of securities. These financial statements and their explanatory notes included as part of this prospectus 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 the outcome of this uncertainty. If we fail to obtain additional financing, either through
Note 3 – Merger with CLS Labs
On April 29, 2015, the Company, CLS Labs and CLS Merger, Inc., a Nevada corporation and wholly owned subsidiary of the Company, entered into an offeringAgreement and Plan of our securities orMerger (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 common stock of CLS Holdings owned by obtaining loans, we may be forced to cease ourCLS 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 the Company 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.
We are bearing all costs relating toFor financial reporting purposes, the registrationMerger represents a capital transaction of CLS Labs or a “reverse merger” rather than a business combination, because the sellers of CLS Labs controlled the Company immediately following the completion of the common stock, whichMerger. As such, CLS Labs is deemed to be the accounting acquirer in the transaction and, consequently, the transaction is being treated as a recapitalization of CLS Labs. Accordingly, the assets and liabilities and the historical operations reflected in the Company’s ongoing financial statements are estimatedthose of CLS Labs and are recorded at approximately $20,000.the historical cost basis of CLS Labs. The selling security holder, however, will pay any commissions or other fees payable to brokers or dealers in connectionCompany’s assets, liabilities and results of operations have been consolidated with any salethe assets, liabilities and results of operations of CLS Labs after consummation of the common stock.
DESCRIPTION OF BUSINESS
GENERAL OVERVIEW
Merger. The Company was incorporated inCompany’s historical capital accounts have been retroactively adjusted to reflect the Stateequivalent number of Nevada on March 31, 2011. Adelt Design, Inc. will market carpet binding art to be sold to the general public.
Adelt is a development stage company with a limited history of development stage operations.
Adelt Design, Inc. has not commenced its major operations of having its carpet binding art sold to anyone. The Company will not manufacture its carpet binding art until it has an order from a client. We plan during the next twelve months to create a client base by aggressively marketing our product to generate: (1) sales to individual clients who place orders; (2) sales on our website; and (3) sales through word of mouth advertising. Adelt Design, Inc. is considered a development stage Company because it has not commenced its major operations. In addition, the Company has not achieved any revenue in connection with its business to date. As a result we are a startup Company. This means we have no operating history or revenue, and are at a competitive disadvantage.
We have no operating history and expect to incur losses for the foreseeable future. Should we continue to incur losses for a significant amount of time, the value of your investment in the common shared could be affected downward, and you could lose your entire investment.
We have not yet received any revenues from our development stage operations, nor have we otherwise engaged in any business operations. Adelt Design, Inc. is a development stage Company and in the absent of revenues and operations the Independent Audit Report dated June 3, 2011 cites a going concern. The going concern statement opinionshares issued by the independent auditorsCompany in the Merger while CLS Labs’ historical retained earnings have been carried forward. The historical financial statements of the Company before the Merger will be replaced with the historical financial statements of CLS Labs before the Merger in all future filings with the Securities and Exchange Commission, or “SEC”. The Merger is intended to be treated as a tax-free exchange under Section 368(b) of the resultInternal Revenue Code of a lack of operations and working capital.1986, as amended.
The Company will need to raise capital which concerned the independent auditors because there is insufficient cash for operations for the next twelve months. We will have to seek other sources of capital.
We established the minimum amount of $75,000 that the Company will need to raise through debt instruments such as bank loans, or private financing so that operations can start, in order to generate some type of revenue. Presently no other sources have been identified and it is unknown if any other sources will be identified. There is no assurance that the Company will be able to obtain any bank loans or private financing.
Adelt Design, Inc. intends to market and distribute its carpet binding art to be sold to the general public.
ORGANIZATION WITHIN LAST FIVE YEARS
To date, the Company has not generated any sales. Upon an order being placed with Adelt Design, Inc. for its carpet binding art, Mr. Adelt will begin manufacturing said carpet binding art.
Over the next twelve months, Adelt Design, Inc. plans to build out its reputation and network in the art industry, thereby attracting new customers. Presently, the Company does not have any clients.
BUSINESS FACILITIES
Adelt Design, Inc. is located at 3217 South Orchard Street, Salt Lake City, Utah 84106. The Company’s telephone number is 801-467-3530.
INTERNET ADDRESS
Our Internet address is http://www.adeltdesign.com
UNIQUE FEATURES OF THE COMPANY
Adelt Design, Inc. will market the sale of customized carpet binding art. Adelt Design’s carpet binding art can be customized for a purchaser’s personal use or for corporate use. Unlike portraits and other subjects done simply with inlays, Adelt Design, Inc.’s carpet binding art begins with a detailed sketch of a photo of the carpet binding art subject. The sketch shows every cut that will have to be made in the carpet, such as the eyes, nose, mouth, and other features. Following the sketch, Mr. Adelt hand carves and crafts all the features through repeated carving and applications of various dyes (the same acid based dyes used by the mills), until the desired tones and shading are obtained.
OVERALL STRATEGIC DIRECTION
The Company plans to establish its reputation in carpet binding art industry, thereby attracting new clients and building out its network of operations.
The Company aims to form long term working relationships with professional business retail art dealers in the Salt Lake City, Utah area.
DESCRIPTION OF PRODUCT
Larry A. Adelt, CEO and Director of Adelt Design, Inc, came up with the idea over the last year of what he believes will be a successful carpet binding art product.
Product Development:
In March of 2011, Mr. Adelt began working with Adelt Design, Inc., located at 3217 South Orchard Street, Salt Lake City, Utah 84106.
The Company has not patented the specifications for its carpet binding art.
Manufacturing:
Adelt Design, Inc. has not manufactured any carpet binding art as yet. Adelt Design, Inc. will manufacture its carpet binding art once an order is place by a customer and/or an order is placed with professional business retail art dealers in the Salt lake City, Utah area.
Packaging:
No packaging is applicable in carpet binding art.
Sales Strategy:
We have established a two prong sales approach, which utilizes direct sales through Larry A. Adelt who plans to market his carpet binding art through direct sales and sales on Adelt’s internet website.
Direct Sales:
Our direct sales will be conducted by Mr. Adelt, who will market the art picture and carpet bindings locally in the Salt Lake City, Utah area to retail customers. His current marketing strategy consists of various Point of Sale material to include advertising posters, flyers and magnetic strips with the Company name and its product developed by Larry Adelt in the past several months. We also intent to derive sales from our internet website which is currently under development at: http://www.Adeltdesign.com. We need further funding to complete the Company’s internet website.
We intend to derive income from these sales and our goal is establish brand recognition. Over the next twelve months, Adelt Design, Inc. plans to build out and establish its reputation and network of clients and advisors in the carpet binding art business for sale to the general public.
THE CARPET BINDING ART INDUSTRY
Competition:
Adelt Design, Inc. is not aware of any companies and/or individuals who produce customized carpet binding art. Adelt Design’s carpet binding art can be customized for a purchaser’s personal use or for corporate use. Unlike portraits and other subjects done simply with inlays, Adelt Design, Inc.’s carpet binding art begins with a detailed sketch of a photo of the carpet binding art subject. The sketch shows every cut that will have to be made in the carpet, such as the eyes, nose, mouth, and other features. Following the sketch, Mr. Adelt hand carves and crafts all the features through repeated carving and applications of various dyes (the same acid based dyes used by the mills), until the desired tones and shading are obtained.
Current Business Focus:
The Company’s business focus is to market carpet binding art to customers in the Salt Lake City, Utah area along with, at a reasonable price, to the largest percentage of the target market population as possible. The Company believes that the ability to deliver a quality product that no other companies and/or individuals produces is the main factor in generating a customer base and fostering repeat customers.
Advantages of Competitors over us:
Adelt Design, Inc. is not aware of any companies and/or individuals who produce customized carpet binding art in any manner similar to us.
Customer Base:
Presently the Company does not have an established regular customer base.
COMPETIVE ADVANTAGES:
Experienced Management:
The Company believes that it has experienced management. Our sole Director and executive officer Mr. Adelt has over 30 years of experience in the management and business operations. The Company believes that the knowledge, relationships, reputation and successful track record of its management will help it to build and maintain its client base.
PERFORMANCE
The Company believes that its ability to provide quality carpet binding art will be one of its key advantages. Through a quality product, the Company will develop a customer base, a repeat customer base and reputation.
NICHE INDUSTRY
Adelt Design, Inc.’s product sets it apart from any other companies in the art industry as no companies and/or individuals produce for sale to the public, that Adelt Design, Inc. is aware, on the internet or otherwise, carpet binding art. There are artists and studios who paint on paper, canvas, wood, etc. None, however, hand carve, hand paint and dye on carpet to create carpet binding art like Adelt Design, Inc. does.
RESEARCH AND DEVELOPMENT
The Company is not currently conducting any research and development activities. However if research and development is required in the future, we intend to rely on third party service providers.
EMPLOYEES
Larry A. Adelt is the sole Director, Chief Executive Officer, President, and Principal Executive Officer and Principal Financial Officer of Adelt Design, Inc. At this time, we only have one employee, Larry A. Adelt.
The Company plans to employ individuals on an as needed basis. The Company anticipates that it will need to hire additional employees as the business grows. In addition, the Company may expand the size of our Board of Directors in the future.
Larry A. Adelt does not receive a salary or benefits in any form. Presently the Company does not have any plans to begin paying salaries, cash or otherwise, or offering any form of benefits to our Board of Directors, Officer and employees.
Larry A. Adelt currently devotes approximately 10 hours per week to the affairs of the Company. Once the Company raises $75,000 in capital, Mr. Adelt will devote 40 hours per week to the Company or more, and draw a salary of $2,000 per month.
ADDITIONAL PRODUCTS:
The Company does not intend to market any other products.
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth the name and age of officers and director as of May 31, 2011. Our Executive officers are elected annually by our board of directors. Our executive officers hold their offices until they resign, are removed by the Board, or his and/or her successor is elected and qualified.
NAME | | AGE | | POSITION/INITIAL ELECTION | | APPOINTMENT
DATE
|
| | | | Chief Executive Officer, President, Chief Financial Officer, Secretary
| | |
Executive Officers
The Company’s Chief Executive Officer, President, Chief Financial Officer, Secretary, sole Director and the selling security holder Larry A. Adelt is the "Promoter” within the meaning of Rule 405 of Regulation C.
Board of Directors
Larry A. Adelt.
The Directors will hold office until the next annual meeting of the security holders following their election and until their successors have been elected and qualified. The Board of Directors appoints Officers. Officers hold office until the next annual meeting of our Board of Directors following their appointment and until successors have been appointed and qualified.
Set forth below is a description of the recent employment and business experience of our Directors and Executive Officers:
MANAGEMENT BIOGRAPHIES
Larry A. Adelt; Chief Executive Officer, President, Chief Financial Officer
Mr. Larry A. Adelt joined Adelt Design in 2011as President and CEO, to provide his professional experience, expertise gained over the past ten (10) years carpet binding for Carpet One- Giant One as a independent contractor.
Mr. Adelt is also a graduate in Commercial Art from Utah Technical College. He is an Honorary Member of the Colonels with the West Valley Police Department and a staunch supporter of the Foundation against Battered Women in Salt Lake City, Utah. He has contributed many hours and donated numerous completed art pieces towards their cause.
AUDIT COMMITTEE
The Company does not presently have an Audit Committee and the Board acts in such capacity for the immediate future due to the limited size of the Board. The Company intends to increase the size of its Board in the future, at which time it may appoint an Audit Committee.
The Audit Committee will be empowered to make such examinations as are necessary to monitor the corporate financial reporting and the external audits of the Company, to provide to the Board of Directors (the "Board") the results of its examinations and recommendations derived there from, to outline to the Board improvements made, or to be made, in internal control, to nominate independent auditors, and to provide to the Board such additional information and materials as it may deem necessary to make the Board aware of significant financial matters that require Board attention.
COMPENSATION COMMITTEE
The Company does not presently have a Compensation Committee and the Board acts in such capacity for the immediate future due to the limited size of the Board. The Company intends to increase the size of its Board in the future, at which time it may appoint a Compensation Committee.
The Compensation Committee will be authorized to review and make recommendations to the Board regarding all forms of compensation to be provided to the executive officers and directors of the Company, including stock compensation, and bonus compensation to all employees.
INDEPENDENT DIRECTOR/CORPORATE GOVERNANCE COMMITTEE
Our Board of Directors currently consists of only Larry A. Adelt. We are not a “listed company” under SEC rules and therefore are not required to have separate committees comprise of independent directors. We do not have independent director(s) at this time.
The Company does not presently have a Corporate Governance Committee and the Board acts in such capacity for the immediate future due to the limited size of the Board. The Company intends to increase the size of its Board in the future, at which time it may appoint a Corporate Governance Committee.
The Corporate Governance Committee will be responsible for reviewing developments in corporate governance practices, evaluating the adequacy of our corporate governance practices and reporting and making recommendations to our Board of Directors concerning corporate governance matters.
NOMINATING COMMITTEE
The Company does not have a Nominating Committee and the full Board acts in such capacity.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTPro Forma Results
The following tables set forth certain information regarding beneficial ownership of our securities by (i) each person who is known by us to own beneficially more than five percent (5%)the unaudited pro forma results of the Company as if the acquisition of CLS Labs had taken place on the first day of the three and nine month periods ended February 28, 2015. These combined results are not necessarily indicative of the results that may have been achieved had the companies always been combined.
| | | Three Months | | | Nine Months | |
| | | Ended | | | Ended | |
| | | February 28, | | | February 28, | |
| | | 2015 | | | 2015 | |
| | | | | | | | |
Net loss attributable to CLS Holdings USA, Inc. | | | | | | | | |
Basic net income (loss) per common share | | | | | | | | |
Diluted net income (loss) per common share | | | | | | | | |
Weighted average shares - basic | | | | | | | | |
Weighted average shares - diluted | | | | | | | | |
Note 4 – Prepaid Expenses
Prepaid expenses consisted of the following as of February 29, 2016 and May 31, 2015:
| | | February 29, | | | May 31, | |
| | | 2016 | | | 2015 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Note 5 – Security Deposit
The Company had a security deposit in the amount of $50,000 at February 29, 2016 and May 31, 2015. This amount consists of a deposit to secure office and warehouse space.
Note 6 – Property, Plant and Equipment
Property, plant and equipment consisted of the following at February 29, 2016 and May 31, 2015.
| | | February 29, | | | May 31, | |
| | | 2016 | | | 2015 | |
| | | | | | | | |
Property and equipment, gross | | | | | | | | |
Less: accumulated depreciation | | | | | | | | |
Property and equipment, net | | | | | | | | |
Depreciation expense totaled $223 and $669 for the three and nine months ended February 29, 2016 and $0 for the three and nine months ended February 28, 2015, respectively.
During the nine months ended February 29, 2016, the Company paid $41,803 for construction in progress related to the Company’s Colorado facility.
Note 7 – Intangible Assets
Intangible assets consisted of the following at February 29, 2016 and May 31, 2015.
| | | February 29, | | | May 31, | |
| | | 2016 | | | 2015 | |
| | | | | | | | |
| | | | | | | | | |
Less: accumulated amortization | | | | | | | | |
| | | | | | | | |
Total amortization expense charged to operations for the three and nine months ended February 29, 2016 was $108 and $288 and $0 for the three and nine months ended February 28, 2015, respectively. The domain name is being amortized over a period of 60 months.
Note 8 – Accounts Payable and Accrued Liabilities
The Company had accounts payable and accrued liabilities of $343,488 and $145,024 at February 29, 2016 and May 31, 2015 consist of legal fees and other trade payables.
Note 9 – Convertible Notes Payable
April 2015 Note:
On April 29, 2015, the Company issued a convertible note to an unaffiliated individual in the amount of $200,000 (the “April 2015 Note”). Interest accrues on the April 2015 Note at a rate of 15% per annum. On the first anniversary of the April 2015 Note, the Company shall pay all then accrued interest. Thereafter, the Company shall make eight (8) equal payments of principal together with accrued interest, quarterly in arrears, commencing on July 1, 2016 and continuing on the same day of each October, January, April and July thereafter until paid in full. All outstanding principal and any accumulated unpaid interest thereon shall be due and payable on the third anniversary of note.
At the election of the holder of the April 2015 Note, at any time prior to payment or prepayment of the April 2015 Note in full, all principal and accrued interest under the April 2015 Note may be converted in whole, but not in part, into the Company’s securities. For each dollar converted, the holder of the April 2015 Note shall receive two shares of each classcommon stock and a three-year warrant to purchase 1.33 shares (post Reverse Split) of our voting securities, (ii) eachcommon stock at $0.75 per share (post Reverse Split).
During the nine months ended February 29, 2016 and February 28, 2015, the Company recorded interest expense in the amount of our directors$22,521 and executive officers,$0, respectively, on this note. As of February 29, 2016 and (iii) allMay 31, 2015 the outstanding principal balance on the Convertible Note was $200,000 and the Company had accrued interest in the amount of our directors$25,151 and executive officers as a group. We believe that each individual or entity named has sole investment$2,630, respectively, on this note.
The Company calculated the fair value of the beneficial conversion features embedded in the April 2015 Note via the intrinsic value method. The Company also calculates the fair value of the detachable warrants offered with the April 2015 Note via the Black-Scholes valuation method. The value of the conversion feature and voting power with respectthe detachable warrants are considered discounts to the securities indicated as beneficially owned by them, subjectApril 2015 Note, to community property laws, where applicable, except where otherwise noted. Unless otherwise stated, our address is: 3217 South Orchard Street, Salt Lake City, Utah 84106. The Company's telephone number is: 801-467-3530.the extent the aggregate value of the warrants and conversion features do not exceed the face value thereof. These discounts were amortized to interest expense over the term of the April 2015 Note.
The Company recorded a discount to the April 2015 Note in the amount of $200,000 during the year ended May 31, 2015. The discount was comprised of $100,000 related to the beneficial conversion feature embedded in the April 2015 Note and $100,000 for the detachable warrants. During the nine months ended February 29, 2016, the Company amortized $50,000 of this discount to interest expense. As of February 29, 2016 and May 31, 2011, there2015, the Company had unamortized discounts on the April 2015 Note in the amount of $144,444 and $194,444, respectively.
Related Party Notes:
During the year ended May 31, 2015, the Company borrowed $600,000 from Frank Koretsky, a director of the Company, to fund operations (the “Koretsky Funding Note 1”). From June 1, 2015 through January 12, 2016, the Company borrowed an additional $295,000 from Mr. Koretsky under the Koretsky Funding Note 1. These loans were Eighteen Million (18,000,000)unsecured, due not less than one year after the date the loans were made, and carried interest at the rate of 6% per annum. On January 12, 2016, the Company entered into a new loan agreement with Mr. Koretsky (the “Koretsky Convertible Note”), and the principal balance of $895,000 and accrued interest in the amount of $31,008 from the Koretsky Funding Note 1 were transferred into the Koretsky Convertible Note. This note is unsecured and 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. Principal and additional accrued interest will be paid in eight equal quarterly installments beginning on April 1, 2017. At Mr. Koretsky’s election, at any time prior to payment or prepayment of the loans in full, all principal and accrued interest under the loans may be converted, in whole or in part, into the Company’s securities. Upon such an election, Mr. Koretsky will receive 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. As of February 29, 2016 and May 31, 2015, the outstanding principal balance under the Koretsky Funding Note 1 was $0 and $600,000, respectively; the outstanding principal balance under the Koretsky Convertible Note was $895,000 and $0, respectively. At February 29, 2016 and May 31, 2015, the Company had a total of $38,070 and $3,337, respectively, of accrued interest due to Mr. Koretsky under the Koretsky Convertible Note and Koretsky Funding Note 1.
During January and February 2016, the Company borrowed an additional $380,000 from Mr. Koretsky to fund operations at an interest rate of 6% per annum with the balance of the loan terms remaining unfinalized. The interest rate was increased to 10% per annum effective March 1, 2016 and the terms of the loans were subsequently memorialized in a convertible promissory note dated April 11, 2016 (the “Koretsky Funding Note 2”). The Koretsky Funding Note 2 is unsecured and bears interest at a rate of 6% per annum through February 29, 2016 and 10% per annum commencing March 1, 2016. All accrued interest will become due on April 1, 2017, with principal paid in eight equal quarterly installments along with accrued interest beginning on July 1, 2017. At Mr. Koretsky’s election, at any time prior to payment or prepayment of the loans in full, all principal and accrued interest under the loans may be converted, in whole or in part, into the Company’s securities. Upon such an election, Mr. Koretsky will receive one “Unit” for each $1.07 converted, with each Unit consisting of one (1) share of common stock and a five-year warrant to purchase (1) share of common stock at a price of $1.07 per share. As of February 29, 2016, the outstanding principal balance under the Koretsky Funding Note 2 was $380,000 and the Company had accrued interest in the amount of $3,487.
The Company calculated the fair value of the beneficial conversion features embedded in the convertible notes via the intrinsic value method. The Company also calculates the fair value of the detachable warrants offered with the convertible notes via the Black-Scholes valuation method. The value of the conversion feature and the detachable warrants are considered discounts to the convertible note, to the extent the aggregate value of the warrants and conversion features do not exceed the face value thereof. These discounts were amortized to interest expense over the term of the convertible notes.
The Company recorded a discount to the convertible notes in the amount of $895,000 during the nine months ended February 29, 2016. The discount was comprised of $458,982 related to the beneficial conversion feature embedded in the convertible note and $436,018 for the detachable warrants. During the nine months ended February 29, 2016, the Company amortized $61,077 of this discount to interest expense. As of February 29, 2016, the Company had unamortized discounts on this convertible note in the amount of $833,923.
From June 1, 2015 through January 12, 2016, the Company borrowed $50,000 from Mr. Binder, a director and officer of the Company, to fund operations (the “Binder Funding Note 1). These loans were unsecured, due not less than one year after the date the loans were made, and carried interest at the rate of 6% per annum. On January 12, 2016, the Company entered into a new loan agreement with Mr. Binder (the “Binder Convertible Note”), and the principal balance of $50,000 and accrued interest in the amount of $962 from the Binder Funding Note 1 were transferred into the Binder Convertible Note. This note is unsecured and 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. Principal and additional accrued interest will be paid in eight equal quarterly installments beginning on April 1, 2017. At Mr. Binder’s election, at any time prior to payment or prepayment of the loans in full, all principal and accrued interest under the loans may be converted, in whole or in part, into the Company’s securities. Upon such an election, Mr. Binder will receive 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. As of February 29, 2016 and May 31, 2015, the outstanding principal balance under the Binder Convertible Note was $50,000 and $0, respectively. At February 29, 2016 and May 31, 2015, the Company had an aggregate of $1,357 and $0, respectively, of accrued interest due to Mr. Binder under the Binder Convertible Note.
The Company calculated the fair value of the beneficial conversion features embedded in this convertible note via the intrinsic value method. The Company also calculates the fair value of the detachable warrants offered with the convertible note via the Black-Scholes valuation method. The value of the conversion feature and the detachable warrants are considered discounts to the convertible note, to the extent the aggregate value of the warrants and conversion features do not exceed the face value thereof. These discounts were amortized to interest expense over the term of the convertible note.
The Company recorded a discount to the convertible note in the amount of $50,000 during the nine months ended February 29, 2016. The discount was comprised of $25,641 related to the beneficial conversion feature embedded in the convertible note and $24,359 for the detachable warrants. During the nine months ended February 29, 2016, the Company amortized $3,412 of this discount to interest expense. As of February 29, 2016, the Company had unamortized discounts on this convertible note in the amount of $46,588.
During January and February 2016, the Company borrowed an additional $12,750 from Mr. Binder to fund operations at an interest rate of 6% per annum with the balance of the loan terms remaining unfinalized. The interest rate was increased to 10% per annum effective March 1, 2016 and the terms of the loans were subsequently memorialized in a convertible promissory note dated April 11, 2016 (the “Binder Funding Note 2”). The Binder Funding Note 2 is unsecured and bears interest at a rate of 6% per annum through February 29, 2016 and 10% commencing March 1, 2016. All accrued interest will become due on April 1, 2017, with principal paid in eight equal quarterly installments along with accrued interest beginning on July 1, 2017. At Mr. Binder’s election, at any time prior to payment or prepayment of the loans in full, all principal and accrued interest under the loans may be converted, in whole or in part, into the Company’s securities. Upon such an election, Mr. Binder will receive one “Unit” for each $1.07 converted, with each Unit consisting of one (1) share of common stock and a five-year warrant to purchase (1) share of common stock at a price of $1.07 per share. As of February 29, 2016, the outstanding principal balance under the Binder Funding Note 2 was $12,750, and the Company had accrued interest in the amount of $70.
Note 10 – Stockholders’ Equity
The Company’s authorized capital stock consists of 250,000,000 shares of common stock, par value $0.0001 per share and 20,000,000 shares of preferred stock, par value $0.001 per share. The Company had 20,320,003 and 20,000,003 shares (post Reverse Split) of common stock issued and outstanding.outstanding as of February 29, 2016 and May 31, 2015, respectively.
(1) This table is based on Eighteen Million (18,000,000)On December 10, 2014, the Company effected a reverse stock split of the Company’s issued and outstanding common stock at a ratio of 1-for-0.625, wherein 0.625 shares of common stock outstanding.
Aswere issued in exchange for each share of the Company’s common stock owned by the Company’s stockholders on December 1, 2014, the record date for the reverse stock split. As a result of this prospectus, we had the following security holder holding greater than 5%:
| Title of Class | | Name and Address of Beneficial Owner | | Amount and Nature of Beneficial Owner | | Percent of Class (1) |
| | | | | | | |
| | | | | | |
| | All executive officers and directors as a group | | | | |
| | | | | | |
REMUNERATION OF DIRECTORS AND OFFICERS
Adelt Design, Inc.reverse stock split, 11,250,000 shares (post Reverse-Split) of common stock were outstanding as of December 10, 2014. The reverse stock split did not affect the number of authorized shares of the Company’s common stock. All share and per share information contained in the financial statements has made no provisions for paying cash or non-cash compensationbeen retroactively adjusted to its officers and sole director. No salaries are being paid atreflect the present time, and none will be paid unless and until our developmental stage operations generate sufficient cash flow.reverse stock split.
The following table sets forth allCompany recorded imputed interest of $807 and $0 during the remunerationnine months ended February 29, 2016 and February 28, 2015 on related party payables due to a director and officer of our Directorthe Company.
On August 1, 2015, the Company and Officers for the period from inception on March 31, 2011, throughAlan Bonsett entered into a five-year employment agreement. Pursuant to the endagreement, Mr. Bonsett commenced serving as the Company’s Chief Operating Officer on August 15, 2015. Mr. Bonsett is entitled to a one-time signing bonus of 250,000 (post Reverse Split) shares of restricted common stock of the periodCompany, which will become 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 the stock price at August 3, 2015. During the nine months ended February 29, 2016, the Company recognized $327,500 in share based compensation.
Stock Issued for Services
On August 28, 2015, the Company issued 60,000 shares of common stock, valued at $45,000, to a consultant for services. Of these shares, 50,000, valued at $37,500, were included in stock payable as of May 31, 2011:2015. The shares were valued based on the closing market price on the grant date.
On July 22, 2015, pursuant to a consulting agreement, the Company agreed to issue 5,000 shares of common stock, valued at $5,750, to a consulting firm in exchange for investor relations consulting services. On August 17, 2015, the consulting agreement was amended, whereby the Company agreed to issue 5,000 additional shares of common stock, valued at $6,350. On August 26, 2015, the Company extended the consulting agreement (“First Extension”) and agreed to issue the consultant an additional 10,000 shares of common stock, valued at $12,700. On October 9, 2015, the Company extended the consulting agreement (“Second Extension”) and agreed to issue the consultant an additional 10,000 shares of common stock, valued at $11,700. On December 15, 2015, the Company extended the consulting agreement (“Third Extension”) and agreed to issue the consultant an additional 10,000 shares of common stock, valued at $8,000. All shares were valued based on the closing market price of the common stock on the grant date. During the nine months ended February 29, 2016, the Company issued 10,000 shares to this consultant and at February 29, 2016 had 30,000 shares of common stock, valued at $32,750 included in stock payable on the accompanying balance sheets.
NAME OF INDIVIDUAL | | CAPACITIES IN WHICH
RENUMERATION WAS RECEIVED
| | AGGREGATE CASH
REMUNERATION
|
| | | | |
| | Chief Executive Officer, President, Chief Financial Officer, Secretary
| | |
| | All Officers and Directors
| | |
On October 15, 2015, pursuant to a consulting agreement, the Company agreed to issue 10,000 shares of common stock per month, valued at $11,600 per month, to a consultant in exchange for investor relations consulting services. The consulting agreement was terminated during the first month of its term. The parties are in discussions regarding whether any shares of the Company's common stock have been earned and it is uncertain whether any shares will be issued. As of February 29, 2016, we have included 20,000 shares of common stock, valued at $23,200 in stock payable on the accompanying balance sheets. The shares were valued based on the closing market price on the grant date.
On December 18, 2015, pursuant to a consulting agreement commencing on January 4, 2016, the Company agreed to issue 25,000 shares of common stock per month, valued at $19,750 per month, to a consultant in exchange for investor relations consulting services. The consulting agreement was terminated during the first month of its term. The parties are in discussions regarding whether any shares of the Company's common stock have been earned and it is uncertain whether any shares will be issued. As of February 29, 2016, the Company had 50,000 shares of common stock, valued at $39,500 included in stock payable on the accompanying balance sheet. The shares were valued based on the closing market price on the grant date.
Note 11 – Related Party Transactions
During the nine months ended February 29, 2016 and February 28, 2015, the Company accrued related party payables in the amount of $0 and $0, respectively, for amounts due to officers and directors related to expenses paid on behalf of the Company. As of February 29, 2016 and May 31, 2015, the Company had related party payables in the amount of $17,930 and $18,455.
During the nine months ended February 29, 2016 and February 28, 2015, the Company recorded imputed interest of $807 and $0, respectively, on related party payables due to directors and an officer of the Company.
During the nine months ended February 29, 2016 and February 28, 2015, the Company accrued compensation in the amount $106,250 and $25,000, respectively, to Jeffrey Binder pursuant to his employment agreement. Mr. Binder has deferred all salary since the commencement of the agreement. At February 29, 2016 and May 31, 2015, total accrued compensation to Mr. Binder was $212,500 and $106,250, respectively.
Effective August 1, 2015, the Company and Alan Bonsett entered into a five-year employment agreement. Pursuant to the agreement, Mr. Bonsett commenced serving as the Company’s Chief Operating Officer on August 15, 2015. Under the agreement, Mr. Bonsett is entitled to receive an annual salary of $150,000. Further, he is entitled to receive a performance bonus equal to 2% of the Company’s annual EBITDA, up to a maximum annual cash compensation of $1 million (including his base salary), and annual stock options, exercisable at the fair market value of the Company’s common stock on the date of grant, in an amount equal to 2% of its annual EBITDA up to $42.5 million and 4% of its annual EBITDA in excess of $42.5 million. Additionally, Mr. Bonsett is entitled to a one-time signing bonus of 250,000 (post Reverse-Split) shares of restricted common stock of the Company, valued at $327,500, which will become fully vested one year from the effective date of the agreement. The shares were valued based on the closing market price on the grant date. The 250,000 shares were issued on January 19, 2016. During the nine months ended February 29, 2016, the Company recognized share based compensation of $327,500.
On April 17, 2015, CLS Labs Colorado, Inc. (“CLS Labs Colorado”), a wholly owned subsidiary of CLS Labs, loaned $500,000 (the “Note”) to Picture Rock Holdings, LLC, a Colorado limited liability company (“PRH”), to be used by PRH in connection with the financing of the building out, equipping, and development of a grow facility by PRH that will be operated by a licensed third-party marijuana grower. Pursuant to the Note, as amended by the parties effective June 30, 2015 and October 31, 2015, 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 fourth quarter of 2016 (the “Payment Date”) and continuing until paid in full. Interest will accrue on the unpaid principal balance of the 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 Note will be due and payable on the fifth anniversary of the Payment Date. In the event of default as defined in the agreements related to the Note, all amounts under the Note shall become at once due and payable. During the year ended May 31, 2015, the Company recorded an impairment related to the note receivable in the amount of $500,000. This receivable is recorded on the balance sheet as of February 29, 2016 and May 31, 2015 in the amount of $0 and $0, net of allowance in the amount of $500,000.
EMPLOYMENT AGREEMENTSOn April 17, 2015, prior to Alan Bonsett’s appointment as Chief Operating Officer, the Company, through CLS Labs Colorado, entered into an arrangement with PRH (the “Colorado Arrangement”) to, among other things, (i) license its proprietary technology, methods and processes to PRH in Colorado in exchange for a fee; (ii) sub-lease warehouse and office space in Denver, Colorado to PRH where PRH can grow, extract and process cannabis and other plant products in exchange for lease payments totaling an aggregate of $1,067,067 over a seventy-two (72) month term; (iii) build a processing facility and lease such facility, including equipment, to PRH in exchange for a monthly fee; and (iv) loan $500,000 to PRH to be used by PRH in connection with its financing of the building out, equipping, and development of a marijuana grow facility. Mr. Bonsett, as an owner of PRH, will indirectly receive the benefits of the Colorado Arrangement. Because construction of the Grow Facility was only completed in December 2015, the business to be operated by PRH pursuant to the Colorado Arrangement has not yet produced revenues.
To date, the Company has no employment agreements in effect with its Principal Executive Officer. We do not pay compensation to our Director for attendance at meetings. We will reimburse Directors for reasonable expenses incurred during the course of their performance.
EXECUTIVE COMPENSATIONRelated Party Notes Payable
The following executiveCompany has convertible notes payable and notes payable outstanding to Jeffrey Binder, an officer and director, and to Frank Koretsky, a director; see note 9.
Note 12 – Commitment and Contingencies
The Company, through CLS Labs Colorado, leases 42,392 square feet of warehouse and office space (the “Leased Space”) 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 conduct certain intended activities, including growing, extraction, conversion, assembly and packaging of cannabis and other plant materials, as permitted by and in compliance with state, city and local laws, rules, ordinances and regulations. Total expense for the lease was $163,024 and $0 for the nine months ended February 29, 2016 and February 28, 2015.
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 disclosure reflectsof $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. My Binder has deferred all compensation awarded to, earned by or paidsalary since the commencement of the agreement.
Effective August 1, 2015, the Company and Alan Bonsett entered into a five-year employment agreement. Pursuant to the executive officersagreement, Mr. Bonsett commenced serving as the Company’s Chief Operating Officer on August 15, 2015. Under the agreement, Mr. Bonsett is entitled to receive an annual salary of $150,000. Further, he is entitled to receive a performance bonus equal to 2% of the Company’s annual EBITDA, up to a maximum annual cash compensation of $1 million (including his base salary), and annual stock options, exercisable at the fair market value of the Company’s common stock on the date of grant, in an amount equal to 2% of its annual EBITDA up to $42.5 million and 4% of its annual EBITDA in excess of $42.5 million. Additionally, Mr. Bonsett is entitled to a one-time signing bonus of 250,000 (post Reverse-Split) shares of restricted common stock of the Company, which will become fully vested one year from the effective date of the agreement. Mr. Bonsett, as an owner of PRH, will indirectly receive the benefits of the Colorado Arrangement, as discussed in Note 11. Because construction of the grow facility was only completed in December 2016, the business to be operated by PRH pursuant to the Colorado Arrangement has not yet produced revenues.
Note 13 – Subsequent Events
On March 18, 2016, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Old Main Capital, LLC (“Old Main”), whereby Old Main agreed to purchase an aggregate of up to $500,000 in subscription amount corresponding to an aggregate of up to $555,555 in 10% Original Issue Discount Convertible Promissory Notes (the “10% Notes”) due, subject to the terms therein, in installments as set forth below. The following table summarizes all compensation frompurchase will occur, at the Company’s option, in up to five tranches, with the first tranche of $200,000 being purchased on March 31, 2011 (inception) to May 31, 2011.
SUMMARY COMPENSATION TABLE
| | | | OTHER ANNUAL COMPENSATION
REMUNERATION
|
NAME
PRINCIPAL OTHER
| | CAPACITIES IN WHICH
RENUMERATION WAS RECEIVED
| | YEAR | SALARY $ | BONUS $ |
| | | | | | |
| | Chief Executive Officer, President, Chief Financial Officer, Secretary
| | | | |
COMPENSATION OF DIRECTORS
Directors do not currently receive compensation for their services as directors, but we plan to reimburse them for expenses incurred in attending board meetings.
STOCK INCENTIVE PLAN
At present, we do not have18, 2016; the second tranche of $50,000 being purchased on the first Friday, which is a stock incentive plan in place. We have not granted any options to Directors and Officers.
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND
CHANGE-IN-CONTROL ARRANGEMENTS
At present, we do not have employment agreements with our Principal Executive officer and trading day after the Company does not intend to enter into an employment agreement with Mr. Adelt.
PRINCIPAL STOCKHOLDER
a) Security Ownership of Management - the number and percentage ofdate (the “Filing Date”) that a registration statement (the “Registration Statement”) registering shares of common stock of the Company owned of record and beneficially, by each officer and directorissuable upon conversion or repayment of the 10% Notes, is filed with the SEC; the third tranche of $50,000 being purchased on the first Friday, which is a trading day at least three (3) trading days after the Company and by all officers and directors ofreceives initial comments from the Company as a group, and all shareholders known toSEC on the Company to beneficially own 5%Registration Statement, or more of the issued and outstanding Shares ofdate that the Company is as follows.
Unless otherwise stated, our address is: 3217 South Orchard Street, Salt Lake City, Utah 84106. The Company's telephone numbernotified by the SEC that the Registration Statement will not be reviewed; the fourth tranche of $100,000 being purchased on the first Friday, which is (801) 467-3530.a trading day at least three trading days after of the date that the Registration Statement is declared effective by the SEC (the “SEC Effective Date”); and the fifth Tranche of $100,000 being purchased on the first Friday, which is a trading day after the thirty (30) day anniversary of the SEC Effective Date.
| Name | | Shares Beneficially Owned prior to Offering | | | Shares to be Offered | | | Shares Beneficially Owned after Offering | | | Percent Beneficially Owned after Offering | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | |
Total Officers, Directors and Significant Shareholders as a group | | | | | | | | | | | | |
INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
AsAt the earlier of September 18, 2016 or two (2) trading days after the SEC Effective Date, 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 payment may be made, at the option of the Company, in cash or, subject to certain conditions, in common stock of the Company pursuant to a conversion rate equal to the lower of (a) $0.80 (the “Fixed Conversion Price”) or (b) 75% of the lowest daily volume weighted average price of the common stock of (the “VWAP”) in the 20 consecutive trading days immediately prior to the applicable conversion date. At any time after the issue date of this prospectus, there are no, and have not been since inception, any material agreements or proposed transactions, whether direct or indirect, with any of the following:
| * | Any of our Directors or Officers; |
| * | Any nominee for election as a director; |
| * | Any principal security holder identified in the preceding “Security Ownership of Selling Shareholder and Management" section; or |
| * | Any relative or spouse, or relative of such spouse, of the above referenced persons. |
TRANSFER AGENT AND REGISTRAR
Transfer Agent and Registrar: The Company acts as its own transfer agent at this time. When this registration statement becomes effectiveNotes, the Company will use for our common stockholder may convert the services of ISLAND STOCK TRANSFER INC., 100 Second Avenue South, Suite 705S St Petersburg, FL 33701, Telephone (727) 459-7378 Facsimile 727-290-3961,
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have outstanding Eighteen Million (18,000,000) shares of common stock. Of these shares, the Eight Million (8,000,000) shares to be sold in the offering, will be freely tradable in the public market without restriction under the Securities Act, unless the shares are held by our "affiliates," as that term is defined in Rule 144 under the Securities Act.
The remaining10% Notes into shares of common stock outstanding upon completion of the offeringCompany at the holder’s option. The conversion price will be "restricted securities," asthe Fixed Conversion Price. Subject to certain exclusions, if the Company sells or issues its common stock or certain common stock equivalents at an effective price per share that term is defined in Rule 144. Restricted securities maylower than the Fixed Conversion Price, the conversion price will be soldreduced to equal to such lower price. On March 18, 2016, the Company issued Old Main a 10% Original Issuance Discount Convertible Promissory Note in the public market only if they are registered or if they qualify principal amount of $222,222 with the original issue date of March 18, 2016 in exchange for an exemption from registration, such as the exemption afforded by Rule 144.
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
We have adopted provisions in our certificate of incorporation that limit the liability of our Directors for monetary damages for breach of their fiduciary duty as directors, except for liability that cannot be eliminated under the Nevada General Corporation Law. Nevada law provides that directors of a Company will not be personally liable for monetary damages for breach of their fiduciary duty as directors, except for liabilities:
| * | For any breach of their duty of loyalty to us or our security holders; |
| * | For acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; |
| * | For unlawful payment of dividend or unlawful stock repurchase or redemption, as provided under Section 174 of the Nevada General Corporation Law; or, |
| * | For any transaction from which the director derived an improper personal benefit. |
In addition, our bylaws provide for the indemnification of officers, directors and third parties acting on our behalf, to the fullest extent permitted by Nevada General Corporation Law, if our board of directors authorizes the proceeding for which such person is seeking indemnification (other than proceedings that are brought to enforce the indemnification provisions$200,000 pursuant to the bylaws).
Purchase Agreement, representing the first tranche under the Purchase Agreement.
These indemnification provisionsOn March 18, 2016, the Company also issued Old Main an 8% Convertible Promissory Note (the “8% Note”) in the principal amount of $200,000 for Old Main’s commitment to enter into an equity line transaction with the Company and prepare all of the related transaction documents. The 8% Note bears interest at the rate of 8% per annum. At the earlier of the six month anniversary of the Closing Date or two (2) trading days after the SEC Effective Date, the Company must begin to redeem 1/6th of the face amount of the 8% Note and any accrued but unpaid interest on a monthly basis. Such amortization payment may be sufficiently broad to permit indemnificationmade, at the option of the registrant's executive officersCompany, in cash or, subject to certain conditions, in common stock of the Company pursuant to a conversion rate equal to the lower of (a) $1.07 (the “8% Note Fixed Conversion Price”) or (b) 75% of the lowest VWAP in the twenty (20) consecutive trading days ending on the trading day that is immediately prior to the applicable conversion date. Subject to certain exclusions, if the Company sells or issues its 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 will be reduced to equal to such lower price.
In connection with the Purchase Agreement, the Company and directors for liabilities (including reimbursementOld Main entered into a Registration Rights Agreement dated March 18, 2016 (the “Registration Rights Agreement”), whereby the Company agreed to register the resale of expenses incurred) arising under the Securities Actshares of 1933.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers and controlling personsCompany’s common stock underlying the 10% Notes, among other securities, pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. No pending material litigation or proceeding involving our directors, executive officers, employees or other agents as to which indemnification is being sought exists, and we are not aware of any pending or threatened material litigation that may result in claims for indemnification by any of our directors or executive officers.
Our articles of incorporation and applicable Nevada law provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against attorney's fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or activities on our behalf. We will also bear the expenses of such litigation for any of our directors, officers, employees, or agents, upon such person's written promise to repay us if it is ultimately determined that any such person shall not have been entitled to indemnification. This indemnification policy could result in substantial expenditures by us, which we will be unable to recoup.
We have been advised that, in the opinion of the SEC, indemnification for liabilities arising under federal securities laws is against public policy as expressed in the Securities Act of 1933, as amended (the “Securities Act”), and is, therefore, unenforceable.terms thereof. In the event that a claim for indemnification for liabilities arising under federal securities laws, other than the payment by us of expenses incurred or paid by a director, officer or controlling personCompany fails to meet certain timing requirements set forth in the successful defenseRegistration Rights Agreement, among other penalties, for each month that such delay continues, the outstanding principal amount of any action, suit or proceeding, is asserted by a director, officer or controlling person in connection with the securities being registered, we will (unless in the opinion of our counsel, the matter has been settled by controlling precedent) submit to a court of appropriate jurisdiction, the question whether indemnification by us is against public policy as expressed in the Securities Act and10% Notes will be governedincreased in an amount equal to the product of 2% multiplied by the final adjudication of such issue. The legal process relatingaggregate subscription amount paid pursuant to this matter if it were to occur is likely to be very costly and may result in us receiving negative publicity, either of which factors is likely to materially reduce the market and price for our shares, if such a market ever develops.Purchase Agreement.
DESCRIPTION OF SECURITIES TO BE REGISTERED
General
WeAs discussed in Note 9, on April 11, 2016, convertible promissory notes in favor of Mr. Koretsky and Mr. Binder were finalized. These notes are authorizedunsecured and bear interest at the rate of 6% per annum on interest accrued through February 29, 2016 and 10% per annum thereafter. No payments are required until April 1, 2017, at which time all accrued interest becomes due and payable. Principal will be paid in eight equal quarterly installments, together with accrued interest, beginning on July 1, 2017. At the note holder’s election, at any time prior to issuepayment or prepayment of the loans in full, all principal and accrued interest under the loans may be converted, in whole or in part, into the Company’s securities. Upon such an aggregate numberelection, the holder will receive one “Unit” for each $1.07 converted, with each Unit consisting of 100,000,000 shares of capital stock, of which 90,000,000 shares are common stock, $0.001 par value per share, and 10,000,000 shares are preferred stock, $0.001 par value per share.
Common Stock
The Company issued to the founder Eighteen Million 18,000,000 common shares of stock for $18,000. As of May 31, 2011, there are Eighteen Million (18,000,000) shares issued and outstanding at a value of $0.001 per share.
The securities being offered by the selling security holder are shares of our Common stock.
We are authorized to issue 90,000,000 shares of common stock, $0.001 par value per share. Currently, we have 18,000,000 shares of common stock issued and outstanding.
Eachone (1) share of common stock shall have oneand a five-year warrant to purchase (1) vote per share for all purposes. The holders of a majority of the shares entitled to vote, present in person or represented by proxy shall constitute a quorum at all meetings of our shareholders. Our common stock does not provide a preemptive, subscription or conversion rights and there are no redemption or sinking fund provisions or rights. Our common stock holders are not entitled to cumulative voting for election of the board of directors.
Holders of common stock are entitled to receive ratably such dividends as may be declared by the boardat a price of directors out of funds legally available therefore as well as any distributions to the security holder. We have never paid cash dividends on our common stock, and do not expect to pay such dividends in the foreseeable future.$1.07 per share.
In the event of a liquidation, dissolution or winding up of our Company, holders of common stock are entitled to share ratably in all of our assets remaining after payment of liabilities. Holders of common stock have no preemptive or other subscription or conversion rights. There are no redemption or sinking fund provisions applicable to the common stock.
Preferred Stock
We are authorized to issue 10,000,000 shares of “blank check” preferred stock, $0.001 par value per share. The preferred stock may be divided into any number of series as our directors may determine from time to time. Our directors are authorized to determine and alterevaluated subsequent events after the rights, preferences, privileges and restrictions granted to and imposed upon any wholly issued series of preferred stock, and to fix the number of shares of any series of preferred stock and the designation of any such series of preferred stock. As ofbalance sheet date through the date ofthe financial statements were issued. We did not identify any additional material events or transactions occurring during this filing, we do not have any preferred shares issued and outstanding.
Dividends
We have not paid any cash dividends to our shareholders. The declaration of any future cash dividends is at the discretion of our board of directors and depends upon our earnings, if any, our capital requirements and financial position, our general economic conditions, and other pertinent conditions. It is our present intention not to pay any cash dividends in the foreseeable future, but rather to reinvest earnings, if any, in our business operations.
Warrants
There are no outstanding warrants to purchase our securities.
Options
There are no outstanding stock options to purchase our securities.
LEGAL MATTERS
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 resultsubsequent event reporting period that required further recognition or disclosure 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.
EXPERTS
AUDITOR: The financial statements included in this prospectus and the registration statement have been audited by M&K CPAS, PLLC to the extent and for the periods set forth in their report appearing elsewhere herein and in the registration statement, and are included in reliance upon such report given upon the authority of said firm as experts in auditing and accounting.
INTERESTS OF NAMED EXPERTS AND COUNSEL
No expert or counsel named in this prospectus as having prepared or certified any part of this prospectus or having given an opinion upon the validity of the securities being registered or upon other legal matters in connection with the registration or offering of the common stock was employed on a contingency basis, or had, or is to receive, in connection with the offering, a substantial interest, direct or indirect, in the registrant or any of its parents or subsidiaries. Nor was any such person connected with the registrant or any of its parents or subsidiaries as a promoter, managing or principal underwriter, voting trustee, director, officer, or employee.
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.
AVAILABLE INFORMATION
We have not previously been subject to the reporting requirements of the Securities and Exchange Commission. We have filed with the Commission a registration statement on Form S-1 under the Securities Act with respect to the shares offered hereby. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules thereto. For further information with respect to our securities and us you should review the registration statement and the exhibits and schedules thereto.
You can inspect the registration statement and the exhibits and the schedules thereto filed with the commission, without charge, in our files in the Commission's public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You can also obtain copies of these materials from the public reference section of the commission at 100 F Street, N.E., Room 1580 Washington, D.C. 20549, at prescribed rates. You can obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Commission maintains a web site on the Internet that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission at http://www.sec.gov.
REPORTS TO SECURITY HOLDER
As a result of filing the registration statement, we are subject to the reporting requirements of the federal securities laws, and are required to file periodic reports and other information with the SEC. We will furnish our security holder with annual reports containing audited financial statements certified by independent public accountants following the end of each fiscal year and quarterly reports containing unaudited financial information for the first three quarters of each fiscal year following the end of such fiscal quarter.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
ADELT DESIGN, INC.
(A Development Stage Company)CLS Holdings USA, Inc.
We have audited the accompanying consolidated balance sheetsheets of Adelt Design,CLS Holdings USA, Inc. (A Development Stage Company) as of May 31, 2011,2015 and 2014, and the related consolidated statements of operations, stockholder’schanges in shareholders' equity (deficit), and cash flows for the year ended May 31, 2015 and the period from inception on March 31, 2011 through(May 1, 2014) to May 31, 2011.2014. These consolidated financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on thesethe financial statements based on our audit.audits.
We conducted our auditaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company wasis not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’sCompany's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includesstatements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Adelt Design,CLS Holdings USA, Inc. (A Development Stage Company) as of May 31, 2011,2015 and 2014, and the related statementsresults of its operations, stockholders' equity (deficit)changes in shareholders' deficit and cash flows for the period from inception on March 31, 2011 through May 31, 2011,periods described above in conformity with accounting principles generally accepted in the United States of America.
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 financial statements, the Company has an accumulated deficit of $15,530,suffered recurring losses from operations, which raises substantial doubt about its ability to continue as a going concern. Management’sManagement's plans concerning theseregarding those matters also are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ M&K CPAS, PLLC
www.mkacpas.com
Houston, Texas
June 3, 2011August 28, 2015
CONSOLIDATED BALANCE SHEETS
| | | May 31 | | | May 31 | |
| | | 2015 | | | 2014 | |
| ASSETS | | | | | | |
| Current assets | | | | | | |
| Cash and cash equivalents | | $ | 208,821 | | | $ | - | |
| Prepaid expenses | | | 31,800 | | | | - | |
| Note receivable, current, net of allowance of $100,000 | | | - | | | | - | |
| Total current assets | | | 240,621 | | | | - | |
| | | | | | | | | |
| Security deposit | | | 50,000 | | | | - | |
| Note receivable, noncurrent, net of allowance of $400,000 | | | - | | | | - | |
| Intangible assets, net | | | 2,158 | | | | - | |
| Total assets | | $ | 292,779 | | | $ | - | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
| Current liabilities | | | | | | | | |
| Accounts payable and accrued liabilities | | $ | 145,024 | | | $ | - | |
| Accrued compensation, related party | | | 106,250 | | | | - | |
| Due to related party | | | 18,455 | | | | - | |
| Accrued interest | | | 2,630 | | | | - | |
| Accrued interest, related party | | | 3,337 | | | | - | |
| Notes payable, related party | | | 600,000 | | | | - | |
| Total current liabilities | | | 875,696 | | | | - | |
| | | | | | | | | |
| Noncurrent liabilities | | | | | | | | |
| Convertible notes payable, net of debt discount | | | 5,556 | | | | - | |
| Total Liabilities | | | 881,252 | | | | - | |
| | | | | | | | | |
| Commitments and contingencies | | | - | | | | - | |
| | | | | | | | | |
| Stockholder's equity | | | | | | | | |
| Common stock, $0.0001 par value; 250,000,000 shares authorized; 20,000,003 and zero shares issued and outstanding at May 31, 2015 and 2014 | | | 2,000 | | | | - | |
| Additional paid-in capital | | | 887,614 | | | | - | |
| Stock payable | | | 37,500 | | | | - | |
| Accumulated deficit | | | (1,515,587 | ) | | | - | |
| Total stockholder's equity | | | (588,473 | ) | | | - | |
| | | | | | | | | |
| Total liabilities and stockholders' equity | | $ | 292,779 | | | $ | - | |
See notes to the consolidated financial statements.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | May 31, | |
| | | 2011 | |
| ASSETS | | | |
| Current assets: | | | |
| Cash | | $ | 15,570 | |
| Total current assets | | | 15,570 | |
| | | | | |
| Total assets | | $ | 15,570 | |
| | | | | |
| LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) | | | | |
| | | | | |
| Current liabilities: | | | | |
| Due to related party | | $ | 100 | |
| Accrued expenses | | | 13,000 | |
| Total current liabilities | | | 13,100 | |
| | | | | |
| Total Liabilities | | | 13,100 | |
| | | | | |
| Stockholder's equity (deficit): | | | | |
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding | | | - | |
Common stock, $0.001 par value, 90,000,000 shares authorized, 18,000,000 shares issued and outstanding | | | 18,000 | |
| Deficit accumulated during the development stage | | | (15,530 | ) |
| Total stockholder's equity (deficit) | | | 2,470 | |
| | | | | |
| Total liabilities and stockholder's equity | | $ | 15,570 | |
| | | | | |
| | | | | | For the Period | |
| | | | | | May 1, 2014 | |
| | | For the Year | | | (Inception) | |
| | | Ended | | | Through | |
| | | May 31, | | | May 31, | |
| | | 2015 | | | 2014 | |
| | | | | | | |
| Revenue | | $ | - | | | $ | - | |
| Cost of goods sold | | | - | | | | - | |
| Gross margin | | | - | | | | - | |
| | | | | | | | | |
| Selling, general and administrative expenses | | | 998,994 | | | | - | |
| Professional fees | | | 504,354 | | | | - | |
| Total operating expenses | | | 1,503,348 | | | | - | |
| | | | | | | | | |
| Operating loss | | | (1,503,348 | ) | | | - | |
| | | | | | | | | |
| Other (income) expense: | | | | | | | | |
| Interest expense | | | 12,239 | | | | - | |
| Total other expense | | | 12,239 | | | | - | |
| | | | | | | | | |
| Income (Loss) before income taxes | | | (1,515,587 | ) | | | - | |
| | | | | | | | | |
| Income tax expense | | | - | | | | - | |
| | | | | | | | | |
| Net income (loss) | | $ | (1,515,587 | ) | | $ | - | |
| | | | | | | | | |
| Net income (loss) per share - basic | | $ | (0.24 | ) | | $ | - | |
| | | | | | | | | |
| Net income (loss) per share - diluted | | $ | (0.24 | ) | | $ | - | |
| | | | | | | | | |
| Weighted average shares outstanding - basic | | | 6,356,167 | | | | - | |
| | | | | | | | | |
| Weighted average shares outstanding - diluted | | | 6,356,167 | | | | - | |
See Accompanying Notesnotes to Financial Statements.
F-2
the consolidated financial statements.(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
STOCKHOLDERS' EQUITY (DEFICIT)
| | | March 31, 2011 | |
| | | (inception) to | |
| | | May 31, 2011 | |
| | | | |
| Revenue | | $ | - | |
| | | | | |
| Operating expenses: | | | | |
| General and administrative | | | 2,530 | |
| Professional fees | | | 13,000 | |
| | | | | |
| Total operating expenses | | | 15,530 | |
| | | | | |
| Net operating loss | | | (15,530 | ) |
| | | | | |
| Other income (expense) | | | - | |
| | | | | |
| Loss before provision for income taxes | | | (15,530 | ) |
| | | | | |
| Provision for income taxes | | | - | |
| | | | | |
| Net (loss) | | $ | (15,530 | ) |
| | | | | |
| | | | | |
| Weighted average number of common shares outstanding - basic and fully diluted | | | 18,000,000 | |
| | | | | |
| Net (loss) per share - basic and fully diluted | | $ | (0.00 | ) |
| | | | | | | | | | | | | | | | | | | |
| | | Common Stock | | | | | | Paid In | | | Stock | | | Accumulated | | | | |
| | | Amount | | | Value | | | Capital | | | Payable | | | Deficit | | | Total | |
| | | | | | | | | | | | | | | | | | | |
Balance, May 1, 2014 (inception) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of founders shares | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Value of vested portion of shares to be issued to a service provider | | | | | | | | | | | | | | | | | | | | | | | | |
Discount due to beneficial conversion feature and warrants | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
See Accompanying Notesnotes to Financial Statements.
F-3
the consolidated financial statements.F-19
ADELT DESIGN, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
| | | | | | For the Period | |
| | | | | | May 1, 2014 | |
| | | For the | | | (Inception) | |
| | | Year Ended | | | Through | |
| | | May 31 | | | May 31, | |
| | | 2015 | | | 2014 | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
| | | | | | | | |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
| | | | | | | | |
Impairment of note receivable | | | | | | | | |
| | | | | | | | |
Amortization of debt discount | | | | | | | | |
Changes in assets and liabilities: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Accounts payable and accrued expenses | | | | | | | | |
Accrued compensation, related party | | | | | | | | |
| | | | | | | | |
Accrued interest, related party | | | | | | | | |
| | | | | | | | |
| | | | | | | | | |
Net cash used in operating activities | | | | | | | | |
| | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
Payment of cash for note receivable | | | | | | | | |
Payments to acquire intangible assets | | | | | | | | |
Payments for investment in shell company | | | | | | | | |
| | | | | | | | | |
Net cash used in investing activities | | | | | | | | |
| | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
Proceeds from sale of common stock | | | | | | | | |
Proceeds from related party note | | | | | | | | |
Proceeds from issuance of convertible note | | | | | | | | |
| | | | | | | | | |
Net cash provided by financing activities | | | | | | | | |
| | | | | | | | | |
Net increase in cash and cash equivalents | | | | | | | | |
| | | | | | | | | |
Cash and cash equivalents at beginning of period | | | | | | | | |
| | | | | | | | | |
Cash and cash equivalents at end of period | | | | | | | | |
| | | | | | | | | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | |
NON-CASH INVESTING AND FINANCING ACTIVITIES: | | | | | | | | |
Discount due to beneficial conversion feature and warrants | | | | | | | | |
Stock issued to founder for intellectual property | | | | | | | | |
| | | | | | | | |
| | | Preferred stock | | | Common stock | | | Additional paid-in | | | Deficit accumulated during development | | | Total stockholder's | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | capital | | | stage | | | equity | |
| Common stock issued to founder for cash at $0.001 per share | | | - | | | $ | - | | | | 18,000,000 | | | $ | 18,000 | | | $ | - | | | $ | - | | | $ | 18,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss from March 31, 2011 (inception) to May 31, 2011 | | | - | | | | - | | | | - | | | | - | | | | - | | | | (15,530 | ) | | | (15,530 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, May 31, 2011 | | | - | | | $ | - | | | | 18,000,000 | | | $ | 18,000 | | | $ | - | | | $ | (15,530 | ) | | | 2,470 | |
See Accompanying Notes to Financial Statements.
F-4
See notes to the consolidated financial statements.(A DEVELOPMENT STAGE COMPANY)
| | | March 31, 2011 | |
| | | (inception) to | |
| | | May 31, 2011 | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | |
| Net loss | | $ | (15,530 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | |
| Changes in: | | | | |
| Due to related party | | | 100 | |
| Accrued expenses | | | 13,000 | |
| | | | | |
| Net cash used in operating activities | | | (2,430 | ) |
| | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | |
| Proceeds from sale of common stock | | | 18,000 | |
| | | | | |
| Net cash provided by financing activities | | | 18,000 | |
| | | | | |
| NET CHANGE IN CASH | | | 15,570 | |
| | | | | |
| CASH AT BEGINNING OF PERIOD | | | - | |
| | | | | |
| CASH AT END OF PERIOD | | $ | 15,570 | |
| | | | | |
| SUPPLEMENTAL INFORMATION: | | | | |
| Interest paid | | $ | - | |
| Income taxes paid | | $ | - | |
| | | | | |
See Accompanying Notes to Financial Statements.
ADELT DESIGN,CLS HOLDINGS USA, INC.(A Development Stage Company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes to Financial Statements
NOTE 1 - BUSINESS ORGANIZATION AND NATURE OF OPERATIONS
Note 1 – Nature of Business and Significant Accounting Policies
Nature of Business
CLS Holdings USA, Inc. (the “Company”) was originally incorporated as Adelt Design, Inc. (“Adelt”) on March 31, 2011 to manufacture and market carpet binding art. Production and marketing of carpet binding art never commenced operations.
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, and Michael Abrams, the Chief Operating Officer of CLS Labs, was appointed the Chief Operating Officer of Adelt. On November 20, 2014, Adelt adopted amended and restated articles of incorporation, thereby changing its name to CLS Holdings USA, Inc. Effective December 10, 2014, the Company effected a reverse stock split of its issued and outstanding common stock at a ratio of 1-for-0.625 (the “Reverse Split”), wherein 0.625 shares of the Company’s common stock were issued in exchange for each share of common stock issued and outstanding. As a result, 6,250,000 shares of the Company’s common stock were issued to CLS Labs in exchange for the 10,000,000 shares that it owned by virtue of the above-referenced purchase from Larry Adelt.
The Company”)Merger
CLS Labs was originally incorporated in the state of Nevada on March 31, 2011May 1, 2014 under the name RJF Labs, Inc. RJF Labs, Inc. changed its name to manufacture carpet binding art.CLS Labs, Inc. on October 24, 2014.
On April 29, 2015, the Company, CLS Labs and CLS Merger Inc., a Nevada corporation and wholly owned subsidiary of CLS Holdings, 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 stockholders of the Company 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 our previous business.
For financial reporting purposes, the Merger represents a capital transaction of CLS Labs or a “reverse merger” rather than a business combination, because the sellers of CLS Labs controlled the Company immediately following the completion of the Merger. As such, CLS Labs is deemed to be the accounting acquirer in the transaction and, consequently, the transaction is being treated as a recapitalization of CLS Labs. Accordingly, the assets and liabilities and the historical operations that will be reflected in the Company’s ongoing financial statements will be those of CLS Labs and will be recorded at the historical cost basis of CLS Labs. The Company’s assets, liabilities and results of operations will be consolidated with the assets, liabilities and results of operations of CLS Labs after consummation of the Merger. The Company’s historical capital accounts will be retroactively adjusted to reflect the equivalent number of shares issued by the Company in the Merger while CLS Labs’ historical retained earnings will be carried forward. The historical financial statements of the Company before the Merger will be replaced with the historical financial statements of CLS Labs before the Merger in all future filings with the Securities and Exchange Commission, or “SEC”. The Merger is intended to be treated as a tax-free exchange under Section 368(b) of the Internal Revenue Code of 1986, as amended.
These statements reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management are necessary for fair presentation of the information contained therein.Operations
The Company has adopted a fiscal year endproprietary method of May 31st.
Development Stage Company
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 is currently considered a development stage company as defined by FASB ASC 915-10-05. As a development stage enterprise, the Company discloses the deficit accumulated during the development stage and the cumulative statements of operations and cash flows from inception to the current balance sheet date. An entity remains in the development stage until such time as, among other factors, revenues have been realized. To date, the development stage of the Company’s operations consists of developing the business model and marketing concepts.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and equivalents include investments with initial maturities of three monthshas not commercialized its proprietary process or less.otherwise earned any revenues. The Company maintainsplans to generate revenues through licensing, fee-for-service and joint venture arrangements related to its cash balances at credit-worthy financial institutions that are insured byproprietary method of extracting cannabinoids from cannabis plants and converting the Federal Deposit Insurance Corporation ("FDIC") up to $250,000. Deposits with these banks may exceed the amount of insurance provided on such deposits; however, these deposits typically may be redeemed upon demand and, therefore, bear minimal risk. The Company did not have any cash equivalents at May 31, 2011.
Advertising and Promotion
All costs associated with advertising and promoting products are expensed as incurred.
Income Taxes
The Company accounts for income taxes using the asset and liability method, which requires the establishment of deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided to the extent deferred tax assets may not be recoverable after consideration of the future reversal of deferred tax liabilities, tax planning strategies, and projected future taxable income.
Segment Reporting
Under FASB ASC 280-10-50, the Company operates as a single segment and will evaluate additional segment disclosure requirements as it expands its operations.
Fair Value of Financial Instruments
Under FASB ASC 820-10-05, the Financial Accounting Standards Board establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This Statement reaffirms that fair value is the relevant measurement attribute. The adoption of this standard did not have a material effect on the Company’s financial statements as reflected herein. The carrying amounts of cash and accrued expenses reported on the balance sheet are estimated by management to approximate fair value primarily due to the short term nature of the instruments. The Company had no items that required fair value measurement on a recurring basis.resulting cannabinoid extracts into saleable concentrates.
ADELT DESIGN, INC.
(A Development Stage Company)
Notes to Financial StatementsNOTE 2 - GOING CONCERN
Revenue Recognition
For revenue from product sales, the Company recognizes revenue using four basic criteria that must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgment regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required.
The Company has not generated revenues to date.
Basic and Diluted Loss Per Share
The basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing the net loss adjusted on an “as if converted” basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For the periods presented, there were no outstanding potential common stock equivalents and therefore basic and diluted earnings per share result in the same figure.
Stock-Based Compensation
The Company adopted FASB guidance on stock based compensation upon inception on March 31, 2011. Under FASB ASC 718-10-30-2, all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. The Company did not issue any stock and stock options for services and compensation for the period from March 31, 2011 (Inception) through May 31, 2011.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”) issued the FASB Accounting Standards Codification (the “ASC”). The ASC has become the single source of non-governmental accounting principles generally accepted in the United States (“GAAP”) recognized by the FASB in the preparation of financial statements. The ASC does not supersede the rules or regulations of the Securities and Exchange Commission (“SEC”), therefore, the rules and interpretive releases of the SEC continue to be additional sources of GAAP for the Company. The Company adopted the ASC upon inception at March 31, 2011. The ASC does not change GAAP and did not have an effect on the Company’s financial position, results of operations or cash flows.
In February 2010, the FASB issued ASU No. 2010-09 regarding subsequent events and amendments to certain recognition and disclosure requirements. Under this ASU, a public company that is a SEC filer, as defined, is not required to disclose the date through which subsequent events have been evaluated. This ASU is effective upon the issuance of this ASU. The adoption of this ASU did not have a material impact on the Company’s financial statements.
In January 2010, the FASB issued ASU No. 2010-06 regarding fair value measurements and disclosures and improvement in the disclosure about fair value measurements. This ASU requires additional disclosures regarding significant transfers in and out of Levels 1 and 2 of fair value measurements, including a description of the reasons for the transfers. Further, this ASU requires additional disclosures for the activity in Level 3 fair value measurements, requiring presentation of information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements. This ASU is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this ASU did not have a material impact on the Company’s financial statements.
ADELT DESIGN, INC.
(A Development Stage Company)
Notes to Financial Statements
Note 2 – Going Concern
As shown in the accompanying financial statements, the Company is in the development stage, has incurred net losses of $15,530,from operations resulting in an accumulated deficit of $15,530, has no revenues, and cash on hand of $15,570$1,515,587 as of May 31, 2011. These factors raise2015. Further losses are anticipated in the development of its business raising substantial doubt about the Company’s ability to continue as a going concern. Management is currently seeking additional sources of capital to fund short term operations. The Company, however, is dependent upon its ability to secure equity and/or debt financing and there are no assurances that the Company will be successful, therefore, without sufficient financing it would be unlikely for the Company to continue as a going concern.
The financial statements do not include any adjustments that might result from the outcome of any uncertainty as to the Company’s ability to continue as a going concern. Theconcern is dependent upon the Company generating profitable operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management intends to finance operating costs over the next twelve months with loans and/or the sale of common stock. These financial statements also do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classificationsclassification 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 wholly owned operating subsidiaries, CLS Labs, Inc. and CLS Labs Colorado, Inc. All material intercompany transactions have been eliminated upon consolidation of these entities.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less to be necessary shouldcash equivalents. The Company had cash and cash equivalents of $208,821 and $0 as of May 31, 2015 and 2014.
Concentrations of Credit Risk
The Company maintains its cash in bank deposit accounts, the balances of which at times may exceed federally insured limits. The Company continually monitors its banking relationships and consequently has not experienced any losses in such accounts.
Advertising and Marketing Costs
Advertising and marketing costs are expensed as incurred. The Company incurred no advertising and marketing costs for the year ended May 31, 2015 and for the period from inception (May 1, 2014) to May 31, 2014.
Research and Development
Research and development expenses are charged to operations as incurred. The Company incurred research and development costs of $32,769 and $0 for the years ended May 31, 2015 and 2014, respectively.
Fair Value of Financial Instruments
Pursuant to ASC No. 825, Financial Instruments, the Company is required to estimate the fair value of all financial instruments included on its balance sheets. The carrying amount of the Company’s cash and cash equivalents, note receivable, notes payable, accounts payable and accrued expenses, none of which is held for trading, approximates their estimated fair values due to the short-term maturities of those financial instruments.
A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable, either directly or indirectly.
Level 3 - Significant unobservable inputs that cannot be unablecorroborated by market data.
Revenue Recognition
The Company applies the revenue recognition provisions pursuant to continueASC No. 605, Revenue Recognition, which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. The guidance outlines the basic criteria that must be met to recognize the revenue and provides guidance for disclosure related to revenue recognition policies.
Basic and Diluted Per Share
Basic net earnings per share is based on the weighted average number of shares outstanding during the period, while fully-diluted net earnings per share is based on the weighted average number of shares of common stock and potentially dilutive securities assumed to be outstanding during the period using the treasury stock method. Potentially dilutive securities consist of options and warrants to purchase common stock, and convertible debt. Basic and diluted net loss per share is computed based on the weighted average number of shares of common stock outstanding during the period.
The Company uses the treasury stock method to calculate the impact of outstanding stock options and warrants. Stock options and warrants for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on earnings per common share and, accordingly, are excluded from the calculation.
A net loss causes all outstanding stock options and warrants to be antidilutive. As a result, the basic and dilutive losses per common share are the same for the year ended May 31, 2015 and for the period from May 1, 2014 (inception) through May 31, 2014.
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.
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 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
The FASB has issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU supersedes the revenue recognition requirements in Accounting Standards Codification 605 - Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU is effective on January 1, 2017 and should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application. The Company has not yet determined the effect of the adoption of this standard and it is expected to have an immaterial impact on the Company’s consolidated financial statements.
On June 19, 2014, the Company adopted the amendment to (Topic 718) Stock Compensation: Accounting for Share-Based Payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The amendment for accounting for share based payments, when an award provides that a performance target that affects vesting could be achieved after an employee completes the requisite service period shall be accounted for as a going concern.performance condition. The performance target shall not be reflected in estimating the fair value of the award at the grant date, and compensation cost shall be recognized in the period in which it becomes probable that the performance target will be achieved and will represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost shall be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period shall reflect the number of awards that are expected to vest and shall be adjusted to reflect the awards that ultimately vest. The Company does not believe the accounting standards currently adopted will have a material effect on the accompanying condensed 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's consolidated financial position, results of operations or cash flows.
Note 3 – Related PartyNOTE 4 - MERGER WITH CLS LABS
On April 29, 2015, the Company, CLS Labs and CLS Merger, Inc., a Nevada corporation and wholly owned subsidiary of the Company, 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 stockholders of CLS Labs were issued an aggregate of 15,000,000 (post Reverse Split) shares of common stock in the Company 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.
Pro Forma Results
The following tables set forth the unaudited pro forma results of the Company as if the acquisition of CLS Labs had taken place on the first day of the periods presented. These combined results are not necessarily indicative of the results that may have been achieved had the companies always been combined.
| | Twelve months ended | |
| | May 31, 2015 | |
| | | | |
Net loss attributable to CLS Holdings USA, Inc. | | | | |
Basic net income (loss) per common share | | | | |
Diluted net income (loss) per common share | | | | |
Weighted average shares - basic | | | | |
Weighted average shares - diluted | | | | |
NOTE 5 - PREPAID EXPENSES
Prepaid expenses consist of the following as of May 31, 2015 and 2014:
| | | May 31, | | | May 31, | |
| | | 2015 | | | 2014 | |
| Prepaid legal fee | | $ | 3,466 | | | $ | - | |
| Prepaid consulting fees | | | 28,334 | | | | - | |
| Total prepaid expenses | | $ | 31,800 | | | $ | - | |
NOTE 6 - NOTE RECEIVABLE
On April 19, 2011,17, 2015, CLS Labs Colorado, Inc., a wholly owned subsidiary of the Company’s CEO, Larry Adelt providedCompany, loaned $500,000 (the “Note”) to Picture Rock Holdings, LLC, a Colorado limited liability company (“PRH”) to be used by PRH in connection with the financing of the building out, equipping, and development of a grow facility by PRH that will be operated by a licensed third-party marijuana grower. Pursuant to the Note, as amended by the parties effective June 30, 2015, PRH will repay the principal due under the Note in twenty (20) equal quarterly installments of Twenty Five Thousand Dollars ($25,000) commencing three (3) months after a certificate of occupancy is issued with respect to the grow facility (the “CO Date”) and continuing until paid in full. Interest will accrue on the unpaid principal balance of the Note at the rate of twelve percent (12%) per annum and will be paid quarterly in arrears commencing on the CO Date 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 CO Date. In the event of default as defined in the agreements underlying the Note, all amounts under the Note shall become at once due and payable. During the year ended May 31, 2015, the Company recorded an advanceimpairment related to the note receivable in the amount of $100 in cash, which was$500,000. This receivable is recorded as a current liabilityon the balance sheet as of May 31, 2011.2015 in the amount of $0, net of allowance in the amount of $500,000.
NOTE 7 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities of $145,024 at May 31, 2015 consist of legal fees and other trade payables. The advanceCompany had no accounts payable or accrued liabilities at May 31, 2014.
NOTE 8 - RELATED PARTY TRANSACTIONS
As of May 31, 2015 the Company had related party payables in the amount of $18,455 due to directors and officers of the Company for expenses paid on behalf of the Company. The Company recorded imputed interest of $716 during the year end May 31, 2015 on $17,930 of the $18,455 due to a director and officer of the Company.
As of May 31, 2015, the Company had accrued compensation in the amount of $106,250 due to Jeffrey Binder pursuant to his employment agreement, as amended. Mr. Binder has deferred all salary since the commencement of the agreement.
During the year ended May 31, 2015, three founding shareholders were each issued 5,000,000 (post Reverse Split) common shares for a total of 15,000,000 (post Reverse Split) founder shares. The transaction was non-interest bearingvalued at $1,000,000. The Company received cash proceeds of $1,000,000 from two shareholders and intellectual property from a third shareholder. Due to the related party nature, no value was assigned to the intellectual property exchanged for stock.
During the year ended May 31, 2015, the Company borrowed $600,000 from Frank Koretsky, a director of the Company, to fund operations. This loan is unsecured, due on demand.not less than one year after the date of the loan, and bears interest at a rate of 6% per annum. As of May 31, 2015, the outstanding principal balance was $600,000 and the Company had accrued interest in the amount of $3,337. The balance of the loan terms have not yet been finalized.
On May 15, 2011,April 17, 2015, prior to Alan Bonsett’s appointment as Chief Operating Officer, the Company, through CLS Colorado, entered into an arrangement with PRH (the “Colorado Arrangement”) to, among other things, (i) license its proprietary technology, methods and processes to PRH in Colorado in exchange for a fee; (ii) sub-lease warehouse and office space in Denver, Colorado to PRH where PRH can grow, extract and process cannabis and other plant products in exchange for lease payments totaling an aggregate of $1,067,067 over a seventy-two (72) month term; (iii) build a processing facility and lease such facility, including equipment, to PRH in exchange for a monthly fee; and (iv) loan $500,000 to PRH to be used by PRH in connection with its financing of the building out, equipping, and development of a marijuana grow facility. Mr. Bonsett, as an owner of PRH, will indirectly receive the benefits of the Colorado Arrangement. Because construction of the Grow Facility is not yet complete, the business to be operated by PRH pursuant to the Colorado Arrangement has not yet produced revenues.
NOTE 9 - NOTES PAYABLE
Convertible Note
On April 29, 2015, the Company issued 18,000,000 founder’sa convertible note to an unaffiliated individual (the “Holder”) in the amount of $200,000 (the “Convertible Note”). Interest accrues on the Convertible Note at a rate of 15% per annum. On the first anniversary of the Convertible Note, the Company shall pay all then accrued interest. Thereafter, the Company shall make eight (8) equal payments of principal together with accrued interest, quarterly in arrears, commencing on July 1, 2016 and continuing on the same day of each October, January, April and July thereafter until paid in full. All outstanding principal and any accumulated unpaid interest thereon shall be due and payable on the third anniversary of note.
The Holder has the right but not the obligation to make additional loans to the Company (the "Subsequent Loans"), in tranches of $200,000 each, until the earlier of October 29, 2015 or until the Holder has made loans to Company that in the aggregate equal $1,000,000. The Holder shall provide the Company with not less than five (5) business days’ notice of its desire to make a Subsequent Loan and the Company shall accept such Subsequent Loan and execute a promissory note, in the form of, and at the interest rate set forth in, the Convertible Note evidencing such Subsequent Loan.
At the Holder’s election, at any time prior to payment or prepayment of the Convertible Note in full, all principal and accrued interest under the Convertible Note may be converted in whole, but not in part, into shares of common stock of Company. For each dollar converted, the Holder shall receive two shares of common stock and a three-year warrant to purchase 1.33 shares (post Reverse Split) of common stock at the par value of $0.001 to the Company’s CEO, Larry Adelt in exchange for proceeds of $18,000.$0.75 per share (post Reverse Split).
As of May 31, 2015 the outstanding principal balance on the Convertible Note 4 – Stockholder’s Equitywas $200,000 and the Company had accrued interest in the amount of $2,630 on this note.
Beneficial Conversion Feature of Convertible Note
The Company calculated the fair value of the beneficial conversion features embedded in the Convertible Note via the intrinsic value method. The Company also calculates the fair value of the detachable warrants offered with the Convertible Note via the Black-Scholes valuation method. The value of the conversion feature and the detachable warrants are considered discounts to the Convertible Note, to the extent the aggregate value of the warrants and conversion features did not exceed the face value thereof. These discounts were amortized to interest expense over the term of the Convertible Note.
The Company recorded a discount to the Convertible Note in the amount of $200,000. The discount was comprised of $100,000 related to the beneficial conversion feature embedded in the Convertible Note and $100,000 for the detachable warrants. During the year ended May 31, 2015 the Company amortized $5,556 of this discount to interest expense. As of May 31, 2015, the Company had unamortized discount on the Convertible Note in the amount of $194,444.
Koretsky Note
During the year ended May 31, 2015, the Company borrowed $600,000 from Frank Koretsky, a director of the Company, to fund operations. This loan is unsecured, due not less than one year after the date of the loan, and bears interest at a rate of 6% per annum. As of May 31, 2015 the outstanding principal balance was $600,000 and the Company had accrued interest in the amount of $3,337. The balance of the loan terms have not yet been finalized.
NOTE 10 - STOCKHOLDERS’ EQUITY
The Company’s authorized to issue 90,000,000capital stock consists of 250,000,000 shares of $.001common stock, par value common stock.$0.0001 per share and 20,000,000 shares of preferred stock, par value $0.001 per share. The Company has 18,000,000had 20,000,003 and zero shares (post Reverse Split) of common sharesstock issued and outstanding as of May 31, 2011. The Company is authorized to issue 10,000,000 shares of $.001 par value preferred stock. The Company has never issued any shares of preferred stock.2015 and 2014, respectively.
On May 15, 2011,Effective December 10, 2014, the Company effected a reverse stock split of its common stock then issued and outstanding at a ratio of 1-for-0.625. A total of 18,000,000 founder’s shares of common stock at the par value of $0.001were outstanding immediately prior to the Company’s CEO, Larry Adelt in exchange for proceedsreverse split, and a total of $18,000.11,250,000 shares of common stock were outstanding after the reverse stock split.
Note 5 – Subsequent Events
There have been no subsequent events to report in accordance with ASC 855-10.
During the year ended May 31, 2015, three founding shareholders were each issued 5,000,000 (post Reverse Split) shares of common stock for a total of 15,000,000 (post Reverse Split) founder shares. The transaction was valued at $1,000,000. The Company received cash proceeds $1,000,000 from two shareholders and intellectual property from a third shareholder. Due to the related party nature, no value was assigned to the intellectual property exchanged for stock.
On April 29, 2015, a net amount of 5,000,003 shares (post Reverse-Split) of Common Stock were issued pursuant to the Merger Agreement (Note 1) in accordance with the financial accounting treatment for a Reverse Merger. These shares of Common Stock represent the shares issued to the Company's shareholders other than the former shareholders of CLS Labs, Inc. prior to the Merger. The Company recorded a discount on its Convertible Note (Note 9) in the amount of $200,000. The discount was comprised of $100,000 related to the beneficial conversion feature embedded in the Convertible Note and $100,000 for the detachable warrants.
The Company recorded imputed interest of $716 during the year end May 31, 2015 on $17,930 due to a director and officer of the Company.
Restricted Stock Agreements
DEALER PROSPECTUS DELIVERY OBLIGATIONIn October 2014, the Company agreed to issue 120,000 (post Reverse Split) shares of restricted common stock to a consultant. These shares vest at a rate of 10,000 (post Reverse Split) shares per month. The stock was valued at $90,000. The agreement was suspended at the end of January 2015 until completion of the Merger and began again in May 2015. During the year ended May 31, 2015, 50,000 (post Reverse Split) shares vested and the Company recognized $37,500 in expenses for the vested shares. As of May 31, 2015 the Company has $37,500 included in stock to be issued on the accompanying balance sheet. Subsequent to May 31, 2015, the Company and consultant agreed to terminate the agreement.
NOTE 11 - 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.
Until __________________ (90th dayAs of May 31, 2015, the Company had incurred a net operating loss and, accordingly, no provision for income taxes has been recorded. In addition, no benefit for income taxes has been recorded due to the uncertainty of the realization of any tax assets.
The tax effects of the temporary differences that give rise to the Company's estimated deferred tax assets and liabilities are as follows:
| | | May 31, | | | May 31, | |
| | | 2015 | | | 2014 | |
Federal and State Statutory Rate | | | | | | | | |
Net operating loss carry forwards | | | | | | | | |
Valuation allowance for deferred tax assets | | | | | | | | |
| | | | | | | | |
As of May 31, 2015 and 2014, the Company had net operating loss carry forwards of approximately $500,417 and $0 available to offset future taxable income. The net operating loss carry forwards, if not utilized, will begin to expire in 2035.
Based on the available objective evidence, including the Company’s history of losses, management believes it is more likely than not that the net deferred tax assets will not be fully realizable. Accordingly, the Company has provided for a full valuation allowance against its net deferred tax assets at May 31, 2015. The Company had no uncertain tax positions as of May 31, 2015.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Lease Agreement
On April 17, 2015, the Company entered into an arrangement (the “Colorado Arrangement”), through its wholly owned subsidiary, CLS Labs Colorado, Inc., a Florida corporation (“CLS Labs Colorado”), via a number of agreements with certain Colorado entities, including the following:
| i. | a Licensing Agreement with Picture Rock Holdings, LLC, a Colorado limited liability company (“PRH”), whereby, in exchange for a license fee payable over the ten (10) year term 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 distribution of the Products. Pursuant to the Licensing Agreement, if during its term applicable state and local laws change to permit, in whole or in part, the ownership or issuance of a marijuana-infused products license in Colorado (a “MIP License”), directly or indirectly, by or to a person or entity who is not a Colorado resident, CLS Labs Colorado has the option to demand the transfer of up to a fifty six percent (56%) ownership interest in the MIP Licenses owned by PRH to CLS Labs Colorado or its designees in exchange for a proportionate reduction in license fees. |
| ii. | an Industrial Lease Agreement (the “Lease”) with Casmir-Quince, LLC, a Colorado limited liability company, whereby CLS Labs Colorado leased 14,392 square feet of warehouse and office space (the “Leased Real Property”) in a building in Denver, Colorado where certain intended activities, including growing, extraction, conversion, assembly and packaging of cannabis and other plant materials, are permitted by and in compliance with state, city and local laws, rules, ordinances and regulations. The Lease has an initial term of seventy-two (72) months and provides CLS Labs Colorado with two options to extend the term of the lease by up to an aggregate of ten (10) additional years. |
| iii. | a Sublease Agreement with PRH (the “Sublease”), thereby subletting the entire Leased Real Property to PRH. The term of the Sublease is the same as the Lease and PRH is required to pay CLS Labs Colorado monthly rent equal to the total rent due under the Lease for the corresponding month. |
| iv. | an Equipment Lease Agreement (the “Equipment Lease”) with PRH, whereby, in exchange for a lease payment, CLS Labs Colorado agreed to commence building a fully equipped lab at the Leased Real Property, including purchasing all equipment necessary to extract, convert and provide quality control of all cannabis products of PRH. The Equipment Lease terminates upon the earlier of ten (10) years from its effective date or such earlier date upon which the Lease is terminated. PRH has the option to renew the Equipment Lease for a period of five (5) years, or such lesser period as remains under the Lease at the time of the renewal. If during the term of the Equipment Lease applicable state and local laws change to permit, in whole or in part, the ownership or issuance of an MIP License, directly or indirectly, by or to a person or entity who is not a Colorado resident, CLS Labs Colorado has the option to demand the transfer of up to a fifty six percent (56%) ownership interest in the MIP Licenses owned by PRH to CLS Labs Colorado or its designees in exchange for a proportionate reduction in lease payments. |
| v. | a promissory note (the “Note”) pursuant to which CLS Labs Colorado loaned Five Hundred Thousand Dollars ($500,000) to PRH to be used by PRH in connection with the financing of the building out, equipping, and development of the Grow Facility by PRH that will be operated by a licensed third-party marijuana grower. PRH will repay the principal due under the Note in twenty (20) equal quarterly installments of Twenty Five Thousand Dollars ($25,000) commencing on July 1, 2015 and continuing until paid in full. Interest will accrue on the unpaid principal balance of the Note at the rate of twelve percent (12%) per annum and will be paid quarterly in arrears commencing on July 1, 2015 and continuing until paid in full. All outstanding principal and any accumulated unpaid interest due under the Note is due and payable on April 1, 2020. |
Effective June 30, 2015, CLS Labs Colorado and PRH agreed to defer all payments due from PRH to CLS Labs Colorado pursuant to the Note and Licensing Agreement until three months after the laterdevelopment of (1)the Grow Facility is complete and a certificate of occupancy has been issued.
Consulting Agreements
In September 2014, the Company entered into a three month consulting agreement at a monthly rate of $25,000 which commenced upon completion of the Merger. During the year ended May 31, 2015 the Company paid $25,000 under this agreement.
In October 2014, the Company entered into a one year consulting agreement. During the year ended May 31, 2015 the Company paid a retainer of $80,000 and an additional $35,000 for meeting certain milestones. The Company is amortizing the retainer over the term of the consulting agreement. During the year ended May 31, 2015 the Company recognized $91,667 in expense related to this agreement.
In October 2014, the Company entered into a one year consulting agreement for investor relations. The Company pays a monthly fee of $6,000 at the beginning of each month and awarded 120,000 (post Reverse Split) shares of restricted common stock that vests at a rate of 10,000 (post Reverse Split) shares per month. The agreement was suspended at the end of January 2015 until completion of the Merger and began again in May 2015. During the year ended May 31, 2015, the Company paid $37,500 under this agreement and 50,000 (post Reverse Split) shares vested. As of May 31, 2015 the Company has $37,500 included in stock to be issued on the accompanying balance sheet. Subsequent to May 31, 2015 the Company and consultant agreed to terminate the agreement.
NOTE 13 - 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, Mr. Binder, CLS Labs and the Company entered into an addendum to Mr. Binder’s employment agreement whereby Mr. Binder agreed to, in addition to his obligations to CLS Labs, 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 Mr. Binder with respect to annual salary and annual stock options, as referenced above. As of May 31, 2015, Mr. Binder had deferred all compensation payable pursuant to the agreement.
CLS Labs and Michael Abrams entered into a five-year employment agreement effective October 1, 2014. Under the agreement, Mr. Abrams served as CLS Labs’ Chief Operating Officer and earned an annual salary of $150,000. Under the agreement, Mr. Abrams was 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. Additionally, Mr. Abrams was entitled to a one-time signing bonus of 250,000 shares of common stock of CLS Labs.
On April 28, 2015, Mr. Abrams, CLS Labs and the Company entered into an addendum to Mr. Abrams’s employment agreement whereby Mr. Abrams agreed to, in addition to his obligations to CLS Labs, 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 with respect to Mr. Abrams’ annual salary and annual stock options, as referenced above, and agreed to issue Mr. Abrams 250,000 (post Reverse Split) shares of the Company’s common stock in lieu of CLS Labs’ signing bonus, in exchange for Mr. Abrams serving as its Chief Operating Officer.
NOTE 14 - SUBSEQUENT EVENTS
The Company and Michael Abrams mutually agreed to terminate the employment agreement dated October 1, 2014 between RJF Labs, Inc. (now known as CLS Labs, Inc.) and Mr. Abrams, as amended, effective September 1, 2015. The Company and Mr. Abrams agreed that Mr. Abrams would resign as Chief Operating Officer effective as of August 15, 2015 and serve as consultant to the Company after his employment terminated on September 1, 2015. The parties further agreed that neither party would have any further obligations under the Employment Agreement as of such date.
Effective August 1, 2015, the Company and Alan Bonsett entered into a five-year employment agreement. Pursuant to the agreement, Mr. Bonsett commenced serving as the Company’s Chief Operating Officer on August 15, 2015. Under the agreement, Mr. Bonsett is entitled to receive an annual salary of $150,000. Further, he is entitled to receive a performance bonus equal to 2% of the Company’s annual EBITDA, up to a maximum annual cash compensation of $1 million (including his base salary), and annual stock options, exercisable at the fair market value of the Company’s common stock on the date of grant, in an amount equal to 2% of its annual EBITDA up to $42.5 million and 4% of its annual EBITDA in excess of $42.5 million. Additionally, Mr. Bonsett is entitled to a one-time signing bonus of 250,000 (post Reverse Split) shares of restricted common stock of the Company, which will become fully vested one year from the effective date of the registration statementagreement. Mr. Bonsett, as an owner of PRH, will indirectly receive the benefits of the Colorado Arrangement, as discussed in Note 8. Because construction of the Grow Facility is not yet complete, the business to be operated by PRH pursuant to the Colorado Arrangement has not yet produced revenues.
We evaluated subsequent events after the balance sheet date through the date the financial statements were issued. We did not identify any additional material events or (2) the first date on which the securities are offered publicly), all dealerstransactions occurring during this subsequent event reporting period that effect transactionsrequired further recognition or disclosure in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.financial statements.
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM Item 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTIONOther Expenses of Issuance and Distribution
The following table sets forth the costs and expenses to be paidpayable by us in connection with the issuance and distribution of the securities being registered hereunder. No expenses will be borne by the Selling Stockholder. All of the amounts shown are as follows:estimates, except for the SEC registration fee.
| SEC registration fee | | $ | 513.57 | |
| Accounting fees and expenses* | | $ | | |
| Legal fees and expenses* | | $ | 50,000.00 | |
| Printing expenses* | | $ | 10,000.00 | |
| Miscellaneous fees and expenses* | | $ | 10,000.00 | |
| Total* | | $ | | |
Securities and Exchange Commission Registration Fee approximate. | | | | |
| | | | |
| | | | |
| | | | |
| | | | |
* Estimated amountItem 14. Indemnification of Officers and Directors
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERSNevada Law
Article VIISection 78.7502 of our Articles of Incorporation permit usthe Nevada Revised Statutes permits a corporation to indemnify our officers and directors and certain other persons against expensesany person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, except an action by or in defensethe right of a suit to which they are partiesthe corporation, by reason of such office, so longthe fact that he is or was a director, officer, employee, or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee, or agent of another corporation, partnership joint venture, trust, or other enterprise, against expenses, including attorneys’ fees, judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with the persons conducted themselvesaction, suit or proceeding if he:
(a) is not liable pursuant to Nevada Revised Statute 78.138, or
(b) acted in good faith and the personsin a manner which he reasonably believed that their conduct wasto be in our best interests or not opposed to ourthe best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe theirhis conduct was unlawful. See our Articles
In addition, Section 78.7502 of Incorporation filedthe Nevada Revised Statutes permits a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee, or agent of the corporation, or is or was serving at the request of the corporation as Exhibit 3.1 to this registration statement.
Indemnification is not permitteda director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise against expenses, including amounts paid in settlement and attorneys’ fees actually and reasonably incurred by him in connection with the defense or settlement of the action or suit if he:
(a) is not liable pursuant to Nevada Revised Statute 78.138; or
(b) acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation.
To the extent that a director, officer, employee, or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit, or proceeding by usreferred to above, or in our right in whichdefense of any claim, issue, or matter, the officer or director was adjudged liablecorporation is required to us orindemnify him against expenses, including attorneys’ fees, actually and reasonably incurred by him in connection with any other proceeding charging that the officer or director derived an improper personal benefit, whether or not involving action in an official capacity.defense.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
ISSUANCE TO FOUNDERS
On May 15, 2011,Section 78.751 of the Nevada Revised Statutes provides that such indemnification may also include payment by the Company issued 18,000,000 founder’s shares at the par value of $0.001expenses incurred in exchange for proceeds of $18,000.
There are 10,000,000 preferred shares authorized. The Company has issued no preferred shares.
The Company has no stock option plan, warrantsdefending a civil or other dilutive securities.
These shares were issued pursuant to Section 4(2)criminal action or proceeding in advance of the Securities Act. The Eighteen Million (18,000,000) sharesfinal disposition of common stock are restricted shares as defined insuch action or proceeding upon receipt of an undertaking by the Securities Act. These issuances were madeperson indemnified to Larry Adelt,repay such payment if he shall be ultimately found not to be entitled to indemnification under Section 78.751 of the founderNevada Revised Statutes. Indemnification may be provided even though the person to be indemnified is no longer a director, officer, employee, or agent of the Company who is a sophisticated individual. Since our inception, the founders are in a position of access to relevant and material information regarding our operations. The selling security holder is the "underwriter” within the meaning of the Securities Act of 1933, as amended with respect to allor such other shares being offered hereby.entities.
Section 78.752 of the Nevada Revised Statutes allows a corporation to purchase and maintain insurance or make other financial arrangements on behalf of any person who is or was a director, officer, employee, or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise for any liability asserted against him and liability and expenses incurred by him in his capacity as a director, officer, employee, or agent, or arising out of his status as such, whether or not the corporation has the authority to indemnify him against such liability and expenses.
Other financial arrangements made by the corporation pursuant to Section 78.752 of the Nevada Revised Statutes may include the following:
(a) the creation of a trust fund;
(b) the establishment of a program of self-insurance;
(c) the securing of its obligations of indemnification by granting a security interest or other lien on any assets of the corporation; and
(d) the establishment of a letter of credit, guaranty or surety.
No financial arrangement made pursuant to Section 78.752 may provide protection for a person adjudged by a court of competent jurisdiction, after exhaustion of all appeals, to be liable for intentional misconduct, fraud or a knowing violation of law, except with respect to the advancement of expenses of indemnification ordered by a court.
Any discretionary indemnification pursuant to Section 78.7502 of the Nevada Revised Statutes, unless ordered by a court or advanced pursuant to an undertaking to repay the amount if it is determined by a court that the indemnified party is not entitled to be indemnified by the corporation, may be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee, or agent is proper in the circumstances. The determination must be made:
(a) by the stockholders;
(b) by the board of directors by a majority vote of a quorum consisting of directors who were not parties to the action, suit, or proceeding;
(c) if a majority vote of a quorum consisting of directors who were not parties to the action, suit, or proceeding so orders, by independent legal counsel in a written opinion, or
(d) if a quorum consisting of directors who were not parties to the action, suit, or proceeding cannot be obtained, by independent legal counsel in a written opinion.
Subsection 7 of Section 78.138 of the Nevada Revised Statutes provides that, subject to certain very limited statutory exceptions, a director or officer is not individually liable to the corporation or its stockholders or creditors for any damages as a result of any act or failure to act in his or her capacity as a director or officer, unless it is proven that the act or failure to act constituted a breach of his or her fiduciary duties as a director or officer and such breach of those duties involved intentional misconduct, fraud or a knowing violation of law. The statutory standard of liability established by Section 78.138 controls even if there is a provision in the corporation’s articles of incorporation unless a provision in the corporation’s articles of incorporation provides for greater individual liability.
Charter Provisions and Other Arrangements
Pursuant to the provisions of Nevada Revised Statutes, we have adopted indemnification provisions in our Amended and Restated Articles of Incorporation with respect to our officers and directors which state that, among other things, each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was an officer or director shall be indemnified and held harmless by the Company to the fullest extent authorized by Nevada law against all expense, liability, damage, claim and loss (including attorneys’ fees, judgments, fines, ERISA excise taxes and penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith, and such indemnification shall continue as to an indemnitee who has ceased to be such a director, officer, employee or agent and shall inure to the benefit of the indemnitee’s heirs, executors and administrators.
Effective December 18, 2015, the Company entered into an indemnification agreement with each of its directors and executive officers, namely, Jeffrey Binder, its Chairman, President, Chief Executive Officer and a director; Frank Koretsky, a director; and Alan Bonsett, its Chief Operating Officer (each, an “Indemnitee”). Pursuant to the indemnification agreements, the Company is obligated to indemnify the Indemnitees to the fullest extent permitted by applicable law and to advance all reasonable expenses incurred by or on behalf of the Indemnitees in connection with any proceeding covered by the indemnification agreement, subject to certain restrictions and repayment provisions.
ITEM 16. EXHIBITSItem 15. Recent Sales of Unregistered SecuritiesDuring the past three years, the following securities were sold or otherwise issued by the Company and were not registered under the Securities Act:
On April 29, 2015, the Company entered into a loan agreement and convertible promissory note with an unaffiliated third party in exchange for $200,000 in cash, which debt is convertible into common stock of the Company.
On April 30, 2015, in connection with the Merger, the Company issued 5,000,000 shares of common stock to each of Jeffrey Binder, Frank Koretsky and Raymond Keller in exchange for their respective interests in CLS Labs.
On August 28, 2015, the Company issued 60,000 shares of common stock to Stratcon Partners, LLC in exchange for consulting services pursuant to a consulting agreement.
On January 12, 2016, the Company issued convertible promissory notes to each of Jeffrey Binder and Frank Koretsky in the amounts of $50,000 and $895,000, respectively, in exchange for cash. The Company issued additional convertible promissory notes in the amounts of $42,500 and $380,000, respectively, to each of Mr. Binder and Mr. Koretsky on April 11, 2016 in exchange for cash.
On January 21, 2016, the Company issued 250,000 shares of restricted common stock to Alan Bonsett as a signing bonus, pursuant to the terms of his employment agreement.
On March 18, 2016, the Company issued a 10% Original Issue Convertible Promissory Note in the principal amount of $222,222 to Old Main Capital, LLC in exchange for cash, and an 8% Convertible Promissory Note in the principal amount of $200,000 as a commitment fee for an equity line.
On November 13, 2015 and April 15, 2016, the Company issued 10,000 and 30,000 shares of common stock, respectively, to Wall Street Buy Sell Hold, Inc. in exchange for consulting services pursuant to a consulting agreement.
All of the issuances of securities set forth above were deemed exempt from registration under the Securities Act in reliance on Section 4(a)(2) and/or Regulation D.
The following exhibits are included as part of this Form S-1 or are incorporatedRegistration Statement by reference to our previous filings:reference:
| 2.1 | | ArticlesAgreement and Plan of Incorporation
|
| | |
| | Legal Opinion of Steven Sager, Attorney, June 3, 2011
|
| | Consent of M & K CPAS, PLLC, June 3, 2011
|
| 3.1 | Articles of Incorporation of Adelt Design, Inc. (incorporated by reference from Exhibit 3.1 in the Company's Registration Statement filed with the SEC on June 3, 2011). |
ITEM 17. UNDERTAKINGS.| 3.2 | Amended and Restated Articles of Incorporation of CLS Holdings USA, Inc. (incorporated by reference from Exhibit 1.1 in the Company's Current Report on Form 8-K filed with the SEC on November 26, 2014). |
| 3.3 | Bylaws of Adelt Design, Inc. (incorporated by reference from Exhibit 3.3 in the Company's Registration Statement filed with the SEC on June 3, 2011). |
| 3.4 | Amended and Restated Bylaws of CLS Holdings USA, Inc. (incorporated by reference from Exhibit 1.2 in the Company's Current Report on Form 8-K filed with the SEC on November 26, 2014). |
The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denomination and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.
| 4.1 | Form of Stock Certificate (incorporated by reference from Exhibit 4.1 in the Company's Current Report on Form 8-K filed with the SEC on April 30, 2015). |
| 5.1 | Legal opinion of Broad and Cassel.*** |
| 10.1 | Employment Agreement dated October 1, 2014 between CLS Labs, Inc. and Jeffrey Binder (incorporated by reference from Exhibit 10.1 in the Company's Current Report on Form 8-K filed with the SEC on April 30, 2015) (1). |
| 10.2 | Addendum to Employment Agreement dated April 28, 2015 between CLS Labs, Inc., CLS Holdings USA, Inc. and Jeffrey Binder (incorporated by reference from Exhibit 10.2 in the Company's Current Report on Form 8-K filed with the SEC on April 30, 2015) (1). |
| 10.3 | Employment Agreement dated October 1, 2014 between CLS Labs, Inc. and Michael Abrams (incorporated by reference from Exhibit 10.3 in the Company's Current Report on Form 8-K filed with the SEC on April 30, 2015) (1). |
| 10.4 | Addendum to Employment Agreement dated April 28, 2015 between CLS Labs, Inc., CLS Holdings USA, Inc. and Michael Abrams (incorporated by reference from Exhibit 10.4 in the Company's Current Report on Form 8-K filed with the SEC on April 30, 2015) (1). |
| 10.5 | Lease dated April 17, 2015 between Casimir-Quince, LLC, and CLS Labs Colorado, Inc. (incorporated by reference from Exhibit 10.5 in the Company's Current Report on Form 8-K filed with the SEC on April 30, 2015). |
| 10.6 | Sublease Agreement dated April 17, 2015 between CLS Labs Colorado, Inc. and Picture Rock Holdings, LLC (incorporated by reference from Exhibit 10.6 in the Company's Current Report on Form 8-K filed with the SEC on April 30, 2015). |
| 10.7 | Licensing Agreement dated April 17, 2015 between CLS Labs Colorado, Inc. and Picture Rock Holdings, LLC (incorporated by reference from Exhibit 10.7 in the Company's Current Report on Form 8-K filed with the SEC on April 30, 2015).** |
| 10.8 | Equipment Lease dated April 17, 2015, between CLS Labs Colorado, Inc. and Picture Rock Holdings, LLC (incorporated by reference from Exhibit 10.8 in the Company's Current Report on Form 8-K filed with the SEC on April 30, 2015).** |
| 10.9 | Restricted Stock Grant Agreement dated April 28, 2015 between CLS Holdings USA, Inc. and Michael Abrams (incorporated by reference from Exhibit 10.9 in the Company's Current Report on Form 8-K filed with the SEC on April 30, 2015) (1). |
| 10.10 | Subscription for Property Agreement dated July 16, 2014, between CLS Labs, Inc. and Raymond Keller (incorporated by reference from Exhibit 2.1 in the Company's Current Report on Form 8-K filed with the SEC on April 30, 2015. |
| 10.11 | Promissory Note dated April 17, 2015, between CLS Labs Colorado, Inc. and Picture Rock Holdings, LLC (incorporated by reference from Exhibit 10.11 in the Company's Current Report on Form 8-K filed with the SEC on April 30, 2015). |
| 10.12 | Confidentially, Non-Compete and Proprietary Rights Agreement dated July 16, 2104 between CLS Labs, Inc. and Raymond Keller (incorporated by reference from Exhibit 2.1 in the Company's Current Report on Form 8-K filed with the SEC on April 30, 2015). |
| 10.13 | Employment Agreement dated August 18, 2015 between CLS Holdings USA, Inc. and Alan Bonsett (incorporated by reference from Exhibit 10.1 on the Company's Current Report on Form 8-K filed with the SEC on August 20, 2015) (1). |
| 10.14 | Loan Agreement dated April 29, 2015 (incorporated by reference from Exhibit 10.1 in the Company's Current Report on Form 8-K filed with the SEC on May 5, 2015). |
| 10.15 | 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, 2105). |
| 10.16 | Convertible Promissory Note dated January 12, 2016 in favor of Frank Koretsky (incorporated by reference from Exhibit 10.1 in the Company's Current Report on Form 8-K filed with the SEC on January 19, 2016). |
| 10.17 | Convertible Promissory Note dated January 12, 2016, in favor of Jeffrey Binder (incorporated by reference from Exhibit 10.2 in the Company's Current Report on Form 8-K filed with the SEC on January 19, 2016) (1). |
| 10.18 | 10% Original Issue Discount Convertible Promissory Note dated March 18, 2016, in favor of Old Main Capital, LLC (incorporated by reference from Exhibit 4.1 in the Company's Current Report on Form 8-K filed with the SEC on March 24, 2016). |
| 10.19 | 8% Convertible Promissory Note dated March 18, 2016 in favor of Old Main Capital, LLC (incorporated by reference from Exhibit 4.2 in the Company's Current Report on Form 8-K filed with the SEC on March 24, 2016). |
| 10.20 | Securities Purchase Agreement dated March 18, 2016 between the Company and Old Main Capital, LLC (incorporated by reference from Exhibit 10.1 in the Company's Current Report on Form 8-K filed with the SEC on March 24, 2016). |
| 10.21 | Registration Rights Agreement dated March 18, 2016 between the Company and Old Main Capital, LLC (incorporated by reference from Exhibit 10.2 in the Company's Current Report on Form 8-K filed with the SEC on March 24, 2016). |
| 10.22 | Convertible Promissory Note dated April 11, 2016, in favor of Frank Koretsky (incorporated by reference from Exhibit 10.1 in the Company's Current Report on Form 8-K filed with the SEC on April 14, 2016). |
| 10.23 | Convertible Promissory Note dated April 11, 2016, in favor of Jeffrey Binder (incorporated by reference from Exhibit 10.2 in the Company's Current Report on Form 8-K filed with the SEC on April 14, 2016). |
| 10.24 | Equity Purchase Agreement dated April 18, 2016 between the Company and Old Main Capital, LLC (incorporated by reference from Exhibit 10.1 in the Company's Current Report on Form 8-K filed with the SEC on April 20,, 2016). |
| 23.2 | Consent of Broad and Cassel (included in Exhibit 5.1).* |
| 24.1 | Power of Attorney of Directors of the Registrant (set forth on signature page to this filing). |
(1) Management Contract or Compensation Plan
| ** | Portions of this document are omitted pursuant to a confidential treatment order granted pursuant to Rule 24(b)-2 under the Exchange Act. Confidential portions of this document have been filed separately with the Securities and Exchange Commission. |
| *** | To be filed by amendment. |
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities Act;
(ii) To reflect in the prospectus any facts or events arising after the effective date of this registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in this registration statement;
(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4) That, for purposes of determining liability under the Securities Act to any purchaser:
(i) If the registrant is relying on Rule 430B:
(A) Each prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and
(B) Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) (§ 230.424(b)(2), (b)(5), or (b)(7) of this chapter) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) (§ 230.415(a)(1)(i), (vii), or (x) of this chapter) for the purpose of providing the information required by section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date.
(b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrantregistrant pursuant to the foregoing provisions, or otherwise, the Registrantregistrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrantregistrant of expenses incurred or paid by a director, officer or controlling person of the Registrantregistrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrantregistrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
(c) The undersigned Registrantregistrant hereby undertakes that:
(1) For the purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in thea form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securitiessecurities Act shall be deemed to be part of thethis registration statement as of the time it was declared effective.
(2) For purposesthe purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities atas that time shall be deemed to be the initial bona fide offering thereof.
Pursuant to the requirements of the Securities Act of 1933, the Registrantregistrant has duly caused this Amendment to Registration Statement to be signed on its behalf by the undersigned;undersigned, thereunto duly authorized in Salt Lakethe City Utah,of Miami, State of Florida, on this 3rd, day of June 2011.April 21, 2016.
| ADELT DESIGN, INC. |
| |
| By: /s/ Larry Adelt
|
| Larry Adelt |
| President and Chief Executive Officer |
CLS HOLDINGS USA, INC.
PursuantBy:/s/ Jeffrey I. Binder
Jeffrey I. Binder
Chairman, President and Chief Executive Officer
(principal executive officer and principal financial officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jeffrey I. Binder and Frank Koretsky, and each of them, as his or her true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any or all amendments (including post-effective amendments) to this Registration Statement on Form S-1 of CLS Holdings USA, Inc., and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, grant unto said attorney-in-fact and agents, and each of them, full power and authority to do and perform each and every act an thing requisite and necessary to be done in and about the foregoing, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agents, or his substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, as amended, this Amendment to the Registration Statement has beenwas signed by the following persons in the capacities and on the dates indicated.stated.
Signature | | Title | | Date |
| | | | |
/s/ Larry Adelt | | President, Chief Executive Officer and Director (Principal Executive Officer) | | June 3, 2011 |
Larry Adelt | | Chief Financial Officer (Principal Financial and Accounting Officer) | | |
By: /s/ Jeffrey I. Binder Dated: April 21, 2016
Chairman, President, Chief Executive Officer and Director
(principal executive officer and principal financial officer)\
By: /s/ Frank Koretsky Dated: April 21, 2016
Director
EXHIBIT INDEX
Exhibit No. | | Description |
| | Articles of Incorporation
|
| | |
| | Legal Opinion of Steven Sager, Attorney, June 3, 2011
|
| | Consent of M & K CPAS, PLLC, June 3, 2011
|
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