CLS HOLDINGS USA, IN

CLSH
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CLS USA : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-K)

08/30/2021 | 04:34pm

History and Outlook



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



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






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



On April 17, 2015, CLS Labs took its first step toward commercializing its
proprietary methods and processes by entering into the Colorado Arrangement
through its wholly owned subsidiary, CLS Labs Colorado, with certain Colorado
entities, including PRH. During 2017, we suspended our plans to proceed with the
Colorado Arrangement due to regulatory delays and have not yet determined if or
when we will pursue them again.



We have been issued a U.S. patent with respect to our proprietary method of
extracting cannabinoids from cannabis plants and converting the resulting
cannabinoid extracts into concentrates such as oils, waxes, edibles and shatter.
These concentrates may be ingested in a number of ways, including through
vaporization via electronic cigarettes, and used for a variety of pharmaceutical
and other purposes. Internal testing of this extraction method and conversion
process has revealed that it produces a cleaner, higher quality product and a
significantly higher yield than the cannabinoid extraction processes currently
existing in the marketplace. We have not yet commercialized our proprietary
process. We plan to generate revenues through licensing, fee-for-service and
joint venture arrangements related to our proprietary method of extracting
cannabinoids from cannabis plants and converting the resulting cannabinoid
extracts into saleable concentrates.



We intend to monetize our extraction and conversion method and generate revenues
through (i) the licensing of our patented proprietary methods and processes to
others, (ii) the processing of cannabis for others, and (iii) the purchase of
cannabis and the processing and sale of cannabis-related products. We plan to
accomplish this through the acquisition of companies, the creation of joint
ventures, through licensing agreements, and through fee-for-service arrangements
with growers and dispensaries of cannabis products. We believe that we can
establish a position as one of the premier cannabinoid extraction and processing
companies in the industry. Assuming we do so, we then intend to explore the
creation of our own brand of concentrates for consumer use, which we would sell
wholesale to cannabis dispensaries. We believe that we can create a "gold
standard" national brand by standardizing the testing, compliance and labeling
of our products in an industry currently comprised of small, local businesses
with erratic and unreliable product quality, testing practices and labeling. We
also plan to offer consulting services through Cannabis Life Sciences
Consulting, LLC
, which will generate revenue by providing consulting services to
cannabis-related businesses, including growers, dispensaries and laboratories,
and driving business to our processing facilities. Finally, we intend to grow
through select acquisitions in secondary and tertiary markets, targeting newly
regulated states that we believe offer a competitive advantage. Our goal at this
time is to become a successful regional cannabis company.



On December 4, 2017, we entered into the Acquisition Agreement with Alternative
Solutions to acquire the outstanding equity interests in the Oasis LLCs.
Pursuant to the Acquisition Agreement, as amended, we paid a non-refundable
deposit of $250,000 upon signing, which was followed by an additional payment of
$1,800,000 on February 5, 2018, for an initial 10% of Alternative Solutions and
each of the subsidiaries. At the closing of our purchase of the remaining 90% of
the ownership interests in Alternative Solutions and the Oasis LLCs, which
occurred on June 27, 2018, we paid the following consideration: $5,995,543 in
cash, a $4.0 million promissory note due in December 2019, and $6,000,000 in
shares of our common stock. The cash payment of $5,995,543 was less than the
$6,200,000 payment originally contemplated because we assumed an additional
$204,457 of liabilities. The Oasis Note, which was repaid in full in December
2019
, was secured by all of the membership interests in Alternative Solutions
and the Oasis LLCs and by the assets of the Oasis LLCs. At that time, we applied
for regulatory approval to own an interest in the Oasis LLCs, which approval was
received on June 21, 2018. Just prior to closing, the parties agreed that we
would instead acquire all of the membership interests in Alternative Solutions,
the parent of the Oasis LLCs, from its members, and the membership interests in
the Oasis LLCs owned by members other than Alternative Solutions. We have
applied for regulatory approval to own our interest in the Oasis LLCs through
Alternative Solutions under the final structure of the transaction, which is
currently under review.






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In October 31, 2018, the Company, CLS Massachusetts, Inc., a Massachusetts
corporation and a wholly-owned subsidiary of the Company ("CLS Massachusetts"),
and In Good Health, Inc., a Massachusetts corporation ("IGH"), entered into an
Option Agreement (the "IGH Option Agreement"). Under the terms of the IGH Option
Agreement, CLS Massachusetts had an exclusive option to acquire all of the
outstanding capital stock of IGH (the "IGH Option") during the period beginning
on the earlier of the date that is one year after the effective date of the
conversion and December 1, 2019 and ending on the date that was 60 days after
such date. If CLS Massachusetts exercised the IGH Option, the Company, a
wholly-owned subsidiary of the Company and IGH would enter into a merger
agreement (the form of which has been agreed to by the parties) (the "IGH Merger
Agreement"). At the effective time of the merger contemplated by the IGH Merger
Agreement, CLS Massachusetts would pay a purchase price of $47,500,000, subject
to reduction as provided in the IGH Merger Agreement, payable as follows: $35
million
in cash, $7.5 million in the form of a five-year promissory note, and $5
million
in the form of restricted common stock of the Company, plus $2.5 million
as consideration for a non-competition agreement with IGH's President, payable
in the form of a five-year promissory note. IGH and certain IGH stockholders
holding sufficient aggregate voting power to approve the transactions
contemplated by the IGH Merger Agreement had entered into agreements pursuant to
which such stockholders had, among other things, agreed to vote in favor of such
transactions. On October 31, 2018, as consideration for the IGH Option, we made
a loan to IGH, in the principal amount of $5,000,000, subject to the terms and
conditions set forth in that certain loan agreement, dated as of October 31,
2018
between IGH as the borrower and the Company as the lender. The loan was
evidenced by a secured promissory note of IGH, which bore interest at the rate
of 6% per annum and was to mature on October 31, 2021. To secure the obligations
of IGH to us under the loan agreement and the promissory note, the Company and
IGH entered into a security agreement dated as of October 31, 2018, pursuant to
which IGH granted to us a first priority lien on and security interest in all
personal property of IGH. If we did not exercise the Option on or prior to the
date that was 30 days following the end of the option period, the loan amount
was to be reduced to $2,500,000 as a break-up fee, subject to certain exceptions
set forth in the IGH Option Agreement. On August 26, 2019, the parties amended
the IGH Option Agreement to, among other things, delay the closing until January
2020
. By letter agreement dated January 31, 2020, the parties extended the IGH
Option Agreement to February 4, 2020. On February 4, 2020, CLS Massachusetts
exercised the IGH Option.



By letter dated February 26, 2020, we informed IGH that as a result of its
breaches of the IGH Option, which remained uncured, an event of default had
occurred under the IGH Note. We further advised IGH that we were electing to
cause the IGH Note to bear interest at the default rate of 15% per annum
effective February 26, 2020 and to accelerate all amounts due under the IGH
Note. On March 3, 2020, we filed a claim for declaratory relief, among other
things, requesting the court declare that CLS Massachusetts had validly
exercised the IGH Option and instruct IGH to comply with its diligence requests
and ultimately execute a merger agreement with us. The dispute regarding whether
CLS Massachusetts properly exercised the IGH Option arose after CLS
Massachusetts delivered a notice of exercise to IGH and IGH subsequently
asserted that CLS Massachusetts' exercise was invalid. On February 27, 2021, IGH
notified us that it did not plan to make further payments under the IGH Note on
the theory that the Break-Up fee excused additional payments. We vehemently
disagreed with this assertion. At May 31, 2021, we had collected a total of
$2,901,569 of principal and $220,196 of interest on the IGH Note. During the
twelve months ended May 31, 2021, we impaired the remaining amounts due under
the IGH Note in the amount of $2,498,706, which includes $2,497,884 in principal
and $822 in accrued interest. As of May 31, 2021, the principal balance of the
IGH Note was $0 and the interest receivable was $0.



On June 14, 2021, the parties to the IGH lawsuit entered into a confidential
settlement agreement to resolve the action and a secured promissory note dated
and executed by IGH in favor of the Company effective on June 11, 2021. Pursuant
to the promissory note, IGH shall pay the Company $3,000,000, $500,000 of which
was paid on or before June 21, 2021. A second payment of $500,000 was paid on or
before July 12, 2021. The remaining $2,000,000 and accrued interest is to be
paid in 12 equal, monthly installments beginning on August 12, 2021, pursuant to
the terms of the promissory note.



On September 13, 2018, we entered into a non-binding letter of intent (the
"CannAssist LOI") with CannAssist, LLC ("CannAssist") setting forth the terms
and conditions upon which we proposed to acquire an 80% ownership interest in
CannAssist. On January 29, 2019, we made a line of credit loan to CannAssist, in
the principal amount of up to $500,000, subject to the terms and conditions set
forth in that certain Loan Agreement, dated as of January 29, 2019 between
CannAssist as the Borrower and the Company as the Lender (the "CannAssist Loan
Agreement"). The Loan was evidenced by a secured promissory note of CannAssist
(the "CannAssist Note"), which bore interest at the rate of 8% per annum and was
personally guaranteed by the two equity owners of CannAssist. CannAssist had
drawn down $325,000 on the CannAssist Note. On March 11, 2019, the Company,
through our wholly-owned subsidiary, CLS Massachusetts, entered into a
membership interest purchase agreement (the "CannAssist Purchase Agreement")
with CannAssist, each of the members of CannAssist, and David Noble, as the
members' representative. Mr. Noble currently serves as the President of IGH, an
entity that we hold an option to acquire. After conducting diligence regarding
the cost of the planned buildout of the CannAssist facility, the parties jointly
decided to terminate the CannAssist Purchase Agreement effective August 26, 2019
and declared the CannAssist Note due and payable in full not later than February
28, 2020
. On December 23, 2019, we received payment in full on the CannAssist
Note in the amount of $342,567, which comprised $325,000 of principal and
$17,567 of interest.






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On January 4, 2018, former Attorney General Jeff Sessions rescinded the
memorandum issued by former Deputy Attorney General James Cole on August 29,
2013
(as amended on February 14, 2014, the "Cole Memo"), the Cole Banking
Memorandum, and all other related Obama-era DOJ cannabis enforcement
guidance. While the rescission did not change federal law, as the Cole Memo and
other DOJ guidance documents were not themselves laws, the rescission removed
the DOJ's formal policy that state-regulated cannabis businesses in compliance
with the Cole Memo guidelines should not be a prosecutorial priority. Notably,
former Attorney General Sessions' rescission of the Cole Memo has not affected
the status of the U.S. Department of the Treasury's Financial Crimes Enforcement
Network
("FinCEN") memorandum issued by the Department of Treasury, which
remains in effect. This memorandum outlines Bank Secrecy Act-compliant pathways
for financial institutions to service state-sanctioned cannabis businesses,
which echoed the enforcement priorities outlined in the Cole Memo. In addition
to his rescission of the Cole Memo, Attorney General Sessions issued a one-page
memorandum known as the "Sessions Memorandum". The Sessions Memorandum explains
the DOJ's rationale for rescinding all past DOJ cannabis enforcement guidance,
claiming that Obama-era enforcement policies are "unnecessary" due to existing
general enforcement guidance adopted in the 1980s, in chapter 9.27.230 of the
U.A. Attorneys' Manual ("USAM"). The USAM enforcement priorities, like those of
the Cole Memo, are based on the use of the federal government's limited
resources and include "law enforcement priorities set by the Attorney General,"
the "seriousness" of the alleged crimes, the "deterrent effect of criminal
prosecution," and "the cumulative impact of particular crimes on the community."
Although the Sessions Memorandum emphasizes that cannabis is a federally illegal
Schedule I controlled substance, it does not otherwise instruct U.S. Attorneys
to consider the prosecution of cannabis-related offenses a DOJ priority, and in
practice, most U.S. Attorneys have not changed their prosecutorial approach to
date. However, due to the lack of specific direction in the Sessions Memorandum
as to the priority federal prosecutors should ascribe to such cannabis
activities, there can be no assurance that the federal government will not seek
to prosecute cases involving cannabis businesses that are otherwise compliant
with state law.



William Barr served as United States Attorney General from February 14, 2019 to
December 23, 2020. The DOJ under Mr. Barr did not take a formal position on
federal enforcement of laws relating to cannabis. On March 11, 2021, United
States President Biden's nominee, Merrick Garland was sworn in as the U.S.
Attorney General. During his campaign, President Biden stated a policy goal to
decriminalize possession of cannabis at the federal level, but he has not
publicly supported the full legalization of cannabis. It is unclear what impact,
if any, the new administration will have on U.S. federal government enforcement
policy on cannabis. Nonetheless, there is no guarantee that the position of the
Department of Justice will not change.



We incurred a net loss of $15,890,514 for the year ended May 31, 2021, resulting
in an accumulated deficit as of May 31, 2021 of $92,736,638. These conditions
raise substantial doubt about our ability to continue as a going concern.



Recent Developments - COVID-19



On March 12, 2020, Governor Steven Sisolak declared a State of Emergency related
to the COVID-19 global pandemic. This State of Emergency was initiated due to
the multiple confirmed and presumptive cases of COVID-19 in the State of Nevada.
On March 17, 2020, pursuant to the Declaration of Emergency, Governor Sisolak
released the Nevada Health Response COVID-19 Risk Mitigation Initiative
("Initiative"). This Initiative provided guidance related to the March 12
Declaration of Emergency, requiring Nevadans to stay home and all nonessential
businesses to temporarily close to the public for thirty (30) days. In the
Initiative, it was declared that licensed cannabis stores and medical
dispensaries could remain open only if employees and consumers strictly adhered
to the social distancing protocols.



In light of the Initiative, Governor Sisolak issued Declaration of Emergency
Directive 003 on March 20, 2020 which mandated retail cannabis dispensaries to
operate as delivery only. On April 29, 2020, Governor Sisolak issued Declaration
of Emergency Directive 016 which amended the cannabis section of Directive 003
and permitted licensed cannabis dispensaries to engage in retail sales on a
curbside pickup or home delivery basis pursuant to guidance from the Cannabis
Compliance Board. Through Directive 016, licensed cannabis dispensaries were
able to begin curbside pickup on May 1, 2020 so long as the facility adhered to
protocols developed by the Cannabis Compliance Board ("CCB").



In accordance with Directive 016, the CCB released guidelines related to
curbside pickup requiring all facilities wishing to offer curbside pickup to
first submit and receive approval from the CCB. Serenity Wellness Center LLC
developed the required procedures and submitted and received State approval on
April 30, 2020 to conduct curbside pickup sales effective May 1, 2020. Further,
the City of Las Vegas required cannabis facilities to obtain a temporary 30-day
curbside pickup permit. Serenity Wellness Center LLC was issued its first
temporary curbside pickup permit from the City of Las Vegas on May 1, 2020.
Serenity Wellness Center LLC has subsequently received a temporary curbside
permit every thirty (30) days thereafter. Upon expiration every 30 days, the
City of Las Vegas reviews the licensee and determines if a new temporary permit
shall be issued.






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On May 7, 2020, Governor Sisolak issued Declaration of Emergency Directive 018.
Directive 018 worked to reopen the State of Nevada as a part of Phase One of the
Nevada United: Roadmap to Recovery Plan introduced by Governor Sisolak on April
30, 2020
. Directive 018 provided that, in addition to curbside pickup or home
delivery, licensed cannabis dispensaries could engage in retail sales on an
in-store basis effective May 9, 2020, pursuant to guidance from the CCB. The CCB
required facilities wishing to engage in limited in-store retail sales to submit
Standard Operating Procedures and receive approval of the same. Serenity
Wellness Center LLC
developed the required procedures and submitted and received
State approval on May 8, 2020 to conduct limited in-store retail sales effective
May 9, 2020. The City of Las Vegas did not require a separate permit for limited
in-store sales.



On July 31, 2020, Governor Sisolak issued Declaration of Emergency Directive 029
reaffirming The Nevada United: Roadmap to Recovery Plan. Directive 029 stated
that all directives promulgated pursuant to the March 12, 2020 Declaration of
Emergency or subsections thereof set to expire on July 31, 2020, would remain in
effect for the duration of the current state of emergency unless terminated
prior to that date by a subsequent directive or by operation of law associated
with lifting the Declaration of Emergency. Further, Directive 029, having become
effective at 11:59 PM on Friday, July 31, 2020 shall remain in effect until
terminated by a subsequent directive promulgated pursuant to the March 12, 2020
Declaration of Emergency, or dissolution or lifting of the Declaration of
Emergency itself, to facilitate the State's response to the COVID-19 pandemic.



The global pandemic of COVID-19 continues to evolve and the ways that our
business may evolve to respond to the pandemic and the needs of our customers
cannot be fully known.



Results of Operations for the Years Ended May 31, 2021 and May 31, 2020






The table below sets forth our expenses as a percentage of revenue for the
applicable periods:



Year Ended Year Ended
May 31, 2021 May 31, 2020
Revenue 100 % 100 %
Cost of Goods Sold 50 % 50 %
Gross Margin 50 % 50 %
Selling, General, and Administrative Expenses 56 % 74 %
Interest expense, net 19 % 25 %
Impairment of notes receivable 13 % -
Gain on settlement of liabilities - (2 %)
Loss on amendment of debt 32 % -




The table below sets forth certain statistical and financial highlights for the
applicable periods:



Year Ended Year Ended
May 31, 2021 May 31, 2020
Number of Customers Served (Dispensary) 255,756 228,458
Revenue $ 19,292,087 $ 11,917,629
Gross Profit $ 9,647,326 $ 5,958,343
Impairment of Goodwill $ - $ 25,181,003
Impairment of Note Receivable $ 2,498,706 $ -
Loss on Amendment of Debt $ 6,105,679 $ -
Net Loss $ (15,890,514 ) $ (30,657,973 )
EBITDA (1) $ (9,057,822 ) $ (27,267,650 )
Adjusted EBITDA (1) $ (123,617 ) $ (1,732,557 )





(1) EBITDA and Adjusted EBITDA are non-GAAP financial performance measures and
should not be considered as alternatives to net income(loss) or any other
measure derived in accordance with GAAP. These non-GAAP measures have
limitations as analytical tools and should not be considered in isolation or as
substitutes for analysis of our financial results as reported in accordance with
GAAP. Because not all companies use identical calculations, these presentations
may not be comparable to other similarly titled measures of other companies. As
required by the rules of the SEC, we provide below a reconciliation of the
non-GAAP financial measures contained herein to the most directly comparable
measure under GAAP. Management believes that EBITDA and Adjusted EBITDA provide
relevant and useful information, which is widely used by analysts, investors and
competitors in our industry as well as by our management. Adjusted EBITDA
excludes certain non-cash expenses not already excluded as part of EBITDA as
well as the impact of the significant litigation expenses, which were associated
with our action against IGH related to its breach of the IGH Option, and which
has been settled. By providing these non-GAAP profitability measures, management
intends to provide investors with a meaningful, consistent comparison of our
profitability measures for the periods presented.






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Reconciliation of net loss for the years ended May 31, 2021 and 2020 to EBITDA
and Adjusted EBITDA is in the table below:






Year Ended Year Ended
May 31, 2021 May 31, 2020
Net Loss $ (15,890,514 ) $ (30,657,973 )
Add:
Interest expense, net $ 3,657,105 $ 2,941,131
Provision for income taxes $ 2,490,295 $ -
Depreciation and amortization $ 685,292 $ 449,192
EBITDA $ (9,057,822 ) $ (27,267,650 )

Other adjustments:
Impairment of goodwill $ - $ 25,185,003


Non-recurring cash payments for litigation $ 220,507 $ 134,259
Non-recurring impairment of note receivable $ 2,498,706 $


-
Non-recurring loss on amendment of convertible
debentures $ 6,105,679 $ -
Non-recurring loss on disposal of assets $ - $ 16,817
Non-cash compensation $ 109,313 $ 199,014
Adjusted EBITDA $ (123,617 ) $ (1,732,557 )




Revenues




We had revenue of $19,292,087 during the year ended May 31, 2021, an increase of
$7,374,458, or 62%, compared to revenue of $11,917,629 during the year ended May
31, 2020
. Our cannabis dispensary accounted for $14,595,115, or 76%, of our
revenue for the year ended May 31, 2021, an increase of $5,230,010, or 56%,
compared to $9,365,105 during the year ended May 31, 2020. Dispensary revenue
also increased during the 2021 fiscal year because our average sales per day
increased from $25,588 during fiscal 2020 to $39,987 during fiscal 2021. Our
cannabis production accounted for $4,696,972, or 24%, of our revenue for the
year ended May 31, 2021, an increase of $2,144,448, or 84%, compared to
$2,552,524 for the year ended May 31, 2020. The increase in production revenues
for fiscal 2021 was primarily due to delays during fiscal 2020 in making changes
to our wholesale product mix dictated by market demand during construction of
our state-of-the-art manufacturing facility. Such changes have now been
implemented. The increase in wholesale revenue for fiscal 2021 was primarily due
to the impact of our rebranding and relaunch efforts, which commenced in
September 2020.






Cost of Goods Sold




Our cost of goods sold for the year ended May 31, 2021 was $9,644,761, an
increase of $3,685,475, or 62%, compared to cost of goods sold of $5,959,286 for
the year ended May 31, 2020. The increase in cost of goods sold for the year
ended May 31, 2021 was due primarily to our increase in sales during fiscal
2021. Cost of goods sold was 50% of sales during both fiscal 2021 and fiscal
2020 resulting in a 50% gross margin for both years, which is our target. Cost
of goods sold during fiscal 2021 primarily consisted of $8,596,979 of product
cost, $649,766 of state and local fees and taxes, and $345,716 of supplies and
materials.



Selling, General and Administrative Expenses



Selling, general and administrative expenses, or SG&A, increased by $2,024,068,
or approximately 23%, to $10,800,944 during the year ended May 31, 2021,
compared to $8,776,876 for the year ended May 31, 2020. The increase in SG&A
expenses for the twelve months ended May 31, 2021 was primarily due to office
and facilities costs incurred in connection with our expanded manufacturing
facility; payroll and related expenses due to an increase in commissions related
to increased sales, and increased staffing needed to support this sales growth;
and costs directly related to our response to COVID-19.



SG&A expense during fiscal 2021 was primarily attributable to an aggregate of
$8,249,589 in costs associated with operating the Oasis LLCs, an increase of
$2,124,783 compared to $6,124,806 during fiscal 2020. The major components of
the $2,125,157 increase in SG&A associated with the operation of the Oasis LLCs
during the twelve months ended May 31, 2021 compared to the twelve months ended
May 31, 2020 were as follows: lease, facilities and office costs of $1,943,555
compared to $1,075,219; payroll and related costs of $4,106,545 compared to
$3,421,119; sales, marketing, and advertising costs of $1,237,326 compared to
$563,425; and depreciation and amortization of $685,292 compared to $449,192.
Payroll and marketing costs increased during fiscal 2021 due to the growth in
revenues of the Oasis LLCs during fiscal 2021; our use of a third-party
marketing firm for campaigns to promote brand awareness, the re-branding of our
City Trees products and packaging; and costs incurred in connection with our
response to COVID-19. Lease, facilities, and office costs increased due to our
expanded production facility and due to costs incurred in connection with our
response to COVID-19. These increases in costs were partially offset by a
decrease in bad debt expense of $92,594, and a decrease in taxes, licenses, and
registration fees by $44,428.






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Finally, SG&A decreased by an aggregate of $99,805 during fiscal 2021 as a
result of a decrease in the expenses associated with the ongoing implementation
of other aspects of our business plan and our general corporate overhead to an
aggregate of $2,551,150, from $2,650,956 during fiscal 2020. The major
components of this decrease compared to fiscal 2020 were as follows: sales,
marketing, and investor relations costs decreased by $202,277; travel related
expenses decreased by $93,964; non-cash compensation decreased by $89,701; and
payroll and related fees decreased by $27,610. These decreases were primarily
due to a decline in travel and our spend on investor relations during fiscal
2021 due to the impact of COVID-19. This decrease was partially offset by an
increase in depreciation and amortization in the amount of $142,499; and an
increase in professional fees in the amount of $128,155.






Impairment of Goodwill




We review the value of our intangible property on an annual basis as required by
applicable accounting principles. Although our revenue and gross profit from our
operation of the Oasis LLCs have improved since we acquired these companies and
are projected by management to continue to improve, due to the sharp decline in
our stock price over fiscal 2020, which translated to a lower enterprise value
for our company as a whole during fiscal 2020, we calculated that the net
carrying value of the goodwill associated with our acquisition of the Oasis LLCs
in the amount of $25,742,899 exceeded the fair value by $25,185,003. As a
result, we recorded a non-cash impairment charge to operations in this amount
during the year ended May 31, 2020. Fair value was based upon the price of our
common stock at May 31, 2020, of $0.06 per share, compared to our stock price at
May 31, 2019, which was $0.30 per share. There was no comparable charge during
fiscal 2021.



Impairment of Note Receivable



During the twelve months ended May 31, 2021, we recorded an impairment of the
IGH Note in the amount of $2,498,706; there was no comparable transaction during
the prior fiscal year. This impairment arose after IGH notified us on February
27, 2021
, that it did not plan to make further payments in accordance with the
terms of the IGH Note on the theory that the Break-Up Fee excused such
additional payments. We vehemently disagreed with this assertion. On June 14,
2021
, the parties to the IGH lawsuit entered into a confidential settlement
agreement to resolve the action and a secured promissory note dated and executed
by IGH in favor of us effective on June 11, 2021. Pursuant to the promissory
note, IGH shall pay us $3,000,000, $500,000 of which was due and payable on or
before June 21, 2021. A second payment of $500,000 was due and payable on or
before July 12, 2021. The remaining $2,000,000 and accrued interest shall be
paid in 12 equal, monthly installments beginning on August 12, 2021, pursuant to
the terms of the promissory note. In June and July 2021, we received the first
three payments due under the confidential settlement agreement in the aggregate
amount of $1,167,000.






Interest Expense, Net




Our interest expense, net of interest income, was $3,657,105 for the year ended
May 31, 2021, an increase of $715,974, or 24%, compared to $2,941,131 for the
year ended May 31, 2020. The increase in interest expense was primarily due to
the write-off of discounts on debentures in the amount $622,955 in connection
with the amendment of U.S. Convertible Debentures 1, 2 and 4 and the Canaccord
Debentures during the fiscal year ended May 31, 2021. The increase in net
interest expense for fiscal 2021 was also partially due to a decrease in
interest income during fiscal 2021 in the amount of $160,950, from $310,923
during the year ended May 31, 2020 to $149,973 during the year ended May 31,
2021
. This decrease occurred due to the lower principal balance under the IGH
Note and the zero balance on the CannAssist Note, which was paid in full in
December 2019.






Loss on Amendment of Debt




In March and April 2021, certain of our convertible debentures in the aggregate
principal amount of $19,729,822 were amended such that the conversion prices
were reduced from $0.80 to $0.30 and the maturity dates were extended for one
year. We recognized a loss on the amendment of debt in the amount of $6,105,679
in connection with these amendments, which was charged to operations during
fiscal 2021. There was no comparable transaction in the prior fiscal year.



Gain on Settlement of Liabilities



During the year ended May 31, 2020, we made a prepayment on the Oasis Note in
connection with the settlement of a dispute between the former owners of
Alternative Solutions and a consultant, and the amount of $275,000, which we had
accrued with respect to this dispute, was extinguished. There was no comparable
transaction during the fiscal 2021.






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Gain on Modification of Leases



During the years ended May 31, 2021 and 2020, we revised several of our Nevada
operating leases for the use of warehouse and office facilities, which resulted
in a gain on modification of leases in the amounts of $14,889 for fiscal 2021
and $28,511 for fiscal 2020.






Loss on Disposal of Assets




During the year ended May 31, 2020, we recognized a loss on the disposal of
assets in the amount of $16,817 in connection with the discontinued use of
capitalized software. There was no comparable transaction during the 2021 fiscal
year.






Provision for Income Taxes




We recorded a provision for income taxes in the amount of $2,490,295 during the
year ended May 31, 2021 compared to $0 during the year ended May 31, 2020.
Although we have net operating losses that we believe are available to us to
offset this entire tax liability, which arises under Section 280E of the Code
because we are a cannabis company, as a conservative measure, we have accrued
this liability.






Net Loss




Our net loss for the year ended May 31, 2021 was $15,890,514 compared to
$30,657,973 for the year ended May 31, 2020, a decrease of $14,767,459, or 48%.



Liquidity and Capital Resources



The following table summarizes our total current assets, liabilities and working
capital at May 31, 2021 and 2020:






May 31, May 31,
2021 2020
Current Assets $ 3,840,563 $ 7,941,808



Current Liabilities $ 4,984,485 $ 1,882,216
Working Capital (Deficit) $ (1,143,922 ) $ 6,059,592



At May 31, 2021, we had a working capital deficit of $1,143,922, a decrease of
$7,203,514 from the working capital of $6,059,592 we had at May 31, 2020. Our
working capital at May 31, 2021, includes $1,665,263 of cash. Our working
capital was reduced by the impairment of the IGH Note of $2,498,706. Subsequent
to May 31, 2021, we settled our lawsuit with IGH for a $3,000,000 note, which
replaced the IGH Note, and since such time, IGH has made three payments on the
new note and such note remains current. Additionally, we recorded a $2,490,295
liability for income taxes on May 31, 2021, which taxes are imposed because we
are a cannabis company. We believe we have net operating losses sufficient to
offset this income tax liability in full. These two items together decreased
our working capital as of May 31, 2021 by $4,989,001. If we had not made these
two adjustments, our working capital as of May 31, 2021 would have been
$3,845,079.



Our working capital needs will likely continue to increase, and if we require
additional funds to meet them, we will seek additional debt or equity financing.
We have operated at a loss since inception.



On June 14, 2021, we settled our lawsuit with IGH and IGH executed a note for
$3,000,000 to replace the IGH Note that was impaired. In addition, we believe we
have net operating losses to offset the income tax payable. As a result, our
current working capital has likely improved.



Cash flows used in operating activities were $2,535,159 during the year ended
May 31, 2021, a decrease of $627,806, or approximately 20%, compared to
$3,162,965 during the year ended May 31, 2020. In deriving cash flows used in
operating activities from the net losses for fiscal 2021 and fiscal 2020, there
were net amounts of $11,561,585 and $27,194,179, respectively, of non-cash items
that were added back to the net loss for each such year. For fiscal 2021, the
most significant item added back to the net loss was $6,105,679 related to the
loss on extinguishment of debt; there was no comparable charge during fiscal
2020. We also recorded the following significant items in fiscal 2021:
$2,497,884 impairment of note receivable related to the IGH Note, compared to $0
during fiscal 2020; $2,203,234 of amortization of debt discounts primarily
associated with the amendment of our convertible debt during fiscal 2021
compared to $1,647,664 during fiscal 2020; and $685,292 of depreciation and
amortization during fiscal 2021 compared to $449,192 during fiscal 2020. For
fiscal 2020, the most significant item added back to the net loss was
$25,185,003 related to the impairment of goodwill; there was no comparable
charge during fiscal 2021.






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Finally, our cash used in operating activities was affected by changes in the
components of working capital. The amounts of the components of working capital
fluctuate for a variety of reasons, including management's expectation of
required inventory levels; the amount of accrued interest, both receivable and
payable; the amount of prepaid expenses; the amount of accrued compensation and
other accrued liabilities; our accounts payable and accounts receivable
balances; and the capitalization of right of use assets and liabilities
associated with operating leases. The overall net change in the components of
working capital resulted in a decrease in cash from operating activities in the
amount of $712,026 during the twelve months ended May 31, 2021, compared to an
increase in cash from operating activities of $192,437 during the prior twelve
months of fiscal 2020. The more significant changes for the year ended May 31,
2021
were as follows: inventory increased by $652,810, compared to a decrease of
$171,591 during the prior fiscal year because we increased inventory levels in
our production and wholesale division as part of the rebranding and relaunch
that occurred in September 2020; accounts receivable increased by $539,324
compared to an increase of $106,230 during the prior fiscal year due to an
increase in sales volume; accounts payable and accrued interest increased by
$435,742 compared to a decrease of $74,319 during the prior fiscal due to
increased business activity including an increase in city and state sales and
excise taxes due; and accrued interest increased by $258,113 compared to
$1,300,715 during the prior fiscal year as we began to pay the accrued interest
on the convertible debentures during the current fiscal year, which interest was
capitalized during the prior fiscal year.



Cash flows provided by investing activities were $1,274,854 for the year ended
May 31, 2021, an increase of $1,712,944, or 391%, compared to cash flow used by
investing activities of $438,090 during the year ended May 31, 2020. During the
year ended May 31, 2021, we received principal payments on the IGH Note in the
amount of $1,544,291, compared to cash collected on the CannAssist Note in the
amount $1,357,278 and on the IGH Note in the amount of $325,000 in the prior
fiscal year. We also made an additional loan to CannAssist in the amount of
$175,000 during the fiscal year ended May 31, 2020; there was no comparable
transaction during fiscal 2021. During the current fiscal year, we made payments
for property and equipment in the amount of $269,437, compared to $1,923,338 in
fiscal 2020. The decrease was due to the completion of the build-out of our
production facility during fiscal 2020.



Cash flows used in financing activities were $0 for the year ended May 31, 2021,
a decrease of $3,999,168 or 100%, compared to cash generated by financing
activities of $3,999,168 during the year ended May 31, 2020. During the year
ended May 31, 2021, we did not make any principal payments on our debt compared
to principal payments on the Oasis Note in the aggregate amount of $3,999,168
during fiscal 2020.






Third Party Debt




The table below summarizes the status of our third party debt and reflects
whether such debt remains outstanding, has been repaid, or has been converted
into or exchanged for our common stock:






Original Outstanding
Name of Note Principal Amount or Repaid Payment Details

Oasis Note $ 4,000,000 Repaid Repaid

2018 U.S. Due October 26-31, 2021. Amount due
Convertible includes capitalized interest of
Debentures $ 365,991 Outstanding $40,991.

Amended and
Restated 2018 Due October 22-25, 2022. Amount due
U.S. Convertible includes capitalized interest of
Debentures $ 6,229,672 Outstanding $697,672.

Due December 2022. Amount includes
capitalized interest of $1,514,006 less
2018 Convertible conversion of principal in the amount of
Debentures $ 13,500,150 Outstanding $25,856.




Oasis Note




On June 27, 2018, we closed on the purchase of the remaining 90% of the
membership interests of Alternative Solutions and the Oasis LLCs. The closing
occurred pursuant to the Acquisition Agreement dated December 4, 2017, as
amended. On such date, we made the payments to indirectly acquire the remaining
90% of the Oasis LLCs, which were equal to cash in the amount of $5,995,543, a
$4.0 million promissory note due in December 2019 (the "Oasis Note"), and
22,058,823 shares of our common stock. The cash payment of $5,995,543 was less
than the $6,200,000 payment originally contemplated because we assumed an
additional $204,457 in liabilities. The Oasis Note bears interest at the rate of
6% per annum. The principal amount of the Oasis Note was reduced in August
2019
, in accordance with the terms of the Acquisition Agreement, as a result of
the settlement of the dispute between the former owners of Alternative Solutions
and 4Front Advisors, a consultant to Alternative Solutions. The terms of the
settlement with 4Front Advisors are confidential. The Oasis Note is secured by
all of the membership interests in Alternative Solutions and the Oasis LLCs and
by the assets of the Oasis LLCs. On December 31, 2019, we repaid the remaining
amount of the note, which comprised $1,363,925 of principal and $370,370 of
interest.






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2018 U.S. Convertible Debenture Offering



Between October 22, 2018 and November 2, 2018, we entered into six subscription
agreements, pursuant to which we agreed to sell, $5,857,000 in original
principal amount of convertible debentures in minimum denominations of $1,000
each for an aggregate purchase price of $5,857,000.



Under the original terms, the debentures bear interest, payable quarterly, at a
rate of 8% per annum, with capitalization of accrued interest on a quarterly
basis for the first 18 months, by increasing the then-outstanding principal
amount of the debentures. The debentures originally matured on a date that was
three years following their issuance. The debentures were convertible into units
at a conversion price of $0.80 per unit. Each unit consists of (i) one share of
our common stock, par value $0.001 and (ii) one-half of one warrant, with each
warrant exercisable for three years to purchase a share of common stock at an
initial price of $1.10. The warrants also provided that we could force their
exercise at any time after the bid price of our common stock exceeds $2.20 for a
period of 20 consecutive business days. The debentures include a provision for
the capitalization of accrued interest on a quarterly basis for the first 18
months. After capitalizing accrued interest in the aggregate amount of $738,663,
the aggregate principal amount of the debentures increased to $6,595,663.



The debentures have other features, such as mandatory conversion in the event
our common stock trades at a particular price over a specified period of time
and required redemption in the event of a "Change in Control" of the Company.
The debentures are unsecured obligations of the Company and rank pari passu in
right of payment of principal and interest with all other unsecured obligations
of the Company. The warrants have anti-dilution provisions that provide for an
adjustment to the exercise price in the event of a future sale of our common
stock at a lower price, subject to certain exceptions as set forth in the
warrant.



On July 26, 2019, we entered into amendments to the debentures with four of the
purchasers, pursuant to which we agreed to reduce the conversion price of the
original debentures if, in general, we issue or sell common stock, or warrants
or options exercisable for common stock, or any other securities convertible
into common stock, in a capital raising transaction, at a consideration per
share, or exercise or conversion price per share, as applicable, less than the
conversion price of the original debentures in effect immediately prior to such
issuance. In such case, the conversion price of the original debentures will be
reduced to such issuance price. The amendments also provided that, if a dilutive
issuance occurs, the warrant to be issued upon conversion will be exercisable at
a price equal to 137.5% of the Adjusted Conversion Price at the time of
conversion of the debenture. If a dilutive issuance occurs, the form of warrant
attached to the subscription agreement would be amended to change the Initial
Exercise Price, as defined therein, to be the Revised Warrant Exercise Price.



The Debenture Amendment (as hereafter defined) was a dilutive issuance. As a
result, the conversion price of the convertible debentures was automatically
reduced from $0.80 per unit to $0.30 per unit and the form of warrant attached
to the subscription agreement will be amended to reduce the exercise price from
$1.10 per share of common stock to 137.5% of the debenture conversion price
(presently $0.4125 per share of common stock).



On April 15, 2021 and April 19, 2021, we amended the three of the purchasers'
debentures and subscription agreements in order to (i) reduce the conversion
price of the debentures from $0.80 per unit to $0.30 per unit, and (ii) extend
the maturity date of the debentures by one year to four (4) years from the
execution date of the debentures. The subscription agreements, as amended, also
provide that we will file a registration statement to register for resale all of
the shares of common stock issuable to these three purchasers upon conversion of
the debentures and the exercise of the warrants issuable upon conversion of such
debentures. Each warrant issuable pursuant to the debentures is exercisable for
one share of common stock at a price equal to 137.5% of the conversion price
(presently $0.4125 per share) for a period of three-years from the earlier of
the date of issuance of the warrant or the effectiveness of a registration
statement registering the warrant shares.



2018 Convertible Debenture Offering



On December 12, 2018, we entered into an agency agreement with two Canadian
agents regarding a private offering of up to $40 million of convertible
debentures of the Company at an issue price of $1,000 per debenture (the
"Canaccord Debentures"). The agents sold the convertible debentures on a
commercially reasonable efforts private placement basis. Each debenture was
convertible into units of the Company at the option of the holder at a
conversion price of $0.80 per unit at any time prior to the close of business on
the last business day immediately preceding the maturity date of the debentures,
being the date that is three (3) years from the closing date of the offering
(the "2018 Convertible Debenture Offering"). Each unit will be comprised of one
share of common stock and a warrant to purchase one-half of a share of common
stock. Each warrant was initially exercisable for one share of common stock at a
price of $1.10 per warrant for a period of 36 months from the closing date.






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We closed the 2018 Convertible Debenture Offering on December 12, 2018, issuing
$12,012,000 million in 8% senior unsecured convertible debentures at the initial
closing. At the closing, we paid the agents: (A)(i) a cash fee of $354,000 for
advisory services provided to us in connection with the offering; (ii) a cash
commission of $720,720, equivalent to 6.0% of the aggregate gross proceeds
received at the closing of the offering; (B)(i) an aggregate of 184,375 units
for advisory services; and (ii) a corporate finance fee equal to 375,375 units,
which is the number of units equal to 2.5% of the aggregate gross proceeds
received at the closing of the offering divided by the conversion price; and
(C)(i) an aggregate of 442,500 advisory warrants; and (ii) 900,900 broker
warrants, which was equal to 6.0% of the gross proceeds received at the closing
of the offering divided by the conversion price. During the year ended May 31,
2020
, principal in the amount of $25,856 was converted into 32,319 shares of
common stock. The debentures include a provision for the capitalization of
accrued interest on a quarterly basis for the first 18 months. Accrued interest
in the amount of $1,514,006 was capitalized, and the principal amount of the
debentures is $13,500,150.



The debentures are unsecured obligations of the Company, rank pari passu in
right of payment of principal and interest and were issued pursuant to the terms
of a debenture indenture, dated December 12, 2018, between the Company and
Odyssey Trust Company as the debenture trustee. The debentures bear interest at
a rate of 8% per annum from the closing date, payable on the last business day
of each calendar quarter.



Beginning on the date that is four (4) months plus one (1) day following the
closing date, we could force the conversion of all of the principal amount of
the then outstanding debentures at the conversion price on not less than 30
days' notice should the daily volume weighted average trading price, or VWAP, of
our common stock be greater than $1.20 per share for the preceding 10
consecutive trading days.



Upon a change of control of the Company, holders of the debentures have the
right to require us to repurchase their debentures at a price equal to 105% of
the principal amount of the debentures then outstanding plus accrued and unpaid
interest thereon. The debentures also contain standard anti-dilution provisions.



On March 31, 2021, the holders of the Canaccord Debentures approved the
amendment of the indenture related to the Canaccord Debentures (the "Debenture
Amendment") to: (i) extend the maturity date of the Canaccord Debentures from
December 12, 2021 to December 12, 2022; (ii) reduce the conversion price from
$0.80 per unit (as such term is defined in the indenture) to $0.30 per unit;
(iii) reduce the mandatory conversion VWAP threshold from $1.20 to $0.60 per
share; and (iv) amend the definitions of "Warrant" and "Warrant Indenture" (as
such terms are defined in the indenture), to reduce the exercise price of each
warrant to $0.40 per share of our common stock. Simultaneously, we amended the
warrant indenture to make conforming amendments and extend the expiration date
of the warrants to March 31, 2024.



If, at the time of exercise of any warrant in accordance with the warrant
indenture, there is no effective registration statement under the Securities Act
covering the resale by the holder of a portion of the shares of common stock to
be issued upon exercise of the warrant, or the prospectus contained therein is
not available for the resale of the shares of common stock by the holder under
the Securities Act by reason of a blackout or suspension of use thereof, then
the warrants may be exercised, in part for that portion of the shares of common
stock not registered for resale by the holder under an effective registration
statement or in whole in the case of the prospectus not being available for the
resale of such shares of common stock, at such time by means of a "cashless
exercise" in which the holder shall be entitled to receive a number of shares of
common stock equal to the quotient obtained by dividing [(A-B) (X)] by (A),
where: A = the last volume weighted average price, or VWAP, for the trading day
immediately preceding the time of delivery of the exercise form giving rise to
the applicable "cashless exercise"; B = the exercise price of the warrant; and X
= the number of shares of common stock that would be issuable upon exercise of
the warrant in accordance with the terms of such warrant if such exercise were
by means of a cash exercise rather than a cashless exercise.



Pursuant to the agency agreement, we granted the agents an option to increase
the offering by an additional $6 million in principal amount of debentures,
which option was not exercised by the agents prior to the closing date of the
offering.



Pursuant to the agency agreement and the subscription agreements signed by
investors in the offering, we granted certain registration rights to the holders
of the debentures pursuant to which we agreed to prepare and file a registration
statement with the SEC to register the resale by the original purchasers of the
debentures of the shares of common stock issuable upon conversion of the
debentures or exercise of the warrants.



Over the next twelve months we will likely require additional capital to cover
our projected corporate level cash flow deficits, and the implementation of our
business plan, including the development of other revenue sources, such as
possible acquisitions.






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During the next twelve months we do not have any capital projects planned. We
may pursue additional acquisitions in the next twelve months but we have not
entered into any definitive agreements with respect to either additional
acquisitions or the capital necessary to finance them. If we do pursue any
acquisitions, we would likely fund them with the proceeds of future equity
sales, warrant exercise proceeds, loans or seller financings. We have not
pursued the availability of any such sources at present.



Although our revenues are expected to grow as we expand our operations, our
revenues only recently exceeded our Oasis and City Trees operating costs and we
do not yet exceed our Oasis and City Trees operating costs and corporate
overhead. Although we believe we have funds sufficient to sustain our operations
at their current level, if we require additional cash, we expect to obtain the
necessary funds as described above; however, our prospects must be considered in
light of the risks, expenses and difficulties frequently encountered by
companies in their early stage of operations. To address these risks, we must,
among other things, seek growth opportunities through additional debt and/or
equity investments and acquisitions in our industry, successfully execute our
business strategy, including our planned expansion and acquisitions, and
successfully navigate the COVID-19 business environment in which we currently
operate as well as any changes that may arise in the cannabis regulatory
environment. We cannot assure that we will be successful in addressing such
risks, and the failure to do so could have a material adverse effect on our
business prospects, financial condition and results of operations.






Sales of Equity




The Canaccord Special Warrant Offering



On June 20, 2018, we executed an agency agreement with Canaccord Genuity Corp.
and closed on a private offering of our Special Warrants for aggregate gross
proceeds of CD$13,037,859 (USD$9,785,978). In connection therewith, we also
entered into a Special Warrant Indenture and a Warrant Indenture with Odyssey
Trust Company
, as special warrant agent and warrant agent.



Pursuant to the offering, we issued 28,973,014 special warrants at a price of
CD$0.45 (USD$0.34) per Special Warrant. Each Special Warrant was automatically
exercised, for no additional consideration, into Units on November 30, 2018.



Each Unit consisted of one Unit Share and one Warrant to purchase one share of
common stock. Each Warrant was to be exercisable at a price of CD$0.65 for three
years after our common stock was listed on a recognized Canadian stock exchange,
subject to adjustment in certain events. Because we did not receive a receipt
from the applicable Canadian securities authorities for the qualifying
prospectus by August 20, 2018, each Special Warrant entitled the holder to
receive 1.1 Units (instead of one (1) Unit); provided, however, that any
fractional entitlement to penalty units was rounded down to the nearest whole
penalty unit.



In connection with the Special Warrant Offering, we paid a cash commission and
other fees equal to CD$1,413,267 (USD$1,060,773), a corporate finance fee equal
to 1,448,651 Special Warrants with a fair value of USD$1,413,300, and 2,317,842
Broker Warrants. Each Broker Warrant entitles the holder thereof to acquire one
unit at a price of CD$0.45 per unit for a period of 36 months from the date that
our common stock is listed on a recognized Canadian stock exchange, subject to
adjustment in certain events. Our common stock commenced trading on the Canadian
Stock Exchange
on January 7, 2019. During the year ended May 31, 2020, we also
issued investors 3,042,167 Special Warrants with a fair value of $7,142,550 as a
penalty for failure to timely effect a Canadian prospectus with regard to the
securities underlying the Special Warrants.






The Navy Capital Investors




Effective July 31, 2018, we entered into a subscription agreement with Navy
Capital Green International, Ltd.
, a British Virgin Islands limited company
("Navy Capital"), pursuant to which we agreed to sell to Navy Capital, for a
purchase price of $3,000,000, 7,500,000 units ($0.40 per unit), representing (i)
7,500,000 shares of our common stock, and (ii) three-year warrants to purchase
an aggregate of 7,500,000 shares of our common stock (the "Navy Warrant Shares")
at an exercise price of $0.60 per share of common stock (the "Navy Capital
Offering"). We valued the warrants using the Black-Scholes valuation model, and
allocated gross proceeds in the amount of $1,913,992 to the common stock and
$1,086,008 to the warrants. The closing occurred on August 6, 2018. In the
subscription agreement, we also agreed to file, on or before November 1, 2018, a
registration statement with the SEC registering the shares of common stock and
Navy Warrant Shares issued to Navy Capital. If we failed to file the
registration statement on or before that date, we were required to issue to Navy
Capital
an additional number of units equal to ten percent (10%) of the units
originally subscribed for by Navy Capital (which would include additional
warrants at the original exercise price). On August 29, 2019, we filed a
registration statement with the SEC which included the shares of common stock
and Navy Warrant Shares issued to Navy Capital. The warrant is exercisable from
time to time, in whole or in part for three years. The warrant has anti-dilution
provisions that provide for an adjustment to the exercise price in the event of
a future issuance or sale of common stock at a lower price, subject to certain
exceptions as set forth in the warrant. As a result of the Debenture Amendment,
conversion of the debentures issued in the 2018 Convertible Debenture Offering
will trigger this provision and reduce the exercise price of the warrants. The
warrant also provides that it is callable at any time after the bid price of our
common stock exceeds 120% of the exercise price of the warrant for a period of
20 consecutive business days. This warrant expired on July 31, 2021.






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Between August 8, 2018 and August 10, 2018, we entered into five subscription
agreements, pursuant to which we sold, for an aggregate purchase price of
$2,750,000, 6,875,000 units ($0.40 per unit), representing (i) 6,875,000 shares
of our common stock, and (ii) three-year warrants to purchase an aggregate of
6,875,000 shares of our common stock at an exercise price of $0.60 per share of
common stock. We valued the warrants using the Black-Scholes valuation model,
and allocated gross proceeds in the amount of $1,670,650 to the common stock and
$1,079,350 to the warrants. These warrants expired on August 7, 2021. The
balance of the terms set forth in the subscription agreements are the same as
the terms in the Navy Capital subscription agreement summarized above.






Oasis Cannabis Transaction




On December 4, 2017, we entered into the Acquisition Agreement, with Alternative
Solutions for us to acquire all of the outstanding equity interests in
Alternative Solutions and the Oasis LLCs. Pursuant to the Acquisition Agreement,
we paid a non-refundable deposit of $250,000 upon signing, which was followed by
an additional payment of $1,800,000 approximately 45 days thereafter and were to
receive, upon receipt of applicable regulatory approvals, an initial 10% of each
of the Oasis LLCs. Regulatory approvals were received and the 10% membership
interests were transferred to us.



On June 27, 2018, we closed on the purchase of the remaining 90% of the
membership interests in Alternative Solutions and the Oasis LLCs from the owners
thereof (excluding Alternative Solutions). The closing consideration was as
follows: $5,995,543 in cash, a $4.0 million promissory note due in December
2019
, known as the Oasis Note, and $6,000,000 in shares of our common stock. The
cash payment of $5,995,543 was less than the $6,200,000 payment originally
contemplated because the Company assumed an additional $204,457 of liabilities.



The number of shares to be issued was computed as follows: $6,000,000 divided by
the lower of $1.00 or the conversion price to receive one share of our common
stock in our first equity offering of a certain minimum size that commenced in
2018, multiplied by 80%. This price was determined to be $0.272 per share. The
Oasis Note was secured by a first priority security interest over our membership
interests in Alternative Solutions and the Oasis LLCs, and by the assets of each
of the Oasis LLCs and Alternative Solutions. We also delivered a confession of
judgment to a representative of the former owners of Alternative Solutions and
the Oasis LLCs (other than Alternative Solutions) that would generally become
effective upon an event of default under the Oasis Note or failure to pay
certain other amounts when due. We repaid the Oasis Note in full in December
2019
.



At the time of closing of the Acquisition Agreement, Alternative Solutions owed
certain amounts to a consultant known as 4Front Advisors, which amount was in
dispute. In August 2019, we made a payment to this company to settle this
dispute and the Oasis Note was reduced accordingly.



The former owners of Alternative Solutions and the Oasis LLCs (other than
Alternative Solutions) became entitled to a $1,000,000 payment from us because
the Oasis LLC maintained an average revenue of $20,000 per day during the 2019
calendar year. We made a payment in the amount of $850,000 to the sellers on May
27, 2020
. We deposited the balance due to sellers of $150,000 with an escrow
agent to hold pending the outcome of a tax audit. During the year ended May 31,
2020
, the State of Nevada notified the Oasis LLCs that it would be conducting a
tax audit for periods both before and after the closing of the sale to CLS. The
Oasis LLCs have not yet received the demand from the State of Nevada with the
precise amount due and the amount escrowed is our best estimate of the
pre-closing tax liability If the ultimate tax liability is less than $150,000,
the balance of the escrowed amount will be paid to sellers. As of May 31, 2020,
the $150,000 remains a liability on the Company's balance sheet and $150,000 is
recorded in an escrow account in the asset section of the Company's balance
sheet.



We received final regulatory approval to own the membership interests in the
Oasis LLCs on December 12, 2018. We have applied for regulatory approval to own
our interest in the Oasis LLCs through Alternative Solutions, which is currently
under review.






Consulting Agreements




We periodically use the services of outside investor relations consultants.
During the year ended May 31, 2016, pursuant to a consulting agreement, we
agreed to issue 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 May 31,
2021
, we 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.






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On December 29, 2015, pursuant to a consulting agreement, we agreed to issue
25,000 shares of common stock per month, valued at $21,250, to a consultant in
exchange for investor relations consulting services. The consulting agreement
was terminated during the first month of its term. The parties are in
discussions regarding whether any shares of our common stock have been earned
and it is uncertain whether any shares will be issued. As of May 31, 2021, we
had 50,000 shares of common stock, valued at $42,500 included in stock payable
on the accompanying balance sheet. The shares were valued based on the closing
market price on the grant date.



On August 16, 2019, we amended a consulting agreement whereby we agreed to issue
up to 200,000 shares of common stock plus pay certain amounts in exchange for
the consultant's development for us of a corporate finance and investor
relations campaign, which services will be provided over a six month period. We
issued 100,000 shares of common stock to this consultant in full satisfaction of
this agreement before this agreement was terminated.






Going Concern




Our financial statements were prepared using accounting principles generally
accepted in the United States of America applicable to a going concern, which
contemplate the realization of assets and liquidation of liabilities in the
normal course of business. We have incurred continuous losses from operations
since inception, and have an accumulated deficit of $92,736,638 as of May 31,
2021
, compared to $76,846,124, as of May 31, 2020. We had a working capital
deficit of $1,143,922 as of May 31, 2021, compared to working capital of
$6,059,592 at May 31, 2020. The report of our independent auditors for the year
ended May 31, 2021 contained a going concern qualification. Our ability to
continue as a going concern must be considered in light of the problems,
expenses, and complications frequently encountered by early stage companies.



Our ability to continue as a going concern is dependent on our ability to
generate sufficient cash from operations to meet our cash needs, to borrow
capital and to sell equity to support our plans to acquire operating businesses,
open processing facilities and finance ongoing operations There can be no
assurance that we will be successful in our efforts to raise additional debt or
equity capital and/or that cash generated by our future operations will be
adequate to meet our needs. These factors, among others, indicate that we may be
unable to continue as a going concern for a reasonable period of time.



Off-Balance Sheet Arrangements



We do not have any off-balance sheet arrangements that have, or are reasonably
likely to have, a current or future effect on our financial condition, changes
in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors.



Recently Issued Accounting Standards



Accounting standards promulgated by the Financial Accounting Standards Board
(the "FASB") are subject to change. Changes in such standards may have an impact
on our future financial statements. The following are a summary of recent
accounting developments.



In February 2016, the FASB issued Accounting Standards Update ("ASU") No.
2016-02, Leases (Topic 842): Accounting for Leases. This update requires that
lessees recognize right-of-use assets and lease liabilities that are measured at
the present value of the future lease payments at lease commencement date. The
recognition, measurement, and presentation of expenses and cash flows arising
from a lease by a lessee will largely remain unchanged and shall continue to
depend on its classification as a finance or operating lease. We have performed
a comprehensive review in order to determine what changes were required to
support the adoption of this new standard. We adopted the ASU and related
amendments on June 1, 2019 and expect to elect certain practical expedients
permitted under the transition guidance. We elected the optional transition
method that allows for a cumulative-effect adjustment in the period of adoption
and will not restate prior periods. Under the new guidance, the majority of our
leases will continue to be classified as operating. During the first quarter of
fiscal 2020, we completed our implementation of our processes and policies to
support the new lease accounting and reporting requirements. This resulted in an
initial increase in both our total assets and total liabilities in the amount of
$1,781,446. The adoption of this ASU has not had a significant impact on our
consolidated statements of operations or cash flows on an ongoing basis.



In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic
230). The update addresses eight specific cash flow issues and is intended to
reduce diversity in practice in how certain cash receipts and cash payments are
presented and classified in the statement of cash flows. This update is
effective for reporting periods beginning after December 15, 2017, including
interim periods within the reporting period. Adoption of ASU 2016-15 did not
have a material effect on our financial statements.






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In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for
Goodwill Impairment, which simplifies the subsequent measurement of goodwill by
eliminating Step 2 from the goodwill impairment test. In computing the implied
fair value of goodwill under Step 2, current U.S. GAAP requires the performance
of procedures to determine the fair value at the impairment testing date of
assets and liabilities (including unrecognized assets and liabilities) following
the procedure that would be required in determining the fair value of assets
acquired and liabilities assumed in a business combination. Instead, the
amendments under this ASU require the goodwill impairment test to be performed
by comparing the fair value of a reporting unit with its carrying amount. An
impairment charge should be recognized for the amount by which the carrying
amount exceeds the reporting unit's fair value; however, the loss recognized
should not exceed the total amount of goodwill allocated to that reporting unit.
The ASU became effective for us on January 1, 2020. The amendments in this ASU
were applied on a prospective basis. During the year ended May 31, 2020, the
Company recorded an impairment of goodwill in the amount of $25,185,003 pursuant
to ASU No. 2017-04.



In May 2017, the FASB issued ASU No. 2017-09, Stock Compensation - Scope of
Modification Accounting, which provides guidance on which changes to the terms
or conditions of a share-based payment award require an entity to apply
modification accounting. The ASU requires that an entity account for the effects
of a modification unless the fair value (or calculated value or intrinsic value,
if used), vesting conditions and classification (as equity or liability) of the
modified award are all the same as for the original award immediately before the
modification. The ASU became effective for us on January 1, 2018, and is applied
to an award modified on or after the adoption date. Adoption of ASU 2017-09 did
not have a material effect on the Company's financial statements.



In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260),
Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging
(Topic 815). The amendments in Part I of this update change the classification
analysis of certain equity-linked financial instruments (or embedded features)
with down round features. When determining whether certain financial instruments
should be classified as liabilities or equity instruments, a down round feature
no longer precludes equity classification when assessing whether the instrument
is indexed to an entity's own stock. The amendments also clarify existing
disclosure requirements for equity-classified instruments. As a result, a
freestanding equity-linked financial instrument (or embedded conversion option)
no longer would be accounted for as a derivative liability at fair value as a
result of the existence of a down round feature. For freestanding equity
classified financial instruments, the amendments require entities that present
earnings per share (EPS) in accordance with Topic 260 to recognize the effect of
the down round feature when it is triggered. That effect is treated as a
dividend and as a reduction of income available to common shareholders in basic
EPS. Convertible instruments with embedded conversion options that have down
round features are now subject to the specialized guidance for contingent
beneficial conversion features (in Subtopic 470-20, Debt-Debt with Conversion
and Other Options), including related EPS guidance (in Topic 260). The
amendments in Part II of this update recharacterize the indefinite deferral of
certain provisions of Topic 480 that now are presented as pending content in the
Codification, to a scope exception.



These amendments do not have an accounting effect. For public business entities,
the amendments in Part I of this update are effective for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2018.
Early adoption is permitted for all entities, including adoption in an interim
period. If an entity early adopts the amendments in an interim period, any
adjustments should be reflected as of the beginning of the fiscal year that
includes that interim period.



Effective June 1, 2018, we adopted Accounting Standards Codification ("ASC") 606
- Revenue from Contracts with Customers. Under ASC 606, we recognize revenue
from the commercial sales of products and licensing agreements by applying the
following steps: (1) identify the contract with a customer; (2) identify the
performance obligations in the contract; (3) determine the transaction price;
(4) allocate the transaction price to each performance obligation in the
contract; and (5) recognize revenue when each performance obligation is
satisfied. For the comparative periods, revenue has not been adjusted and
continues to be reported under ASC 605 - Revenue Recognition. Under ASC 605,
revenue is recognized when the following criteria are met: (1) persuasive
evidence of an arrangement exists; (2) the performance of service has been
rendered to a customer or delivery has occurred; (3) the amount of fee to be
paid by a customer is fixed and determinable; and (4) the collectability of the
fee is reasonably assured. There was no impact on our financial statements as a
result of adopting ASC 606.



On June 1, 2018, we adopted ASU 2017-11 and accordingly reclassified the fair
value of the reset provisions embedded in convertible notes payable and certain
warrants with embedded anti-dilutive provisions from liability to equity in the
aggregate amount of $1,265,751.



There are various other updates recently issued, most of which represented
technical corrections to the accounting literature or application to specific
industries and are not expected to a have a material impact on our consolidated
financial position, results of operations or cash flows.






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Critical Accounting Estimates




Management uses various estimates and assumptions in preparing our financial
statements in accordance with generally accepted accounting principles. These
estimates and assumptions affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Accounting estimates that are the most important to the
presentation of our results of operations and financial condition, and which
require the greatest use of judgment by management, are designated as our
critical accounting estimates. We have the following critical accounting
estimates:



? Estimates and assumptions regarding the



deductibility of expenses for purposes



of Section 280E of the Internal Revenue



Code: Management evaluates the expenses



of its manufacturing and retail



operations and makes certain judgments



regarding the deductibility of various



expenses under Section 280E of the



Internal Revenue Code based on its



interpretation of this regulation and



its subjective assumptions about the



categorization of these expenses.



? Estimates and assumptions used in the



valuation of derivative liabilities:



Management utilizes a lattice model to



estimate the fair value of derivative



liabilities. The model includes



subjective assumptions that can



materially affect the fair value



estimates.





? Estimates and assumptions used in the



valuation of intangible assets. In



order to value our intangible assets,



management prepares multi-year



projections of revenue, costs of goods



sold, gross margin, operating expenses,



taxes and after tax margins relating to



the operations associated with the



intangible assets being valued. These



projections are based on the estimates



of management at the time they are



prepared and include subjective



assumptions regarding industry growth



and other matters.

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