Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
OVERVIEW AND OUTLOOK
We were incorporated on March 31, 2011 as Adelt Design, Inc. to manufacture and market carpet binding art. Production and marketing of carpet binding art never commenced. On November 20, 2014, we adopted amended and restated articles of incorporation, thereby changing our name to CLS Holdings USA, Inc. Effective December 10, 2014, we effected a reverse stock split of our issued and outstanding common stock at a ratio of 1-for-0.625 (the “Reverse Split”), wherein 0.625 shares of our common stock were issued in exchange for each share of common stock issued and outstanding.
On April 29, 2015, the Company, CLS Labs and the Merger Sub consummated the merger, whereby the Merger Sub merged with and into CLS Labs, with CLS Labs remaining as the surviving entity. As a result of the merger, we acquired the business of CLS Labs and abandoned our previous business. As such, only the financial statements of CLS Labs are included in this annual report.
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. 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, 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.
We had a net loss of $565,685 for the three months ended August 31, 2017, resulting in an accumulated deficit as of August 31, 2017 of $9,557,295. These conditions raise substantial doubt about our ability to continue as a going concern.
Results of Operations for the Three Months Ended August 31, 2017 and August 31, 2016
Revenues
The Company had no revenues during the three months periods ended August 31, 2017 and August 31, 2016.
General and administrative expenses
General and administrative expenses increased $38,458, or approximately 22%, to $213,203 during the three months ended August 31, 2017, compared to $174,745 for the three months ended August 31, 2016. General and administrative expenses consisted primarily of general office expenses, travel costs, rent expense, compensation costs, bank charges and payroll expenses. The increase was primarily due to costs associated with terminating a lease held by the Company's Colorado subsidiary. We expect general and administrative expenses to increase in future periods as we implement our business plan and commence operations.
Professional fees
Professional fees decreased $160,180, or approximately 52%, to $146,001 during the three months ended August 31, 2017 compared to $306,181 for the three months ended August 31, 2016. This decrease was due primarily to the reduction of legal and investor relations fees for the three months ended August 31, 2017 compared to the prior period due to a decrease in SEC filings and capital raising activities during the three months ended August 31, 2017. We expect professional fees to increase in future periods as our business grows.
Interest expense
Interest expense for the three months ended August 31, 2017 was $74,866, a decrease of $183,204, or 71%, compared to $258,070 for the three months ended August 31, 2016. Interest expense decreased primarily due to a decrease in amortization of the discount on convertible debt, which was $42,060 during the current period compared to $202,196 for the prior year. During the three months ended August 31, 2016, $163,481 of the amortization on discount on convertible debt was related to debt that was converted to equity at May 31, 2017; since this debt was no longer outstanding, there was no amortization of discount related to this debt during the three months ended August 31, 2017.
Change in fair value of derivative liability
We revalued the derivative liability related to our 8% Note at August 31, 2017 at $214,621. This revaluation resulted in a loss of $105,950, a decrease in the amount of $229,871 compared to a gain of $123,921 during the three months ended August 31, 2016.
Gain on settlement of debt
During the three months ended August 31, 2017, we recognized a gain on the settlement of accounts payable in the amount of $3,480 because we repaid an account using our common stock. There was no comparable transaction during the quarter ended August 31, 2016.
Loss on modification of debt
During the three months ended August 31, 2017, we recognized a loss on the modification of debt in the amount of $29,145. This loss related to the amendment of the 8% Note. There was no comparable transaction during the quarter ended August 31, 2016.
Net loss
For the reasons above, we had a net loss for the three months ended August 31, 2017 of $565,685, which is a decrease of $49,390, or approximately 8%, compared to a net loss of $615,075 during the three months ended August 31, 2016.
Liquidity and Capital Resources
The following table summarizes total current assets, liabilities and working capital at August 31, 2017 compared to May 31, 2017.
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August 31,
2017
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May 31,
2017
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Current Assets
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$
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13,509
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|
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$
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79,720
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Current Liabilities
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$
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1,414,784
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|
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$
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1,826,478
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Working Capital (Deficit)
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$
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(1,401,275
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)
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$
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(1,746,758
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)
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At August 31, 2017 and May 31, 2017, we had a working capital deficit of $1,401,275 and $1,746,758, respectively. This working capital deficit occurred primarily because we have not yet commenced earning revenues. Due to the suspension of our plans to commence operations in Colorado, we cannot estimate when we will commence earning revenues. During the three months ended August 31, 2017, we obtained loans from our officers, directors and entities affiliated with Frank Koretsky, one of our directors, to cover operating expenses. This working capital deficit will likely 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 used in operating activities was $183,978 during the three months ended August 31, 2017 compared to $378,493 during the three months ended August 31, 2016. This decrease is primarily due to the decrease in the amount of amortization of debt discount associated with our convertible notes in the amount of $42,060, which was partially offset by the increase in the change in fair value of the derivative liability associated with the 2016 Convertible Notes by $105,950.
Cash flows used in investing activities was $0 during the three months ended August 31, 2017 compared to $11,513 during the three months ended August 31, 2016. The amounts used during the three months ended August 31, 2016 related to construction in progress at our Colorado processing facility, which has been put on hold.
Cash flows provided by financing activities provided $117,767 during the three months ended August 31, 2017 compared to $305,000 during the three months ended August 31, 2016. The decrease in cash flows from financing activities during the three months ended August 31, 2017, was primarily due to lower borrowings from our officers, directors and entities affiliated with one of our directors during the three months ended August 31, 2017, because of the suspension of our planned Colorado operations.
Old Main Notes
On March 18, 2016, we 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 us and prepare all of the related transaction documents. The 8% Note bears interest at the rate of 8% per annum. On October 6, 2016, we amended the 8% Note, among other documents (the “First Amendment”) to defer the commencement of amortization payments on the 8% Note so that they commenced at the earlier of February 3, 2017 or on the SEC Effective Date. On such 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 payment 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) $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 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.
On November 28, 2016, we entered into a Second Amendment to the 8% Note issued on March 18 (the “Second Amendment”) to amend the 8% Note, among other documents, as amended by the First Amendment, in certain respects. Pursuant to the Second Amendment, among other things, the 8% Note was converted from an installment note to a “balloon” note, with all principal and interest on the 8% Note due on March 18, 2017; the Fixed Conversion Price associated with the 8% Note was changed to a variable conversion price equal to the lesser of the prior Fixed Conversion Price or 75% of the lowest VWAP in the fifteen trading days ending on the trading day immediately prior to the conversion date; our ability to repay the 8% Note with our common stock was deleted except pursuant to a voluntary conversion by Old Main; and Old Main was prohibited from selling, per trading day, an amount of our common stock in excess of the greater of $5,000 or 25% of the average number of shares of common stock sold per day for the five trading days preceding the day of sale multiplied by the average daily VWAP during the immediately preceding 5-trading day period.
On March 27, 2017, we entered into the third amendment to the 8% Note, which, among other things, increased the outstanding amount due under the 8% Note as of March 18, 2017 by 5%. In exchange for doing so, Old Main agreed to extend the maturity of the 8% Note until July 1, 2017 and to suspend conversions under the 8% Note until July 1, 2017.
On July 6, 2017, we entered into the fourth amendment to the 8% Note (the “Fourth Amendment”) to further amend the terms of the 8% Note, which is the only note that remains outstanding. Pursuant to the Fourth Amendment, the maturity date of the 8% Note was extended to July 15, 2017 and the outstanding balance of the 8% Note as of June 30, 2017 was increased by multiplying it by 1.075. The Fourth Amendment was effective on June 30, 2017.
On August 23, 2017, we entered into the fifth amendment to the 8% Note (the “Fifth Amendment”) to further amend the terms of the 8% Note. Pursuant to the Fifth Amendment, the maturity date of the 8% Note was extended to September 15, 2017 and the outstanding balance remained unchanged. The Fifth Amendment was effective on July 15, 2017.
Subsequent to August 31, 2017, we entered into an agreement to exchange the balance due under the 8% Note of approximately $325,000 for up to 4,500,000 shares of common stock. See note 13.
On April 18, 2016, we also entered into an equity line agreement with Old Main whereby we may issue and sell to Old Main, at our option from time to time, up to $4,000,000 of our common stock at a purchase price equal to 80% of the lowest VWAP of the common stock during a five day “Valuation Period.”
On October 6, 2016, we entered into an amendment to the equity line Agreement to amend the new commitment period, which is 24 months from the date of this amendment. Second, the equity line agreement was amended to prohibit us from delivering a subsequent put notice from the beginning of any “Valuation Period” until the fourth trading day immediately following the closing associated with the prior put notice. Third, the beneficial ownership limitation was amended to increase the beneficial ownership limitation to 9.99% and to remove the ability of Old Main to increase or decrease the beneficial ownership limitation.
Koretsky and Affiliate Notes
Between August 11, 2015 and May 31, 2017, we borrowed an aggregate of $1,657,000 from Frank Koretsky, a director of the Company, and $150,000 from CLS CO 2016, LLC and $465,000 from Newcan Investment Partners, LLC, two entities that are affiliated with Mr. Koretsky. These loans were unsecured, accrued interest between 6% and 15% per year, were due either on demand or within three years after the date of the applicable note, and, in some cases, were convertible into shares of our common stock and warrants at rates between $.25 and 1.07 per share. Effective on May 31, 2017, we entered into the Omnibus Loan Amendment Agreement, whereby the portion of these loans that was advanced prior to December 31, 2017 was converted into our common stock, together with accrued interest on these loans. As a result of these conversions, Mr. Koretsky, CLS CO 2016 and Newcan converted an aggregate of $1,485,000, $150,000, and $460,000 in principal, and $130,069, 49,247 and $7,747 in accrued interest, into an aggregate of 6,460,276, 636,988 and 1,870,988 shares of common stock at $.25 per share. Pursuant to the Omnibus Loan Amendment Agreement, the conversion rate on all of the loans made by Mr. Koretsky, CO CLS 2016, and Newcan was reduced, if applicable, to $.25 per share and Mr. Koretsky and his affiliates gave up the right to receive warrants upon conversion. Thus, each of Mr. Koretsky, CLS CO 2016 and Newcan received 4,560,849, 488,159 and 1,433,841 shares of common stock in excess of what they would have received had they converted their loans into common stock prior to the effective date of the Omnibus Loan Amendment Agreement.
Effective March 31, 2017, $120,000 of the Koretsky Funding Notes was exchanged for Newcan Convertible Note 1. This note is unsecured and bears interest at the rate of 10% per annum. No payments are required until April 1, 2018, at which time all accrued interest becomes due and payable. Principal will be payable in eight equal quarterly installments, together with accrued interest, beginning on July 1, 2018. At Newcan’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 common stock at the rate of one share for each $0.25 converted.
After excluding the loans from Mr. Koretsky, CLS CO 2016 and Newcan that were converted into our common stock effective as of May 31, 2017, there was a balance of $120,000 in loans that remained outstanding as of December 31, 2016. This amount consisted of the $120,000 principal balance of the Koretsky Funding Loans (which were exchanged for Newcan Convertible Note 1 on March 31, 2017). Prior to May 31, 2017, Newcan advanced an additional $621,658 of unsecured book entry loans. During the three months ended August 31, 2017, $621,658 was transferred out of the Newcan Funding Notes and used to fund Newcan Convertible Note 4. In addition, during the three months ended August 31, 2017, Newcan loaned the Company an additional $70,000 under the Newcan Funding Notes; this amount was transferred out of the Newcan Funding Notes and used to fund Newcan Convertible Note 5. These loans bear interest at the rate of 10% per annum and are convertible into our common stock at the rate of one share for each $0.25 converted. No payments are required until October 1, 2018, at which time all accrued interest becomes due and payable. Principal will be payable in eight equal quarterly installments, together with accrued interest, beginning on January 2, 2019. At Newcan’s election, at any time prior to payment or prepayment of the Newcan Convertible Note 4 or 5 in full, all principal and accrued interest under the Newcan Convertible Note 4 or 5 may be converted, in whole or in part, into our common stock at the rate of one share for each $0.25 converted.
On October 9, 2017, Newcan, an entity wholly owned by Mr. Koretsky, a director of the Company, exchanged $29,999.50 in principal of Newcan Funding Notes (advanced in September 2017) for Newcan Convertible Note 6. This note bears interest at the rate of 10% per annum. No payments are required until January 2, 2019, at which time all accrued interest becomes due and payable. Commencing on April 1, 2019, the first of eight principal payments will become due; subsequent principal payments will become due on the first day of each July, October, January and April until paid in full. This note and accrued interest thereunder may be converted, in whole or in part, into one share of common stock for each $0.25 converted.
Binder Notes
Between June 1, 2015 and May 31, 2017, we borrowed an aggregate of $251,800 from Jeffrey Binder, a director and officer of the Company. These loans were unsecured, accrued interest between 6% and 10% per year, were due either on demand or within three years after the date of the applicable note, and, in some cases, were convertible into shares of our common stock and warrants at rates between $.25 and 1.07 per share. Effective on May 31, 2017, we entered into the Omnibus Loan Amendment Agreement, whereby the portion of these loans that was advanced prior to May 31, 2017 was converted into our common stock, together with accrued interest on these loans. As a result of these conversions, Mr. Binder converted an aggregate of $442,750 in principal and $19,427 in accrued interest, into an aggregate of 1,848,708 shares of common stock at $.25 per share. Pursuant to the Omnibus Loan Amendment Agreement, the conversion rate on all of the loans made by Mr. Binder was reduced, if applicable, to $.25 per share and Mr. Binder gave up the right to receive warrants upon conversion. Thus, Mr. Binder received 1,127,061 shares of common stock in excess of what he would have received had he converted his loans into common stock prior to the effective date of the Omnibus Loan Amendment Agreement.
Effective March 31, 2017, $47,000 of the Binder Funding Notes and $25,000 of accrued salary due to Mr. Binder were exchanged for Binder Convertible Note 4. This note is unsecured and bears interest at the rate of 10% per annum. No payments are required until April 1, 2018, at which time all accrued interest becomes due and payable. Principal will be payable in eight equal quarterly installments, together with accrued interest, beginning on July 1, 2018. 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 our common stock at the rate of one share for each $0.25 converted.
All of Mr. Binder’s loans that were outstanding as of December 31, 2016 were converted to common stock effective May 31, 2017, including all of his accrued deferred salary as of December 31, 2016. As of May 31, 2017, there was a balance of $149,550 in loans from Mr. Binder that remained outstanding. This amount consisted of the $72,000 principal balance of Binder Convertible Note 4, which related to advances made and salary accrued after January 1, 2017, and an additional $77,550 of unsecured, book entry loans. During the three months ended August 31, 2017, Mr. Binder advanced a total of $47,767 to the Company under the Binder Funding Notes. Also during the three months ended August 31, 2017, principal in the amount of $77,550, accrued salary due to Mr. Binder in the amount of $37,500, and accrued interest in the amount of $2,246 were transferred from the Binder Funding Notes to fund Binder Convertible Note 5, and principal in the amount of $47,767, accrued salary due to Mr. Binder in the amount of $25,000, and accrued interest in the amount of $1,384 were transferred from the Binder Funding Notes to fund Binder Convertible Note 6. The Binder Convertible Notes 5 and 6 are unsecured and bear interest at the rate of 10% per annum. No payments are required until October 1, 2018, at which time all accrued interest becomes due and payable. Principal will be payable in eight equal quarterly installments, together with accrued interest, beginning on January 2, 2019. At Mr. Binder’s election, at any time prior to payment or prepayment of the Binder Convertible Note 5 or 6 in full, all principal and accrued interest under the Binder Convertible Note 5 or 6 may be converted, in whole or in part, into our common stock at the rate of one share for each $0.25 converted.
On October 9, 2017, Mr. Binder, an officer and director of the Company, exchanged $39,520.56 in principal of Binder Funding Notes (advanced in September and October 2017) for Binder Convertible Note 7. This amount included $12,500 of accrued but unpaid salary due by the Company to Mr. Binder. This note bears interest at the rate of 10% per annum. No payments are required until January 2, 2019, at which time all accrued interest becomes due and payable. Commencing on April 1, 2019, the first of eight principal payments will become due; subsequent principal payments will become due on the first day of each July, October, January and April until paid in full. This note and accrued interest thereunder may be converted, in whole or in part, into one share of common stock for each $0.25 converted.
Omnibus Loan Amendment Agreement
On May 31, 2017, we entered into an Omnibus Loan Amendment Agreement (the “Omnibus Loan Amendment”) with Jeffrey I. Binder, Frank Koretsky, Newcan Investment Partners LLC and CLS CO 2016, LLC (collectively, the “Insiders”). Pursuant to the Omnibus Loan Amendment, we agreed with the Insiders to amend certain terms of loans the Insiders made to us for working capital purposes, which loans were initially demand loans, and, except for certain loans made in 2017, were later memorialized as convertible loans (the “Insider Loans”), in exchange for the agreement of the Insiders to convert all Insider Loans where funds were advanced prior to January 1, 2017, which total $2,537,750, plus $166,490 of accrued interest thereon, into an aggregate of 10,816,960 shares of our common stock, and forego the issuance of warrants to purchase our common stock upon conversion. This resulted in the issuance of an additional 7,609,910 shares compared to the original number of shares issuable upon conversion of the Insider Loans prior to the Omnibus Loan Agreement. We valued the shares at $0.125, which was the market price of our stock at the conversion date, and charged the amount of $951,239 to loss on modification of debt during the twelve months ended May 31, 2017.
We entered into the Omnibus Loan Amendment in order to ease the debt burden on us and prevent us from defaulting on the Insider Loans. Pursuant to the Omnibus Loan Amendment, the following amendments were made to the Insider Loans: (a) we reduced the conversion price on the Insider Loans from between $0.75 and $1.07 per share of common stock to $0.25 per share of common stock, in those cases where the conversion price was greater than $0.25, which reduced conversion price exceeds the closing price of the common stock during the last three months; (b) we deleted the requirement to issue warrants to purchase our common stock upon conversion of the Insider Loans; (c) we amended one Insider Loan to permit conversion of only the portion of the Insider Loan related to services that were provided to us prior to January 1, 2017; and (d) we amended the terms of the Insider Loans where funds were advanced on or after January 1, 2017, which Insider Loans were not converted into our common stock, to provide for, where not already the case, a 10% interest rate per annum, a $0.25 conversion price per share of common stock, and the deletion of the requirement that we issue warrants to purchase our common stock upon conversion of such Insider Loans.
Over the next twelve months we will require significant additional capital to cover our projected cash flow deficits due to payments on the loans from Jeffrey Binder and Newcan Investment Partners, LLC, the implementation of our business plan, including the acquisition of complementary operating companies, and the development of alternative revenue sources.
We currently have one employee, Jeffrey Binder, who serves as our Chairman, President and Chief Executive Officer. In an effort to assist us conserve cash, Mr. Binder converted all accrued salary due to him through August 31, into convertible promissory notes. Mr. Binder has deferred all of his salary to date for the fiscal year ended May 31, 2017 and the three months ended August 31, 2017. Mr. Bonsett, our former Chief Operating Officer, left the Company following the expiration of his employment agreement effective October 1, 2017.
We do not currently have the capital necessary to meet our liquidity needs, fund our capital requirements or implement our business plan. We intend to fund our cash flow and capital requirements during the next year from the proceeds of the equity line, the sale of our debt and equity securities, by obtaining additional loans and with cash generated from the operations of companies we may acquire. There can be no assurance that we will be able to meet our needs, however, as we have not yet received any commitments for the purchase of our equity securities or for additional loans and although we have entered into a non-binding letter of intent to acquire Oasis Cannabis, as described below, we have not entered into any definitive agreements to acquire any companies. Because we do not know when we will re-visit commencing operations in Colorado, there can be no assurance that PRH will ever generate sufficient cash to repay the $500,000 loan from CLS Labs Colorado or to meet PRH’s obligations under the Licensing Agreement or Equipment Lease. Further, due to the delays we encountered with the construction of our Colorado processing facility, we have placed our proposed Colorado operations on hold and will pursue revenue producing opportunities in other states. We anticipate that we may incur operating losses during the next twelve months.
Pure Harvest and Oasis Cannabis Transaction
Earlier this year, we entered into a non-binding letter of intent with Pure Harvest Cannabis Producers, Inc., or Pure Harvest, a development stage cannabis company, which had planned to become a licensed vertically integrated cannabis business involved in all aspects of the cannabis cycle, including plant science, cultivation, production, medical and recreational dispensaries and delivery. Pure Harvest intended to accomplish this through an active acquisition strategy combined with greenfield development.
Following this announcement, in August 2017, we entered into a non-binding letter of intent with Alternative Solutions, LLC (“Oasis Cannabis”), a cannabis company that operates a revenue-producing dispensary in Las Vegas, Nevada and plans to become a vertically integrated cannabis operator in Nevada. As a result, we will focus on directly acquiring Oasis Cannabis instead of Pure Harvest although the CEO of Pure Harvest, David Lamadrid, is anticipated to join us as our new President and CFO if and when the Oasis Cannabis transaction closes. Upon closing, we will likely relocate to Las Vegas, Nevada and change our name to “Pure Harvest Cannabis Producers, Inc.” Jeffrey Binder is expected to remain as our CEO and Chairman of the board of directors of the combined company. Due diligence is almost completed at this time and we are both finalizing the terms of the transaction as well as preparing the necessary financial statements. We anticipate that we will need to raise significant additional capital in order to close the Oasis Cannabis transaction. We have not yet executed any definitive agreements with Oasis Cannabis so there can be no assurance that the transaction will close or what the ultimate terms of the transaction will be.
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, have an accumulated deficit of $9,557,295 and had a working capital deficit of $1,401,275 at August 31, 2017. In addition, we do not currently have the cash resources to meet our operating commitments during the next twelve months. Our ability to continue as a going concern must be considered in light of the problems, expenses, and complications frequently encountered by developmental 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, however, that we will be successful in our efforts to raise additional debt or equity capital and/or that cash generated by our future operations will be adequate to meet our needs. These factors, among others, indicate that we may be unable to continue as a going concern for a reasonable period of time.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Critical Accounting Estimates
Management uses various estimates and assumptions in preparing our financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Accounting estimates that are the most important to the presentation of our results of operations and financial condition, and which require the greatest use of judgment by management, are designated as our critical accounting estimates. We have the following critical accounting estimates:
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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.
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Recently 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 August 2016, the Financial Accounting Standards Board (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 will be effective for reporting periods beginning after December 15, 2017, including interim periods within the reporting period. Early adoption is permitted. We are currently evaluating the potential impact of the update on our financial statements.
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 becomes effective for us on January 1, 2020. The amendments in this ASU will be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed.
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 becomes effective for us on January 1, 2018, and will be applied prospectively to an award modified on or after the adoption date. Early adoption is permitted, including adoption in any interim period. We are currently assessing the impact that this standard will have on any awards that are modified once this standard is adopted.
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.