CLS HOLDINGS USA, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

HISTORY AND OUTLOOK

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

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

CLS Labs was originally incorporated in the state of Nevada on May 1, 2014 under
the name RJF Labs, Inc. before changing its name to CLS Labs, Inc. on October
24, 2014. It was formed to commercialize a proprietary method of extracting
cannabinoids from cannabis plants and converting the resulting cannabinoid
extracts into concentrates such as oils, waxes, edibles and shatter. 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 agreements through its wholly
owned subsidiary, CLS Labs Colorado, with certain Colorado entities. During
2017, we suspended our plans to proceed with the Colorado Arrangement due to
regulatory delays and have not yet determined if or when we will pursue them
again.



We have been issued a U.S. patent with respect to our proprietary method of
extracting cannabinoids from cannabis 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.



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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.



On October 31, 2018, the Company, CLS Massachusetts, Inc., a Massachusetts
corporation and a wholly-owned subsidiary of the Company ("CLS Massachusetts"),
and In Good Health, Inc., a Massachusetts corporation ("IGH"), entered into an
Option Agreement (the "IGH Option Agreement"). Under the terms of the IGH Option
Agreement, CLS Massachusetts had an exclusive option to acquire all of the
outstanding capital stock of IGH (the "IGH Option") during the period beginning
on the earlier of the date that is one year after the effective date of the
conversion and December 1, 2019 and ending on the date that was 60 days after
such date. If CLS Massachusetts exercised the IGH Option, the Company, a
wholly-owned subsidiary of the Company and IGH would enter into a merger
agreement (the form of which has been agreed to by the parties) (the "IGH Merger
Agreement"). At the effective time of the merger contemplated by the IGH Merger
Agreement, CLS Massachusetts would pay a purchase price of $47,500,000, subject
to reduction as provided in the IGH Merger Agreement, payable as follows: $35
million in cash, $7.5 million in the form of a five-year promissory note, and $5
million in the form of restricted common stock of the Company, plus $2.5 million
as consideration for a non-competition agreement with IGH's President, payable
in the form of a five-year promissory note. IGH and certain IGH stockholders
holding sufficient aggregate voting power to approve the transactions
contemplated by the IGH Merger Agreement had entered into agreements pursuant to
which such stockholders had, among other things, agreed to vote in favor of such
transactions. On October 31, 2018, as consideration for the IGH Option, we made
a loan to IGH, in the principal amount of $5,000,000, subject to the terms and
conditions set forth in that certain loan agreement, dated as of October 31,
2018 between IGH as the borrower and the Company as the lender. The loan was
evidenced by a secured promissory note of IGH, which bore interest at the rate
of 6% per annum and was to mature on October 31, 2021. To secure the obligations
of IGH to us under the loan agreement and the promissory note, the Company and
IGH entered into a security agreement dated as of October 31, 2018, pursuant to
which IGH granted to us a first priority lien on and security interest in all
personal property of IGH. If we did not exercise the Option on or prior to the
date that was 30 days following the end of the option period, the loan amount
was to be reduced to $2,500,000 as a break-up fee, subject to certain exceptions
set forth in the IGH Option Agreement. On August 26, 2019, the parties amended
the IGH Option Agreement to, among other things, delay the closing until January
2020. By letter agreement dated January 31, 2020, the parties extended the IGH
Option Agreement to February 4, 2020. On February 4, 2020, CLS Massachusetts
exercised the IGH Option and IGH subsequently asserted that CLS Massachusetts'
exercise was invalid. By letter dated February 26, 2020, we informed IGH that as
a result of its breaches of the IGH Option, which remained uncured, an event of
default had occurred under the IGH Note. We advised IGH that we were electing to
cause the IGH Note to bear interest at the default rate of 15% per annum
effective February 26, 2020 and to accelerate all amounts due under the IGH
Note. On February 27, 2020, IGH informed CLS Massachusetts that it did not plan
to make further payments under the IGH Note on the theory that the break-up fee
excused additional payments. This dispute, including whether IGH breached the
IGH Option and whether CLS was entitled to collect default interest, was in
litigation. During the twelve months ended May 31, 2021, we impaired the
remaining amounts due under the IGH Note in the amount of $2,498,706, which
included $2,497,884 in principal and $822 in accrued interest. As of November
30, 2021, the principal balance of the IGH Note was $0 and the interest
receivable was $0.



On June 14, 2021, the parties to the IGH lawsuit entered into a confidential
settlement agreement to resolve the action and a secured promissory note dated
and executed by IGH in favor of us and effective June 11, 2021 (the "IGH
Settlement Note"). Pursuant to the IGH Settlement Note, IGH shall pay us
$3,000,000, $1,000,000 of which was paid on or before July 12, 2021. The
remaining $2,000,000 and accrued interest is being paid in 12 equal monthly
installments, which began on August 12, 2021. During the three months ended
February 28, 2022, we received $522,245 under the IGH Settlement Note, which
included $500,000 in principal and $22,245 in accrued interest. During the nine
months ended February 28, 2022, we received $2,218,572 under the IGH Settlement
Note, which included $2,166,667 in principal and $51,905 in accrued interest. As
of February 28, 2022, $833,333 was due under the IGH Settlement Note. We record
amounts paid under the IGH Settlement Note as gains when payments are received.



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On October 20, 2021, we entered into a management services agreement (the "Quinn
River Joint Venture Agreement") through our 50% owned subsidiary, Kealii
Okamalu, LLC ("Kealii Okamalu"), with CSI Health MCD LLC ("CSI") and a
commission established by the authority of the Tribal Council of the Fort
McDermitt Paiute and Shoshone Tribe (the "Tribe"). The purpose of the Quinn
River Joint Venture Agreement is to establish a business (the "Quinn River Joint
Venture") to grow, cultivate, process and sell cannabis and related products.
The Quinn River Joint Venture Agreement has a term of 10 years plus a 10 year
renewal term from the date the first cannabis crop produced is harvested and
sold. Pursuant to the Quinn River Joint Venture Agreement, Kealii Okamalu will
lease approximately 30 acres of the Tribe's land located along the Quinn River
at a cost of $3,500 per month and manage the design, finance and construction of
a cannabis cultivation facility on such tribal lands (the "Cultivation
Facility"). Kealii Okamalu will also manage the ongoing operations of the
Cultivation Facility and related business, including, but not limited to,
cultivation of cannabis crops, personnel staffing, product packaging, testing,
marketing and sales. Packaged products will be branded as "Quinn River Farms."
We will provide 10,000 square feet of warehouse space at our Las Vegas facility,
and will have preferred vendor status including the right to purchase cannabis
flower and the business's cannabis trim at favorable prices. Kealii Okamalu will
contribute $6 million towards the construction of the Cultivation Facility and
the working capital for the Quinn River Joint Venture. This amount will be
repaid from a portion of the net income of the Quinn River Joint Venture
otherwise payable to CSI and the Tribe at the rate of $750,000 per quarter for
eight quarters. Kealii Okamalu will receive one-third of the net profits of the
Quinn River Joint Venture.



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



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



We incurred a net loss of $15,890,514 for the year ended May 31, 2021, and net
losses of $1,117,530 and $1,039,903 for the three and nine months ended February
28, 2022, respectively, resulting in an accumulated deficit of $92,736,638 as of
May 31, 2021, which increased to $93,767,013 as of February 28, 2022. Although
we achieved net income during the first quarter of fiscal 2022, these conditions
continue to 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.



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



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



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



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



COVID-19 cases increased at a significant rate in November and December 2021
with the arrival of the Omicron variant, but then sharply dropped off as we
started 2022. As a result, our curbside and delivery programs have now returned
to approximately 20% of total dispensary revenue. The number of transactions at
our dispensary have increased recently, although the amount of each transaction
decreased slightly primarily as a result of the cessation of special federal
unemployment benefits.

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 Three Months Ended February 28, 2022 and 2021

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



                                    Three Months Ended       Three Months Ended       Nine Months Ended       Nine Months Ended
                                    February 28, 2022        February 28, 2021        February 28, 2022       February 28, 2021
Revenue                                             100 %                    100 %                   100 %                   100 %
Cost of Goods Sold                                   48 %                     55 %                    48 %                    49 %
Gross Margin                                         52 %                     45 %                    52 %                    51 %
Selling, General, and
Administrative Expenses                              63 %                     55 %                    57 %                    58 %
Interest expense, net                                11 %                     17 %                     9 %                    17 %
Impairment of note receivable                         - %                     55 %                     - %                    19 %
Gain on settlement of note
receivable                                            9 %                      - %                    13 %                     - %




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



                                   Three Months     Three Months       Nine Months       Nine Months
                                      Ended             Ended             Ended             Ended
                                   February 28,     February 28,      February 28,      February 28,
                                       2022             2021              2022              2021
Number of Customers Served
(Dispensary)                             66,016            62,753           195,994           184,129
Revenue                            $  5,588,266     $   4,554,082     $  16,502,978     $  13,232,840
Gross Profit                       $  2,887,106     $   2,055,176     $   8,513,161     $   6,745,751
Net Loss Attributable to CLS
Holdings USA, Inc.                 $   (992,268 )   $  (3,712,772 )   $    (910,141 )   $  (5,707,184 )
EBITDA (1)                         $    100,595     $  (2,786,327 )   $   1,834,716     $  (2,958,982 )




  (1) EBITDA is a non-GAAP financial performance measures and should not be

considered as alternatives to net income(loss) or any other measure derived

in accordance with GAAP. This non-GAAP measure has limitations as an

analytical tool and should not be considered in isolation or as substitutes

for analysis of our financial results as reported in accordance with GAAP.

Because not all companies use identical calculations, these presentations

may not be comparable to other similarly titled measures of other companies.

As required by the rules of the SEC, we provide below a reconciliation of

this non-GAAP financial measure contained herein to the most directly

comparable measure under GAAP. Management believes that EBITDA provides

relevant and useful information, which is widely used by analysts, investors

and competitors in our industry as well as by our management. By providing

this non-GAAP profitability measure, management intends to provide investors

with a meaningful, consistent comparison of our profitability measures for

      the periods presented.




Reconciliation of net loss for the three and nine months ended February 28, 2022
and 2021 to EBITDA for the three and nine months ended February 28, 2022 and
2021:



                                   Three Months     Three Months      Nine Months       Nine Months
                                      Ended             Ended            Ended             Ended
                                   February 28,     February 28,      February 28,     February 28,
                                       2022             2021              2022             2021
Net Income (Loss) Attributable
to CLS Holdings USA, Inc.          $   (992,268 )   $  (3,712,772 )   $   (910,141 )   $  (5,707,184 )
Add:
Income tax                         $    324,265     $           -     $    793,322     $           -
Interest expense, net              $    589,692     $     757,740     $  1,416,164     $   2,237,166
Depreciation and amortization      $    178,906     $     168,705     $    535,361     $     511,036
EBITDA                             $    100,595     $  (2,786,327 )   $  1,834,716     $  (2,958.982 )

Three Months Ended February 28, 2022 and February 28, 2021

Revenues



We had revenue of $5,588,266 during the three months ended February 28, 2022, an
increase of $1,044,184, or 23%, compared to revenue of $4,544,082 during the
three months ended February 28, 2021. Our cannabis dispensary accounted for
$3,333,229, or 60%, of our revenue for the three months ended February 28, 2022,
a decrease of $50,910, or 2%, compared to $3,384,139 during the three months
ended February 28, 2021. Dispensary revenue decreased during the third quarter
of fiscal year 2022 reflecting the absence of federal unemployment payments to
taxpayers in the community. Our cannabis production accounted for $2,255,037, or
40%, of our revenue for the three months ended February 28, 2022, an increase of
$1,095,094, or 94%, compared to $1,159,943 for the three months ended February
28, 2021. The increase in production revenues for the third quarter of fiscal
2022 was primarily due to our addition of a new sales director, an improvement
in our product mix, the introduction of new products, operating efficiencies and
the procurement of higher quality materials. The increase was also due to
greater revenue from third parties for whom we manufactured and processed their
products.



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Cost of Goods Sold



Our cost of goods sold for the three months ended February 28, 2022 was
$2,701,160, an increase of $212,254, or 9%, compared to cost of goods sold of
$2,488,906 for the three months ended February 28, 2021. The increase in cost of
goods sold for the three months ended February 28, 2022 was due primarily to an
increase in revenue. Cost of goods sold was 48% of sales during third quarter of
fiscal 2022 resulting in a gross margin of 52%; cost of goods sold was 55% for
the third quarter of fiscal 2021 resulting in a gross margin of 45%. Cost of
goods sold as a percentage of revenue declined due to our utilization of
low-cost high volume purchasing and a shift in product mix at City Trees to
increased THC distillate sales, which are no-cost sales. Gross margin for the
quarter did not exceeded our target of 50%. Cost of goods sold during the third
quarter of fiscal 2022 primarily consisted of $2,418,531 of product cost,
$200,102 of state and local fees and taxes, and $82,527 of supplies and
materials.

Selling, General and Administrative Expenses

Selling, general and administrative expenses, or SG&A, increased by $981,189, or
approximately 39%, to $3,492,691 during the three months ended February 28,
2022, compared to $2,511,502 for the three months ended February 28, 2021. The
increase in SG&A expenses for the three months ended February 28, 2022 was
primarily due to increases in costs associates with operating the Oasis LLCs and
offering expenses associated with the 2021 Debenture Offering.



SG&A expense during the third quarter of fiscal 2022 was primarily attributable
to an aggregate of $2,576,817 in costs associated with operating the Oasis LLCs,
an increase of $605,110 compared to $1,971,707 during the third quarter of
fiscal 2021. The major components of the $605,110 increase in SG&A associated
with the operation of the Oasis LLCs during the three months ended February 28,
2022 compared to the three months ended February 28, 2021 were as follows:
lease, facilities and office costs were $662,294 compared to $381,763; and
payroll and related costs were $1,220,960 compared to $989,837. Lease,
facilities and office costs increased due to our efforts to prepare our
facilities for the new pre-roll division by purchasing equipment and
implementing compliance procedures applicable to this new division. Lease,
facilities and office costs also increased during the third quarter of fiscal
2022 due to costs incurred in connection with our response to COVID-19. Payroll
costs increased during the third quarter of fiscal 2022 primarily due to
increases in salaries of our employees related to the national labor shortage
and due to an increase in the number of employees in our manufacturing division
as we planned for the rollout of our pre-roll division. Payroll costs also
increased due to costs incurred in connection with our response to COVID-19.



Finally, SG&A increased by an aggregate of $376,079 during the third quarter of
fiscal 2022 as a result of an increase in the expenses associated with the
ongoing implementation of other aspects of our business plan and our general
corporate overhead to an aggregate of $915,875, from $539,796 during the third
quarter of fiscal 2021. The major components of this increase compared to the
third quarter of fiscal 2022 were as follows: expenses related to the 2011
Debenture Offering were $411,298; and payroll and related costs increased by
$53,787. These increases were partially offset by decreases in sales and
marketing in the amount of $50,795 and professional fees in the amount of
$28,012 during the third quarter of fiscal 2022.

Gain on Settlement of Note Receivable

During the three months ended February 28, 2022, we recorded a gain on the
settlement of the IGH Note in the amount of $522,246; there was no comparable
transaction during the third quarter of the prior fiscal year. This gain on the
settlement arose after IGH notified us on February 27, 2021, that it did not
plan to make further payments in accordance with the terms of the IGH Note on
the theory that the Break-Up Fee excused such additional payments. On June 14,
2021, the parties to the IGH lawsuit entered into a confidential settlement
agreement to resolve the action and executed the $3,000,000 IGH Settlement Note.
Pursuant to the IGH Settlement Note, IGH paid us $1,000,000 on or before July
21, 2021. The remaining $2,000,000 and accrued interest is being paid in 12
equal monthly installments, which commenced on August 12, 2021.



Interest Expense, Net



Our interest expense, net of interest income, was $589,692 for the three months
ended February 28, 2022, a decrease of $168,048, or 22%, compared to $757,740
for the three months ended February 28, 2021. The decrease in interest expense
was primarily due to a $389,767 decrease in the amortization of the discounts on
debentures to $5,303 during the three months ended February 28, 2022 compared to
$395,070 during the three months ended February 28, 2021. The decrease occurred
because discounts on debentures in the amount $996,727 were written off in
connection with the amendment of U.S. Convertible Debentures 1, 2 and 4 and the
Canaccord Debentures during the fourth quarter of fiscal 2021. The decrease in
net interest expense for the third quarter of fiscal 2022 was partially offset
by an increase in interest expense of $65,938 in connection with our issuance of
the 2021 Debentures in the principal amount of $2,500,000 (net of original issue
discount of $1,875,000) in the 2021 Debenture Offering. In addition, original
issue discount, associated with the 2021 Debentures, in the amount of $91,936
was amortized to interest expense during the three months ended February 28,
2022, which increased interest expense there was no comparable charge in the
same period of the prior year.



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Impairment of Note Receivable

During the three months ended February 28, 2021, we recorded an impairment of
the IGH Note in the amount of $2,498,706; there was no comparable transaction in
the comparable period of the current year. This impairment arose after IGH
notified us on February 27, 2021, that it did not plan to make further payments
in accordance with the terms of the IGH Note on the theory that the Break-Up Fee
excused such additional payments. We vehemently disagreed with this assertion.
On June 19, 2021 we entered into a settlement agreement with IGH regarding this
dispute and IGH executed the $3,000,000 IGH Settlement Note, which is being paid
in accordance with its terms. There are no comparable charges in the current
period.

Provision for Income Taxes

We recorded a provision for income taxes in the amount of $324,265 during the
three months ended February 28, 2022 compared to $0 during the three months
ended February 28, 2021. We have net operating losses that we believe are
available to us to offset any income tax liability that may arise under Section
280E of the Code because we are a cannabis company.



Net Loss



Our net loss for the three months ended February 28, 2022 was $997,296 compared
to a net loss of $3,712,772 for the three months ended February 28, 2021, an
improvement of $2,715,476, or 73%.



Non-Controlling Interest



During the three months ended February 28, 2022, the non-controlling interest in
our investment in the Quinn River Joint Venture, through our subsidiary, Kealii
Okamalu was $5,028. This amount is composed primarily of the cost of a land
lease. There was no comparable expense during the third quarter of fiscal 2021.

Net Loss Attributable to CLS Holdings USA, Inc.

Our net loss attributable to CLS Holdings USA, Inc. for the three months ended
February 28, 2022 was $992,268 compared to $3,712,772 for the three months ended
February 28, 2021, an improvement of $2,720,504, or 73%.

Results of Operations for the Nine Months Ended February 28, 2022 and 2021

Revenues



We had revenue of $16,502,978 during the nine months ended February 28, 2022, an
increase of $3,270,138, or 25%, compared to revenue of $13,232,840 during the
nine months ended February 28, 2021. Our cannabis dispensary accounted for
$10,670,203, or 65%, of our revenue for the nine months ended February 28, 2022,
an increase of $467,565, or 5%, compared to $10,202,638 during the nine months
ended February 28, 2021. Dispensary revenue increased during the first nine
months of fiscal year 2022 because our average sales per day increased from
$37,372 during the first nine months of fiscal 2021 to $39,085 during the first
nine months of fiscal 2022. Our cannabis production accounted for $5,832,775, or
35%, of our revenue for the nine months ended February 28, 2022, an increase of
$2,802,573 or 92%, compared to $3,030,202 for the nine months ended February 28,
2021. The increase in production revenues for the first nine months of fiscal
2022 was primarily due to an increase in our THC distillate sales of almost
$1,000,000, as well as sales to 10 new dispensaries and significant increases in
existing customer order size and frequency. These improvements occurred as a
result of our addition of a new sales director, an improvement in our product
mix, the introduction of new products, operating efficiencies and the
procurement of higher quality materials. The increase was also due to greater
revenue from third parties for whom we manufactured and processed their
products.



Cost of Goods Sold



Our cost of goods sold for the nine months ended February 28, 2022 was
$7,989,817, an increase of $1,502,728, or 23%, compared to cost of goods sold of
$6,487,089 for the nine months ended February 28, 2021. The increase in cost of
goods sold for the nine months ended February 28, 2022 was due primarily to an
increase in revenue. Cost of goods sold was 48% of sales during the nine months
ended February 28, 2022 resulting in a gross margin of 52%; cost of goods sold
was 49% for the nine months ended February 28, 2021 resulting in a gross margin
of 51%. Costs of goods sold as a percentage of revenue declined due to our
utilization of low-cost high volume purchasing and a shift in product mix at
City Trees to increased THC distillate sales, which are no cost sales. Gross
margin exceeded our target of 50%. Cost of goods sold during the first nine
months of fiscal 2022 primarily consisted of $7,087,380 of product cost,
$565,485 of state and local fees and taxes, and $311,367 of supplies and
materials.



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Selling, General and Administrative Expenses

Selling, general and administrative expenses, or SG&A, increased by $1,723,855,
or approximately 22%, to $9,440,918 during the nine months ended February 28,
2022, compared to $7,717,063 for the nine months ended February 28, 2021. The
increase in SG&A expenses for the nine months ended February 28, 2022 was
primarily due to increases in costs associates with operating the Oasis LLCs and
offering expenses associated with the 2021 Debenture Offering.



SG&A expense during the nine months ended February 28, 2022 was primarily
attributable to an aggregate of $7,417,653 in costs associated with operating
the Oasis LLCs, an increase of $1,509,840 compared to $5,907,813 during the
first nine months of fiscal 2021. The major components of the $1,509,840
increase in SG&A associated with the operation of the Oasis LLCs during the nine
months ended February 28, 2022 compared to the nine months ended February 28,
2021 were as follows: lease, facilities and office costs of $1,819,549 compared
to $1,354,521; payroll and related costs of $3,363,573 compared to $2,987,897.
sales, marketing, and advertising costs of $1,087,692 compared to $767,378; and
travel of $242,056 compared to $33,829. Lease, facilities and office costs
increased due to our efforts to prepare our facilities for the new pre-roll
division by purchasing equipment and implementing compliance procedures
applicable to this new division. Lease, facilities and office costs also
increased during the first nine months of fiscal 2022 due to costs incurred in
connection with our response to COVID-19. Payroll costs increased during the
first nine months of fiscal 2022 primarily due to increases in salaries of our
employees related to the national labor shortage and due to an increase in the
number of employees in our manufacturing division as we planned for the rollout
of our pre-roll division. Payroll costs also increased due to costs incurred in
connection with our response to COVID-19. Sales and marketing costs increased
during the first nine months of fiscal 2022 due to our use of a third-party
marketing firm for campaigns to promote brand awareness.



Finally, SG&A increased by $213,451 during the nine months ended February 28,
2022 as a result of an increase in the expenses associated with the ongoing
implementation of other aspects of our business plan and our general corporate
overhead to $2,022,702, from $1,809,251 during the nine months ended February
28, 2021. The major components of this increase compared to the first nine
months of fiscal 2021 were as follows: expenses related to the 2021 Debenture
Offering were  $411,298, and payroll and related costs increased by $143,379.
Payroll and related costs increased during the first nine months of fiscal 2022
due to an increase in the number of administrative employees to support our
expanding operations. These increases were partially offset by decreases in the
following costs: professional fees decreased by $122,264 due to the settlement
of the IGH litigation, and sales and marketing expenses decreased by $59,489 due
to a decline in website design and development.

Gain on Settlement of Note Receivable

During the nine months ended February 28, 2022, we recorded a gain on the
settlement of the IGH Note in the amount of $2,218,574; there was no comparable
transaction during the first nine months of the prior fiscal year. This gain on
the settlement arose after IGH notified us on February 27, 2021, that it did not
plan to make further payments in accordance with the terms of the IGH Note on
the theory that the Break-Up Fee excused such additional payments. We vehemently
disagreed and litigation ensued. On June 14, 2021, the parties to the IGH
lawsuit entered into a confidential settlement agreement to resolve the action
and executed the $3,000,000 IGH Settlement Note. Pursuant to the IGH Settlement
Note, IGH paid us $1,000,000 on or before July 21, 2021. The remaining
$2,000,000 and accrued interest is being paid in 12 equal monthly installments,
which commended on August 12, 2021.



Interest Expense, Net



Our interest expense, net of interest income, was $1,416,164 for the nine months
ended February 28, 2022, a decrease of $821,002, or 37%, compared to $2,237,166
for the nine months ended February 28, 2021. The decrease in interest expense
was primarily due to a $1,144,411 decrease in the amortization of the discounts
on debentures to $40,799 during the nine months ended February 28, 2022,
compared to $1,185,210 during the nine months ended February 28, 2021. The
decrease occurred because the discounts on debentures in the amount $996,727
were written off in connection with the amendment of U.S. Convertible Debentures
1, 2 and 4 and the Canaccord Debentures during the fourth quarter of fiscal
2021. The decrease in net interest expense for the third quarter of fiscal 2022
was partially offset by an increase in interest expense of $65,938 in connection
with our issuance of the 2021 Debentures in the principal amount of $2,500,000
(net of original issue discount of $1,875,000) in the 2021 Debenture Offering.
In addition, original issue discount associated with the 2021 Debentures in the
amount of $91,936 was amortized to interest expense during the three months
ended February 28, 2022; there was no comparable charge in the same period of
the prior year.

Impairment of Note Receivable

During the nine months ended February 28, 2021, we recorded an impairment of the
IGH Note in the amount of $2,498,706; there was no comparable transaction in the
comparable period of the current year. This impairment arose after IGH notified
us on February 27, 2021, that it did not plan to make further payments in
accordance with the terms of the IGH Note on the theory that the Break-Up Fee
excused such additional payments. We vehemently disagreed with this assertion.
On June 19, 2021 we entered into a settlement agreement with IGH regarding this
dispute and IGH executed the $3,000,000 IGH Settlement Note, which is being paid
in accordance with its terms. There are no comparable charges during the current
period.



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Provision for Income Taxes



We recorded a provision for income taxes in the amount of $793,322 during the
nine months ended February 28, 2022 compared to $0 during the nine months ended
February 28, 2021. Although we have net operating losses that we believe are
available to us to offset this entire tax liability, which arises under Section
280E of the Code because we are a cannabis company, as a conservative measure,
we have accrued this liability.



Net Loss

Our net loss for the nine months ended February 28, 2022 was $918,669 compared to a net loss of $5,707,184 for the nine months ended February 28, 2022, an improvement of $4,788,515, or 84%.

Non-Controlling Interest



During the nine months ended February 28, 2022, the non-controlling interest in
our investment in the Quinn River Joint Venture, through our subsidiary, Kealii
Okamalu was $8,528. This amount is composed primarily of the cost of a land
lease. There was no comparable expense during the first nine months of fiscal
2021.

Net Loss Attributable to CLS Holdings USA, Inc.

Our net loss attributable to CLS Holdings USA, Inc. for the nine months ended
February 28, 2022 was $910,141 compared to a net loss of $5,707,184 for the nine
months ended February 28, 2021, an improvement of $4,797,043, or 84%.

Liquidity and Capital Resources

The following table summarizes our total current assets, liabilities and working capital at February 28, 2022 and May 31, 2021:

                            February 28,        May 31,
                                2022              2021
Current Assets              $   6,908,563     $  3,840,563
Current Liabilities         $  25,524,476     $  4,984,485
Working Capital (Deficit)   $ (18,615,913 )   $ (1,143,922 )




At February 28, 2022, we had a working capital deficit of $18,615,913, an
increase of $17,471,991 from the working capital deficit of $1,143,922 we had at
May 31, 2021. Our working capital was decreased primarily due to the
reclassification of the U.S. Convertible Debentures in the aggregate amount of
$19,118,821 from long term to current liabilities during the period. Our working
capital decrease was partially offset due to an increase in inventory of
$1,114,556 and an increase of cash in the amount of $1,789,321, which was the
result of the 2021 Debenture Offering in which we raised $2,500,000.



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.
Until the first quarter of fiscal 2022, we operated at a loss. Over the next
twelve months we will likely require additional capital to pursue the
implementation of our business plan, including the development of other revenue
sources, such as possible acquisitions and the start-up of the Quinn River Joint
Venture.



On October 20, 2021, we entered into the Quinn River Joint Venture Agreement
through our 50% owned subsidiary, Kealii Okamalu, with CSI and the Tribe. Kealii
Okamalu expects to loan approximately $6,000,000 to the Quinn River Joint
Venture. We will invest 50% of this amount, or up to $3,000,000, for our equity
interest in Kealii Okamalu. We anticipate using all of the proceeds from the
2021 Debenture Offering toward this loan. We will obtain the balance of the
funds required, if any, from our general working capital or from additional debt
or equity financings. The $6,000,000 loan will be repaid from the portion of the
profits generated by the Quinn River Joint Venture otherwise payable to CSI and
the Tribe at the rate of $750,000 per quarter for eight quarters. We expect the
first harvest under the Quinn River Joint Venture to occur during the first
quarter of fiscal 2023.



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Although our revenues are expected to grow as we expand our operations, we only
achieved net income for the first time during our first quarter of fiscal 2022
and we have experienced net losses since such time. 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 joint ventures, and successfully navigate the COVID-19 business
environment in which we currently operate as well as any changes that may arise
in the cannabis regulatory environment. We cannot assure that we will be
successful in addressing such risks, and the failure to do so could have a
material adverse effect on our business prospects, financial condition and
results of operations.



Cash flows used in operating activities were $2,557,348 during the nine months
ended February 28, 2022, an increase of $500,689, or approximately 24%, compared
to $2,056,659 during the nine months ended February 28, 2021. In deriving cash
flows used in operating activities from the net loss for the first nine months
of each of fiscal 2022 and fiscal 2021, certain non-cash items were (deducted
from) or added back to the net loss) for each such period. These amounts were
($1,539,369) and $1,757,236 for the nine months ended February 28, 2022 and
2021, respectively. For the first nine months of fiscal 2022, the most
significant item deducted from net income was $2,218,574 related to the gain on
settlement of the IGH Note. During the first nine months of fiscal 2021, we
recognized an impairment on this note in the amount of $2,498,706. For the first
nine months of fiscal 2021, the most significant item added back was
amortization of discounts on the convertible debentures in the amount of
$1,185,210, compared to $132,735 during the first nine months of fiscal 2022.We
also added back to the respective net loss for the first nine months of each of
fiscal 2022 and fiscal 2021: $535,361 and $511,036 of depreciation and
amortization expense, respectively.



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 $99,310 during the nine months ended February 28, 2022, compared to a
decrease in cash from operating activities of $605,417 during the first nine
months of fiscal 2021. The more significant changes for the nine months ended
February 28, 2022 were as follows: inventory increased by $1,114,556, compared
to an increase of $394,414 during the first nine months of the prior fiscal year
because of increased inventory levels necessary to support increased sales;
accounts payable and accrued expenses increased by $546,417 during the first
nine months of fiscal 2022 compared to $6,865 during the first nine months of
the prior fiscal year due to increased payments of trade payables and an
increase in city and state sales and excise taxes due; deferred tax liability
increased by $793,322 during the first nine months of fiscal 2022, compared to
$0 during the same period of the prior year as we accrued potential taxes in
connection with Section 280E of the tax code; and operating lease liability
decreased by $213,827 during the first nine months of fiscal 2022 compared to
$314,311 during the same period of the prior fiscal year as certain leases were
renegotiated resulting in lower monthly amortization.



Cash flows provided by investing activities were $1,970,199 for the nine months
ended February 28, 2022, an increase of $607,174, or 45%, compared to cash flow
provided by investing activities of $1,363,025 during the nine months ended
February 28, 2021. This increase was primarily due to our receipt of principal
payments on the IGH Note in the amount of $2,218,574 during the nine months
ended February 28, 2022, compared to our receipt of $1,544,291 during the nine
months ended February 28, 2021.



Cash flows provided by financing activities were $2,376,470 for the nine months
ended February 28, 2022, an increase of $2,376,470, or 100%, compared to cash
flow used in financing activities of $0 during the nine months ended February
28, 2021. This increase was primarily due to our sale of the 2021 Debentures,
which resulted in proceeds in the amount of $2,500,000, and proceeds from a loan
payable in the amount of $808,800, which were partially offset by principal
payments we made to repay debentures of $365,991 and payments of the loans
payable in the amount of $566,339. There were no comparable transactions during
the first nine months of fiscal 2021.



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Third Party Debt



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



Name of            Original        Outstanding
Note           Principal Amount    or Repaid     Payment Details

Oasis Note    $        4,000,000   Repaid        Repaid

2018 U.S.
Convertible
Debentures    $          365,991   Outstanding   Repaid

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

                                                 Due December
                                                 2022. Amount
                                                 includes
                                                 capitalized
                                                 interest of
                                                 $1,514,006 less
                                                 conversion of
2018                                             principal in the
Convertible                                      amount of
Debentures    $       13,219,150   Outstanding   $306,856.

2021
Debenture                                        Due July 10,
Offering *    $        2,500,000   Outstanding   2024.

* The terms of the 2021 Debenture provide for additional payments in the aggregate amount of not less than $375,000 per year for five years after the maturity of the 2021 Debentures.

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.

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.



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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 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.

On October 25, 2021, we repaid three of the debentures, which comprised $365,991 of principal and $2,065 of interest.

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.



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.



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



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



On March 31, 2021, the holders of the Canaccord Debentures approved the
amendment of the indenture related to the Canaccord Debentures (the "Debenture
Amendment") to: (i) extend the maturity date of the Canaccord Debentures from
December 12, 2021 to December 12, 2022; (ii) reduce the conversion price from
$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.



2021 Debenture Offering



During November 2021, we commenced an offering of a maximum of $5,500,000 of
debentures (the "2021 Debentures Offering") and warrants to purchase shares of
our common stock at an exercise price of $0.4125 per share in an aggregate
amount equal to one-half of the aggregate purchase price for the 2021 Debentures
(the "Debenture Warrants") (collectively, the "2021 Debenture Offering"). The
proceeds of the 2021 Debenture Offering will be used to fund our investment in
the Quinn River Joint Venture.



On March 9, 2022, we conducted the final closing of the 2021 Debenture Offering.
Between December 1, 2021 and January 4, 2022, we completed multiple closings of
the 2021 Debenture Offering in which we sold an aggregate of $2,500,000 of 2021
Debentures and issued an aggregate of 3,030,304 Debenture Warrants to the
investors. The 2021 Debentures bear interest at the rate of 15% per annum
calculated on the basis of a 360 day year and mature on July 10, 2024.
Commencing 36 months after issuance of the 2021 Debentures and for a period of 5
years thereafter, all note holders shall receive, on an annual basis, cash
payments equal to the greater of (i) 15% of the principal amount of the notes
they purchased, or (ii) such purchaser's pro rata portion of 5% of the
distributions we receive for the prior fiscal year pursuant to the terms of the
Quinn River Joint Venture Agreement. The Debenture Warrants have a term of 3
years and are exercisable, in whole or in part, at any time, or from time to
time, after the date of issuance.



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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 was exercisable from
time to time, in whole or in part for three years. The warrant had anti-dilution
provisions that provided for an adjustment to the exercise price in the event of
a future issuance or sale of common stock at a lower price, subject to certain
exceptions as set forth in the warrant. The warrant also 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.



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.



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



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



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



The former owners of Alternative Solutions and the Oasis LLCs (other than
Alternative Solutions) became entitled to a $1,000,000 payment from us because
the Oasis LLC maintained an average revenue of $20,000 per day during the 2019
calendar year. We made a payment in the amount of $850,000 to the sellers on May
27, 2020. We deposited the balance due to sellers of $150,000 with an escrow
agent to hold pending the outcome of a tax audit. During the year ended May 31,
2020, the State of Nevada notified the Oasis LLCs that it would be conducting a
tax audit for periods both before and after the closing of the sale to CLS. In
February 2021, we finalized the tax audit, used approximately $43,000 of the
escrowed amount to reimburse ourselves for the portion of the tax liability
properly payable by the sellers, and returned approximately $107,000 of the
escrowed amount to the sellers.



We received final regulatory approval to own the membership interests in the
Oasis LLCs on December 12, 2018. We 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
February 28, 2022, 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.



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 February 28, 2022,
we had 50,000 shares of common stock, valued at $42,500 included in stock
payable on the accompanying balance sheet. The shares were valued based on the
closing market price on the grant date.



On August 16, 2019, we amended a consulting agreement whereby we agreed to issue
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. With the exception of the first quarter of fiscal
2022, we have incurred losses from operations since inception, and have an
accumulated deficit of $93,646,779 as of February 28, 2022, compared to
$92,736,638, as of May 31, 2021. We had a working capital deficit of $18,615,913
as of February 28, 2022, compared to a working capital deficit of $1,143,922 at
May 31, 2021. 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.



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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,
execute on joint ventures, 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.



Critical Accounting Estimates



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

? Estimates and assumptions regarding the deductibility of expenses for

purposes of Section 280E of the Internal Revenue Code: Management evaluates

the expenses of its manufacturing and retail operations and makes certain

judgments regarding the deductibility of various expenses under Section

280E of the Internal Revenue Code based on its interpretation of this

regulation and its subjective assumptions about the categorization of these

      expenses.

? Estimates and assumptions used in the valuation of derivative liabilities:

Management utilizes a lattice model to estimate the fair value of

derivative liabilities. The model includes subjective assumptions that can

      materially affect the fair value estimates.

? Estimates and assumptions used in the valuation of intangible assets. In

order to value our intangible assets, management prepares multi-year

projections of revenue, costs of goods sold, gross margin, operating

expenses, taxes and after tax margins relating to the operations associated

with the intangible assets being valued. These projections are based on the

      estimates of management at the time they are prepared and include
      subjective assumptions regarding industry growth and other matters.

Recently Issued Accounting Standards

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



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



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



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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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