DEF: CLS Holdings USA Proposes 1:4 Million Reverse Stock Split to Go Private, Citing High Public Company Costs and Industry Headwinds

CLS Holdings USA, Inc. is seeking shareholder approval for a drastic 1-for-4,000,000 reverse stock split aimed at reducing its shareholder count to fewer than 15, enabling it to deregister with the SEC and delist from the Canadian Securities Exchange to save approximately $950,000 annually.

Summary

• CLS Holdings USA, Inc. (CLSH) will hold a Special Meeting of Stockholders on June 24, 2025, to vote on a 1-for-4,000,000 reverse stock split.
• The primary purpose of the Consolidation is to reduce the number of record shareholders to below 15, allowing the Company to deregister with the SEC and delist from the Canadian Securities Exchange.
• This strategic move is expected to result in annual cost savings of approximately $950,000 by eliminating public company compliance burdens.
• Stockholders holding fewer than 4,000,000 pre-Consolidation shares will be cashed out at a price of $0.037 per pre-Consolidation share.
• The cash-out price of $0.037 per share is at the high end of the $0.018 to $0.037 fair value range determined by an independent valuation firm, Houlihan Capital, LLC.
• The Company estimates total transaction costs for the reverse stock split and cash-out to be approximately $1.675 million, with $1.36 million allocated for purchasing fractional shares.
• Funding for the cash-out will come from existing cash reserves and $1.35 million in new loans from three existing shareholders: Frank Koretsky, Patrick Haldan, and LEM Investments, LLC, at a 12% annual interest rate over 36 months.
• The Board of Directors and an Independent Committee unanimously recommend approval of the reverse stock split.
• The Company has experienced significant revenue declines at its Oasis Dispensary and City Trees production facility over the last three years, totaling $3,430,845 and $1,923,422 respectively.
• Management has implemented cost-cutting measures, including reducing employee count from 89 to 78, saving $924,400.32 in wages and employer expenses.
• The Company has also significantly reduced its debt from $10,649,252 in FY2023 to $3,154,570 as of February 28, 2025.
• Warrants to purchase 14,398,169 shares are outstanding, but their exercise prices exceed the cash-out price, making them likely to become worthless if the split is approved.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative. While the company is taking decisive action to address its financial challenges and high public company costs, the underlying reasons for this 'going private' transaction are significant revenue declines, lack of access to capital markets, and a stated risk of insolvency if it remains public. The move is a defensive measure to survive rather than a growth-oriented strategy, despite providing liquidity to some shareholders at a fair price.

Positives

• The proposed reverse stock split is expected to generate significant annual cost savings of approximately $950,000 by eliminating public company compliance expenses.
• The Company has proactively reduced its debt from $10,649,252 in FY2023 to $3,154,570 by Q3 FY2025, demonstrating financial discipline.
• The cash-out price of $0.037 per pre-Consolidation share provides a liquidity event for minority shareholders at the high end of the independent fairness opinion's valuation range ($0.018 to $0.037).
• The Board and an Independent Committee conducted a thorough strategic review, including engaging an independent valuation firm, to determine the best course of action for the Company and its shareholders.
• Cost and time savings from going private can be redirected to improve operations through capital investments, information systems, and potentially better wages/benefits for employees.

Negatives

• The Company has experienced a precipitous revenue decline over the last three years, with Oasis Dispensary revenue decreasing by $3,430,845 and City Trees revenue by $1,923,422.
• The cannabis industry faces significant headwinds, including punitive tax treatment (Section 280E), limited access to conventional capital markets, and competition from unregulated intoxicating hemp products.
• The Company expects to face insolvency within three years if it remains a public entity, highlighting severe financial challenges.
• Going private will result in the loss of public market liquidity and transparency for remaining shareholders.
• Outstanding warrants are likely to become ineffective and worthless due to the reverse stock split, as their exercise prices exceed the cash-out price.
• The new loans secured to fund the cash-out carry a high interest rate of 12% per year, which could add financial pressure.
• The Company has a shareholders' deficit and negative book value per share, indicating a challenging financial position.

Risks

• Failure to obtain shareholder approval for the proposed 1:4,000,000 reverse stock split could prevent the Company from achieving its cost-saving and strategic objectives.
• The Company faces a risk of insolvency within three years if it continues to operate as a public entity, as indicated by management's discussions with Houlihan Capital.
• Ongoing challenges in the cannabis industry, such as punitive tax treatment under Section 280E, limited access to conventional capital markets, and oppressive banking expenses, could continue to hamper profitability and growth.
• Competition from unregulated intoxicating hemp products poses a direct threat to regulated cannabis sales, potentially further impacting the Company's revenue.
• Shareholders who dissent from the reverse stock split may initiate legal proceedings to determine the fair value of their shares, potentially leading to additional legal costs and uncertain outcomes.
• Shareholders holding shares in multiple accounts or through nominees might inadvertently be cashed out if their individual holdings are below the 4,000,000 share threshold, despite their total ownership exceeding it.
• The 12% interest rate on the new loans could strain the Company's cash flow if operational improvements do not materialize as expected.

Future Outlook

CLS Holdings USA, Inc. intends to transition into a private company by deregistering with the SEC and delisting from the Canadian Securities Exchange, contingent on shareholder approval of the reverse stock split. This move is expected to significantly reduce compliance costs and reallocate time and financial resources towards operational improvements, capital investments, and strategic business initiatives. The Company anticipates continued challenges in the cannabis industry due to current federal regulations and competition from unregulated products, but believes going private will allow it to operate more efficiently and potentially avoid insolvency.

Management Comments

• Andrew Glashow, CEO and Chairman of the Board, stated that the Company's internal strategic review, commenced in 2024, aimed to evaluate industry trends, company structure, performance, and strategic positioning.
• Management believes that the Company has reached its limit on cost savings from payroll reductions without negatively impacting performance and sales.
• Management understands that the reverse stock split will ultimately result in the Company having fewer than 15 shareholders of record, allowing it to become a private company and be relieved of filing and compliance requirements.
• Management believes that the benefits of remaining a public company no longer outweigh the prohibitive costs, given factors like stock performance and limited access to conventional capital markets.
• The Independent Committee concluded that transitioning the Company to a private entity would serve the Company's best interests and provide liquidity to shareholders at a fair price.

Industry Context

The U.S. cannabis industry faces significant challenges, including punitive tax treatment under Section 280E of the Internal Revenue Code, which severely limits profitability for cannabis businesses. Companies in this sector also struggle with inaccessibility to conventional capital markets and oppressive expenses associated with banking and financial transactions due to cannabis remaining a Schedule I drug at the federal level. This has forced companies like CLSH to rely on private lenders and tactical funds, often at above-market rates. Furthermore, the introduction of unregulated intoxicating hemp products offers consumers a cheaper alternative, directly impacting sales of regulated cannabis. While state and federal governments are expected to eventually address this illicit market, it currently poses a significant competitive threat. However, the Nevada cannabis market benefits from limited licensing opportunities for retail locations, creating a barrier to entry that mitigates the risk of losing market share to new retail competitors.

Comparison to Industry Standards

• Houlihan Capital, LLC, in its fairness opinion, compared CLS Holdings USA, Inc. to a peer group of eight publicly traded cannabis companies: Cresco Labs Inc., Curaleaf Holdings, Inc., Green Thumb Industries Inc., Planet 13 Holdings Inc., TerrAscend Corp., Trulieve Cannabis Corp., Verano Holdings Corp., and Vext Science, Inc.
• CLS Holdings USA, Inc. is significantly smaller than its guideline public company peers in terms of revenue and total assets, which generally suggests lower valuation multiples.
• While the peer group experienced median revenue growth rates of 0.9%, 3.6%, and 3.9% for calendar years 2025, 2026, and 2027 respectively, CLSH is projected to experience a decline of -16.8% in 2025 before achieving modest growth of 2.9% and 3.0% in the following two years.
• CLSH's projected net losses (ranging from -18.7% to -26.3% over the next three years) are similar to the median net income/loss margins of the peer group (-19.5% over the last twelve months), indicating widespread profitability challenges in the industry.
• Houlihan applied revenue multiples at a significant discount (approximately 55%) to the mean multiple indicated by the peer group, reflecting CLSH's smaller size, negative growth, and higher risk profile within the challenging cannabis market.
• In its comparable transactions analysis, Houlihan identified four M&A transactions involving cannabis companies (Acreage Holdings, HEXO Corp., The Valens Company Inc., VIVO Cannabis Inc.) over the last three years, with enterprise value to LTM revenue multiples ranging from 0.34x to 1.44x.
• Houlihan's analysis of comparable transactions indicated an equity value per share range of $0.018 to $0.030, while the guideline public company method indicated a range of $0.024 to $0.037. The Company chose the high end of the combined range ($0.037) for the cash-out price.

Corporate Governance

Related Party Transactions

• Frank Koretsky, a beneficial owner of 48.6% of the Company's common stock and considered an affiliate, is expected to make a loan of $450,000.00 to the Company.
• Patrick Haldan, a beneficial owner of 9.93% of the Company's common stock, is expected to make a loan of $450,000.00 to the Company.
• LEM Investments, LLC, a beneficial owner of 9.93% of the Company's common stock, is expected to make a loan of $450,000.00 to the Company.
• These loans, totaling $1.35 million, are intended to partially fund the Company's repurchase of fractionalized shares following the reverse stock split.
• The loans will be secured by all otherwise unencumbered assets of the Company or its subsidiaries and will bear interest at 12% per year, payable over 36 months.

Stakeholder Impact

• **Shareholders (holding less than 4,000,000 shares)**: Will be cashed out at $0.037 per pre-Consolidation share, providing a liquidity event at a price at the high end of the independent fairness opinion's range.
• **Shareholders (holding 4,000,000 or more shares)**: Will remain shareholders of a private company, losing the liquidity and transparency associated with public trading on the OTCQB and Canadian Securities Exchange, and no longer benefiting from SEC reporting requirements.
• **Employees**: The Company has already reduced its workforce from 89 to 78 employees. Future cost savings from going private could potentially be redirected to improve wages and benefits packages to attract and retain quality personnel.
• **Company Operations**: Management expects to reallocate time and financial resources previously spent on public company compliance to strategic matters, capital investments (e.g., new equipment, business lines), improved information systems, and enhanced cash flow for prompt payment discounts.
• **Creditors**: The Company is taking on new secured loans totaling $1.35 million at a 12% interest rate to fund the share repurchase, which will increase its debt obligations, though it has significantly reduced overall debt recently.

Next Steps

• Stockholders will vote on Proposal Number 1 (the reverse stock split) at the Special Meeting on June 24, 2025.
• If Proposal Number 1 is approved, the Company intends to execute the reverse stock split and repurchase fractionalized shares.
• Following implementation, the Company intends to terminate the registration of its common stock pursuant to Section 12(g)(4) of the Exchange Act.
• The Company will apply to have its common stock voluntarily delisted from the Canadian Securities Exchange concurrently with, or following, the reverse stock split.
• The Company will apply to applicable Canadian securities regulatory authorities to cease to be a reporting issuer in each Canadian jurisdiction.
• The Company will file a Current Report on Form 8-K with the SEC following the Special Meeting to report the official voting results.
• A final amendment of Schedule 13E-3 will be filed to report the results of the vote on Proposal Number 1.
• If Proposal Number 1 is approved, the Company or its paying agent will send a letter to each shareholder to inform them of the next steps for payment for fractional shares.
• Dissenting shareholders must deliver a statement of intent to dissent by June 23, 2025, and not vote in favor of the proposal to preserve their appraisal rights.

Key Dates

Recommendation

Keywords

Cannabis, Reverse Stock Split, Going Private, SEC Deregistration, Delisting, Share Consolidation, Marijuana, Dispensary, Cultivation, Nevada, Corporate Governance, Financial Reporting