Notes to Condensed Consolidated
Financial Statements
(Unaudited)
NOTE 1 –
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business:
Nature of Business – The
4LESS Group, Inc., (the “Company”), was incorporated under the laws of the State of Nevada on December 5, 2007. The Company,
under the name MedCareers Group, Inc. (“MCGI”) formally operated a website for nurses, nursing schools and nurses’ organizations
designed for better communication between nurses and the nursing profession.
On November 29, 2018, the
Company entered into a transaction (the “Share Exchange”), pursuant to which the Company acquired 100% of the issued and outstanding
equity securities of The 4LESS Corp. (“4LESS”), in exchange for the issuance of (i) nineteen thousand (19,000) shares of Series
B Preferred Stock, (ii) six thousand seven hundred fifty (6,750) shares of Series C Preferred Stock, and (iii) 870 shares of Series D
Preferred Stock. The Series C Preferred Shares have a right to convert into common stock of the Company by multiplying the number of issued
and outstanding shares of common stock by 2.63 on the conversion date. The Share Exchange closed on November 29, 2018. As a result
of the Share Exchange, the former shareholders of 4LESS became the controlling shareholders of the Company. The Share Exchange was
accounted for as a reverse takeover/recapitalization effected by a share exchange, wherein 4LESS is considered the acquirer for accounting
and financial reporting purposes. The capital, share price, and earnings per share amount in these consolidated financial statements for
the period prior to the reverse merger were restated to reflect the recapitalization in accordance with the shares issued as a result
of the reverse merger except otherwise noted.
4LESS was formed as Vegas
Suspension & Offroad, LLC on October 24, 2013 as a Nevada limited liability company and converted to a Nevada corporation with the
same name on May 8, 2017. On April 2, 2018, the Company changed its name to The 4LESS Corp. The Corporation had S Corporation status.
The Corporation operates as an e-commerce auto and truck parts sales company. As a result of the share exchange, the 4LESS Group, Inc.
is now a holding company operating through 4LESS and offers products including exhaust systems, suspension systems, wheels, tires, stereo
systems, truck bed covers, and shocks. On December 30, 2019 4LESS changed its name to Auto Parts 4Less, Inc.
Significant Accounting
Policies:
The Company’s management
selects accounting principles generally accepted in the United States of America and adopts methods for their application. The application
of accounting principles requires the estimating, matching and timing of revenue and expense. The accounting policies used conform to
generally accepted accounting principles which have been consistently applied in the preparation of these condensed financial statements.
Basis of Presentation:
The Company prepares its
financial statements on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States.
The accompanying unaudited
condensed consolidated financial statements and related notes have been prepared in accordance with the rules and regulations of the U.S.
Securities and Exchange Commission (“SEC”) for interim unaudited consolidated financial information. Accordingly, they do
not include all of the information and footnotes required by accounting principles generally accepted in the United States of America
(“GAAP”) for complete consolidated financial statements. Certain information and footnote disclosure normally included in
financial statements prepared in accordance with GAAP have been omitted pursuant to instructions, rules, and regulations prescribed by
the SEC. The unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) which are,
in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Interim results are not
necessarily indicative of the results for the full year. These unaudited condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements of the Company for the year ended January 31, 2021 and notes thereto contained
in the Company’s Annual Report on Form 10-K filed on May 14, 2021.
Principles of Consolidation:
The condensed financial
statements include the accounts of The 4LESS Group, Inc. as well as The Auto Parts 4Less, Inc., and JBJ Wholesale LLC. All significant
inter-company transactions have been eliminated. All amounts are presented in U.S. Dollars unless otherwise stated.
- 7 -
Use of Estimates:
In order to prepare financial
statements in conformity with accounting principles generally accepted in the United States, management must make estimates, judgments
and assumptions that affect the amounts reported in the financial statements and determine whether contingent assets and liabilities,
if any, are disclosed in the financial statements. The ultimate resolution of issues requiring these estimates and assumptions could differ
significantly from resolution currently anticipated by management and on which the financial statements are based. The most significant
estimates included in these consolidated financial statements are those associated with the assumptions used to value derivative liabilities.
Reclassifications
Certain amounts in the Company’s
condensed consolidated financial statements for prior periods have been reclassified to conform to the current period presentation. These
reclassifications have not changed the results of operations of prior periods.
Cash and Cash Equivalents:
The Company considers all
highly liquid instruments with a maturity of three months or less to be cash equivalents. At times, cash balances may be in excess of
the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. The carrying amount of cash and cash equivalents approximates
fair market value.
Inventory Valuation
Inventories are stated at
the lower of cost or net realizable value. Inventories are valued on a first-in, first-out (FIFO) basis. Inventory is comprised of finished
goods.
Concentrations
Cost of Goods Sold
For the three months ended
April 30, 2021 the Company purchased approximately 54% of its inventory and items available for sale from third parties from three vendors.
As of April 30, 2021, the net amount due to the vendors included in accounts payable was $462,991. For the three months ended April 30,
2020, the Company purchased from three vendors approximately 53% of its inventory and items available for sale from third parties. As
of April 30, 2020, the net amount due to these vendors included in accounts payable was $434,528. The Company believes there are numerous
other suppliers that could be substituted should a supplier become unavailable or non-competitive.
Leases
We adopted ASU No. 2016-02—Leases
(Topic 842), as amended, as of February 1, 2019, using the full retrospective approach. The full retrospective approach provides a
method for recording existing leases at adoption and in comparative periods. In addition, we elected the package of practical expedients
permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical
lease classification.
In addition, we elected
the hindsight practical expedient to determine the lease term for existing leases. Our election of the hindsight practical expedient resulted
in the shortening of lease terms for certain existing leases and the useful lives of corresponding leasehold improvements. In our application
of hindsight, we evaluated the performance of the leased stores and the associated markets in relation to our overall real estate strategies,
which resulted in the determination that most renewal options would not be reasonably certain in determining the expected lease term.
Adoption of the new standard
resulted in the recording of additional net lease assets and lease liabilities of $454,087 and $454,087 respectively, as of February 1,
2019. The standard did not materially impact our consolidated net earnings, retained earnings and had no impact on cash flows.
- 8 -
Income Taxes
Income taxes are accounted
for under the asset and liability method. Deferred tax assets and liabilities are recognized when items of income and expense are recognized
in the financial statements in different periods than when recognized in the tax return. Deferred tax assets arise when expenses are recognized
in the financial statements before the tax returns or when income items are recognized in the tax return prior to the financial statements.
Deferred tax assets also arise when operating losses or tax credits are available to offset tax payments due in future years. Deferred
tax liabilities arise when income items are recognized in the financial statements before the tax returns or when expenses are recognized
in the tax return prior to the financial statements. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
On December 22, 2017, the
Tax Cuts and Jobs Act (“Tax Act”) was signed into law. ASC 740, Accounting for Income Taxes requires companies to recognize
the effects of changes in tax laws and rates on deferred tax assets and liabilities and the retroactive effects of changes in tax laws
in the period in which the new legislation is enacted. The Company’s gross deferred tax assets were revalued based on the reduction
in the federal statutory tax rate from 35% to 21%. A corresponding offset has been made to the valuation allowance, and any potential
other taxes arising due to the Tax Act will result in reductions to the Company’s net operating loss carryforward and valuation
allowance. The Company will continue to analyze the Tax Act to assess its full effects on the Company’s financial results, including
disclosures, for the Company’s fiscal year ending January 31, 2022, but the Company does not expect the Tax Act to have a material
impact on the Company’s consolidated financial statements.
Fair Value of Financial
Instruments:
The Company’s financial
instruments consist of cash, accounts payable, advances and notes payable. The Company considers the carrying value of such amounts in
the financial statements to approximate their fair value due to the short-term nature of these financial instruments. Derivatives are
recorded at fair value at each period end. Fair value is defined as the price that would be received to sell an asset or paid to transfer
a liability (an exit price) in an orderly transaction between market participants at the reporting date.
The ASC guidance for fair
value measurements and disclosure establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy
are described below:
Level 1 Inputs
– Quoted prices for identical instruments in active markets.
Level 2 Inputs
– Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are
not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 Inputs
– Instruments with primarily unobservable value drivers.
The following table sets
forth, by level within the fair value hierarchy, the Company’s financial liabilities that were accounted for at fair value on a
recurring basis as of April 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2021
|
|
Quoted Prices in
Active
Markets
For Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Liabilities – embedded redemption feature
|
|
$
|
148,957
|
|
$
|
—
|
|
$
|
—
|
|
$
|
148,957
|
|
|
Totals
|
|
$
|
148,957
|
|
$
|
—
|
|
$
|
—
|
|
$
|
148,957
|
|
- 9 -
Related Party Transactions:
The Company has a verbal
policy that includes procedures intended to ensure compliance with the related party provisions in common practice for public companies.
For purposes of the policy, a “related party transaction” is a transaction in which the Company or any one of its subsidiaries
participates and in which a related party has a direct or indirect material interest, other than ordinary course, arms-length transactions
of less than 1% of the revenue of the counterparty. Any transaction exceeding the 1% threshold, and any transaction involving consulting,
financial advisory, legal or accounting services that could impair a director’s independence, must be approved by the CEO. Any related
party transaction in which an executive officer or a Director has a personal interest, or which could present a possible conflict under
the Guide to Ethical Conduct, must be approved by Board of Directors, following appropriate disclosure of all material aspects of the
transaction.
Derivative Liability
The derivative liabilities
are valued as a level 3 input under the fair value hierarchy for valuing financial instruments. The derivatives arise from convertible
debt where the debt and accrued interest is convertible into common stock at variable conversion prices and reclassification of equity
instrument to liability due to insufficient shares for issuance. As the price of the common stock varies, it triggers a gain or loss based
upon the discount to market assuming the debt was converted at the balance sheet date. When evaluating the effect of the issuance of new
equity-linked or equity-settled instruments on previously issued instruments, the Company uses first-in, first-out method (“FIFO”)
where authorized and unused shares would first be used to satisfy the earliest issued equity-linked instruments.
The fair value of the derivative
liability is determined using a lattice model, is re-measured on the Company’s reporting dates, and is affected by changes in inputs
to that model including our stock price, historical stock price volatility, the expected term, and both high risk and the risk-free interest
rate. The most sensitive inputs to the model are for expected time for the holder to convert or be repaid and the estimated historical
volatility of the Company’s common stock. However, because the historical volatility of the Company’s common stock is
so high (see Note 10), the sensitivity required to change the liability by 1% as of April 30, 2021 is greater than 25% change in historical
volatility as of that date. The other inputs, such as risk free rate, high yield cash rate and stock price all have a sensitivity
for a 1% change in the input variable results in a significantly less than 1% change in the calculated derivative liability.
Revenue Recognition
The Company recognizes revenue
under ASC 606, “Revenue from Contracts with Customers. The core principle of the revenue standard is that a company should
recognize revenue when control is transferred over the promised goods or services to customers in an amount that reflects the consideration
to which the company expects to be entitled in exchange for those goods or services. The Company only applies the five-step model to contracts
when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods and services transferred
to the customer. The following five steps are applied to achieve that core principle:
Step
1: Identify the contract with the customer
Step
2: Identify the performance obligations in the contract
Step
3: Determine the transaction price
Step
4: Allocate the transaction price to the performance obligations in the contract
Step
5: Recognize revenue when the company satisfies a performance obligation
Because the Company’s
sales agreements generally have an expected duration of one year or less, the Company has elected the practical expedient in ASC 606-10-50-14(a)
to not disclose information about its remaining performance obligations.
Disaggregation of Revenue:
Channel Revenue
The following table shows
revenue split between proprietary and third party website revenue for the three months ended April 30, 2021 and 2020:
|
|
|
|
|
|
|
Change
|
|
|
|
|
2021
|
|
2020
|
|
$
|
|
%
|
|
|
Proprietary website revenue
|
|
$
|
2,123,101
|
|
|
1,109,106
|
|
$
|
1,013,995
|
|
91%
|
|
Third party website revenue
|
|
|
1,605,683
|
|
|
890,965
|
|
|
714,718
|
|
80%
|
|
Total Revenue
|
|
$
|
3,728,784
|
|
$
|
2,000,071
|
|
$
|
1,728,713
|
|
86%
|
- 10 -
The Company’s performance
obligations are satisfied at the point in time when products are received by the customer, which is when the customer has title and obtained
the significant risks and rewards of ownership. Therefore, the Company’s contracts have a single performance obligation (shipment
of product). The Company primarily receives fixed consideration for sales of product. Shipping and handling amounts paid by customers
are primarily for online orders, and are included in revenue. Sales tax and other similar taxes are excluded from revenue.
Stock-Based Compensation:
The Company accounts for
stock options at fair value. The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing
model and provides for expense recognition over the service period, if any, of the stock option.
Earnings (Loss) Per Common
Share:
Basic earnings (loss) per
share (“EPS”) is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average
number of shares outstanding (denominator) during the period. Diluted EPS give effect to all dilutive potential common shares outstanding
during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted
EPS, the average stock price for the period is used to determine the number of shares assumed to be purchased from the exercise of stock
options and/or warrants. Diluted EPS excluded all dilutive potential shares if their effect is anti-dilutive.
Basic loss per common share
is computed based on the weighted average number of shares outstanding during the period. Diluted loss per share is computed in a manner
similar to the basic loss per share, except the weighted-average number of shares outstanding is increased to include all common shares,
including those with the potential to be issued by virtue of convertible debt and other such convertible instruments. Diluted loss per
share contemplates a complete conversion to common shares of all convertible instruments only if they are dilutive in nature with regards
to earnings per share.
Recently Issued Accounting
Standards:
In January 2017, the FASB
issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350) which simplifies goodwill impairment testing by requiring that such periodic
testing be performed by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge for
the amount by which the carrying amount exceeds the reporting unit’s fair value. The policy is effective for fiscal years, including
interim periods, beginning after December 15, 2019. We adopted on February 1, 2020 and the adoption had no impact.
Fair Value Measurement:
In 2018, the FASB issued amended guidance to remove, modify and add disclosure requirements for fair value measurements. This amendment
is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted
for any removed or modified disclosure requirements. Transition is on a prospective basis for the new and modified disclosures, and on
a retrospective basis for disclosures that have been eliminated. The adoption of this guidance on February 1, 2020 did not have a material
impact on our consolidated financial statements.
In June 2018, the FASB issued
ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvement to Nonemployee Share-Based Payment Accounting, which is part of
the FASB’s simplification initiative to maintain or improve the usefulness of the information provided to the users of financial
statements while reducing cost and complexity in financial reporting. This update provides consistency in the accounting for share-based
payments to nonemployees with that of employees. The updated guidance had no impact on the Company’s consolidated financial position,
results of operations or cash flows.
In addition to the above,
the Company has reviewed all other recently issued, but not yet effective, accounting pronouncements, and does not believe the future
adoption of any such pronouncements will have a material impact on its financial condition or the results of its operations.
There were various other
accounting standards and interpretations issued recently, none of which are expected to a have a material impact on our financial position,
operations or cash flows.
- 11 -
NOTE 2 –
GOING CONCERN AND FINANCIAL POSITION
The consolidated financial
statements have been prepared on a going concern basis, which contemplates the realization of assets and liquidation of liabilities in
the normal course of business. The Company has an accumulated deficit of $20,949,534 as of April 30, 2021 and has a working capital deficit
at April 30, 2021 of $2,700,793. As of April 30, 2021, the Company only had cash and cash equivalents of $1,342,321 and approximately
$151,000 of short-term debt in default. The short-term debt agreements provide legal remedies for satisfaction of defaults, none of the
lenders to this point have pursued their legal remedies. While the Company has continued to grow its revenues, at this time, the three
months ended July 31, 2020 was only the first quarter the Company was able to achieve profitability from operations prior to interest
and other expenses. While the Company believes it will continue to build on the results achieved in this quarter, our current liquidity
position raises substantial doubt about the Company’s ability to continue as a going concern.
Management’s plan
is to raise additional funds in the form of debt or equity in order to (a) grow the business through building up brand awareness and developing
and launching a potentially much larger auto parts e-commerce web site, autoparts4less.com while (b) continuing to fund losses until such
time as revenues can sustain the Company. However, there is no assurance that management will be successful in being able to continue
to obtain additional funding. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
NOTE 3 –
PROPERTY
The Company capitalizes
all property purchases over $1,000 and depreciates the assets on a straight-line basis over their useful lives of 3 years for computers
and 7 years for all other assets. Property consists of the following at April 30, 2021 and January 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2021
|
|
January 31, 2021
|
|
|
Office furniture, fixtures and equipment
|
|
$
|
85,413
|
|
$
|
85,413
|
|
|
Shop equipment
|
|
|
43,004
|
|
|
43,004
|
|
|
Vehicles
|
|
|
226,760
|
|
|
40,433
|
|
|
Sub-total
|
|
|
355,177
|
|
|
168,850
|
|
|
Less: Accumulated depreciation
|
|
|
(99,558
|
)
|
|
(88,823
|
)
|
|
Total Property
|
|
$
|
255,619
|
|
$
|
80,027
|
|
Additions to fixed assets
for the three months ended April 30, 2021 and were $186,327 with $35,000 paid in cash and $151,327 financed through vehicle loans. Additions
to fixed assets were nil for the three months ended April 30, 2020.
Depreciation expense was
$10,735 and $6,647 for the three months ended April 30, 2021 and April 30, 2020, respectively.
- 12 -
NOTE 4 – LEASES
We lease certain warehouses
and office space. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for
these leases on a straight-line basis over the lease term. For lease agreements entered into or reassessed after the adoption of Topic
842, we did not combine lease and non-lease components.
Most leases include one
or more options to renew, with renewal terms that can extend the lease term from one to 17 years or more. The exercise of lease renewal
options is at our sole discretion. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless
there is a transfer of title or purchase option reasonably certain of exercise.
Below is a summary of our lease assets and liabilities
at April 30, 2021 and January 31, 2021.
|
|
|
|
|
|
|
|
|
|
|
|
Leases
|
|
Classification
|
|
April 30, 2021
|
|
January 31, 2021
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
Operating Lease Assets
|
|
$
|
319,698
|
|
$
|
344,413
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
Current Operating Lease Liability
|
|
$
|
99,937
|
|
$
|
90,286
|
|
|
Noncurrent
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
Noncurrent Operating Lease Liabilities
|
|
|
211,195
|
|
|
244,049
|
|
|
Total lease liabilities
|
|
|
|
$
|
311,132
|
|
$
|
334,335
|
|
Note: As most of our leases
do not provide an implicit rate, we use our incremental borrowing rate of 8% based on the information available at commencement date in
determining the present value of lease payments.
CAM charges were not included
in operating lease expense and were expensed in general and administrative expenses as incurred.
Operating lease cost and
rent was $30,479 and $34,079 for the three months ended April 30, 2021 and April 30, 2020, respectively.
NOTE 5 –
CUSTOMER DEPOSITS
The Company receives payments
from customers on orders prior to shipment. At April 30, 2021 the Company had received $268,932 (January 31, 2021- $188,385) in customer
deposits for orders that were unfulfilled at April 30, 2021 and canceled subsequent to year end. The orders were unfulfilled at April
30, 2021 because of supply chain issues due to supplier back-orders because of the Covid-19 pandemic. The deposits were returned to the
customers subsequent to April 30, 2021.
NOTE 6 –
DEFERRED REVENUE
The Company receives payments
from customers on orders prior to shipment. At April 30, 2021 the Company had received $981,830 (January 31, 2021- $687,766) in customer
payments for orders that were unfulfilled at April 30, 2021 and delivered subsequent to April 30, 2021. The orders were unfulfilled at
April 30, 2021 because of supply chain issues due to supplier back-orders because of the Covid-19 pandemic as well as processing and delivery
timing.
NOTE 7 –
PPP LOAN
On May 2, 2020 the Company
entered into a Paycheck Protection Promissory (PPP) Note Agreement whereby the lender would advance proceeds of $209,447 at a fixed rate
of 1% per annum and a May 2, 2022 maturity. The loan is repayable in monthly installments of $8,818 commencing September 2, 2021 and continuing
on the second day of every month thereafter until maturity when any remaining principal and interest are due and payable. At April 30,
2021 the loan is classified as $79,362 current and $130,085 long-term. The Company used the proceeds of this loans for working capital
and the Company intends to use these proceeds in a manner consistent with obtaining loan forgiveness, which the Company is currently in
the process of gathering the required information to file its forgiveness application and expects to have filed its application before
the end of its second fiscal quarter.
- 13 -
NOTE 8 –
SHORT-TERM AND LONG-TERM DEBT
The components of the Company’s
debt as of April 30, 2021 and January 31, 2021 were as follows:
|
|
|
April 30,
|
|
January 31,
|
|
|
2021
|
2021
|
|
|
|
|
|
|
|
|
|
|
|
Loan dated October 8, 2019, and revised February
29, 2020 and November 10, 2010 repayable June 30, 2022 with an additional interest payment of $20,000(3)
|
|
|
102,168
|
#
|
|
102,168
|
|
|
|
|
|
|
|
|
|
|
|
SFS Funding Loan, original loan of $389,980 January
8, 2020, 24% interest, weekly payments of $6,006, maturing July 28, 2021(2)
|
|
|
83,152
|
*
|
|
161,227
|
|
|
|
|
|
|
|
|
|
|
|
Forklift Note Payable, original note of $20,433
Sept 26, 2018, 6.23% interest, 60 monthly payments of $394.54 ending August 2023(1)
|
|
|
11,269
|
#
|
|
12,269
|
|
|
|
|
|
|
|
|
|
|
|
Vehicle loan original loan of $93,239 February
16, 2021, 2.90 % interest. 72 monthly payments of $1,414 beginning on April 2, 2021 and ending on March 2, 2027. Secured by vehicle having
net book value of $94,316.
|
|
|
92,246
|
#
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicle loan original loan of $59,711 March 20,2021,
7.89% interest. 72 monthly payments of $1,048 beginning on May 4, 2021 and ending on April 4, 2027. Secured by vehicle having net book
value of $87,575.
|
|
|
59,711
|
#
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand loan - $5,000 dated February 1, 2020,
15% interest, 5% fee on outstanding balance
|
|
|
5,000
|
*
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
Demand loan - $2,500, dated March 8, 2019, 25%
interest, 5% fee on outstanding balance
|
|
|
2,500
|
*
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
|
Demand loan - $65,500 dated February 27, 2019,
25% interest, 5% fee on outstanding balance, Secured by the general assets of the Company
|
|
|
12,415
|
*
|
|
12,415
|
|
|
|
|
|
|
|
|
|
|
|
Promissory note -$60,000 dated September 18,
2020 maturing September 18, 2021, including $5,000 original issue discount, 15% compounded interest payable monthly
|
|
|
60,000
|
*
|
|
60,000
|
|
|
|
|
|
|
|
|
|
|
|
Promissory note -$425,000 dated August 28, 2020,
including $50,000 original issue discount, 15% compounded interest payable monthly. This notes matures when the Company receives
proceeds through a financing event of $825,000 plus accrued interest on the note. (4)
|
|
|
425,000
|
*
|
|
425,000
|
|
|
|
|
|
|
|
|
|
|
|
Promissory note -$1,200,000 dated August 28,
2020,maturing August 28, 2022, 12% interest payable monthly with the first six months interest deferred until the 6th month and added
to principal. (5)
|
|
|
1,200,000
|
#
|
|
1,200,000
|
|
|
|
|
|
|
|
|
|
|
|
Promissory note -$50,000 dated August 31, 2020,maturing
February 28, 2021, 10% interest payable accrued monthly payable at maturity Fully repaid at April 30, 2021
|
|
|
—
|
*
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,053,461
|
|
$
|
2,030,579
|
|
- 14 -
|
|
|
30-Apr-21
|
|
31-Jan-21
|
|
|
Short-Term Debt
|
|
$
|
446,404
|
|
$
|
716,142
|
|
|
Current Portion Of Long-Term Debt
|
|
|
588,067
|
|
|
424,064
|
|
|
Long-Term Debt
|
|
|
1,018,990
|
|
|
890,373
|
|
|
|
|
$
|
2,053,461
|
|
$
|
2,030,579
|
|
|
*Short-term loans
|
|
#Long-term loans of $11,269
including current portion of $3,812
|
|
$102,168 including current
portion of $0
|
|
$ 59,711 including current
portion $8,077
|
|
$ 92,246 including current
portion $14,515
|
|
$1,200,000 including current
portion of $420,000
|
|
(1) Secured by equipment
having a net book value of $11,650
|
|
(2) The amounts due under
the note are personally guaranteed by an officer or a director of the Company.
|
|
(3) On November 10, 2020
the Company amended the agreement extending the maturity to June 30, 2022 from April 8, 2021 and changing monthly payments to $0 from
$5,705 and interest rate from 13% to a $20,000 lump sum payable at maturity.
|
|
(3) The Company has pledged
a security interest on all accounts receivable and banks accounts of the Company.
|
|
(4) Financing event would
be a sale or issuance of assets, debt, shares or any means of raising capital. As the Company expects to enter into such a transaction
within the calendar year this loan is treated as current.
|
|
(5) Secured by all assets
of the Company. Loan payable in 2 instalments, $445,200 payable August 28, 2021 and $826,800 payable August 28, 2022
|
NOTE 9 –
SHORT-TERM CONVERTIBLE DEBT
The components of the Company’s
debt as of April 30, 2021 and January 31, 2021 were as follows:
|
|
|
Interest
|
|
Default Interest
|
|
Conversion
|
|
Outstanding Principal
at
|
|
|
Maturity Date
|
|
Rate
|
|
Rate
|
|
Price
|
|
April 30, 2021
|
|
January 31, 2021
|
|
|
Nov 4, 2013*
|
|
12%
|
|
12%
|
|
$1,800,000
|
|
$
|
100,000
|
|
$
|
100,000
|
|
|
Jan 31, 2014*
|
|
12%
|
|
18%
|
|
$2,400,000
|
|
|
16,000
|
|
|
16,000
|
|
|
July 31, 2013*
|
|
12%
|
|
12%
|
|
$1,440,000
|
|
|
5,000
|
|
|
5,000
|
|
|
Jan 31, 2014*
|
|
12%
|
|
12%
|
|
$2,400,000
|
|
|
30,000
|
|
|
30,000
|
|
|
Oct. 12, 2021
|
|
12%
|
|
16%
|
|
(1)
|
|
|
130,000
|
|
|
230,000
|
|
|
Nov. 16, 2021
|
|
12%
|
|
16%
|
|
(1)
|
|
|
125,000
|
|
|
100,000
|
|
|
Nov. 23, 2021
|
|
12%
|
|
16%
|
|
(1)
|
|
|
115,500
|
|
|
165,000
|
|
|
Sub-total
|
|
|
|
|
|
|
|
|
521,500
|
|
|
646,000
|
|
|
Debt Discount
|
|
|
|
|
|
|
|
|
(180,789
|
)
|
|
(309,317
|
)
|
|
|
|
|
|
|
|
|
|
$
|
340,711
|
|
$
|
336,683
|
|
* In default.
|
(1)
|
closing bid price on the
day preceding the conversion date.
|
The Company had accrued
interest payable of $222,667 and $240,713 on the notes at April 31, 2021 and January 31, 2021, respectively.
The Company analyzed the
conversion option for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that some
instruments should be classified as liabilities due to there being a variable number of shares to be delivered upon settlement of the
above conversion options. The instruments are measured at fair value at the end of each reporting period or termination of the instrument
with the change in fair value recorded to earnings. The fair value of the embedded conversion option resulted in a discount to the note
on the debt modification date. For the three months ended April 30, 2021 and 2020, the Company recorded amortization of debt discount
expense of $128,538 and $578,913, respectively. See more information in Note 10.
- 15 -
During the three months
ended April 30, 2021 and April 30, 2020 the Company added $28,000 and nil in penalty interest to the loan, respectively.
As of April 30, 2021, the
Company had $151,000 of aggregate debt in default. The agreements provide legal remedies for satisfaction of defaults, none of the lenders
to this point have pursued their legal remedies. The Company continues to accrue interest at the listed rates, and plans to seek their
conversion or payoff within the next twelve months.
NOTE 10 –
DERIVATIVE LIABILITIES
As of April 30, 2021 and
January 31, 2021, the Company had derivative liabilities of $148,957 and $213,741, respectively. During the three months ended April 30,
2021 and 2020, the Company recorded a gain of $4,187 and a loss of $74,780, respectively, from the change in the fair value of derivative
liabilities. Any liabilities resulting from the warrants outstanding are immaterial.
The derivative liabilities
are valued as a level 3 input for valuing financial instruments.
The following table presents
changes in Level 3 liabilities measured at fair value for the three months ended April 30, 2021. Both observable and unobservable inputs
were used to determine the fair value of positions that the Company has classified within the Level 3 category. Unrealized gains and losses
associated with liabilities within the Level 3 category include changes in fair value that were attributable to both observable (e.g.,
changes in market interest rates) and unobservable (e.g., changes in unobservable long- dated volatilities) inputs.
|
|
|
|
|
|
|
|
|
Level 3
|
|
|
|
|
Derivatives
|
|
|
Balance, January 31, 2021
|
|
$
|
213,741
|
|
|
Settlement due to Repayment of Debt
|
|
|
(60,597
|
)
|
|
Mark to Market Change in Derivatives
|
|
|
(4,187)
|
|
|
Balance, April 30, 2021
|
|
$
|
148,957
|
|
The derivatives arise from
convertible debt where the debt is convertible into common stock at variable conversion prices which are linked to the trading and/or
bid prices of the Company’s common stock as traded on the OTC market.
As the price of the common
stock varies it triggers a gain or loss based upon the discount to market assuming the debt was converted at the balance sheet date.
The fair value of the derivative
liability is determined using the lattice model, is re-measured on the Company’s reporting dates, and is affected by changes in
inputs to that model including our stock price, expected stock price volatility, the expected term, and the risk-free interest rate. A
summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring the Company’s
warrant liabilities and embedded conversion feature that are categorized within Level 3 of the fair value hierarchy as of April 30, 2021
is as follows:
|
|
|
Embedded
|
|
|
|
|
Derivative Liability
|
|
|
|
|
As of
April 30, 2021
|
|
|
Strike price
|
|
$
|
2.10 - 4.30
|
|
|
Contractual term (years)
|
|
|
0.25 - 1.00 years
|
|
|
Volatility (annual)
|
|
|
116.5% - 537.3
|
%
|
|
High yield cash rate
|
|
|
24.90% - 29.42
|
%
|
|
Underlying fair market value
|
|
$
|
2.10
|
|
|
Risk-free rate
|
|
|
0.07% - 0.17
|
%
|
|
Dividend yield (per share)
|
|
|
0
|
%
|
- 16 -
NOTE 11 –
STOCKHOLDERS’ DEFICIT
Preferred Stock:
The Series A Preferred Stock
has an automatic forced conversion into common stock upon the completion of the repurchase or extinguishing of all “toxic”
debt (notes having conversion features tied to the Company’s common stock), the extinguishing of all other existing dilutive debt
or equity structures, and total recapitalization of the Company. As of both April 30, 2021, and January 31, 2021 the Company had 0 shares
of Series A Preferred issued and outstanding and 330,000 authorized with a par value of $0.001 per share.
At both April 30, 2021 and
January 31, 2021, there were 20,000 and 20,000 Series B preferred shares outstanding, respectively. The Series B Preferred Stock have
voting rights equal to 51% of the total voting rights at any time. There are no conversion rights granted holders of Series B Preferred
shares, they are not entitled to dividends, and the Company does not have the right of redemption. Currently, there are 20,000 Series
B preferred shares authorized and issued of the Series B Preferred Stock with a par-value of $0.001 per share.
At both April 30, 2021 and
January 31, 2021, there were 7,250 and 7,250 Series C preferred shares outstanding, respectively. The Series C Preferred Stock have the
right to convert into the common stock of the Company by multiplying the number of issued and outstanding shares of common stock by 2.63
on the conversion date. The holders of Series C Preferred shares are not entitled to dividends, and the Company does not have the right
of redemption. Currently, there are 7,250 Series C preferred shares authorized and issued with a par-value of $0.001 per share.
At both April 30, 2021 and
January 31, 2021, there were 870 Series D preferred shares authorized and outstanding, respectively which with a par value $.001. All
shares of Series D Preferred Stock will rank subordinate and junior to all shares of Series A, B and C of Preferred Stock of the Corporation
and pari passu with any of the Corporation’s preferred stock hereafter created as to distributions of assets upon dissolution or
winding up of the Corporation, whether voluntary or involuntary. These shares are non-voting, do not receive dividends and are redeemable
according to the terms set out as follows:
OPTIONAL REDEMPTION.
(1) At any time,
either the Corporation or the holder may redeem for cash out of funds legally available therefor, any or all of the outstanding Series
D Preferred Stock (“Optional Redemption”) at $1,000 per share.
(2) Should the
Corporation exercise the right of Optional Redemption it shall provide each holder of Preferred Stock with at least 30 days’ notice
of any proposed optional redemption pursuant this Section VI (an “Optional Redemption Notice”). Any optional redemption pursuant
to this Section VI shall be made ratably among holders in proportion to the Liquidation Value of Preferred Stock then outstanding and
held by such holders. The Optional Redemption Notice shall state the Liquidation Value of Preferred Stock to be redeemed and the date
on which the Optional Redemption is to occur (which shall not be less than thirty (30) or more than sixty (60) Business Days after the
date of delivery of the Optional Redemption Notice) and shall be delivered by the Corporation to the holders at the address of such holder
appearing on the register of the Corporation for the Preferred Stock. Within seven (7) business days after the date of delivery of the
Optional Redemption Notice, each holder shall provide the Corporation with instructions as to the account to which payments associated
with such Optional Redemption should be deposited. On the date of the Optional Redemption, provided for in the relevant Optional Redemption
Notice, (A) the Corporation will deliver the redemption amount via wire transfer to the account designated by the holders, and (B) the
holders will deliver the certificates relating to that number of shares of Preferred Stock being redeemed, duly executed for transfer
or accompanied by executed stock powers, in either case, transferring that number of shares to be redeemed. Upon the occurrence of the
wire transfer (or, in the absence of a holder designating an account to which funds should be transferred, delivery of a certified or
bank cashier’s check in the amount due such holder in connection with such Optional Redemption to the address of such holder appearing
on the register of the Corporation for the Preferred Stock), that number of shares of Preferred Stock redeemed pursuant to such Optional
Redemption as represented by the previously issued certificates will be deemed no longer outstanding. Notwithstanding anything to the
contrary in this Designation, each holder may continue to convert Preferred Stock in accordance with the terms hereof until the date such
Preferred Stock is actually redeemed pursuant to an Optional Redemption.
- 17 -
(3) Should the
holder exercise the right of Optional Redemption it shall provide the Corporation with at least 30 days’ notice of any proposed
optional redemption pursuant this Section VI (an “Optional Redemption Notice”). The Optional Redemption Notice shall state
the value of the Preferred Stock to be redeemed and the date on which the Optional Redemption is to occur (which shall not be less than
thirty (30) or more than sixty (60) Business Days after the date of delivery of the Optional Redemption Notice) and shall be delivered
by the holder to the Corporation at the address of the Corporation for the Preferred Stock. Within seven (7) business days after the date
of delivery of the Optional Redemption Notice, each holder shall provide the Corporation with instructions as to the account to which
payments associated with such Optional Redemption should be deposited. On the date of the Optional Redemption, provided for in the relevant
Optional Redemption Notice, (A) the Corporation will deliver the redemption amount via wire transfer to the account designated by the
holder, and (B) the holder will deliver the certificates relating to that number of shares of Preferred Stock being redeemed, duly executed
for transfer or accompanied by executed stock powers, in either case, transferring that number of shares to be redeemed. Upon the occurrence
of the wire transfer (or, in the absence of a holder designating an account to which funds should be transferred, delivery of a certified
or bank cashier’s check in the amount due such holder in connection with such Optional Redemption to the address of such holder
appearing on the register of the Corporation for the Preferred Stock), that number of shares of Preferred Stock redeemed pursuant to such
Optional Redemption as represented by the previously issued certificates will be deemed no longer outstanding. Notwithstanding anything
to the contrary in this Designation, each holder may continue to convert Preferred Stock in accordance with the terms hereof until the
date such Preferred Stock is actually redeemed pursuant to an Optional Redemption.
The Series D Preferred Stock
is not entitled to any pre-emptive or subscription rights in respect of any securities of the Corporation.
Neither the Company nor
any Series D preferred stockholders has given notice to exercise the redemption as of April 30, 2021 on the date of the financial statements.
Because the holders of the
Series D preferred stock have the right to demand cash redemption, the cumulative amount of the redemption feature is included in Temporary
Equity as of April 30, 2021 and January 31, 2021.
Common Stock
The Company is authorized
to issue 15,000,000 common shares at a par value of $0.000001 per share. These shares have full voting rights. The share capital has been
retrospectively adjusted accordingly to reflect these reverse stock splits. At April 30, 2021 and January 31, 2021 there were 2,574,413
and 1,427,163 shares outstanding and issuable, respectively. No dividends were paid in the three months ended April 30, 2021 or
2020. The Company’s articles of incorporation include a provision that the Company is not allowed to issue fractional shares.
The Company issued the
following shares of common stock in the three months ended April 30, 2021:
The Company issued 1,097,250
shares for $2,194,500 as part of Regulation A filing. The company received $2,099,683 in cash proceeds with the remaining $94,817 recorded
as share proceeds receivable.
Issuance of 50,000 shares
with a fair value of $107,500 as payment for fees to a consultant.
Options and Warrants:
The Company has no options
outstanding as of April 30, 2021 or January 31, 2021.
The Company recorded option
and warrant expense of $0 and $0 for the three months ended April 30, 2021 and 2020, respectively.
The Company had the following
fully vested warrants outstanding at April 30,2021:
|
|
|
|
|
|
|
|
|
Issued To
|
# Warrants
|
Dated
|
Expire
|
Strike Price
|
Expired
|
Exercised
|
|
Lender
|
950,000
|
08/28/2020
|
08/28/2023
|
$0.40 per share
|
N
|
N
|
|
Broker
|
2,500
|
10/11/2020
|
10/11/2025
|
$4.50 per share
|
N
|
N
|
|
Broker
|
3,000
|
11/25/2020
|
11/25/2025
|
$3.00 per share
|
N
|
N
|
- 18 -
|
|
|
Options
|
|
Weighted Average
Exercise
Price
|
|
Warrants
|
|
Weighted Average
Exercise
Price
|
|
|
Outstanding at January 31, 2021
|
|
—
|
|
$
|
—
|
|
955,000
|
|
$
|
0.42
|
|
|
Granted
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
Exercised
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
Forfeited and canceled
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
Outstanding at April 30, 2021
|
|
—
|
|
$
|
—
|
|
955,000
|
|
$
|
0.42
|
|
NOTE 12 –
RELATED PARTY TRANSACTIONS
As of April 30, 2021 and
January 31, 2021, the Company had $81,173 and $106,173, respectively of related party accrued expenses related to accrued compensation
for employees and consultants.
NOTE 13 –
COMMITMENTS AND CONTINGENCIES
On August 30, 2016, the
Company entered into a 60-month lease agreement for its 3,554 sf warehouse facility starting in December 2016 with a minimum base rent
of $2,132 and estimated monthly CAM charges of $1,017 per month. This lease is with a shareholder.
On July 1, 2018, the Company
entered into a 60-month lease agreement with its minority shareholder for its 8,800 sf warehouse facility with a minimum base rent of
$6,400 per month.
In October 2019 the Company
entered into an operating lease for a vehicle with an annual cost of $9,067 and a three year term. The company paid initial fees of $17,744
and will pay fees on lease termination of $395. On a straight-line basis these costs amount to $1,259 per month.
|
|
|
|
|
|
Maturity of Lease Liabilities
|
Operating
Leases
|
|
|
April 30 2022
|
$
|
121,917
|
|
|
April 30, 2023
|
|
113,100
|
|
|
April 30, 2024
|
|
42,803
|
|
|
April 30, 2025
|
|
30,003
|
|
|
April 30, 2026
|
|
30,003
|
|
|
After April 30, 2026
|
|
17,503
|
|
|
Total lease payments
|
|
355,329
|
|
|
Less: Interest
|
|
(44,197
|
)
|
|
Present value of lease liabilities
|
$
|
311,132
|
|
The Company had total operating
lease and rent expense of $30,479 and $34,079 for the three months ended April 30, 2021 and 2020 respectively.
There is pending litigation
initiated by the Company around the validity of a $100,000 note which the Company signed based upon representations of funding from the
maker which were never received. The Company initiated litigation to dispute the note and the 1,692 shares that have been issued. There
was no consideration for the issuance of the shares and the shares have been accounted for as if they were returned and cancelled although
they have not been returned.
- 19 -
NOTE 14 –
EARNINGS (LOSS) PER SHARE
The net income (loss) per
common share amounts were determined as follows:
|
|
|
For the Years Ended
|
|
|
|
|
April 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders
|
|
$
|
(567,557
|
)
|
|
$
|
1,186,898
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted average shares – basic
|
|
|
1,940,098
|
|
|
|
551,590
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share – basic
|
|
$
|
(0.29
|
)
|
|
$
|
2.15
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of common stock equivalents
|
|
|
|
|
|
|
|
|
|
Add: interest expense on convertible debt
|
|
|
34,652
|
|
|
|
103,540
|
|
|
Add: amortization of debt discount
|
|
|
128,528
|
|
|
|
—
|
|
|
Add (Less): loss (gain) on change of derivative
liabilities
|
|
|
(4,187
|
)
|
|
|
—
|
|
|
Net income (loss) adjusted for common stock equivalents
|
|
|
(408,564
|
)
|
|
|
1,290,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of common stock equivalents:
|
|
|
|
|
|
|
|
|
|
Convertible notes and accrued interest
|
|
|
—
|
|
|
|
86,413,848
|
|
|
Convertible Class C Preferred shares
|
|
|
—
|
|
|
|
1,632,770
|
|
|
Warrants (1)
|
|
|
—
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted average shares – diluted
|
|
|
1,940,098
|
|
|
|
88,598,209
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share – diluted
|
|
$
|
(0.29
|
)
|
|
$
|
0.01
|
|
The anti-dilutive shares
of common stock equivalents for the three months ended April 30, 2021 and April 30, 2020 were as follows:
|
|
|
For the Years Ended
|
|
|
|
|
April 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Convertible notes and accrued interest
|
|
|
354,365
|
|
|
|
—
|
|
|
Convertible Class C Preferred shares
|
|
|
6,770,706
|
|
|
|
—
|
|
|
Warrants
|
|
|
955,500
|
|
|
|
—
|
|
|
Total
|
|
|
8,080,571
|
|
|
|
—
|
|
- 20 -
NOTE 15 – GAIN
ON SETTLEMENT OF DEBT
For the three months ended
April 30, 2021 the gain on settlement of debt of $914,049 consisted of a $853,452 gain that resulted from the settlement of accounts payable
totaling $950,151 that was settled for $96,699, and a $60,597 gain that resulted from the reduction in the derivative liability due to
cash repayments on convertible debt. For the three months ended April 30, 2020 the gain on settlement of debt of $2,172,646 consisted
of a gain that resulted from the settlement of $1,070,035 in convertible notes, and $175,422 in accrued interest, as well as $122,000
in short-term debt and $22,076 in accrued interest, and the associated derivative liability of $792,218 all totaling $2,181,751 in exchange
for 250 Class C shares having a fair-value of $9,105.
NOTE 16 –
SUBSEQUENT EVENTS
Subsequent to quarter year
end up to June 8, 2021 a lender converted $18,750 in principal for 10,000 shares of common stock
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