ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, which we refer to in this quarterly report as the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, which we refer to in this quarterly report as the Exchange Act. Forward-looking statements are not statements of historical fact but rather reflect our current expectations, estimates and predictions about future results and events. These statements may use words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “predict,” “project” and similar expressions as they relate to us or our management. When we make forward-looking statements, we are basing them on our management’s beliefs and assumptions, using information currently available to us. These forward-looking statements are subject to risks, uncertainties and assumptions, including but not limited to, risks, uncertainties and assumptions discussed in this quarterly report. Factors that can cause or contribute to these differences include those described under the headings “Risk Factors” and “Management Discussion and Analysis and Plan of Operation.”
If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Any forward-looking statement you read in this quarterly report reflects our current views with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or individuals acting on our behalf are expressly qualified in their entirety by this paragraph. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this quarterly report. The Company expressly disclaims any obligation to release publicly any updates or revisions to these forward-looking statements to reflect any change in its views or expectations. The Company can give no assurances that such forward-looking statements will prove to be correct.
Company
The 4LESS Group Inc. (“FLES”, the “Company”, “we” or “us”), the Company described herein, was incorporated under the laws of the State of Nevada on December 5, 2007, with offices located at 4850 N Rancho Dr # 130 , Las Vegas NV 89130. It can be reached by phone at (662) 510-5866.
Nature of Business –
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. The prior period results up until the transaction date would include the results of operations of only 4LESS.
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 Company 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.
In 2018 The 4Less Corp (“4Less”) invested heavily in technologies to support our current and future growth initiatives. These technologies included customer relations management software (CRM) linking all marketplaces together seamlessly and inventory API data feeds linking hundreds of thousands of auto parts inventory levels for availability to be sold. Opening our first warehouse/distribution center here in Las Vegas with our proprietary warehouse software in April of 2018 has further positioned 4Less to capitalize on the multi-billion dollar aftermarket auto parts sector. Additionally, we launched a small manufacturing partnership program which will allow small manufactures to utilize the company’s platform to push their products in front of millions of potential buyers across the globe.
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4Less management believes that the 4Less proprietary web sites, which includes order customization, live chat, install videos, directions and installation services, offer the best buying experience for consumers interested in purchasing aftermarket auto parts on the internet today.
As a result of these many upgrades, the complexity of many of our products and the ability to drive more traffic to our proprietary websites where margins are greater, we felt it was in the best interest of the company to terminate its relationship with Amazon. We expect all of these decisions to help The 4Less Corp achieve growth goals for 2020.
Results of Operations For the Three Months Ended April 30, 2019 compared to the three months ended April 30, 2018
We had revenue of $2,268,225 for the three months ended April 30, 2019, compared to $2,395,073 for the three months ended April 30, 2018. We had total cost of revenues of $1,881,411 for the three months ended April 30, 2019, compared to cost of revenues of $2,027,617 for the three months ended April 30, 2018. For the three months ended April 30, 2019 and 2018 gross profit was $386,814 and $367,456, respectively. Sales decreased due to discontinuing sales on Amazon.com because of lower margin. Cost of revenues decreased as sales decreased, however, margins were higher because after removing Amazon.com sales our other platforms earned slightly higher margins overall.
We had total operating expenses of $709,068 for the three months ended April 30, 2019, consisting of $10,240 of depreciation, $46,613 of marketing and advertising, $22,803 of e-commerce expenses, $26,701 of operating lease cost, $348,553 of personnel costs and $254,158 of general and administrative expenses. For the three months ended April 30, 2018, we had total operating expenses of $427,198, consisting of $6,471 of depreciation, $33,656 of marketing and advertising expenses, $60,245 of e-commerce expenses, $26,702 of operating lease cost, $238,761 of personnel costs and $61,364 of general and administrative expenses. Operating expenses for the three months ended April 30, 2019 were generally higher because they were the combined operations of the 4 Less Group Inc. whereas the prior period consisted of the results of The 4 Less Corp. only. The greatest increase was in personnel costs as we invested heavily to make sure we had great customer service and support, both in the office and with customers, as we grow our business.
We had total other income (expense) of $(1,490,822) for the three months ended April 30, 2019, consisting of interest expense of $(345,637), loss on derivatives of $(910,442), gain on settlement of debt of $67,623, and amortization of debt discount of $(302,366). We had total other income (expense) of $(14,073) for three months ended April 30, 2018, consisting of interest expense of $(751) and loss on sale of property and equipment of $(13,322). Again the results of the three months ended April 30, 2019 were generally higher because they were the combined operations of The 4 Less Group Inc. which contained the interest, discount and derivatives derived from the convertible debt whereas the prior period consisted of the results of The 4 Less Corp. only which had none.
We had a net loss of $1,813,076 for the three months ended April 30, 2019, compared to a net loss of $73,815 for the three months ended April 30, 2018 explained in the reasons given above.
Liquidity and Capital Resources
Management believes that we will continue to incur losses for the immediate future. Therefore, we will need additional equity or debt financing until we can achieve profitability and positive cash flows from operating activities, if ever. These conditions raise substantial doubt about our ability to continue as a going concern. Our unaudited consolidated financial statements do not include and adjustments relating to the recovery of assets or the classification of liabilities that may be necessary should we be unable to continue as a going concern. For the three months ended April 30, 2019, we have generated revenue and are trying to achieve positive cash flows from operations.
As of April 30, 2019, we had a cash balance of $141,928, inventory of $303,419 and $7,216,728 in current liabilities. At the current cash consumption rate, we may need to consider additional funding sources going forward. We are taking proactive measures to reduce operating expenses and drive growth in revenue.
The successful outcome of future activities cannot be determined at this time and there is no assurance that, if achieved, we will have sufficient funds to execute our intended business plan or generate positive operating results.
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Capital Resources
The following table summarizes total current assets, liabilities and working capital (deficit) for the periods indicated:
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April 30 2019
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January 31, 2019
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Current assets
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$
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522,348
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$
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453,942
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Current liabilities
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|
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7,216,728
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|
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5,850,518
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Working capital (deficits)
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$
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(6,694,380
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)
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$
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(5,396,576
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)
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Net cash provided in operations for the three months ended April 30, 2019 was
$53,649 as compared to net cash used in operations of $166,993 for the three months ended April 30, 2018. Net cash provided
by financing activities for the three months ended April 30, 2019 was $28,878 as compared to $238,212 for the same period in
2018.