United States

Securities and Exchange Commission

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended April 30, 2019

 

OR

 

[_] TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE EXCHANGE ACT OF 1934

 

From the transition period ___________ to ____________.

 

Commission File Number 333-152444

 

THE 4LESS GROUP, INC.

(Exact name of small business issuer as specified in its charter)

 

Nevada

7389

26-1580812

(State or jurisdiction of
incorporation or organization) 

(Primary Standard Industrial
Classification Code Number)

(IRS Employer
Identification No.) 

 

4580 N Rancho Dr #130, Las Vegas, NV 89130

(Address of principal executive offices)

 

(662) 510-5866

(Issuer’s telephone number)

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

Yes [_]   No [X]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes [_]   No [X].

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large Accelerated Filer  [_]      Accelerated Filer  [_]

 

Non-Accelerated Filer  [X]      Smaller Reporting Company  [X]      Emerging Growth Company  [_]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  [_]

 

Indicate by a check mark whether the company is a shell company (as defined by Rule 12b-2 of the Exchange Act):

 

Yes [_]   No [X].

 

As of October 16, 2019, there were 157,105,734 shares of Common Stock of the issuer outstanding.

 



TABLE OF CONTENTS

 

PART I.

FINANCIAL STATEMENTS (Unaudited)

3

 

 

 

ITEM 1.

Consolidated Financial Statements (Unaudited)

3

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

7

 

 

 

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

20

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosure About Market Risk

22

 

 

 

ITEM 4.

Controls and Procedures

22

 

 

 

PART II.

OTHER INFORMATION

23

 

 

 

ITEM 1.

Legal Proceedings

23

 

 

 

ITEM 1A.

Risk Factors

23

 

 

 

ITEM 2.

Unregistered Sales of Securities and Use of Proceeds

23

 

 

 

ITEM 3.

Default Upon Senior Securities

23

 

 

 

ITEM 4.

Mine Safety Disclosures

23

 

 

 

ITEM 5.

Other Information

23

 

 

 

ITEM 6.

Exhibits

23

 

- 2 -



PART 1: FINANCIAL INFORMATION


ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS


THE 4LESS GROUP, INC.

Consolidated Balance Sheets


 

 

April 30, 2019

 

January 31, 2019

 

 

 

(Unaudited)

 

(Audited)

 

Assets

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

$

141,928

 

$

59,401

 

Inventory

 

 

303,419

 

 

293,382

 

Prepaid Rent

 

 

75,000

 

 

97,500

 

Other Current Assets

 

 

2,001

 

 

3,659

 

Total Current Assets

 

 

522,348

 

 

453,942

 

Operating Lease Assets

 

 

437,507

 

 

454,087

 

Property and Equipment, net of accumulated depreciation of $74,634 and $64,394

 

 

231,887

 

 

242,126

 

 

 

 

 

 

 

 

 

Total Assets

 

$

1,191,742

 

$

1,150,155

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Deficit

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

Accounts Payable

 

$

245,134

 

$

216,455

 

Accrued Expenses

 

 

1,443,344

 

 

1,045,255

 

Accrued Expenses – Related Party

 

 

180,000

 

 

180,000

 

Short-Term Debt

 

 

198,935

 

 

381,512

 

Current Operating Lease Liability

 

 

72,528

 

 

74,179

 

Short-Term Convertible Debt, net of debt discount of $607,790 and $309,021

 

 

1,959,017

 

 

1,900,160

 

Derivative Liabilities

 

 

3,106,073

 

 

2,041,260

 

Current Portion – Long-Term Debt

 

 

11,697

 

 

11,697

 

Total Current Liabilities

 

 

7,216,728

 

 

5,850,518

 

 

 

 

 

 

 

 

 

Non-Current Lease Liability

 

 

364,979

 

 

379,908

 

Long-Term Debt

 

 

40,857

 

 

44,684

 

 

 

 

 

 

 

 

 

Total Liabilities

 

 

7,622,564

 

 

6,275,110

 

 

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Deficit

 

 

 

 

 

 

 

Common Stock, $0.001 par value, 20,000,000,000 shares authorized, 1,820,515 and 604,301 shares issued and outstanding

 

 

1,820

 

 

604

 

Preferred Stock – Series A, $0.001 par value, 330,000 shares authorized, 0 and 0 shares issued and outstanding

 

 

 

 

 

Preferred Stock – Series B, $0.001 par value, 20,000 shares authorized, 20,000 and 20,000 shares issued and outstanding

 

 

20

 

 

20

 

Preferred Stock – Series C, $0.001 par value, 6,750 shares authorized, 6,750 and 6,750 shares issued and outstanding

 

 

7

 

 

7

 

Preferred Stock – Series D, $0.001 par value, 870 shares authorized, 870 and 870 shares issued and outstanding

 

 

1

 

 

1

 

Additional Paid In Capital

 

 

13,069,713

 

 

12,563,720

 

Accumulated Deficit

 

 

(19,502,383

)

 

(17,689,307

)

Total Stockholders’ Deficit

 

 

(6,430,822

)

 

(5,124,955

)

 

 

 

 

 

 

 

 

Total Liabilities and Stockholders’ Deficit

 

$

1,191,742

 

$

1,150,155

 


The Accompanying Notes are an Integral Part of these Consolidated Financial Statements.


- 3 -



THE 4LESS GROUP, INC.

Consolidated Statements of Operations

For the Three Months Ended April 30, 2019 and 2018

(Unaudited)


 

 

2019

 

2018

 

Revenue

 

$

2,268,225

 

$

2,395,073

 

 

 

 

 

 

 

 

 

Cost of Revenue

 

 

 

 

 

 

 

Product Cost

 

 

1,592,463

 

 

1,708,559

 

Commission and Fees

 

 

176,716

 

 

206,466

 

Postage, Shipping and Freight

 

 

112,232

 

 

112,592

 

Total Cost of Revenue

 

 

1,881,411

 

 

2,027,617

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

386,814

 

 

367,456

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

Depreciation

 

 

10,240

 

 

6,471

 

Marketing and Advertising

 

 

46,613

 

 

33,656

 

E Commerce Services

 

 

22,803

 

 

60,245

 

Operating lease cost

 

 

26,701

 

 

26,701

 

Personnel Costs

 

 

348,553

 

 

238,761

 

General and Administrative

 

 

254,158

 

 

61,364

 

Total Operating Expenses

 

 

709,068

 

 

427,198

 

 

 

 

 

 

 

 

 

Net Operating Loss

 

 

(322,254

)

 

(59,742

)

 

 

 

 

 

 

 

 

Other Income (Expense)

 

 

 

 

 

 

 

Loss on Sale of Property and Equipment

 

 

 

 

(13,322

)

Loss on Derivatives

 

 

(910,442

)

 

 

Gain on Settlement of Debt

 

 

67,623

 

 

 

Amortization of Debt Discount

 

 

(302,366

)

 

 

Interest Expense

 

 

(345,637

)

 

(751

)

Total Other Income (Expense)

 

 

(1,490,822

)

 

(14,073

)

 

 

 

 

 

 

 

 

Net Income (Loss)

 

$

(1,813,076

)

$

(73,815

)

 

 

 

 

 

 

 

 

Basic and Diluted Weighted Average Shares Outstanding; (1)

 

 

1,213,219

 

 

368,410

 

Basic and Diluted Income (Loss) per Share

 

$

(1.49

)

$

(0.20

)


(1) The weighted average number of common shares outstanding at April 30, 2018 was computed by multiplying the number of the Company’s common shares outstanding as of April 30, 2018 by 2.63 based on the terms listed for the Company’s Series C Convertible Preferred Stock


The Accompanying Notes are an Integral Part of these Consolidated Financial Statements.


- 4 -



THE 4LESS GROUP, INC.

Consolidated Statement of Changes in Stockholders’ Deficit

For the Three Months Ended April 30, 2019 and 2018

(Unaudited)


 

Preferred Series A

 

Preferred Series B

 

Preferred Series C

 

Preferred Series D

 

Common Stock

 

Paid in

 

Retained

 

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Earnings

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 31, 2018

 

$

 

19,000

 

$

19

 

6,750

 

$

7

 

870

 

$

1

 

 

$

 

$

219,304

 

$

(335,902

)

$

(120,571

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Paid in Capital by Shareholder

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

361,526

 

 

 

 

361,526

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(73,815

)

 

(73,815

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 30, 2018

 

$

 

19,000

 

$

19

 

6,750

 

$

7

 

870

 

$

1

 

 

$

 

$

576,830

 

$

(409,717

)

$

(167,140

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 31, 2019

 

$

 

20,000

 

$

20

 

6,750

 

$

7

 

870

 

$

1

 

604,301

 

$

604

 

$

12,563,720

 

$

(17,689,307

)

$

(5,124,955

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of Notes Payable and Accrued Interest to Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

1,213,220

 

 

1,213

 

 

494,881

 

 

 

 

496,094

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock Adjustment for 6000:1 Reverse Split

 

 

 

 

 

 

 

 

 

 

 

 

2,994

 

 

3

 

 

11,122

 

 

 

 

11,115

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,813,076

)

 

(1,813,076

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 30, 2019

 

$

 

20,000

 

$

20

 

6,750

 

$

7

 

870

 

$

1

 

1,820,515

 

$

1,820

 

$

13,069,713

 

$

(19,502,383

)

$

(6,430,822

)


The Accompanying Notes are an Integral Part of these Consolidated Financial Statements.


- 5 -



THE 4LESS GROUP, INC.

Consolidated Statements of Cash Flows

For the Three Months Ended April 30, 2019 and 2018

(Unaudited)


 

2019

 

2018

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net Income (Loss)

$

(1,813,076

)

$

(73,815

)

Adjustments to reconcile net loss to cash used by operating activities:

 

 

 

 

 

 

Depreciation

 

10,240

 

 

6,471

 

Change in Fair Value of Derivative Liabilities

 

910,442

 

 

 

Amortization of Debt Discount

 

302,366

 

 

 

Interest expense related to derivative liability in excess of face value of debt

 

84,940

 

 

 

Loan penalties capitalized to the loan included in interest expense

 

75,599

 

 

 

Loss on sale of property and equipment

 

 

 

13,322

 

Accretion of Lease Liability

 

6,567

 

 

 

Gain on settlement of debt

 

(67,623

)

 

 

Change in Operating Assets and Liabilities:

 

 

 

 

 

 

(Increase) in Prepaid Expenses

 

 

 

(10,000

)

(Increase) in Inventory

 

(10,037

)

 

 

Decrease in Other Current Assets

 

1,658

 

 

(1,500

)

Increase (Decrease) in Accounts Payable

 

28,677

 

 

230,233

 

Increase (Decrease) in Accrued Expenses

 

523,896

 

 

2,282

 

CASH FLOWS (USED IN) PROVIDED BY OPERATING ACTIVITIES

 

53,649

 

 

166,993

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Purchase of Property and Equipment

 

 

 

(43,565

)

Disposal of Property and Equipment

 

 

 

30,602

 

CASH FLOWS USED IN INVESTING ACTIVITIES

 

 

 

(12,963

)

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

Due to/from Officer

 

 

 

 

Paid In Capital by Officer / Shareholder

 

 

 

361,526

 

Proceeds on Short-Term Debt

 

235,500

 

 

 

Payments on Short-Term Debt

 

(429,545

)

 

(93,389

)

Payments on Long-Term Debt

 

(3,827

)

 

(29,925

)

Payments on Notes Payable

 

 

 

 

Payments on Notes Payable – Related Party

 

 

 

 

Proceeds from Short-Term Convertible Debt

 

226,750

 

 

 

CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES

 

28,878

 

 

238,212

 

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH

 

82,527

 

 

392,242

 

 

 

 

 

 

 

 

CASH AT BEGINNING OF PERIOD

 

59,401

 

 

384,157

 

 

 

 

 

 

 

 

CASH AT END OF PERIOD

$

141,928

 

$

776,399

 

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flows Information:

 

 

 

 

 

 

Cash Paid for Interest

$

21,577

 

$

751

 

Income Taxes

$

 

$

 

Convertible Notes and Interest Converted to Common Stock

$

253,782

 

$

 

Derivative debt discount

$

335,704

 

$

 


The Accompanying Notes are an Integral Part of these Consolidated Financial Statements.


- 6 -



THE 4LESS GROUP, INC.

Notes to Consolidated Financial Statements

(Unaudited)


NOTE 1 – NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES


Business:


The 4LESS Group, Inc, was incorporated under the laws of the State of Nevada on December 5, 2007.


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 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.


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 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 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 consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended January 31, 2019 and notes thereto contained in the Company’s Annual Report on Form 10-K.


Principles of Consolidation:


The financial statements include the accounts of The 4LESS Group, Inc. as well as The 4LESS Corp. 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.


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 market. Inventories are valued on a first-in, first-out (FIFO) basis. Inventory is comprised of finished goods.


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.


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 carry-forward 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, 2018, but the Company does not expect the Tax Act to have a material impact on the Company’s consolidated financial statements.


- 8 -



On November 29, 2018, the Company completed a reverse merger with The 4 Less Corp. At such time that there was a change in control, all net operating losses for tax purposes of the parent were no longer available for carry-forward and the parent started to accumulate profits or losses from that point forward.


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, 2019:


 

 

April 30, 2019

 

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

 

$

3,106,073

 

$

 

$

 

$

3,106,073

 

Totals

 

$

3,106,073

 

$

 

$

 

$

3,106,073

 


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 for valuing financial instruments. The derivatives arise from convertible debt where the debt 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. As of April 30, 2019, warrants to purchase 583 common shares issued in July 2014 were not classified as derivative liability while the remaining warrants outstanding were classified as derivative liability based on the FIFO method.


- 9 -



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, expected stock price volatility, the expected term, and the risk-free interest rate.


Revenue Recognition


The Company recognizes revenue under ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” (“ASC 606”). The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of 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.


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 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.


Revenue is recorded net of provisions for discounts and promotion allowances, which are typically agreed to upfront with the customer and do not represent variable consideration. Discounts and promotional allowances vary the consideration the Company is entitled to in exchange for the sale of products to customers. The Company recognizes these discounts and promotional allowances in the same period that the revenue is recognized for products sales to customers. The amount of revenue recognized represents the amount that will not be subject to a significant future reversal of 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.


Loss Per Common Share:


The weighted average number of common shares outstanding during each period is used to compute basic loss per share. Diluted loss per common share are computed using the weighted average number of common shares and potentially dilutive common shares outstanding. Potentially dilutive common shares are additional common shares assumed to be exercised. Potentially dilutive common shares are excluded from the diluted earnings per share computation in periods where the Company has incurred a net loss, as their effect would be considered anti-dilutive.


The Company had 5,667 warrants and 6,750 shares of Series C Preferred Stock outstanding at April 30, 2019 which were potentially dilutive common stock equivalents but would be antidilutive and are not included. As the Company incurred a net loss during the three months ended April 30, 2019, the basic and diluted loss per common share is the same amount, as any common stock equivalents would be considered anti-dilutive. Excluded from this calculation are convertible notes of $2,566,807 and $2,209,180 at April 30, 2019 and January 31, 2019, respectively, since the impact would be antidilutive thus not included. The warrants and Series C Preferred Stock could be converted into 4,793,621 common shares as of April 30, 2019 and could convert into 413,193,747 common shares at October 16, 2019.


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Recently Issued Accounting Standards:


Presentation of an Unrecognized Tax Benefit: In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2013-11 related to the presentation of an unrecognized tax benefit when a net operating loss carry-forward, a similar tax loss or a tax credit carry-forward exists. The updated guidance requires an entity to net its unrecognized tax benefits against the deferred tax assets for the same jurisdiction’s net operating loss carry-forward, a similar tax loss, or tax credit carry-forwards. A gross presentation will be required only if such carry-forwards are not available or would not be used by the entity to settle any additional income taxes resulting from disallowance of the uncertain tax position. The update was effective prospectively for the Company’s fiscal year beginning February 1, 2018. The new guidance affects disclosures only and the adoption had no impact on the Company’s consolidated financial position, results of operations or cash flows.


In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), which modifies accounting for lessees by requiring the recording of right-of-use lease assets and lease liabilities for operating leases and disclosing key information about leasing arrangements. The Company is currently implementing the requirements of Topic 842, which is effective for the Company starting on February 1, 2019. Most of the Company’s operating leases are subject to this new standard whose impact will be reflected by an increase in the Company’s total assets and total liabilities relative to such amount prior to adoption.


In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which enhances and clarifies the guidance on the classification and presentation of restricted cash in the statement of cash flows. Topic 230 is effective in fiscal year end January 31, 2019 and its impact is dependent upon the level of restricted cash of the Company, which at this time is insignificant.


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 Company is currently evaluating the impact of Topic 350 on its consolidated financial statements and related disclosures, which is effective for fiscal years, including interim periods, beginning after December 15, 2019.


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 is not expected to 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.


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 incurred cumulative losses through April 30, 2019 of $19,502,383 and has a working capital deficit at April 30, 2019 of $6,694,380. As of April 30, 2019, the Company only had cash and cash equivalents of $141,928 and had 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. These conditions raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year from the date that the financial statements were issued.


- 11 -



The potential proceeds from the sale of common stock and other contemplated debt and equity financing, and increases in operating revenues from new development and business acquisitions might enable the Company to continue as a going concern. However, revenues have not been sufficient to cover operating costs that would permit the Company to continue as a going concern historically and there can be no assurance that the Company can or will be able to complete any debt or equity financing, or develop or acquire one or more business interests on terms favorable to it. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.


NOTE 3 – 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, 2019 and January 31, 2019.


Leases

 

Classification

 

April 30, 2019

 

January 31, 2019

 

Assets

 

 

 

 

 

 

 

 

 

Operating

 

Operating Lease Assets

 

$

437,507

 

$

454,087

 

Liabilities

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

 

Operating

 

Current Operating Lease Liability

 

$

72,528

 

$

74,179

 

Noncurrent

 

 

 

 

 

 

 

 

 

Operating

 

Noncurrent Operating Lease Liabilities

 

 

364,979

 

 

379,908

 

Total lease liabilities

 

 

 

$

437,507

 

$

454,087

 


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 ion general and administrative expenses as incurred.


Operating lease cost was $26,701 and 26,701 for both the three months ended April 30, 2019 and April 30,2018, respectively.


In September 2019 the Company entered into an operating lease for premises with an annual rent of $15,480, a three year term commencing September 1, 2019 to August 31, 2022 and a one year renewal option.


- 12 -



NOTE 4 – SHORT-TERM AND LONG-TERM DEBT


The components of the Company’s debt as of April 30, 2019 and January 31 ,2019 were as follows:


 

April 30, 2019

 

January 31, 2019

 

Vehicle Note Payable - $49,494, dated April 19, 2017, 7.24% interest, 72 payments of $851 starting May 29, 2017 and ending April 2023

$

34,137

 

$

38,690

 

Working Capital Note Payable - $175,000, dated March 16, 2019, repayment of 10% of all eBay sales until paid in full, minimum payments of $17,769 per quarter until paid, fees of $2,696

 

58,088

 

 

 

Working Capital Note Payable - $175,000, dated January 15, 2019, repayment of 10% of all eBay sales until paid in full, minimum payments of $12,695 per quarter until paid

 

 

 

153,057

 

Amazon working capital note, original loan of $94,000 Sept 6, 2018, 9.22% interest, monthly payments of $16,091 paid in full March 5, 2019

 

 

 

31,814

 

SFS Funding Loan, original loan of $298,400 October 5, 2018, 24% interest, weekly payments of $7581, maturing October 9, 2019

 

125,932

 

 

194,642

 

Forklift Note Payable, original note of $20,432.59 Sept 26,2018, 6.23% interest, 60 monthly payments of $394.54 ending August 2023

 

18,417

 

 

19,690

 

Demand loan-$2,500, dated March 8, 2019, 25% interest, 5% fee on outstanding balance

 

2,500

 

 

 

Demand loan -$65,500 dated February 27, 2019, 225% interest, 5% fee on outstanding balance, Secured by the general assets of the Company

 

12,415

 

 

 

Total

$

251,489

 

$

437,893

 


The Company had accrued interest payable of $20,640 and $0 interest on the notes at April 30, 2019 and January 31, 2019, respectively.


The following are the minimum amounts due on the notes:


Year Ended

 

Amount

 

Apr. 30, 2020

 

$

210,632

 

Apr. 30, 2021

 

 

12,525

 

Apr. 30, 2022

 

 

13,410

 

Apr. 30, 2023

 

 

14,360

 

Apr. 30, 2024

 

 

562

 

Total

 

$

251,489

 


- 13 -



NOTE 5 – SHORT-TERM DEBT


The components of the Company’s debt as of April 30, 2019 and January 31, 2019 were as follows:


 

Interest

Default Interest

Conversion

Outstanding Principal at

 

Maturity Date

Rate

Rate

Price

April 30, 2019

 

January 31, 2019

 

Nov 4, 2013

12%

12%

$0.075

$

100,000

 

$

100,000

 

Jan 31, 2014

12%

18%

$0.10

 

16,000

 

 

16,000

 

Apr 24, 2020

12%

24%

$0.10

 

69,730

 

 

69,730

 

July 31, 2013

12%

12%

$0.06

 

5,000

 

 

5,000

 

Jan 31, 2014

12%

12%

$0.10

 

30,000

 

 

30,000

 

Dec 24, 2015

8%

24%

(1)

 

5,000

 

 

5,000

 

Sep 10, 2017

8%

24%

(2)

 

37,958

 

 

37,958

 

Sep 10, 2017

8%

24%

(2)

 

2,375

 

 

2,375

 

Sep 10, 2017

8%

24%

(2)

 

 

 

16,600

 

Sep 10, 2017

8%

24%

(2)

 

 

 

38,677

 

Dec 4, 2017

8%

24%

(2)

 

25,000

 

 

25,000

 

Feb 3, 2017

8%

24%

(5)

 

25,000

 

 

25,000

 

Mar 3, 2017

8%

24%

(5)

 

300

 

 

30,000

 

Mar 3, 2017

8%

24%

(5)

 

30,000

 

 

30,000

 

Mar 24, 2017

8%

24%

(6)

 

 

 

10,950

 

Apr 24, 2020

12%

24%

(6)

 

886,696

 

 

738,896

 

July 8, 2015

8%

24%

(1)

 

5,500

 

 

5,500

 

Apr 24, 2020

8%

24%

(1)

 

4,500

 

 

4,500

 

Apr 24, 2020

8%

24%

(1)

 

23,297

 

 

23,297

 

Apr 24, 2020

8%

24%

(1)

 

7,703

 

 

7,703

 

Apr 24, 2020

8%

24%

(1)

 

26,500

 

 

26,500

 

July 19, 2016

8%

24%

(1)

 

5,000

 

 

5,000

 

March 24, 2017

8%

24%

(6)

 

4,100

 

 

25,000

 

Dec 27, 2018

15%

24%

(4)

 

6,151

 

 

56,925

 

Dec 27, 2018

15%

24%

(4)

 

 

 

1,202

 

Jan 5, 2019

15%

24%

(4)

 

13,200

 

 

18,325

 

Feb 20, 2019

10%

10%

(7)

 

343,047

 

 

274,438

 

Mar 23, 2019

15%

24%

(3)

 

 

 

12,355

 

Jun 6, 2019

12%

18%

(8)

 

76,343

 

 

123,750

 

Oct 24, 2019

8%

24%

(5)

 

47,250

 

 

47,250

 

Nov 14, 2019

8%

24%

(5)

 

78,750

 

 

78,750

 

Dec 14, 2019

8%

24%

(5)

 

130,000

 

 

130,000

 

Dec 28, 2019

12%

18%

(3)

 

133,333

 

 

125,000

 

Jan 9, 2020

8%

24%

(5)

 

62,500

 

 

62,500

 

March 1, 2020

10%

15%

(9)

 

61,425

 

 

 

March 14, 2020

15%

24%

(10)

 

55,000

 

 

 

April 3, 2020

8%

24%

(2)

 

172,149

 

 

 

April 12,2020

10%

24%

(10)

 

75,000

 

 

 

May 24, 2020

15%

24%

(10)

 

3,000

 

 

 

Debt Discount

 

 

 

 

(607,790

)

 

(309,021

)

 

 

 

 

$

1,959,017

 

$

1,900,160

 

__________

(1)

52% of the lowest trading price for the fifteen trading days prior to conversion day.

(2)

50% of the lowest trading price for the fifteen trading days prior to conversion day.

(3)

50% of the lowest trading price for the twenty trading days prior to conversion day.

(4)

50% of the lowest trading price for the forty trading days prior to conversion day, but not higher than $0.000075.

(5)

50% of the lowest trading price for the fifteen trading days prior to conversion day, but not higher than $0.001.

(6)

50% of the lowest trading price for the fifteen trading days prior to conversion day, but not higher than $0.005.

(7)

60% of the lowest trading price for the fifteen trading days prior to conversion day.

(8)

52% of the lowest trading price for the twenty trading days prior to conversion day.

(9)

55% of the lowest trading price for the twenty trading days prior to conversion day.

(10)

50% of the lowest trading price for the twenty-five trading days prior to conversion day.


- 14 -



The Company had accrued interest payable of $576,596 and $463,839 on the notes at April 30, 2019 and January 31, 2019, 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 no explicit limit to the 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. See more information in Note 6.


During the three months ended April 30, 2019 the Company entered into new convertible notes totaling $366,574 with one year maturities, interest rates ranging from 8%-15%, the Company received $226,750 in cash proceeds, recorded original issue discounts of $22,675 and loan and interest of $117,149 was transferred from existing notes of the same lender.


During the three months ended April 30, 2019, the Company converted a total of $184,539 of the convertible notes, $70,055 accrued interest and $4,000 in fees into 1,213,220 common shares. Also, $245,071 in loan penalties were added to various note balances with $75,599 recorded as interest expense and 169,472 recorded as part of the amortization of debt discount.


The Company is in default on a number of its promissory notes which 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.


Each note is convertible with a conversion price for each share equal to the lower of: (a) 50% lowest bid price of the common stock, as reported on the National Quotations Bureau OTC Markets which the Company’s shares are traded or any exchange upon which the common stock may be traded in the future, for the 20 (twenty) prior trading days including the day of issuance of this herein Note or (b) 50% lowest bid price of the common stock, as reported on the National Quotations Bureau OTC Markets which the Company’s shares are traded or any exchange upon which the common stock may be traded in the future, for the 20 (twenty) prior trading days including the day upon which a Notice of Conversion of the Note, is received by the Company


NOTE 6 – DERIVATIVE LIABILITIES


As of April 30, 2019 and January 31, 2019, the Company had derivative liabilities of $3,106,073 and $2,041,260, respectively. During the three months ended April 30, 2019 and 2018, the Company recorded a loss of $910,442 and $0 from the change in the fair value of derivative liabilities, respectively. Any liabilities resulting from the warrants outstanding are immaterial.


The derivative liabilities are valued as a level 3 input for valuing financial instruments.


The derivatives arise from convertible debt where the debt is convertible into common stock at variable conversion prices. 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. In our calculation at April 30, 2019, stock price range from $0.59-$1.42 volatility ranged from 353.7% to 583.6%, the term ranged from 0.24 to 3.00 years, and the risk free interest rate was from 1.70% to 1.75%.


 

 

Level 3

 

 

 

Derivatives

 

Balance, January 31, 2019

 

$

2,041,260

 

Changes due to Issuance of New Convertible Notes

 

$

420,704

 

Changes due to Conversion of Notes Payable

 

$

(266,333

)

Mark to Market Change in Derivatives

 

$

910,442

 

Balance, April 30, 2019

 

$

3,106,073

 


- 15 -



NOTE 7 – 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, 2019, and January 31, 2019 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, 2019 and January 31, 2019, 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, 2019 and January 31, 2019, there were 6,750 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 6,750 Series C preferred shares authorized and 6,750 shares issued with a par-value of $0.001 per share.


At both April 30, 2019 and January 31, 2019, 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 below:


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 rateably 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.


- 16 -



(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.


Common Stock:


The Company is authorized to issue 20,000,000,000 common shares at a par value of $0.001 per share. These shares have full voting rights. At April 30, 2019 and January 31, 2019, there were 1,820,515 and 604,301 shares outstanding, respectively. No dividends were paid in the three months ended April 30, 2019 or 2018.


The Company issued the following shares of common stock in the three months ended April 30, 2019:


Conversion of $184,539 Notes Payable and $70,055 Interest and $4,000 in Fees to 1,213,220 shares of Common Stock.


Options and Warrants:


The Company recorded option and warrant expense of $0 and $0 for the three months ended April 30, 2019 and 2018, respectively.


The Company issued no warrants for the three months ended April 30, 2019.


The Company had the following options and warrants outstanding at April 30, 2019:


Issued To

# Warrants

Dated

Expire

Strike Price

Expired

Exercised

Lender

583

07/02/2015

07/01/2019

$600.00 per share

N

N

Lender

5,667

01/08/2018

01/08/2021

$0.45 per share

N

N



 

 

Options

 

Weighted Average
Exercise Price

 

Warrants

 

Weighted Average
Exercise Price

 

Outstanding at January 31, 2019

 

 

$

 

6,250

 

$

56.38

 

Granted

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

Forfeited and canceled

 

 

 

 

 

 

 

 

Outstanding at April 30, 2019

 

 

$

 

6,250

 

$

56.38

 


- 17 -



NOTE 8 – RELATED PARTY TRANSACTIONS


As of both April 30, 2019 and January 31, 2019, the Company had $180,000 of related party accrued expenses related to accrued compensation for employees and consultants.


In April 2018, a shareholder and landlord of 4Less, agreed to purchase 5% of 4Less (prior to the merger) from its largest shareholder for contributing $350,000 in cash to the 4 Less Corp. and $150,000 of rent concessions amortized over a 20 month period starting July 1, 2018. As of April 30, 2019, and January 31, 2019 the balance of prepaid rent totaled $75,000 and $97,500, respectively.


NOTE 9 – COMMITMENTS AND CONTINGENCIES


On June 1, 2015, the Company entered into a 36-month lease agreement for its 2,590 sf office facility with a minimum base rent of $2,720 per month. The Company paid base rent and their share of maintenance expense of $43,200 and $43,200 related to this lease for the periods ended January 31, 2019 and 2018, respectively. The lease is currently on a month to month basis since the lease has not been renewed and the Company records the payments as rent expense. This lease was with a shareholder – See Note 8 – Related Party Transactions.


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 – See Note 8 – Related Party Transactions.


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.


Maturity of Lease Liabilities

Operating
Leases

 

April 30, 2020

$

106,804

 

April 30, 2021

 

106,804

 

April 30, 2022

 

106,804

 

April 30, 2023

 

106,804

 

April 30, 2024

 

42,804

 

After April 30, 2024

 

77,504

 

Total lease payments

 

547,524

 

Less: Interest

 

(110,017

)

Present value of lease liabilities

$

437,507

 


The Company had total rent expense of $12,958 and $20,381 and total operating lease cost of $26,701 and $0 for the three months ended April 30, 2019 and 2018 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.


NOTE 10 – SUBSEQUENT EVENTS


Management has evaluated subsequent events pursuant to the requirements of ASC Topic 855, from the balance sheet date through the date the financial statements were issued and has determined that no material subsequent events exist other then the following:


Conversion of notes


Subsequent to the balance sheet date through to October 7, 2019 , 110,705,219 shares were issued for the conversion of $415,340 principal, $177,077 of interest and $1500 of fess totaling $533,916.83 of convertible notes that had a conversion price at 50% of the lowest market price during the period the Company fails to make all periodic filings with the SEC.


- 18 -



Issuance of convertible notes


On May 13, 2019, the Company issued a convertible note with principal of $55,000 and net proceeds of $52,000. The note bears interest at 15% per annum and mature in twelve months from the issuance date. The note can be converted at a price equal to 50% of the lowest bid price of common stock reported on the National Quotations Bureau OTC Markets for the 25 days prior to the conversion.


On May 15, 2019, the Company issued a convertible note with principal of $52,500 and net proceeds of $50,000. The note bears interest at 8% per annum and mature in twelve months from the issuance date. The note can be converted at a price equal to 50% of the lowest Trading price of common stock reported on the National Quotations Bureau OTC Markets for the 15 days prior to the conversion.


On May 24, 2019, the Company issued a convertible note with principal of $40,000 and net proceeds of $38,000. The note bears interest at 15% per annum and mature in twelve months from the issuance date. The note can be converted at a price equal to 50% of the lowest bid price of common stock reported on the National Quotations Bureau OTC Markets for the 25 days prior to the conversion.


On June 11, 2019, the Company issued a convertible note with principal of $85,000 and net proceeds of $80,000. The note bears interest at 15% per annum and mature in twelve months from the issuance date. The note can be converted at a price equal to 50% of the lowest bid price of common stock reported on the National Quotations Bureau OTC Markets for the 25 days prior to the conversion.


On June 26, 2019, the Company issued a convertible note with principal of $76,000 and net proceeds of $72,500. The note bears interest at 15% per annum and mature in twelve months from the issuance date. The note can be converted at a price equal to 50% of the lowest bid price of common stock reported on the National Quotations Bureau OTC Markets for the 25 days prior to the conversion.


On July 11, 2019, the Company issued a convertible note with principal of $60,000 and net proceeds of $57,000. The note bears interest at 15% per annum and mature in twelve months from the issuance date. The note can be converted at a price equal to 50% of the lowest bid price of common stock reported on the National Quotations Bureau OTC Markets for the 25 days prior to the conversion.


On August 19, 2019 the Company issued a demand loan for $122,000. The note bears interest at 25% per annum, has a 5 % fee, and is secured by the general assets of the Company.


On August 29, 2019, the Company issued a convertible note with principal of $45,000 and net proceeds of $40,000. The note bears interest at 15% per annum and mature in twelve months from the issuance date. The note can be converted at a price equal to 50% of the lowest bid price of common stock reported on the National Quotations Bureau OTC Markets for the 25 days prior to the conversion.


On September 16, 2019, the Company issued a convertible note with principal of $34,000 and net proceeds of $30,000. The note bears interest at 15% per annum and mature in twelve months from the issuance date. The note can be converted at a price equal to 50% of the lowest bid price of common stock reported on the National Quotations Bureau OTC Markets for the 25 days prior to the conversion.


On September 29, 2019, the Company issued a convertible note with principal of $34,000 and net proceeds of $30,000. The note bears interest at 15% per annum and mature in twelve months from the issuance date. The note can be converted at a price equal to 50% of the lowest bid price of common stock reported on the National Quotations Bureau OTC Markets for the 25 days prior to the conversion.


On October 14, 2019, the Company issued a convertible note with principal of $71,000 and net proceeds of $66,000. The note bears interest at 15% per annum and mature in twelve months from the issuance date. The note can be converted at a price equal to 50% of the lowest bid price of common stock reported on the National Quotations Bureau OTC Markets for the 25 days prior to the conversion.


- 19 -



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.


- 20 -



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.


- 21 -



Capital Resources


The following table summarizes total current assets, liabilities and working capital (deficit) for the periods indicated:


 

 

April 30 2019

 

January 31, 2019

 

Current assets

 

$

522,348

 

$

453,942

 

Current liabilities

 

 

7,216,728

 

 

5,850,518

 

Working capital (deficits)

 

$

(6,694,380

)

$

(5,396,576

)


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.


ITEM 3. Quantitative and Qualitative Disclosure about Market Risk.


Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), we are not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).


ITEM 4. Controls and Procedures


(a)           Evaluation of disclosure controls and procedures. Our Chief Executive Officer and Principal Financial Officer, after evaluating the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”), has concluded that as of the Evaluation Date, our disclosure controls and procedures were not effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Moving forward, we hope that our Chief Executive Officer and Principal Financial Officer will be able to devote the additional time and effort required so that our disclosure controls and procedures are once again effective. Notwithstanding the assessment that our internal controls and procedures were not effective, we believe that our financial statements contained in this Quarterly Report for the quarter ended April 30, 2019 fairly present our financial position, results of operations and cash flows for the years and months covered thereby in all material respects.


(b)           Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting during our most recent fiscal quarter that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.


- 22 -



PART II OTHER INFORMATION


Item 1. Legal Proceedings


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.


Item 1A. Risk Factors


There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended January 31, 2019, filed with the Commission on August 21, 2019 and investors are encouraged to review such risk factors below and in the Form 10-K, prior to making an investment in the Company.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds


Recent Sales of Unregistered Securities


None.


Item 3. Default Upon Senior Securities


None.


Item 4. Mine Safety Disclosures


Not applicable.


Item 5. Other Information


None.


Item 6. Exhibits


See the Exhibit Index immediately following the signature page of this Report on Form 10-Q.


- 23 -



SIGNATURES


In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.


The 4Less Group, Inc.


By:  /s/ Timothy Armes

Timothy Armes

Chairman (Director), Chief Executive Officer, President, Secretary and Treasurer


Date: October 28, 2019



EXHIBIT INDEX


Exhibit

Number

 

Description of Exhibit

 

 

 

31.1*

 

Certificate of the Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32.1*

 

Certificate of the Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


*   Filed herewith.


- 24 -


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